Vi President: High Senior Living Construction Costs Present ‘Great Time to Lock Up Land’

It seemed likely last year that a return to the rental market was at hand for Chicago-based senior living operator Vi. Then, high construction costs pushed the company to put those plans on hold.

But President Gary Smith is not despairing or looking for a backup plan. Instead, he believes the company was fortunate that it did not move forward with its plans given where construction costs are at the beginning of 2023.

“While we weren’t 100% confident it was the right decision to make back then, seven months later, we have no doubt that it was the right thing to do,” Smith said during a recent appearance on SHN+ TALKS.


As tough as conditions for new senior living development are in 2023, he sees a silver lining in the fact that now may be a great time to pick up and ready sites for development down the road when construction prices are more reasonable. And while Vi is not moving forward with its plans for a rental community in Arizona, it is on the hunt for land acquisition opportunities today that could pay dividends tomorrow.

Smith is not only looking for growth in the form of new development. The company is currently “spending more than ever” on its portfolio of 10 life plan communities, including $65 million to update community units and common spaces.

“Our capital budget for 2023 is one of the biggest that we’ve ever had,” Smith added.


Meanwhile, the company is working to push its average community occupancy past its current 90% watermark, an effort that includes everything from new ways to engage residents to targeted hiring and retention efforts.

We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:

— How Smith is preparing Vi for the senior living industry’s next chapter

— Recruitment and retention, and how Vi is breaking the mold in staffing

— What Vi has planned beyond its plans to re-enter rental senior living

[00:00:05] Tim Regan: The last time that we caught up was at the NIC Fall Conference in September of last year, which wasn’t that long ago but feels like a world away. How have things gone at Vi since then?

[00:01:52] Gary: Well, other than a hurricane called Ian, the last three months of 2022 have been good.

I don’t recall if we discussed it when we were together, but around that time, we were preparing at that time for our annual insurance renewal, which usually takes place in early October. At the end of September, our community in Naples, Florida was hit by Hurricane Ian, which was one of the worst ever to hit Florida. It started out as heading toward the northern west coast of Florida and then kept changing direction and finally hit ground around Fort Myers. The damage it did to southwest Florida was devastating.

Luckily, we escaped major damage in our community. We sheltered in place and around 130 of our team members locked down with our residents to take care of them. Our team just did an incredible job of taking care of our residents and taking care of getting things back to normal as quickly as possible afterward. Beyond managing through Ian, we ended the year with strong financial results at all of our communities.

Our entrance fees came in about 10% better than we budgeted. We missed our NOI budget at about half of our communities due to cost inflation, as I know we’ll be talking about; but we beat our budget at the other half, which is quite an accomplishment for 2022. We continue to have workforce labor challenges, which I know we’ll also talk about, but we’re in a much better place than we were mid-year, and we had many accomplishments during the year. I’m extremely proud of our team members during what was a very challenging year for us.

[00:03:41] Tim: I’m very glad to hear that your community in southwest Florida was not severely damaged by the hurricane. Where are you still feeling the most pressure in your operations right now?.

[00:04:49] Gary: Sure. That’s the case for us too, but like we talked about in September, it continues to be the workforce. We’ve always talked about how proud we’ve been as a company for our employee turnover rate to be around 20%. As an industry, that was typically around 50% as a norm. During 2021, our turnover jumped up to about 32%, with the great resignation, the great retirement, and somewhat from our self-imposed mandate for all of our team members to get vaccinated, subject to allowed exemptions.

The higher turnover continued into mid-2022. Then from around July through the rest of the year, turnover finally started coming down to what we would call normal levels. Of course, it didn’t just happen. Retaining our team members and attracting new employees was one of our top priorities for 2022, and continues. Then beyond that, general inflation in all areas has been a challenge — food, utilities, insurance. Labor costs are a little over 50% of our operating costs, so that’s the biggest pressure point.

Going into 2022, we generally increased monthly fees about 4% to 4.5% not anticipating the ongoing impact of inflation. I think that was pretty consistent with what a lot of other CCRC operators were doing. Going into 2023, we needed to increase our monthly fees by more, from around 7% to 10%, which was a tough message to deliver but was generally understood by our residents. They weren’t happy about it, but they seemed to understand it.

[00:06:30] Tim: Earlier this year, we had our senior living executive forecast. Lots of good things made it in there, but one thing that I was really interested in was something that HumanGood CEO John Cochrane wrote, which is that he said it was time for the industry to pivot away from what he called “crisis mode.” The reason I want to bring that up is because I think that fits into this theme of moving from crisis to opportunity. I’m curious, has Vi made a similar pivot away from “crisis mode?”

