Priority Life Care CEO: Senior Living Industry Needs More Middle-Market Innovation

Senior living operators have forged a few different models for middle-market communities in recent years — but Priority Life Care CEO Sevy Petras believes the industry has only scratched the surface of what it needs to do to meet the massive demand from middle-income residents by 2029.

The Fort Wayne, Indiana-based operator is trying to crack the middle-market code at its 34 communities across the U.S. The company recently took on 17 communities formerly operated by Eclipse Senior Living for Ventas (NYSE: VTR) and rebranded them under the Celebration Villa banner.

Part of the challenge in meeting the middle market is that baby boomers are thought to have less savings than previous generations, and fewer children to help them in their retirement years, according to Petras. At the same time, older adults are coming to senior living communities later in life, meaning they are sometimes skipping over more affordable rungs of the care continuum entirely.

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To Petras, the challenge is offering boomers a product they will both want to live in and afford. And to that end, the operator is trying to meet market demand through communities such as Celebration Villa.

“Whether that’s active adult or some combination of independent and active adult that is probably not providing massive amounts of care, it’s significantly less expensive for them to be able to afford it,” Petras told Senior Housing News during a recent appearance on the Transform podcast. “And it can look very different.”

While the middle-market opportunity is sizable, Petras sees many people in the industry who “don’t believe that you can get the right IRR or the right margin, or that you can’t make money off of it.”

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However, Priority Life Care is able to hit margins somewhere between 25% and 35%, and the operator sees the middle market as a viable and growing opportunity in the age of Covid.

“I think we’ve only started to scratch the surface with how we address it,” Petras said. “And it has to be twofold: One, how are they going to afford it? And two, how is it going to appeal to them as something that they want?”

Highlights of Petras’ podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts and SoundCloud. The interview took place in early January.

Where Priority Life Care is with its recovery in 2022:

Where we had made bigger strides in some of our portfolio, they were hit slightly later and were later to come back.

There are parts of Pennsylvania,where we have our largest portfolio, that have recovered very quickly and very well. And then there are parts of Pennsylvania where we’ve continued to struggle along. What I do think is interesting to note is that in Indiana — straight down the fairway, Midwestern State, Republican-led, is not going to adopt a mandate for the vaccine, most likely — we filled a brand-new building in the midst of Covid two months ahead of schedule, which was pretty impressive. It’s in Indianapolis, which is highly competitive, and I think that speaks volumes. I credit the developers on that community and our team’s ability to push through every and all barriers and obstacles with full lockdowns and Covid positives and lack of staffing.

It’s the same case [at our community] in D.C., where we’re filling up at a very rapid rate.

We did find at the beginning of the year that we would have some leases signed, and then [they said], ‘Well, I’m going to sign my lease and pick my unit, but I want to wait until after the holiday.’ Then after the holiday, they said ‘Oh, there are Covid-positives in your building, so I don’t really want to quarantine,’ and then those move-ins are pushing a little bit further out into February. You can’t really blame them or their family members.

I would say we have seen a 10% to 15% uptick in most communities in terms of inquiries. Where we’ve seen a shift in general is that there are less inquiries to tours. You are getting lots and lots of people asking — and some of them may even select their unit — without coming in, just because it’s so needs-based, particularly for those in memory care.

But whereas we used to have a lot more lookie-loos who are going to come in and do those tours, you’re having a lot less of those. So your tour-to-move-in ratio is significantly higher, because you’re just not having as many people coming in and window shopping as they used to do.

We’re giving out a lot more information than we ever did in the past. In the past, we always came from the mindset that you don’t give out the rates, you need to get people in to give out the rates. And I do think that the paradigm has shifted to something a little bit more like the multifamily world, where we’re placing all the pictures of the communities online and you can virtually tour. So they’re making decisions in some regards before they’re even speaking to us to say, ‘You know what? This price point is probably out of my range,’ or, ‘Hey, these are probably going to be too small, so I’m not even going to inquire.’

As an industry, we’re doing a much better job at utilizing technology and the internet and SEO. But that also goes with the fact that our target markets are now the baby boomers, who are extremely tech-savvy. They’re used to doing comparison shopping, and we’re also having Gen Xers are starting to help their baby boomer parents identify things. So the shift is twofold: One, as an industry, we’re starting to get with the times; and two, we do have a client base who are a lot more tech savvy and used to doing some research there.

