The Covid-19 pandemic has renewed a longstanding debate about whether lifestyle-driven hospitality services or health care should be prioritized in future senior living operational models.
Kim Lody, CEO of Capital Senior Living (NYSE: CSU), believes that the debate may not have a cut-and-dried answer, but the pandemic shows that providers must clear up confusion on the part of consumers and government officials about what the industry is bringing to the market.
“I think the whole debate is really interesting and very, very important, because one of my big disappointments has been the lack of early federal funding to senior living operators while other sectors were receiving funding,” she told Senior Housing News. “… I think it should serve as a call to action to educate the broader market and our legislators about what types of care are provided in senior living. It’s an important convergence of health care and hospitality, and I don’t think that’s well known outside of our industry.”
Top executives with Dallas-based Capital Senior Living were able to draw on their past experiences in a variety of health care settings to create and execute the company’s Covid-19 response, said Lody, who herself has a background in managed care and home care. And, she believes that further integration between senior living and other types of health care providers and payers is “inevitable.” However, she also emphasized that the social model of senior living is attractive to consumers — particularly in these challenging times — and must be further enhanced.
Although Lody argues that federal financial support is coming too late and is not yet sufficient, Capital Senior Living has applied to receive the recently announced government allocation for private-pay assisted living providers. Capital’s portfolio encompasses about 120 communities, with about 50% of the unit mix being assisted living, 40% independent living and 10% memory care.
The federal support will help strengthen the company’s financial picture, which in recent months and years has been troubled — including a “going concern” warning issued in May 2020.
But the turnaround that Lody has been leading since taking the CEO reins last year is bearing fruit, and the company will emerge from the pandemic a stronger operator on firmer financial footing, she told SHN.
“We’re about halfway through our three-year strategy and on track,” she said.
Preparing for the worst
As Covid-19 spread around the globe earlier this year, uncertainty about the severity of the virus and the likely length of the pandemic was “disconcerting” as the Capital Senior Living leadership tried to formulate a response plan, Lody said.
“But, it also meant that there was a lot of clarity around the need to gear every decision we were making and every action that we were taking toward the most severe scenario,” she said.
In late February, the company embarked on a push to procure additional personal protective equipment (PPE) and other supplies, and establish regional distribution hubs. For about a week, a team focused almost exclusively on these goals, and succeeded by tapping into both established and new supply channels.
“We avoided the gap in availability of those supplies, and we also avoided being exposed to what turned out to be significantly higher pricing on many of those items,” Lody said.
Another important early decision was to close the corporate office in late February.
“I think it was on a Wednesday, I came in and said, on Friday, when everyone goes home, you’re going to go home with all your files and your laptops and everything you need to work from home for the next several months,” Lody said. “I think it surprised a lot of people, because it was very early on in the pandemic, and a lot of organizations had not yet made those decisions.”
Like many other senior living providers, Capital established a multi-disciplinary Covid-19 task force that met every day. Having every functional area represented on those calls was crucial, as the pandemic tested the company’s speed and flexibility in adjusting operations, particularly given the patchwork of rules, regulations and guidance coming from federal, state and local experts and authorities.
While remaining sensitive to conditions on the ground at particular locations, creating clear protocols that could be consistently applied across the entire portfolio was an important goal and key to keeping the virus at bay and communities operating smoothly.
“Consistency and confidence go hand-in-hand, and we worked extremely hard from the first point of the pandemic to ensure that we had consistency in our protocols and in our messaging to communities, our residents and their families,” Lody said. “That helped breed the confidence across the organization that people knew what to do, how to interact with the various officials and families and so on.”
Lody is pleased with the effectiveness of the organization’s response, as measured by Covid-19 infection rates. As of the company’s Q2 2020 earnings call in early August, there were 48 active cases of Covid-19 across the portfolio; as of Sept. 14, that had fallen to 8 cases, despite a late-summer surge in the virus in states such as Texas where Capital Senior Living has a significant footprint.
Going forward, maintaining morale and wellness among the workforce and residents remains a challenge.
“Covid fatigue is very real, especially in those areas where you see the pandemic begin to subside and then there is a resurgence,” Lody said. “That is very disappointing and frustrating for those folks on the frontline.”
Capital Senior Living’s scale has helped alleviate Covid-19 fatigue among the workforce. The company has been able to tap workers at Covid-free communities to take shifts at communities with active cases, to provide additional support and allow some team members to step away for needed rests.