[00:07:14] Gary: Sure, yes. I think that “crisis mode” is unfortunately a good description of what we’ve been through for the past three years. First crisis, obviously, being Covid. That really dominated 100% of our attention during 2020 and 2021. Then came the second crisis, which is the unprecedented workforce shortage. That really dominated our attention during 2022. I know it isn’t a great management strategy, but we’re keeping our fingers crossed that we’re over the hump for both Covid and the worst of the workforce shortages. That means, in terms of pivoting, we get to devote more of our attention to other matters that we were focused on prior to Covid.

That means continued improvement of the experiences for our residents, providing them with the lifestyle opportunities that they expected when they moved in. We’re really focused on those opportunities within lifestyle with our program called Living Well. It also means continuing to make Vi a great place to work for our team members, so reinstating and enhancing leadership training programs, some of which got back-burnered over the last couple of years, and bringing together leaders during the year in person to share best practices and reinforce relationships. We had a number of those meetings over the last six months, which have been great.

Then we’re continuing to re-invest in our community. We didn’t stop spending on capital during the past three years, but our capital budget for 2023 is one of the biggest that we’ve ever had. We’re continuing to pursue growth strategies and the growth opportunities where it makes sense for us. I know we’ll be talking about how we’ve got some headwinds that are challenging along that direction. It’s not a pivot for us to something completely different, but it’s really getting us back on the track that we were around before the Covid disruption derailed things.

[00:09:12] Tim: I remember early on in the pandemic when margins really started to get hurt and occupancy went down, I remember the conventional wisdom that I heard was, “Well, okay, we’ve lost occupancy before, all we have to do is regain it. Revenue will come back, margins will come back and that will be that.” I’ve talked with more operators in the last six months or so who have told me, “Well, we’re back to our pre-pandemic occupancy, but we are not back to our pre-pandemic margins.”

Do you feel like the bar is now higher with regard to occupancy? What does that do to the stabilization of a community?

[00:10:00] Gary: Since I’ve been with the company — over 21 years — 90% has always been the goal. That’s the magic number you want to achieve. If you wanted to get financing from Fannie or Freddie, you had to demonstrate 90% occupancy for trailing three months. In our continuing care contracts for our new CCRCs, we set them up so that 90% occupancy was the threshold that went from fill-up to stabilized mode.

That said, we weren’t satisfied just to be at 90%. We strive to be at 95% or more in independent living. At the end of 2022, we are at 90% overall, 85% in our care centers and about 92% in independent living. We’re over 95% in about 60% of our communities. We do have a little bit of a different business model than what rentals are seeing in terms of where they’re really more focused in NOI. Our focus from a return perspective is on net entrance fees. NOI is still important because that’s what drives the monthly fee.

As we get occupancy up, we’re dealing with cost pressures. That’s what really has been challenging for us in our industry. We strive to break even in our operations after allowing for an FF&E reserve. It may give us a little bit of an advantage that when we increase our monthly fee that our residents know that we’re doing it to cover the cost of operating the community. We’re pretty upfront of what those costs are, and we’re not doing it to make a profit. That said, it’s important to have to cover the increase in cost that we’re all facing.

[00:12:09] Tim: I want to ask you an impromptu question. This is actually probably something I learned during the recent ASHA conference. I had a very interesting discussion at ASHA at one of the happy hours about these care homes in the UK that did something similar to entry fees, but it was at the end of a resident’s stay, not at the beginning. I found that really fascinating.

Have you ever thought about how that could even work? We had questions about whether or not that would even be possible in the United States.

[00:12:57] Gary: Like an exit fee?

[00:13:00] Tim: I’m not sure. Maybe. When a resident moved out, celestial or otherwise, that was when the money would change hands. It was very interesting.

[00:13:18] Gary: We have several different models. We have one in Hilton Head. It’s a condo model, so the residents own their units, and when they move in, they pay a membership fee. That membership fee is 35,000, plus or minus. Then they’re responsible for the resale of the unit, or the family when there’s turnover. I’ve seen other models that will charge that kind of a fee on the back end. When the unit gets resold, they carve out a piece of that to cover this fee. It’s a variation on a theme. Depending on how it’s structured, it may be challenging to get that at the end.