On Priority Life Care’s new Celebration Villa brand

It really is about a celebration of life, and what that celebration is is different every day. It goes back to what our real mission is, which is to support independence. There’s nothing more important … than an actual hug, sharing a meal, listening in-person and seeing and experiencing a concert. It’s part of our human condition.

So that brand specifically came out of the fact that these are Ventas’ buildings, and as that shift from Eclipse came, they really wanted to let each of the regional operators create their own brand and vision for each one of those. So if we were to do more with Ventas — and we do have two other communities with Ventas, but they’re in South Carolina — that would be a question: Would you want us to just roll this into the Celebration Villa brand? So, that is specifically Ventas’, and if we did more things with Ventas — which we would love to — then that would we would ask if they want it rolled into that, or if they just wanted to keep that and we’d create a different brand.

Our sub-brands are typically more owner based. Our communities will say something like, “a community by Priority Life Care,” but they’re all specifically named according to what our different owner groups want.

We almost have a subsidiary that’s supporting these communities. And because of its interesting dynamic of having certain regional people that were over those communities with Eclipse — and some of them have been with the communities prior to Eclipse — we felt that it was a good move for us to provide some stability to the team

We really lucked out. There were some really amazing people that were there, and it gave us an opportunity to bump up some others who had been in the area and market. And we brought on a couple new people as well. We’ve been really fortunate with some really amazing people that were there and who were willing to stick around and work with us and join our team. We probably will keep that. If anything we would add to it as we continue to evolve in whatever way is best for the portfolio.

On middle-market margins in 2022:

Margins for everybody right now are extremely compressed, whether you are middle-market high end and anything in between.

Everybody just did a pretty significant rate increase to current existing residents. We did, on average, between 6.5% and 7.5%. We try not to go out too high, because typically what happens is then you have to come back down and make some concessions. So, we tried to get something that was reasonable and that we wouldn’t have to go back and recalculate and formulate our actual rates.

Do I think that’s the first of the big jumps? I do not. I think that we have one more year of unseasonably high rates. Normally, we’re all doing maybe 3% to 5%, if you had if you skipped a year or something. But going anything above 5% is pretty unusual. For the most part, very few people — including ourselves — got much pushback from the family members.

When we were doing all of our town halls with the Celebration Villas, one of the big things that the family members wanted to know was, ‘Labor’s tough, and we know that you guys are struggling, are you increasing people’s wages?’ And I would say, ‘I’m so glad you brought that up. We are, in fact, they hadn’t been given raises in like over a year.’

The second question they want to ask is, are you increasing rates? And to that, my first question would be, ‘Has your Starbucks price gone up? Yep. Has your milk price gone up? Yep. So are your rent prices.’ We explain that, typically, the reason that we’re doing it is that we need to be able to be competitive. We want to be able to offer competitive wages and benefits.

So, I think we’re going to see a compression in our margins, in general, for the next two years. So I think once we start to get into 2023, that is really probably when we’re going to start seeing those types of margins come back at a large scale. But generally, for our middle-market products, you’re still seeing margins somewhere between 25% and 35%. It’s going to be rare, you’re going to get into the 50%, which is probably more typical in some of your like class A brand-new builds in some markets. You’re very comfortably hitting your debt service coverages when you’re looking at margins that are 25%, 35%, 40%, so those are pretty typical of what you can expect.

The biggest thing with the middle market is being able to offer a good, affordable property, and programming. You need to understand what you can charge given where the marketplace is, and how much it is all to cost. Unless you’re utilizing a program like the Low-Income Housing Tax Credit (LIHTC) program where you’re getting the equity and other portions of things are coming from some type of a tax credit, the cost of construction right now is just astronomically high, simply because we’re all dealing with a lack of goods and supply chain issues. There are a lot of these particular types of projects that we’re working on in the LIHTC world, and they do utilize less conventional financing, such as bond financing and sometimes HUD construction loans, which can give you a lot more flexibility than your typical construction loan.

