Senior Lifestyle Moves Forward After Shedding More Than 50 Properties

Having transitioned out of 50-plus communities in two portfolios over roughly the last year, Senior Lifestyle Corp. is now rebuilding scale while continuing to navigate the challenges of Covid-19.

The Chicago-based operator — which currently manages around 120 communities — is making progress on both those fronts, CEO Jon DeLuca and Vice Chairman/Chief Investment Officer Jerry Frumm told Senior Housing News.

In terms of regaining scale, Senior Lifestyle is slated to take over management of nine communities on Sept. 1. The provider also has an active pipeline of new developments, including two that just opened in the Chicago metro area and one that will soon break ground near Baltimore.

The portfolio contraction was not precipitated by the pandemic but rather occurred due to a variety of scenarios across different investor partners, DeLuca and Frumm said. And the company is not altering its fundamental strategy as it pursues growth.

On the Covid front, Senior Lifestyle has just implemented a vaccine mandate, spurred in large part by the delta variant. The provider also has forged a joint venture with a Medicare-certified physical and occupational therapy company, which Frumm says holds promise to enhance health and wellness.

DeLuca and Frumm also cited similar statistics, trends and challenges as other operators: Senior Lifestyle’s occupancy of 75% is roughly in line with current industry averages and lead volume is at a historically high level, but labor challenges remain intense.

Meanwhile, the delta variant remains a “wild card,” DeLuca said, although he is hopeful that the impact will not be severe.

Inside the portfolio contraction

Senior Lifestyle was managing 190 communities as of June 1, 2020, according to rankings released by the American Seniors Housing Association (ASHA). But the provider and some of its ownership groups were working through plans that would lead to Senior Lifestyle transitioning out of communities.

Prior to Covid-19, Senior Lifestyle and real estate investment trust LTC Properties (NYSE: LTC) had reached a “mutual agreement” to unwind the leases on 23 properties, DeLuca said.

During a recent SHN+ TALKS, LTC CEO Wendy Simpson said that she perceived a gradual shift in Senior Lifestyle’s “operating platform and philosophy.”

“Over the years, Senior Lifestyle took, in our view, more of a philosophy of, ‘We’re just a manager, and if there’s a problem at the bottom line, that’s not our problem.’ I think we might’ve been the last triple net lease they had,” she said.

Noting that Senior Lifestyle and LTC have had “a very cooperative relationship,” Frumm disagreed with Simpson’s statement regarding the bottom line.

“We always care about the bottom line,” he said. “We understand that we have responsibilities both to ourselves and to our investors to worry about the bottom line.”

Simpson was correct that this was Senior Lifestyle’s last triple-net portfolio, he confirmed, saying that the provider’s decision to move away from leases was a factor in why the “relationship was no longer compatible.”

“In a triple-net lease, the lease payment goes up every year, and operating results don’t always go up every year,” he said. “And so you’ve seen it in the industry in general, a move away from triple net to more of a joint venture structure.”

Indeed, RIDEA has been on the rise for years, and the issue of creating more optimal owner-operator alignment has been a hot topic in the midst of the pandemic.

Senior Lifestyle has a diversified capital base and a variety of structures with its owners, including management fees based on revenue with incentive fees, as well as structures involving a blend of fees on revenue and net operating income (NOI), DeLuca said.

Another situation that led to portfolio contraction involved 31 properties owned by White Oak Healthcare REIT. Senior Lifestyle collaborated with the REIT on a “strategic business plan,” DeLuca said, which resulted in the possibility of White Oak selling a portion of the portfolio that “didn’t fit” the portfolio while investing capital into the remaining communities.

But there was also a potential shorter-term strategy involving a complete sale of the portfolio if White Oak could command an attractive price. The REIT ultimately was able to sell 29 communities to Welltower (NYSE: WELL) for $147 million and two properties to Midwest Health for about $15 million. The new owners brought in different operators for the communities, including Pathway to Living and Frontier Management.

“Things like this happen all the time — people buy and sell and go in and out,” DeLuca said. “The unusual thing about that transaction coupled with LTC is that it all happened at the same time.”

With these transitions now largely in the rearview — the LTC exit is nearly complete — there is some additional uncertainty hovering. Senior Lifestyle manages 30 communities for Colony Capital, which intends to sell its $3.3 billion senior housing and health care portfolio. DeLuca and Frumm declined to comment on the status or implications of that sale.

Growth on the way

The community count in Senior Lifestyle’s portfolio is once again ticking up and is poised to expand further through acquisition and development activity.

Most immediately on the horizon, nine new communities are slated to come under Senior Lifestyle’s management as of Sept. 1, Frumm said.

And, construction recently wrapped up on The Sheridan at Oak Brook — a five-story, 200-unit community that Senior Lifestyle and Kaufman Jacobs co-developed in the Chicago suburb of Oak Brook, Illinois. Another Chicagoland development done in partnership with Kaufman Jacobs, The Sheridan at River Forest, had a ribbon cutting last spring. The community features 91 assisted living and 34 memory care residences.

Senior Lifestyle also is preparing to break ground on a community in Severna Park, in the Baltimore/Washington, D.C. metro area.

Through a new relationship with a private equity source, Senior Lifestyle took over management of three communities, with another to be added soon, DeLuca said. The PE source has another six communities in the pipeline, and Senior Lifestyle is providing development and design assistance, with plans to eventually manage these properties.

The provider is “always in discussions with our existing investors” and sees “opportunities out there” to assume management for additional communities, according to DeLuca. Meanwhile, the internal development team is currently vetting five or six sites.

Ultimately, a portfolio of 150 to 200 communities is “a nice sweet spot” for the company to benefit from efficiencies of scale and be able to reinvest in its platform, DeLuca said.