[00:14:08] Tim: Let’s talk a little bit about cost inflation; big worry, big challenge. Staffing, it sounds like is where you are seeing the most of your cost inflation. I’ve heard many more times in the last six months than any other time that it’s a new normal. Do you feel like it’s a new normal, and how are you dealing with it?

[00:14:41] Gary: I think it is a new normal. We’ve done some pretty dramatic increases in wages over the last several years going into this year. As we know, we can’t go backward. We don’t anticipate paying people less going forward. We also certainly want to be as efficient as we can, but there’s challenges along those lines. End of the day, it’s really being able to push rates to keep up.

That’s been really a challenge for the industry and, as I talked about earlier, with our fees going up higher than they ever have before, it’s certainly been consistent with inflation and it’s been helpful to help move us forward to try to get margins recovered.

It’s in various areas. The new normal includes other cost-drivers like food. There, I think we do have some anomalies that are, hopefully, going to come back down. Have you tried to buy a carton of eggs lately? The price has tripled since 2020. Hopefully, that’s temporary. There’s certainly an issue with the bird flu and the chicken population, but it’s really pushing us to try to be more innovative, more inventive, more creative in how we operate. With food, we just entered into a new group purchasing organization or via an arrangement with a new GPO. It’s called HSPI. They’re part of a company called Avendra, which is known for working with hospitality companies.

We’re expecting to save about 10% in our costs this year working with them. We’re focusing on food areas that haven’t inflated as much, looking for alternatives where we can. We’re getting more requests for more and more vegetarian and vegan meals. I love these terms, that we’re trying to be more plant-forward and we’re doing a protein flip. Not only addresses what residents want but it also saves costs, given the inflation we’ve been experiencing in proteins. Our residents want more flexibility in how we operate our restaurants. We’ve had some nice success in providing small plate options and more fast-casual choices.

These are meals that are still prepared from scratch in our kitchen but they not only address the request, but they can be done at a lower cost. They’re a full four- or five-course meal.

We’re also re-engaging with the Culinary Institute of America, which is a great way to provide training to our chefs to be able to be creative and current and also learn how to do that as economically as possible, with a focus on eliminating waste and controlling costs. Then we’re all set to have an onsite training session with our executive chefs and executive sous chefs this spring at the Culinary Institute of America training center in San Antonio.

And then insurance — that includes health, property, workers comp, liability, cyber risk. We’re doing everything we can to minimize premium increases. Some of those, hopefully, are just temporary, but we are doing what we need to to continue having the protection that we need. Property insurance has been really difficult. We struggled to just get our recent renewal to be just over 20%, given all the losses the insurers have been dealing with, that along with the inflated costs of rebuilding after a loss that has to factor in, but we’ve been really pleased that we were able to actually decrease our premiums and liability insurance and workers compensation, given the good experience we’ve been having.

You just really try to manage your costs as much as you possibly can in this new normal.

[00:19:01] Tim: We’ve talked a little bit about staffing and some of the trends that you’re seeing. Last year we sent out a survey and one of the questions that we asked was, when do you expect industry-wide staffing pressures to improve?

Somewhat pessimistically, the majority of the folks we surveyed — 42% — answered beyond 2024. A little bit over a quarter said the second half of this year, and then a little bit under a quarter said next year. Beyond 2024 — that’s a long time for staffing woes. Do you agree with that or do you think it may be sooner?

[00:20:03] Gary: We’re expecting it to be sooner. Probably, late 2023 or maybe early 2024 to get back to the staffing levels that we’re accustomed to. As I mentioned, we had some real challenges that peaked out around mid-year 2022, where our number of open positions crept up to be about double what they were pre-pandemic levels. From that point forward, with a lot of measures we put in place, we began seeing improved results every month through the end of the year. We’re in a really much better place now than we were back then.

Our agency costs in total are still higher than they should be, and so we’re continuing to make recruiting and retention a top priority. I think like others, our key challenge positions continue to be in nursing positions, culinary, and housekeeping. Even with the January results that we’re seeing, our number of new hires is outpacing the number of terminations.

Our annualized turnover rate is down to around 24%, so still higher than we were pre-pandemic but much better than we were experiencing through mid-year 2022. We’re optimistic that this trend will continue and that we should be in a much better place by the end of 2023, if not, early 2024.

[00:21:33] Tim: It seems hard to compete against companies like McDonald’s or Amazon for workers. These are deep-pocketed companies that can typically offer a dollar or two higher than what you can or at least what I assume senior living operators can. How do you compete with that?

