Capital Senior Living (NYSE: CSU) has shrunk considerably during the two years since Kim Lody became CEO, going from 129 communities to 68. But with its portfolio restructuring complete, recent moves have been focused on growth, and the future of the company is becoming clearer.
Today, the Dallas-based provider is announcing the rollout of a new memory care program, which in its pilot phase led to significant occupancy gains. Also in 2021, the company has launched a management services platform and hired a vice president of information technology.
“Our number one priority has been keeping our residents and employees safe,” Lody told Senior Housing News. “We’ve also recognized that there would be an end to the pandemic at some point, and when that would occur, we want to be ready to take advantage of the market conditions and our own ability to grow.”
She and the executive team at Capital Senior Living are hopeful that the Covid-19 vaccine will lead to a more normalized operating environment later this year, at which point they will be able to exercise levers of growth and lay to rest lingering financial distress clouds, which led to a going concern warning last year.
Lody described three primary levers for future growth. One lever is to drive organic growth and occupancy through new operational processes and programs; another is to grow through the company’s new management services arm; and another is to make capital investments in its portfolio while seizing on opportunistic acquisitions.
This is the plan for the fourth and last phase of a larger reinvention of the company, which the company’s leadership has been pursuing through a strategy dubbed SING, for stabilize, invest, nurture and grow.
Lody and her leadership team believe that there is pent-up demand in the market, and that having differentiated resident programs will be key to winning this business as the pandemic subsides.
The new approach to memory care is one example of the work that the company is doing on this front.
“Despite being in the midst of a pandemic last year, we developed and rolled out a new memory care program to five communities,” Lody said. “That program was based on a tremendous success that we had in the pilot or test community that rolled it out and really brought the program to life.”
Called Magnolia Trails, the program was developed in consultation with dementia care expert Rachel Wonderlin. The approach focuses on individual needs and preferences, with full sensory engagement a key component.
For instance, dining is available on a flexible basis throughout the day, and residents receive warm, scented washcloths before meals, while soft music activates the sense of hearing.
All Magnolia Trails communities will use a resident engagement app to facilitate ongoing connections with families and loved ones, including through real-time photos, videos and updates. And staff go through a hands-on training process and pass a dementia knowledge exam before starting to work with residents. Staff then go through quarterly training in memory care practices and techniques, with quarterly certifications creating a career path.
Investments in the physical infrastructure of memory care buildings is also part of the program’s rollout, as the environment contributes to “consistent, excellent outcomes for residents,” Capital COO Brandon Ribar noted.
While the benefits to residents have been palpable, according to Ribar and Lody, the Magnolia Trails model should also bring business improvements. The first community to pilot this approach saw occupancy increase from 69% to 100% with a wait list, and average monthly rent increased 5%. In Q3 2020, average occupancy across Capital Senior Living’s same-community consolidated memory care units was 75%, and average monthly rent for that period was $4,707.
The plan is to implement Magnolia Trails across Capital’s 37 memory care communities this year.
Other new programs are also in the works or are under consideration, in areas as diverse as telehealth, culinary, clinical offerings and social engagement.
“You can expect to see more from us on these program items,” Lody said.
New processes, new org chart
New resident programs are enabled and supported by operational practices and processes that have been implemented since 2019.
For example, finances and accounting are now being handled in new ways, including through changes to the general ledger and the introduction of personnel and tools.
In making such changes, Capital Senior Living joins a growing trend; in recent years, several senior living providers have evolved their finance function to be more integrated with operations, and to take advantage of new technologies to harness financial data for decision making across the enterprise.
“Philosophically, we took financial reporting from being a kind of ‘recording history’ sort of a function to being more of a business information set and collaborator with Brandon and his team,” Lody explained.
Following the recent departure of CFO Carey Hendrickson, the finance team now is led by SVP of Accounting and Finance Tiffany Dutton, who joined the company in January 2020. Her priorities have included reducing manual processes, shortening the monthly close process, engaging with the operations team, and delivering financial data that is more digestible.
This work has resulted in more visibility around how services being provided in communities are being billed, to ensure that revenue reflects the services rendered, Ribar said. Real-time information related to collections has also been enhanced, enabling best practices to avoid bad debt.
Other functional areas have also gone through changes, including sales and marketing. For instance, Capital Senior Living rolled out a revamped website last year. As has been the case for providers across the board, Covid-19 further accelerated changes in sales and marketing, including a rapid expansion of digital tools.
Going forward, investment is planned to ensure that digital materials are “top-notch” and easily accessible, Ribar said. The Capital team is focused on rapid responsiveness to inquiries, delivering content that meets consumers’ needs and interests while showcasing the company’s new programs.
