How Vertical Integration of Development, Operations Can ‘De-Risk’ Senior Living

Having a vertically integrated senior housing development and operations business is not for everyone — but for two Chicago-based companies, doing so has been valuable.

The example of these firms — CA and Vermilion Development — shows how vertical integration can help drive success in an increasingly complex industry, and can support efforts such as serving a middle-market consumer.

CA is a global real estate company with $13 billion in gross asset value; its senior living arm has 42 communities open or under construction, 32 of which it manages under the Anthology Senior Living banner. Vermilion owns nine assisted living communities in Indiana, and operates them under the Silver Birch Living banner.

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For companies that can tolerate it, closely managing operations helps to “de-risk” investments in senior living by more closely controlling the riskiest processes, such as lease-up or getting a turnaround community off the ground, according to Ben Burke, President of CA’s Anthology Senior Living platform.

“You can build a really nice building in a really good market on a really good corner, and if it’s poorly operated or you’re not in alignment with your operating partner, those properties sometimes don’t do well,” Burke said during Senior Housing News’ recent BUILD conference, which was held virtually. “To help de-risk our investment, we wanted to be able to, in a hands on way, control the marketing, the sales and the hiring of the team members at the community-level to drive velocity in our lease-up and quality of care.”

But while having a hand in operations means more control over the end result, it also takes a strong stomach, and involves many more people and moving parts.

“I don’t think it’s a solution for everybody, [and] it depends upon how hands-on you want to be involved in the nitty-gritty details,” Vermilion President and CEO David Cocagne said. “We went from a development shop, which generally has a pretty small footprint from a human perspective, to having 500 employees.”

Going vertical

CA began operating communities under its Anthology brand about 18 months ago. The process was gradual but developing and operating always was the intention for CA. The burgeoning operator relied on its parent company for help with sourcing capital, human resources, accounting, construction, development and other business functions until it could move those services in-house.

Vermilion, meanwhile, has operated under a vertically integrated model since about two years ago. Today, the company has more than 500 associates and about 920 residents living in its communities. Unlike Anthology, which is predominantly private-pay, about 92% of Vermilion’s residents are on Indiana Medicaid waivers, meaning that they have $2,000 or fewer in the bank.

Both companies see big advantages in vertical integration, and in having much more control over a senior living community’s financial results, and its culture. For Vermilion Development, using a vertically integrated model means the company can more nimbly respond to the challenges it faces, such as with leasing and staffing, according to Cocagne.

“Our community-level leaders — some of whom have been with us since we opened and thus made the transition from third-party management to vertically integrated management — have really enjoyed having a much more nimble organization,” Cocagne said.

Vertical integration also helps Anthology make sure the development and ownership side of the business is culturally aligned with the operations side.

In building a new vertically integrated senior living company, it all starts with people, Burke said.

“It’s amazing what a really good executive director can do to turn around a community. The same is true with an operating business,” he explained. “That first hire that you make to be on the operational side [needs to be] someone who really knows the ins and outs of the community, someone who really knows how to think through sales and marketing, food, care, … recruitment and HR.”

Information technology infrastructure is also vitally important for a burgeoning vertically integrated organization — as is a “fully stocked bar and a full bottle of Tylenol or aspirin,” Cocagne joked.

“[We] learned the hard way about 10 to 12 months after taking over our first communities that we were going to have to go through another IT migration,” he said. “That was a real challenge.”

Challenges and opportunities

In addition to opportunities and advantages, building a vertically integrated senior living business comes with some challenges. For instance, it makes the act of running such a company harder by nature. Executives already must worry about capitalizing new deals, extending credit lines and corporate growth, and vertical integration only adds more responsibilities to that pile.

“All those things are still on my plate, but I’m also focused on reducing turnover, implementing training programs, thinking through childcare issues for first-shift employees whose kids are going to school,” Cocagne said. “It brings with it all of the challenges that go along with having 500 employees, and their benefits, their insurance, turnover and their credentialing.”

As with the rest of the senior living industry, both companies have run into challenges related to the ongoing Covid-19 pandemic. Being vertically integrated has helped Anthology weather that storm, too, Burke said. In particular, the company has been able to more quickly align with its operations team to confront adversity as it has arisen. Anthology is also able to more closely manage leads and move-ins to help build occupancy.

Vermilion, on the other hand, was able to leverage its vertical alignment to build a centrally located supply of personal protective equipment (PPE) and other supplies to weather future infection outbreaks.

And both companies see new opportunities on the horizon, as well. Cocagne, for instance, sees opportunities to locate communities within mixed-use developments in metropolitan areas, such as Chicago, and satisfy local affordable housing requirements.

“Creative developers that are doing mixed-use work and have some of these requirements are beginning to say, wait a minute, we can serve seniors in a unique and different way from how they’re being served today,” he explained. “And in an affordable housing project that might satisfy some of the legal requirements that we have as a result of our entitlements, but also serve a market niche that really isn’t being satisfied today.”

Vertical integration can also help the senior living industry in its quest to serve the middle market.

“By controlling operations, it allows us to dynamically look at how we run these buildings, find savings, create best practices and use technology to allow us to offer that middle market price,” Burke said. “Whether that’s less nurses, some continuum of care with outside providers or use of technology, those types of things all put into a blender are going to be what creates the ability to to lower your price, in addition to cheap financing.”

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