[00:22:15] Gary: They, I think, were some of the employers out there who were leading the way and pushing wages for frontline employees early on in the pandemic. We’ve had to be responsive for the last couple of years to be able to offer a competitive rate. We’re doing a lot of different things to recruit talent. Of course, we raise pay. Nobody in any of our communities makes less than $15 an hour and many above that. We’ve had really good success with job fairs. We’ve had good results bringing on corporate-level recruiters. Something we’ve never done before.

We’re in the process now of increasing our recruiting resources in the markets that we serve. We have two communities in Arizona that are hiring somebody local and that are sharing that person. Then we have a recent addition to our arsenal that we implemented, a software system called ERIN, to be used for employee referrals. Referrals are one of our biggest sources for new hires. We’re calling the initiative Talent Scout. Employees can scan a QR code, they go to that app, and that keeps track of their referrals, and then it ends up with dollars and points for them.

We also just launched a similar process for our residents to make and get payments for referrals of potential employees based on their experiences with workers outside our community, whether they’re at a restaurant or out shopping. We just launched that and we’ve already had some great referrals.

In terms of competing with McDonald’s and Amazon, nothing at all against them, in fact, I’m a customer of both, but I think that our team members would rather work in our environment feeling like they’re serving a bigger purpose and mission, and we have career paths that can lead to a very successful career.

I think that shows up in the turnover numbers. I just was looking the other day and I saw that their turnover rates, at McDonald’s and Amazon, are like 130% to 150%. That’s not sustainable for a company or an operation like ours.

[00:24:44] Tim: Yes, they’re always churning, always hiring. In Amazon’s case, I’ve heard that once you’ve worked there and left, you don’t go back.

[00:24:57] Gary: It’s a question: At some point, are they going to run out of labor because everybody’s already worked there?

[00:25:03] Tim: Right, exactly.

I want to talk to you about another trend I’ve seen. This is on the topic of luxury. I know that Vi is a high-end operator. I know that you guys are not at the very, very top of the market; not this ultra-lux price point. I know that the higher end is something that you guys are focused on.

If you’ve read Senior Housing News in the last few weeks, you’ve probably seen stories about lease-up trends at higher-end communities. I found it interesting that there were some cream-of-the-crop communities out there that are having some trouble with lease-up.

That was surprising to me because when these were being built, it seemed as though this was the best of the best, and if you’ve got the money, this is what you’re going to want. Again, knowing that Vi is not at that price point, do you have any thoughts about those trends in luxury senior living right now and what people are and maybe are not looking for?

[00:26:14] Gary: It’s actually nice to hear somebody say that Vi isn’t at the very top of the market because that’s typically where we are.

[00:26:25] Tim: Nationally, no; but maybe you are in the local market.

[00:26:28] Gary: I understand what you’re saying. With these ultra-luxury concepts, they’re in markets like New York and San Francisco, and gosh, they are charging up to $25,000 or more per month for rent. It’s just hard to imagine paying that kind of rent.

I love it. It’s great to see that there could be a market for that. We’re eagerly watching to see how that goes. It’s hard to sometimes translate high rent to a CCRC where there’s an entrance fee involved. I do think we’re among the top in our market still.

We found that demand in our communities is remaining really high. I talked about the occupancy in our portfolio. We’re really happy with that and we’re expecting the positive momentum to continue through 2023 and beyond. I don’t know if you call it ultra-luxury, but we’re developing 64 new independent living units as part of our Bentley Village community in Naples, Florida.

These apartments are large. They range from 2,650 square feet to 4,500 square feet. They have entrance fee prices of $2.5 million to $4.5 million, with an 80% refundable entrance fee. They’re bigger than anything we’ve done before with the exception of what we’ve done in Palo Alto, probably one of the priciest. We’re about 75% sold. We’re under construction. Started construction in August of 2022, we’re about a year away from completing the project. Demand has been really strong. Some of it is market specific. In that market, that works really well. We enjoy not being the only high-end option within a market.

[00:28:42] Tim: It does seem like this is a kind of senior living that is proliferating. There’s more of these companies that do this, it feels like, every year.

Something else that I thought of when I was writing some of those stories is that maybe being a luxury operator is just different these days. Ten years ago, I’m just assuming, what a luxury senior living community was is different from what a luxury senior living community is now

Do you feel like you have to go above and beyond or at least do things in a different way to be a luxury operator than you did 5 or 10 years ago?.