However, the leadership team is not seeking scale for scale’s sake.

“We look at each opportunity and decide if it makes sense for us or not; if it does, we do it, but we are not compelled to do anything,” Frumm said.

And the strategy in terms of portfolio composition has not changed. The company historically has had a diversified portfolio in terms of community location, size and levels of care. That diversity adds complexity, but as Senior Lifestyle regains scale following the recent transitions, the company is not seeking to create a more homogenous portfolio as some other large operators — such as Five Star Senior Living (Nasdaq: FVE) — have done recently.

“It’s more complicated, but I think our structure allows for that,” DeLuca said, of the portfolio diversity.

The structure that he spoke of involves an asset management team with directors who are dedicated to particular portfolios and have expertise in those types of communities. For example, the White Oak communities in southern Illinois involved many communities with Medicaid waivers, so Senior Lifestyle’s asset manager for those properties was well-versed in the Medicaid product.

“It’s about having the right person aligned on the right spot,” DeLuca said.

Other large providers with diverse portfolios have begun to pursue multi-brand plays, and Senior Lifestyle does operate buildings under different brand names, such as The Sheridan or its Senior Suites affordable communities. But, DeLuca and Frumm believe that the primary benefit of multiple brands is internal rather than as a marketing strategy.

“If you’re an employee that works in Jupiter, Florida, and you want to go to Austin, Texas, you know you can make that transfer very easily, because the way we operate in Jupiter and in Austin is very similar,” DeLuca said.

In Frumm’s perspective, only Sunrise Senior Living — with its well-known “mansion” model — has arguably succeeded in creating a brand with notable consumer recognition, at least for a certain period of time. He and DeLuca believe that a consumer still decides on a senior living community based primarily on its local reputation among referral sources and other influencers.

Having a diverse portfolio that is built up largely through acquisitions also means that Senior Lifestyle contends with a mix of higher performing and more challenging communities, given that portfolio deals almost always are a mixed bag.

“Ideally, do you want to cherry pick the best assets? Absolutely. Does that happen? Very rarely,” DeLuca said.

Senior Lifestyle works closely with its investor partners to assess and create business plans for each portfolio, he said.

Some of the recently transitioned communities do have room for improvement; LTC’s Simpson noted that among former Senior Lifestyle buildings, “occupancy increased under new management sometimes meaningfully” earlier this year. Many senior living communities were gaining in occupancy in early 2021 as Covid-19 vaccinations became available, Frumm observed, and he and DeLuca emphasized that the recent portfolio contraction is not indicative of any diminishment in the quality of Senior Lifestyle’s operations.

“We’re a professional operating company and our investors are asking for a certain level of quality and excellence, and certainly transparency, that we are very, very willing to give to them,” Frumm said. “Everybody’s got to up their game, and I think that’s what we’ve done, and I think that’s what’s happening in the industry across the board.”

Upping the game

As for how Senior Lifestyle is upping its game operationally, the provider is pursuing some new initiatives and partnerships.

Notably, the company struck a joint venture with a Medicare-certified physical and occupational therapy company, the identity of which Senior Lifestyle is not yet disclosing. This JV expands Senior Lifestyle’s business, with the primary goal of increasing residents’ health and wellness, Frumm said.

Under the JV, Senior Lifestyle communities will be staffed with a “wellness concierge” who will work with residents on personal plans and goals. The idea is that this will drive increased satisfaction while also translating to positive business metrics such as longer length of stay and fewer hospitalizations.

The JV also is in line with larger industry trends toward wellness and greater integration of senior living across the health care continuum. Frumm has been carefully tracking how “all the pieces of care management come together,” including how providers are bringing more care in-house, interfacing with referral sources and working with Medicare Advantage payers.

“This is going to go in lots of different directions, but definitely the trend is to understand how we can provide health care to our residents in as efficient a manner as we possibly can,” he said.

Labor is also a huge challenge for senior living providers in the best of times, and the current moment is especially difficult, given a general worker shortage across a variety of industries. The situation likely will improve as enhanced unemployment benefits are phased out, but Senior Lifestyle also is introducing new initiatives related to workforce.

Those efforts include higher pay and greater flexibility in scheduling, as well as a new program to subsidize tuition for educational programs related to senior living careers.

“We will pay for them to become a CNA … and then continue to move forward, if that’s what they desire to do,” Frumm said. “Those are the kind of people we want to attract to our company and our communities.”

Other changes are tied to the pandemic, including new infection control practices, upgrades to outdoor spaces, and increased use of technology for various purposes including sales and marketing. And with the delta variant causing surges in Covid-19 infections around the country, Senior Lifestyle last week introduced a vaccine mandate for its workers.

Senior Lifestyle had been pushing for its staff to also receive the vaccine, but did not feel a worker mandate was necessary, given that 95% of residents were vaccinated and therefore greatly protected from infection.

Now, with breakthrough cases being reported amid the delta-driven surge, a mandate makes sense, DeLuca and Frumm said. The company’s staff vaccination rate prior to the mandate was a little higher than 60%.

Looking ahead, DeLuca and Frumm are cautious about the threat posed by delta but bullish on the prospects for Senior Lifestyle and the senior living industry as a whole.

“Great things happen in our communities,” Frumm said, emphasizing that the industry needs to draw public attention to those great things going forward.

“Unfortunately, what gets reported are the difficult times and problems and issues, and we saw this throughout the pandemic,” he said. “… I’m enormously excited for where senior living is going in the future; I think all the services that we’re bringing in, the continued professionalization, if you will, of the operating side of the business is really beneficial for all the stakeholders. I see that continuing, and we just have to keep telling our story.”