Lody is even more concerned with Covid-fatigue among residents, who are suffering from forced isolation and lack of physical activity during the pandemic. Maintaining infection control practices while enabling greater socialization with both other residents and family members is a top priority. Strategies include using technology, including by setting up FaceTime stations at communities, as well socially distanced outdoor activities and events.
The situation reinforces the value proposition of senior living being able to balance clinical and hospitality services, Lody said.
“Residents really rely on the social aspects and social model of senior living, and with the pandemic, that has been interrupted and adjusted,” she said. “They really feel that a lot.”
Envisioning the future
Like other senior living leaders, Lody anticipates that the pandemic will alter senior living in lasting ways, with changes ranging from more sophisticated infection control technology and air filtration systems, to larger communal spaces to enable social distancing if needed, to greater use of virtual tours and social media in marketing.
She also believes that the pandemic has hastened the process of senior living becoming more integrated into the larger framework of the U.S. health care system.
By managing through the pandemic well — keeping infection rates low through the implementation of more rigorous clinical protocols — senior living providers have proven that they can be valuable partners to health care systems and other potential downstream and upstream partners, she said.
Historically, senior living providers have been separated from other health care providers by the fact that they generally operate on a private-pay model rather than being reimbursed through Medicare and Medicaid. But, this is also changing. Lody has been keeping tabs on efforts to make Medicare Advantage insurance plans a more significant payer of senior living services, and she believes that it is only a matter of time before MA makes inroads across the whole industry.
“Especially as leaders outside the senior living industry begin to understand in greater detail what we do and how we do it, I think it’s inevitable,” she said.
Furthermore, with the continued rapid growth of the population of older adults, the increasing medical needs of senior living residents will necessitate that providers become part of the health care continuum.
So far, though, Capital Senior Living has not participated in any of the Medicare Advantage programs being developed and tested, as Lody and her team have kept the focus on executing their turnaround strategy.
Throughout 2019, the Capital Senior Living team devoted a great deal of effort to tightening operations, she said, and those efforts are reflected in the most recent results, despite the picture being complicated by Covid-19.
“In Q1 and Q2, despite the pandemic, based on public information available, we outperformed the industry in occupancy, revenue and NOI [net operating income],” she told SHN. “So, the actions that we took in 2019 to instill that operational discipline and that improved operational performance served us well in the pandemic.”
In the second quarter, Capital’s same-store portfolio of 118 communities posted an occupancy decline of 230 basis points, compared with an industry-wide drop of 280 basis points, according to data from the National Investment Center for Seniors Housing & Care (NIC). And, while overall NOI declined 2.5% sequentially, 50% of the same-store pool achieved sequential NOI growth, decreases in discretionary spending countering elevated expenses related to Covid-19.
The company’s second-quarter results were accompanied by news that 18 communities in underperforming loan pools would be turned back to Fannie Mae. This decision is part of a larger and ongoing effort to improve the company’s financial position, which began prior to the pandemic, Lody emphasized to SHN.
For example, the company previously announced its intention to exit all its triple-net leases with real estate investment trust (REIT) landlords, and this process has been underway. Once this is accomplished and the 18 properties are turned over to Fannie Mae, $470 million will be removed from Capital Senior Living’s balance sheet, and the company’s cash flow will improve by about $32 million, Lody said.
The coming federal support will also help shore up the balance sheet, and the company has received some relief funds from certain states as well. Lody is hopeful that continued advocacy will result in further money being distributed to the sector.
“I think the 2% of revenue is not nearly enough to offset the losses in revenue that operators incurred, as well as the significant additional expenses,” she said.
Indeed, while Capital’s early action to procure PPE may have saved dollars, the company still spent about $1.4 million on pandemic-related supplies in the second quarter, across its same-store portfolio. An additional $1.5 million went toward pandemic-related labor costs, including hazard pay for employees at communities with positive Covid-19 cases.
Even without federal support, this spending so far has largely been offset by the financial benefits of tighter operations and a leaner portfolio, Lody pointed out.
For example, within the same-store portfolio, discretionary spending decreased by $2.6 million sequentially in the second quarter, although some of that spending will return as sales and marketing efforts again ramp up. And the latest round of dispositions is narrowing down the overall portfolio to properties that have outperformed the company as a whole for several years.
“We’re a much stronger organization than we were 20 months ago, and we will continue to become even stronger as we go through these various community transitions over the next several months,” she said.