[00:29:29] Gary: We started 35 years ago when Penny Pritzker set out on a mission to bring hospitality to senior living. What she was seeing on a personal level with her grandmother was a lot of institutional field offerings. While I’ve only been with the company for about 21 years, I’ve seen a continuous increase over time in the services and amenities that we provide for our residents.

We strive to be one of the most upscale choices in each of our markets. With the natural aging of communities, that means making significant reinvestments of capital if you want to stay relevant.

I was just at the 20-year anniversary for our Vi at the Glen community here in Glenview suburb of Chicago. It looked like it was brand new. We had recently completed a $7 million remodeling, and I might be a little biased, but even after 20 years I think it’s still the top choice for senior living in Chicago. And we’re fully sold with a waitlist. We’re remaining relevant. More than just reinvesting capital, we’ve definitely seen more players entering the luxury space, so we’ve sought out more differentiating high-end experiences our prospects and residents are looking for.

We’ve started offering more flexible dining opportunities to meet their busy lifestyles. As I mentioned, we’re providing small-plate options in our bar areas and fast-casual that there have been a lot of requests for. They don’t necessarily want to have a formal traditional meal every day, especially if they don’t have time for it. We’ve really evolved our fitness program to a higher level. We’ve been installing high-quality fitness equipment that includes technology to allow for a person-centric experience. It really tracks their progress. We utilize technology in our upfront assessment and then continue to monitor and customize the residents’ experiences over time.

Then the lifestyle I mentioned earlier, our Living Well program. We offer over 300 different options over the course of a month. It just gives the residents so many different options to choose from. Then they have a lot of input if there’s new things that they would like to see. It’s somewhat relative that we get driven by what our residents request and what others are doing, and we do see the bar continuing to increase.

[00:32:10] Tim: I want to ask an audience question here. It starts with a comment. “I appreciate your insights regarding these technology investments. Outside of health and wellness, where else do you find technology providing benefits to Vi?” I was also actually going to ask you about technology. This is a good segue.

[00:32:44] Gary: It’s everywhere, from the interesting to the mundane. Our tech mantra has been that we want to be leading edge within our industry, but not bleeding edge. There are lots of products out there — I think Randy Richardson referred to them as “shiny objects” — that really seem interesting and make promises that often aren’t realistic.

We think it’s important to use technology to make our operations efficient and provide great experiences for our residents, but you have to be judicious and not only focus on the cost of the implementation, but providing training, making sure it’s something that will be used; and then it needs to be supported on an ongoing basis, which could be costly.

In terms of specific analogies, we’ve continued to evolve our live-streaming capabilities for programs that really started during the pandemic. We still offer classes in a virtual format, but we’ve now added the capability of participating in these classes on demand and on different formats. If you can’t join our virtual yoga class live at 10:30 in the morning, you can take the course anytime and do it on a number of different platforms, whether it’s TV or your mobile phone, or laptop. It really increases convenience and accessibility for our residents, and we’re continuing to invest in higher-quality AV equipment for that experience.

While I’ve mentioned being on a leading edge but not on a bleeding edge, we piloted a robot for our dining rooms at a couple of our communities. That seems to be going over well. Then also a robot vacuum cleaner, so a supercharged Roomba. I assume there will be more use of robot and chatbot technology — some of that may be in the near future. Some of that I think for now is still considered bleeding edge, so we’re keeping an eye out, but we’re not jumping into it.

We’re also investing in resident tech support with a full-time position. We’re piloting in a couple of our communities and providing additional tech training to some of our current team members so that they could support the tech needs of our residents, which is something that’s important.

We’re excited about a company intranet that we implemented during 2022 that we’re calling the Vi Hive. It’s an app that our employees download, just going to the app store, and it provides all kinds of great information. If I have a message I want to get out I can put it out on this app.

We recognize employees and celebrate successes, and for each of these stories our team members can like it and provide comments, and so it gives them an opportunity to weigh in and feel connected. We’ve been talking about doing an intranet for many years but it just never made it. The Vi Hive is still in its infancy but it’s been a big hit so far and we’ve got over 70% participation, and it’s growing.

Then when I mentioned the mundane, I’m also excited about some of the simpler things that we’ve accomplished like digitizing the multiple manual forms that we have for various things that residents need to sign up for and such. That’s been a great use of technology to make operations more efficient both for our residents and our team members.

[00:36:25] Tim: I don’t want to name any names or give too much away here, but I heard a funny story about an operator that partnered with someone on a robot that would check on people. Apparently that the researchers had programmed inappropriate words into the robot it would say, but they thought only in the lab.

