A 3-Year ‘Big Sort’ of Senior Living Winners, Losers Is Underway

A couple weeks ago, my colleague and SHN Managing Editor Tim Mullaney offered his post-NIC thoughts that the industry is entering a tough spot.

I agree the industry is entering a period fraught with perils, including rising interest rates and cost inflation.

But I also believe that the stage is set for senior living companies to make a comeback — some of them, anyway.


It’s a notion that came up in a recent discussion with Solera Senior Living Founder and CEO Adam Kaplan, who agreed that a “significant transformation needs to occur” for the industry to succeed in the future. But he is also optimistic that operators that prepare for that transformation and adapt with the times will stick the landing.

“Fortunately there should be multiple winners — and losers,” he told me.

In this week’s exclusive, members-only SHN+ Update, I offer my analysis of key ideas from the NIC conference and offer takeaways, including:

  • Winners will beat the competition in figuring out the formula for achieving pre-pandemic margins
  • That formula will be different for various companies
  • Creative partnerships, diversified business models are emerging as crucial

The margin timeline

At NIC, I heard two main schools of thought regarding the future of senior living margins.

One camp is downbeat about margins, pointing to inflation and labor market strife. The other camp is more upbeat, emphasizing that pre-pandemic margins are still within reach for operators that can adapt to a new cost landscape.

Ultimately, I think that both camps are correct — weaker operators that are not able to adjust their operations and cost structures will never get back to pre-pandemic margins, while stronger operators will be able to solve for higher costs. To my mind, the real question is how long it will take to separate these two groups.

That question of time is an issue that Brookdale Senior Living CEO Cindy Baier brought up, in saying, “What we earned historically is a reasonable margin, but it’s going to take some time to get there.”

That clock is now ticking, and operators will be feeling increasing pressure from their lenders and equity groups. Several comments at NIC drove home that dealmaking in the coming months likely will be dominated by distress situations — while rising interest rates put pressure on prices, sellers will be those organizations that have no choice but to take a deal.

Signs point to this just being the start of a “big sort” of winners and losers, as sector-wide recovery is not going to occur any time soon — at least one real estate investor is looking ahead as far as three years for margin recovery.

“It’s really up to our industry and some of us on how we pass through care, and how we can manage the labor costs, [regarding] what those margins become in 12 months,” said Kayne Anderson CIO David Selznick. “In 24, 36 months, they should be back to where they were.”

Stifel analysts also recently provided a perspective on the possibility and pace of margin recovery; according to their calculations related to Brookdale’s shares, investors currently are pricing in a scenario in which recovery ends in 2026, with margins permanently lower by 200 to 500 basis points.

“We think this is too pessimistic,” they wrote in a note, pointing to an anticipated “inflection point” for earnings growth in 2023 to 2024.

Stifel is looking primarily at the variables of pace of occupancy growth and OpEx growth relative to rate increases. And while they are looking at a mix of “historical and recent data” to make their assumptions, I think that these occupancy growth and operating expenses are hard to predict based on what has happened in the past — even the recent past.

That’s in part because the economy is in such a dynamic state. Labor costs could ease if a recession takes hold, and there are indications that this might be increasingly likely. Households have been rapidly spending down money saved during the earlier days of the pandemic, which could portend a big slowdown in consumer spending.

“According to the newly revised stats that came out on September 30, the savings buffer peaked at only $2.1 trillion in August 2021, and roughly $630 billion — or 31% — of that cushion has been spent,” Business Insider reported.

On the other hand — as Brandywine CEO Brenda Bacon pointed out at NIC — very little has unfolded in a predictable way when it comes to the labor markets. Workers did not return as expected when enhanced unemployment benefits expired, for instance.

This observation supported her larger point that to drive margin, providers must not look back at what has worked in the past, but think differently.

“I hear people say so much, ‘We need to get back to a stable workforce, get back to the margins,’” Bacon said. “I really think we need to think about, ‘How do we go ahead?’ Because I don’t think anything goes back.”

Winners and losers

All this is to say, do not expect margins to rebound to pre-pandemic levels quickly; rather, the next two to three years could be the time period in which struggling providers fold or get acquired, while new models emerge and prove themselves successful or not.

As for what these new models will look like, the conversations at NIC also provided some clues.

At least in the short-term, active adult is gaining greater luster. The recent NIC active adult report seems to have spurred even more interest, and it was one of the topics du jour at this year’s NIC.

With higher margins and lower risk than traditional senior living and a resident base that is significantly younger, I believe it will become an even larger part of senior living growth plans in 2023 and beyond. And already I can see the pieces falling into place from senior living companies including Ryan Cos., with Executive Vice President of Senior Living Julie Ferguson telling me in a recent podcast interview that the developer is planning to go big on the space in 2023.

Even companies that aren’t currently playing in the space have made it a target in the future. For example, new operator Chapters Living is first planning to grow in memory care, but then expand into active adult down the road, CEO Danny Stricker told me at NIC. On the debt and equity side, companies including Livingston Street Capital, Freddie Mac, and PGIM Real Estate are also placing new bets on active adult.

Ryan Cos. also has been focused more on the high end of senior living, given that there is greater pricing power for this demographic. Likewise, Kaplan’s Solera Senior Living is bringing a next-generation luxury product to market, and is working with partners such as McCaffery Interests that bring significant expertise from other real estate sectors.

I think infusing such outside expertise will be helpful in shaking up typical senior living operations and finding new efficiencies to drive margin; Belmont Village, partnered with Greystar on new developments, is one example.

Another idea under discussion at NIC was going bigger on adult day services, and elevating or reinventing these offerings to increase their appeal.

In the end, I think “winners” in the space are likely to be providers with strong and creative partners from other parts of real estate and health care. And winners will also have diversified business models that can tap into different areas of demand for revenue streams.

For example, envision a Greystar active adult property co-located with a Belmont Village senior living community, perhaps with a healthy living center staffed by a health system like Baptist Health South Florida. With all three companies partnered up, there’s staffing and health care support from the health system, and the senior living community has dual referral streams — the independent living side might be fed by the active adult community, the health care units might come more through health system referrals. Meanwhile, there’s an intergenerational feeling to the site that appeals to the next generation of consumers.

This is just one scenario; I’m sure there will be many other experiments in senior living to come. Pursuing such experiments will demand a tolerance for risk, but as I often hear, the biggest risk is probably sticking with the status quo.

Companies featured in this article:

, , , , , ,