With the addition of 22 communities as part of a new relationship with Welltower (NYSE: WELL), it’s been an eventful summer for Pathway to Living.
But joining forces with partners like the Toledo, Ohio-based real estate investment trust is just the beginning of what Pathway CEO Jerry Finis wants to accomplish.
Near the top of the list for Finis is bringing independent living to its next evolution by making it more affordable and appealing for the baby boomers.
“Everything that we can do in the industry to get the price points down and make it as affordable as we can does nothing but expand the marketplace for us,” Finis said during a recent appearance on the SHN podcast Transform.
He believes Covid-19 is prompting a “reshuffling” of the senior living landscape, where deep-pocketed buyers will dominate the landscape. The industry must achieve forward momentum while also not falling back into the development-heavy real estate cycles of recent years, he added.
At the same time, operators must find new ways to attract and keep workers, many of whom are exhausted after a long, hard pandemic. For Finis, part of the answer involves figuring out how to pay higher wages.
“We can’t always just hope that we can pay barely enough to fill a position,” Finis said. “We’ve got to make a career out of this, and it somehow has to fit into the cost structure of the industry.”
Highlights of Finis’ podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts and SoundCloud. The interview took place in early July.
On Pathway working with its new partner Welltower:
Welltower approached us. They had been approached by the brokerage community that was representing the sellers, brought us out to market, and they thought it was an opportunity.
We had never done business with Welltower before, but they got to know a lot of the folks here over the years. And they knew we were involved with some Medicaid waiver projects here in the Midwest. We actually had looked at this portfolio several years ago, a little bit with the Welltower folks when they were considering it probably about three years ago. So, there was a little bit of a connection.
Welltower was one of the organizations out in the forefront of bringing in their operating partners and sharing resources, information and best practices. We look forward to that, and we think it’s going to make a big difference. Because they are a public REIT, we had to go through a whole different process in accounting. That’s been a little bit of a learning curve, but we’re on top of that.
The way that an organization like Welltower works is that they want to expand the relationship that they have. We all get familiar with one another. Their model is to only have certain operators in their various regions and expand those relationships if they can. Over time, there will be more that fits into our footprint and fits into things that we want to do. The large financial institutions like Welltower, they get presented these big opportunities first. They see things before most operators, like ourselves, will see it. The REITs seem to be very busy, so it will be an interesting next couple years.
The concept of alignment is important. The whole industry is going that way. The old 100% financed sale-leaseback transaction, I’m not sure about long-term. Markets move up and down, and I’m not sure that the alignment is right. I think the RIDEA-type structure, which is very similar to a joint venture equity-type structure, is much more aligned, where we all participate in the upside.
On the need to bring independent living to its next evolution:
The older independent living model is not necessarily going to work for the boomers. The new independent living model is going to be more affordable, and it will find a way to be less one-size-fits-all in terms of the service bundles people buy, with more optional services.
That’s all going to attract a bigger footprint of folks, because not everybody wants three big meals a day, and not everybody wants all the other things you can get for the age group that they’re in. So, I think it’s going to be the optional services that are going to make a difference. Everything that we can do in the industry to get the price points down and make it as affordable as we can does nothing but expand the marketplace for us.
In terms of the model that we are working on … it was really somewhere between active adult and your typical independent living setting, again, with these optional services. I think the industry is defining itself right now, and as these products get segmented out in the marketplace and go after different market segments, it will be interesting. We’re not sure what senior living 2.0 looks like, but we know it’s evolving.
On meeting the middle market:
The middle market: when that started becoming en vogue, the big development boom was still going on and everything was new construction. And we’re all trying to figure out how to possibly deal with the middle market, because everything new construction has to be expensive without some other form of subsidy.
With Covid and all the occupancy declines that have hit the marketplace, I think that is going to make things more affordable. I think it’s going to be unbundling on the independent living side, but it’s hard to do unbundled services too much on the assisted living side because their needs are so great. And we all know that the average age of folks moving in and the average acuity of folks in assisted living has just grown and grown and grown, and it’s not obvious that that’s going to slow down.
So, I think it will be an interesting time to see how that shakes itself out. There won’t be tons of distress in the marketplace, but there is going to be enough for the capital costs of the brick-and-mortars, and the real estate should be a little bit lower in price than it was a couple of years ago.
Older communities that have been renovated are still cheaper than building brand-new. So that’s going to more likely serve that lower price point, and the higher-end new constructions are going to be for a higher price point.
On the scope of the recovery Pathway is seeing:
From a practical standpoint — at least here in the Midwest — from March 15 of 2020 until December 31 of 2020, nothing changed except that we knew a vaccine was hopefully coming.
Then, from January 1 to mid-March, we were doing nothing but vaccinating the residents and as many staff as we possibly can.