[00:36:56] Gary: Oh, geez.

[00:36:57] Tim: That seemed like an example of the bleeding edge and not the leading edge. I’m glad to hear you’ve had a better experience with the robots.

[00:37:11] Gary: It’s a little scary out there. Just all the stories about what chat GPT can do and how it can be used or misused. It’s really interesting to see where that goes.

[00:37:21] Tim: Talk about scary. This is the tool that’s going to put me out of a job.

[00:37:26] Gary: Well, maybe all of us.

[00:37:28] Tim: Maybe.

That was a good question from our audience member. If anyone else has any questions, please send them in. I am going to ask you specifically about business intelligence. I’m not sure how much of this was in what you just said. I am curious, how much information do you collect? How do you track data? Then maybe if you could flesh out what metrics you’re focused on in your operations. That’s a question we get a lot from our audience.

[00:37:56] Gary: Sure. It’s been a focus of mine since I started with the company 20 years ago. I think it was Peter Drucker who said that if you can’t measure it, you can’t manage it. It’s always been important to us to try to get useful and actionable information, trying to sort through it and get that as quickly and easily as possible. We collect lots of data and do our best to make it as useful as possible.

Every day I get an email, first thing in the morning, with a flash report of occupancy and sales and move-in activity. If the news isn’t good, I’m comfortable rationalizing that one day does not a trend make. That’s just an example of trying to get useful information, and occupancy has always been one of the key metrics for the industry. We have a portal that we created that has all kinds of useful business intelligence information reporting that we keep developing and improving over the year including various sales information such as leads and appointments and tours and sales and move-ins and move-outs. Then you can slice and dice it any way you want. You could even look at it by sales counselor.

We track sales related information using software called Enquire and we just implemented their module for tracking information relating to keeping our care venues full. We can now see how many referrals we’re getting each day and how we’re responding to those and getting more intelligence along those lines. We track all kinds of care-related information. We have skilled nursing in all of our communities, and so we’re tracking nursing hours per resident day; Medicare utilization. Then incidents, looking for trends if there’s falls or any other types of mishaps.

Then we track the number of work orders our residents generate and how fast we resolve them. We closely track metrics like overtime and the use of agency labor. We monitor food costs, looking at it on a per-resident basis. Then with our website, we track all kinds of metrics there, trying to make sure that the experience of those who come to our website, that it’s as meaningful as possible.

Then we track the amount we spend on every apartment turnover to ensure we’re making good use of our capital dollars and we’re not spending on something that we just did a couple years ago without questioning it. We’re spending over $100,000 per unit turnover if it’s an apartment that hasn’t been updated for a while. So we have to make sure we use that money wisely. I can really go through every department and rattle off the various data we’re collecting. It’s just a constant evolution and evaluation and refinement, trying to get the most meaningful and actionable data to keep.

[00:41:00] Tim: The next 12 months seems like a good opportunity for a lot of operators to keep the momentum, get back to pre-pandemic occupancy, and really hit the ground running.

In our survey that we talked about earlier, we asked our readers, “When do you think occupancy is going to go back to the pre-pandemic norms across the industry?” It was pretty equally split between next year and the second half of this year. What are your thoughts?

[00:42:07] Gary: I think that Beth Mace does a great job of tracking information like that and looking at trends. It’s great to see the trend that we’ve been on of increasing occupancy every quarter going back over a year now.

The silver lining of some of the headwinds that we’re facing in terms of the development front of knowing that there isn’t going to be as much new product coming out of the ground is going to offer up an opportunity to recapture occupancy more quickly as an industry.

I think Adam Kaplan talked a little bit about whether certain communities will probably do better than others. He talked about things like architectural prominence of a community. I think that gets back to where I was talking about reinvesting in a community and having it stay relevant is really helpful. On average, I think the recapture of occupancy will continue to happen over the next couple of years and for some more quickly than others.

I feel lucky that, within our portfolio, we’ve had a really good experience of coming back. From a prediction standpoint, I’m feeling pretty good about us through the end of 2023, early 2024, and for most others in the same timeframe. There are some communities that just aren’t going to be relevant and are going to just be challenged to make it work.

[00:43:46] Tim: Yes. It seems like there’s a wide gap right now between the really good ones and then the ones who are still struggling.

Vi had plans to get back into the rental market. Is getting back into the pure rental market still on your radar? Or are you thinking about other things this year?

[00:44:31] Gary: No. It’s definitely still on our radar. The rental business, that’s how our company started 35 years ago, through both development and acquisition of luxury rentals.