These new ways of doing business are underpinned by changes in the company’s organizational chart and structure. As the portfolio has gotten smaller, the payroll has also shrunk. For 2021, general and administrative (G&A) expenses are estimated to be $7.5 million less than annualized G&A costs for 2020.
With the addition of Jay Reed as VP of Information Technology, the executive leadership team is now fully in place, Lody said. In terms of the rest of the organization, Ribar went through an “extensive exercise” to flatten the organization as it scaled down.
The result was removing a reporting layer, so that today, executive directors report to five territory directors, who report to Ribar.
“Kim and I are both huge proponents of the executive directors really being the heart of our organization, and being very close to them and working with them on a day-to-day basis,” he said.
The fear when going through any sort of organizational restructuring is losing top talent, and he is confident that Capital has maintained “the strongest talent profile at the operations leadership positions.” In that part of the company, there are not currently open roles.
“Those folks are all excited about where we’re going together as a team,” Ribar said.
A future in middle-market management
The SING strategy has involved some pain and tough calls. For example, the company decided to hand 18 underperforming communities to non-recourse debt holder Fannie Mae.
The handover did improve the balance sheet, as did the move to exit all triple-net leases with real estate investment trust landlords.
The shift away from leases is also an ongoing trend in the senior living space, as rent escalators and other lease provisions proved burdensome or untenable as operating conditions became more difficult due to oversupply, labor concerns and, most recently, Covid-19.
Capital Senior Living’s triple-net exit was formally completed at the end of 2020. Today, Capital’s portfolio consists of 60 owned communities and 8 under management agreements. These 8 communities form the basis of the management services business that is a lever for future growth.
The company is open to managing communities that are not under the Capital Senior Living brand, Lody confirmed.
“If we can offer operational expertise and put that to work on behalf of another owner and they can benefit from that, and we can benefit from that, we’re happy to do that,” she said.
Capital Senior Living’s skill-set lies in serving the middle market, and that will be a particular focus as the management services business expands. The average blended rate across the portfolio in Q3 2020 was a little under $3,600.
“We are committed to the middle market and have always operated outside the major metros in some secondary and tertiary locations,” Lody said. “… We think we’re really good at that, at providing a high level of value for the rent we receive.”
While Capital has long operated in this segment, the middle-market landscape is changing.
More developers, operators and other players are eyeing this space, seeing the massive demand coming as the baby boomer generation ages. And they are seeking innovative ways to bring rates even lower, and to offer more robust care and other services to these consumers. They are considering or implementing options such as smaller units with shared suites, starting or joining Medicare Advantage plans to expand services, and utilizing tech to supplement staff and further raise the bar on operational efficiencies.
Now that the first stages of SING have been completed, Lody believes that Capital Senior Living has reached a “jumping off point” for considering some of these approaches.
“Whether it’s by more participation in state programs — if that makes sense economically, because they don’t all make sense — perhaps joining in on some of the Medicare Advantage plans, and also utilizing real estate in different ways, I think those are all opportunities that we have available to us now,” she said.
2021 and beyond
Although putting the pieces in place for growth, the immediate focus remains on the pandemic response, and in particular the vaccination process.
So far, Lody and Ribar are pleased with progress. More than half of the company’s communities have gone through a first-dose clinic, and second-dose clinics are starting to occur. Resident participation has been north of 80%, Ribar said, and staff participation is trending up.
Across the industry, staff participation has been lower than resident participation. Some providers have opted to make vaccination mandatory for employment. Capital Senior Living has not done so, but is observing what drives staff engagement in order to maximize uptake. One key is running an organized clinic and taking pains to make it an uplifting event, Ribar said.
“People change their minds over the course of a day when the leadership of the community or regional leadership sit down first and take the vaccine, and continue to talk and share experiences,” he said. “Maybe only 25% or 30% [staff members] signed up ahead of time, but we’ve ended the day with 60% to 65% participation on the staff level.”
Staff vaccination is also likely to trend higher in the second clinics, as some people were always going to wait and see, he noted. Education efforts and a change in the national discourse away from a focus on side effects and toward vaccine availability also have helped.
Still, it remains an open question as to how quickly the vaccination process will take in senior living and in the general population, in order to achieve the level of immunity needed for a return to normalcy. Another unknown relates to the new administration in Washington, D.C.
“I do think that there will be some movement around more standardized reporting … in particular in assisted living,” Lody said. “And I think the industry needs to come together and be proactive in working on those things.”
But despite these unknowns, Lody, Ribar and Dutton expressed optimism about what the future holds for Capital Senior Living, and investors also appear bullish. The company executed a reverse stock split in December, and in recent weeks shares have been moving up, from around $12 per share in early January to a recent high of $26.99 on January 21.
“We’re a completely different company today than we were a year ago,” Lody said. “And we’ve reorganized nearly every area of the organization and channeled our investments into places that will bring the most value.”