So, those are some of the ways that you can do it. You can do it by compressing your general overall mortgage costs; or if you’re buying an existing community, making sure that you’re buying the building at the right price point and understanding the type of CapEx that would need to be put into it.

Regarding margin, I think what that goes back to are what investors expect from their IRR, because that’s really what’s driving the need for certain margins. It’s really about what my IRR is going to be on my investment. And there are several investors out there, lots of different private equity shops, that all have significantly lower requirements for their return on investment.

So, they can do one or two things. They can either pay significantly higher for the type of asset that they want, understanding that because it is more expensive per unit, their return is going to be lower. But they’re also going to need to have those margins be a certain level to make up for the cost per unit. Or you can say, I’m going to pay the right price point so that I know that because I know my margins are going to be lower, I can still get the IRR.

So, it really just depends on the money. The banks really have very little to do with it. That’s just debt service coverage. Those are negotiable, those depend on the type of money that you’re borrowing from, it depends on the type of length of your borrowing the money, but really it goes back to equity. Are they short-term hold? Are they long-term hold? What type of equity is it? Family money? Is it pension fund money, and all of those things have different parameters, dynamics, and that’s what’s driving the need for those margins.

On the wider industry’s middle-market efforts:

We have so much work to do.

Most people don’t believe that you can get the right IRR or the right margin, or that you can’t make money off of it. So I think re-evaluating what it looks like and how we get there are two very separate things.

I recently had a friend who is going through trying to figure out what to do for her father, after her mother just recently passed away. And she is perplexed that Medicare didn’t cover any of this, and that it’s not that easy to get on Medicaid. Part of the problem is that we as a country have done a very poor job at helping our citizens understand what the options are. Let’s be honest, there aren’t many people who can afford to pay $6,000, $7,000 or $8,000 a month to live in a nearby area, just like they did in their current home. And perhaps while home values are exceptionally high and you can garner the highest price, the baby boomers notoriously didn’t save.

We’re looking at a very different population coming up here … [Boomers] had less kids than their parents did, so there are less adult children to help foot the bill. Our generation had kids later, so we still have kids at home that we’re taking care of. And our baby boomers, they don’t want to live with us and don’t want to be a burden. And they don’t want their care to look anything like it looked like for their parents or their grandparents. 

So, we’re dealing with a whole different can of worms in terms of trying to figure out, how do we make it affordable for them? And then most importantly, how do we make it attractive to them? Will there always be a place for assisted living and memory care? One hundred percent. But as we’ve seen in the last decade, it’s taking people longer and longer to need those types of services. People are living well into their 90s, in their hundreds, and that will continue to be the case with the boomers. 

So, I think that we need to have a better middle market [model], almost transitional for them. And whether that’s active adult, or some combination of independent and active adult that is probably not providing massive amounts of care, it’s significantly less expensive for them to be able to afford it. And it can look very different.

We also know home health isn’t an option for when you truly, truly need help. If you can’t afford to go into the private-pay community you want, you cannot afford private-duty, 24-hours-a-day, seven-days-a-week care. So, we need some type of advocacy service that really does help prepare our boomers and the Gen Xers and the Gen Yers for how to set themselves up appropriately for what they’re going to want and when they’re going to need it.

I love the CCRC entry fee models, but very, very few people can afford to buy into those. So, I think we have a big problem. I think we’ve only started to scratch the surface with how we address it. And it has to be twofold: One, how are they going to afford it? And two, how is it going to appeal to them as something that they want?

On staffing challenges:

It really depends on the market. I have some markets where we’ve had really strong people there for a long, long time and adding incrementally to the people that we’ve needed to replace hasn’t been a problem. And then we have plenty of places where staffing was a chronic issue prior to Covid that just got worse during that time.

The big question is, where are all the workers? The simple answer is, if you just look at the statistics, boomers are coming to retirement age and Covid intensified that for some of them. We have had a number of boomers who have decided to take a slightly earlier retirement than they maybe had anticipated.

And then Gen Xers, there are 11% less of us than the baby boomers. So, if we’re looking to replace a boomer who was a top-level leader, or even if they were at the hourly level, there was somebody who had a lot of experience who could be relied upon to replace them.