We sold our rental portfolio in 2011, and from that point forward we’ve focused solely on CCRCs. We love the CCRC model and tend to do more, and still think that there’s a great opportunity on the luxury rental side for independent living in many markets and independent living including a continuum of care of assisted living and memory care as well.

Based on what we were seeing happen in 2022 — which changed dramatically from the beginning of the year to the middle of the year — was project cost inflation and the pullback of new construction financing and climbing interest rates, and the compression of margins driven by wages and cost inflation. We, unfortunately, decided to put a couple of projects we were pretty excited about on hold.

When I say unfortunately, that’s how we were feeling at the time, which was early July, 2022. While we weren’t 100% confident it was the right decision to make back then, seven months later, we have no doubt that it was the right thing to do for us, at least in those circumstances. We’ve always taken the longer view and we think it’s a great time to lock up land that we think will be good for new development. That usually means, when you do that, taking time to change the zoning or other entitlements in order to get it ready, and that can often take a year or more.

We’re optimistic that that could be great timing for us to be able to start building at a point in time when we think construction costs will at least become more predictable and reasonable; and that they will probably have some time then for pricing to catch up. The cost accelerated so fast and pricing hasn’t been able to keep up with it. So, yes, it’s still in our radar and it’s really more focused on looking at land opportunities.

[00:46:55] Tim: What other avenues of growth do you see ahead for VI?

[00:47:11] Gary: We’re fortunate that we still have a lot of growth potential within our existing portfolio. As I mentioned, we’re spending more than ever in capital. We’re spending almost $65 million of capital this current year to update our apartments, to remodel commonary spaces, to improve operating efficiencies as well as normal maintenance. This is what allows us to have 20-year-old communities that look new and remain relevant to our customers. We see a nice return on this reinvestment, especially compared to what our returns would be if we didn’t keep up our communities and we see that sometimes when we’re looking at acquisition opportunities where the owner of that community didn’t keep up with keeping up their communities.

I previously mentioned the expansion we’re doing at our Naples, Florida community. We’re on the fourth phase of redevelopment that started in 2014 at this 35-year-old, 155-acre community. After this fourth phase, our spend will be over $300 million to replace clubhouses and add a new sales center and add new independent living units, and in some cases replace buildings that have become outdated and expand and update our care center buildings.

Then I mentioned in August of 2022 we broke ground on this new phase of really large and high-end units, and that pre-sales have been strong and we’re really excited about that. We expect over time to have additional phases of redevelopment in the future in that community. That’s something that we’re contemplating looking at. Probably not to that extent, but we do have some redevelopment expansion opportunities at a couple of our other communities.

Although we won’t likely be breaking ground on any new community construction in 2023, we continue to look at acquisition opportunities. I think one of our biggest challenges is that after 35 years in the business, we know too much. So, when there’s an acquisition, we’re often inheriting problems that can be really difficult to fix, which is why we pivoted to our growth strategy in the early 2000s to primarily focus on new construction. But there are potentially great acquisition opportunities ahead, especially for communities that are over-leveraged with increasing debt requirements.

In the recent survey, there was a question in there about whether the participants were expecting to be a seller or a buyer or hold tight this year. I think it said almost 50% of participants plan to buy senior living communities in 2023, but only 11% plan to sell, which looks like it could be a good year for sellers — or not.

It’s going to be interesting to see what comes with that. That’s how we’re looking to really grow the company from a revenue stream, and we’re always looking for opportunities beyond monthly fees and the fees that we get related to our care center population.

[00:50:31] Tim: In the last few years I’ve heard a lot of chatter among CCRC Life Plan Community operators who will say things like, ‘We’re going to take the end of the continuum — skilled nursing or the higher acuity care — and then instead of having the care at the end, we’re actually going to put an extra step in the beginning in the form of something like active adult or even like a 55-plus cottage arrangement.

Do you have any thoughts on the utility of replacing certain rungs of care in the continuum, or do you think that the highest-acuity care component is just too much of an important part of the value proposition of what this is?

[00:51:27] Gary: Well, we believe the care component is really critical in our model. We understand all the interest in the active adult sector. What really makes that of interest to some is that there isn’t care being provided but care is welcome to be brought in. On the skilled nursing side, we have skilled nursing in all of our communities. Residents like to know it’s there if they need it, but hopefully they won’t need it; and many don’t. We do think assisted living and memory care is important and is going to continue to be important.