The folks who were living with their kids or in their home or some other place out in the community were not [immediately] vaccinated, and in the Chicago metro area, they weren’t really vaccinated for some time until around early April. So, they really weren’t able to start thinking long and hard and feel comfortable getting out until sometime in the springtime. That’s when we started seeing a lot more of the inquiries really pick up.
We started seeing more move ins, we started seeing a lower-acuity resident coming back into the marketplace. That doesn’t mean they are low acuity, but lower than we saw before. The only folks that did move in during the pandemic were the ones who really had no other alternative.
So, we’re seeing activity and everything else really picking up. My only question is, how long is this? We don’t know, yet. Are we dealing with a lot of pent-up demand that’s going to keep us busy for the next couple of months and slow down? Time will tell.
I think we’re going to see another little surge [of demand] sometime in September or October. If mom is at home living with her daughter and their kids, and now all of a sudden the kids are going back to school and so maybe Mom goes back to work, all of a sudden, everything might open up again.
But it’s not like an apartment building where, if you really worked hard and demand is crazy, you can lease out 50 units in a month. It just doesn’t work that way in senior housing.
On opportunities that lie ahead:
I think the opportunities are going to come in bunches, meaning you’re going to see groups of projects being sold at a time. Maybe smaller groups, but not as many one-off type community sales as we saw before.
The financial buyers that have the cash — between private equity and the REITs — are going to be dominant for the next year or two. The banking industry is going to be a little bit slower to come back into senior housing. There is definitely going to be a reshuffling of the marketplace, and I think it’s going to make a big, big difference — but you have to have the cash to be able to execute.
For example, this portfolio we just did with Welltower, that would not have been an easy portfolio to finance with a bank. Those are the kinds of opportunities that are going to exist. I think you’re going to see a lot of owners exit the industry. From 2014/2015 until Covid really started, there were a whole lot of newer entrants in the senior housing space, a whole lot of developers and owners that came in from other other sectors of the real estate industry and said, ‘Oh, senior housing, I’ve dealt with Mom and she wasn’t happy where she was at, I can do better. Let’s go build one.’ I think those kinds of folks are going to be the ones that are going to exit when they can, because they find out it’s a hard business to operate.
On the biggest pitfalls ahead:
The biggest risk to this industry is the staffing, wages and labor problem.
I’m not sure what the answer is long-term. It was difficult even before the pandemic hit. We were wondering in the industry if, when the hotels shut down back in March, April, May of 2020, if those folks were going to come meander over to senior housing, and fill all the openings that we had. And I think we were all relatively surprised that it didn’t happen as much as we thought it would.
It will be interesting to see how that shakes out. At any one community or in any market, you can do some things, but in general, working in senior housing — especially on the frontline staff — is a very difficult position. It’s demanding, it’s different hours, it’s just not an easy way to make a living. And we as an industry have to try to find a way to make it more attractive.
Chicago raised the minimum wage to $15 an hour, I think it was $14 or $13.50 before that. We were already at that or above in our Chicago, Chicago metropolitan area projects, but in general, that keeps pushing the bar up and I think we’re going to have to have to deal with that. If somebody doesn’t want to work for our senior housing community for $15 or $16 an hour, then they go down the street to Target and work for $17 an hour. It’s a competitive world, and we have to figure out how to compete in it.
We can’t always just hope that we can pay barely enough to fill a position, versus somebody else having to work two jobs. We’ve got to make a career out of this, and it somehow has to fit into the cost structure of the industry. That’s the way that this industry gets stabilized.
On what lies ahead in 2021:
The whole industry is back in lease-up mode today. That doesn’t mean you won’t have communities or markets here and there that, for whatever reason, weren’t hurt as much by the pandemic in terms of occupancy. But I think it’s just going to take a while.
We all have to be cautious and disciplined about what we do and what we’re doing over the next 12 to 18 months. Everybody has to run lean and mean because of the state of the world today. I don’t want the industry to get ahead of itself, because I think that doesn’t help at all.
When you look at the development that went on in ‘15, ‘16, ‘17, ‘18, I hope that we don’t have the same crazy numbers of new buildings. Everybody says, ‘The boomers are around the corner,’ well, the boomers have been ‘around the corner’ for 15 years, and they’re really still 9 or 10 years away from assisted living. I just hope that the industry is going to have enough discipline to not allow the new entrants just to come in and throw up communities wherever they want. Frankly, it gives us no pricing power to pay their wages that we maybe are going to have to pay in the future.
We have to solve these other problems to make sure that we regain the confidence of the consumer. If we don’t do that, it doesn’t matter. If it’s not attractive to somebody or at least a certain part of the population, it doesn’t doesn’t make a difference how much or how little you pay for a particular building.
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