It’s also the first time that we’ve had three or more generations working in one specific place at one time. We have a very large array of people that are working and we’re trying to typically give them a one-size-fits-all when it comes to benefits packages, schedules and job titles. We’re never going to make one person happy if that is the case. We’re really trying to meet our workforce versus making the workforce meet us.

Our HR is called “corporate soul.” Every performance improvement plan is an opportunity to really bring the best out of somebody. Bobby, my brother, always likes to say, “It’s not a death sentence, it doesn’t mean that you’re going to get fired, it means I’m failing you as your leader, and as your team player and as your director, and you’re failing us as well.”

Covid has been a tough couple years for everybody, particularly our people on the front lines. A friend of mine from Ohio, she’s a nurse in a hospital and she posted something on Facebook that I thought really rang true to me. [People are] referring to our nurses and our doctors on the front lines as if this is war. Well, typically whenever you’re talking about being on a front line, that implies that there are reinforcements behind you. And in many, many situations, that is not the case.

We have been striving very hard to make sure that our teams on our front lines at the community level know that we are the reinforcements. At our communities our regionals have come in to serve dinner and to help cook to give our executive directors and our dietary staff and our nurses you know, time off.

I’ve heard all kinds of stuff like we need to utilize more technology [to beat the staffing crisis]. Sure, we do need to use more technology. But unfortunately, we haven’t been very successful in working with many technology companies that understand you need to make [workers’] jobs easier and not more difficult.

We’re working with an adaptive clothing wear company, Joe & Bella. They sent some of their demo clothing to our caregivers, which are pants and some shirts that have been in development, and they are having them utilize those. And then they’re going to do these extensive interviews with them to say, ‘Hey, what did you like about it? Did it help here?’ As they’re continuing to develop these products.

On the challenges and opportunities ahead in 2022:

I see continued opportunities and ways that we can improve.

I think that Covid has given us an opportunity to step back and take a breath and say, what are we doing right and what are we doing wrong? I think it’s become very clear that as a country — not just our industry but as a country — we’ve been doing a lot of wrong things when it comes to our workforce. And, with the boomers retiring and Gen Xers moving up into more leadership roles and then the millennials — they have a different capacity and their views of things are different, like. We really are starting to see the true changes of this generation coming up and then in the one coming behind it. They’re just so aware of the need to be inclusive, and the need to understand. I think sometimes the previous generations would feel like, ‘Oh, you need to toughen up.’ I heard that a lot as a woman in the beginning of my career, growing up in banking and investment banking in particular. It’s not about being tough, it’s about doing what’s right,it’s about being fair and not just giving everybody a trophy for participating. The generation coming up, I feel that we’ve all been really learning from them.

I think that there is like a huge opportunity for us to figure out how to best attract people into our industry. I think that we’re missing the boat on that. Most people think, ‘Oh, well, I have to be a nurse to do this, or I have to have had that background.’ And that’s absolutely not the case. And those are some of the things we’re trying to work on — how do we get people who want to give more and get more out of their career and show them that in senior housing? There’s a wide range of career opportunities, not just at the caregiver level, but in the back office, in marketing, in maintenance, in dietary, in health insurance and banking and private equity. There are all these ways that we are doing something to impact the lives of our seniors every single day. I think we need to be better. That’s an opportunity.

What am I afraid of? I’m truly afraid that we’re we’re just we’re going to get so tied up in this stuff that we’re not going to see the forest through the trees. Don’t make it so complex, let’s keep it simple and we can find solutions. 

The other thing is, I feel like we were so collaborative as an industry during Covid, and prior to that I felt like so many of us would just hold our cards close to the vest. But it is so important for us to work together with Argentum and ASHA to go to Capitol Hill and say, ‘Hey, our seniors deserve this, our employees deserve this, our owners deserve this. We deserve to have some of this assistance and we’re providing a much-needed service.’ A lot of people are fearful that perhaps as a result of doing that, we’re opening the door for more federal regulation. But I just feel like it would take so much for them to get something like that together and they’d also have to coincide it with some way for Medicare to help pay for some of this stuff, too. So, that’s probably not one of my bigger fears, because I play in the Medicaid world for assisted living.

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