There’s something to be said for not having skilled nursing because it really makes things more complicated and difficult and challenging, especially given how heavily those are regulated.

Typically you’d want to have maybe at least some kind of relationship with a skilled nursing provider in the market that somebody could feel comfortable with. We’re looking at that as whether that’s something that would make sense for us, but we haven’t gone that path yet but we recognize that that takes some of the risk out of the equation and you could certainly depend on the licensing requirements in the state, do more in assisted living than you used to be able to.

[00:53:10] Tim: I want to ask you another off-the-cuff question here. This was something that was mentioned in our webinar earlier this morning: Housing prices. I know that those are important to the entry fee CCRC structure. It seems to me like there’s chatter about whether or not housing prices are going to significantly drop this year.

On the flip side, I’ve specifically talked with CCRC operators who say, “Well, housing prices were really high, so they can drop a little bit and we’ll still be okay.”

I won’t ask you to weigh in on what’s going to happen with the housing prices, but does that concern you?

[00:54:22] Gary: That’s something that we’ve always been concerned about.

It used to be that the housing market was really local, and so it wasn’t across the country. All that changed in 2008 and 2009, and for reasons that I don’t think are in play now. So I think it’s getting back to housing prices being more local. But certainly across the board, interest rates have been a real challenge, and mortgage rates have been a challenge that’s affecting everybody.

We all see that it was crazy and unsustainable, what was occurring for a couple of years. We don’t really see there being bubbles like there were back in 2008 and 2009, but it certainly got to a point that wasn’t sustainable to keep going.

What we’ve seen happen is as rates have been going up, sales volume activity has come way down, but prices have held up. Key driver there is that inventory levels are low. Somebody looking to buy still doesn’t have a lot of great choices, and so they’re having to pay prices; and those who are selling, if they don’t need to sell, they’re holding back and waiting.

It’s something that we are keeping an eye on. There’s certainly been some price drops at certain price points in certain markets. A lot of the markets that we’re in, the prices are still hanging tight. As you mentioned, they could fall some, and it still would be at a price probably much higher than where the owner had bought into, and so it’s still a good number. I just heard this morning that there are, across the country, 1.5 million new homes needed in order to meet current demand.

We’re feeling that the housing market is certainly in a different place than where it was, and that’s probably a good thing. We’re not worrying too much, but we’re certainly keeping an eye on it because there’s certainly a correlation between the ability of somebody to sell their home at a price that they are willing to sell at that drives their ability to buy into an entrance fee.

[00:57:16] Tim: I want to specifically get your take on the worry list and the opportunity list as you see ahead. We’re in 2023; again, that theme of inflection, what are you most worried about this year, and what are you most excited about this year?

[00:57:38] Gary: I love to quote Madeleine Albright who used to say that she was an optimist who worries a lot. She would also say that her faith in America and democracy was unshaken.

I also worry a lot about things like overreaching regulation of our industry, a shrinking workforce that’s even more challenged by our immigration policies, and of course the economy. But I have faith in our industry. We serve a need — and a growing need, and that’s clear. I’m excited about how far we’ve come as an industry in the 20 years that I’ve been part of it, and I’m looking forward to us doing our part to make senior living an option that older residents are excited about and look forward to as well.

To be successful, I think we need to continue to put the interests of our residents and team members first. While good real estate’s important, as many in our industry know, it’s the quality of the operator that makes the difference. Of course, that’s coming from an operator, so I might be a little biased.

[00:58:51] Tim: All right. We’re coming up on the hour here, but I do want to end this on a fun note here. If you had the power to change one thing about the senior living industry, what would it be and why?

[00:59:11] Gary: When I first started in senior living, we used to say that our biggest competitor was the home, and part of that has been due to the misconception of what senior living is all about. I would talk about senior living as an option for my mom and dad. My mom would say, “I’m not ready to go into one of your homes.” So I’d have to explain that we’re not a home. She would say, “Maybe I’ll consider it if your father dies before I do, but until then, no thanks.” These were her misconceptions.

We’ve come a long way, as an industry, over the past 20 years, but educating our potential customer about the experiences that are available within senior living, I think it’s still a big need for our industry and it’s just may be a factor that changes and attitudes and perceptions aren’t going to happen all at once, so it’s going to come from our residents having great experiences, telling their friends and having their adult children see it firsthand.

We do what we can in our advertising and on our website. On our website we describe the various facets of senior living and we try to use the website as a resource to address the various questions and concerns we hear from prospects. Somebody may go through that and decide that VI isn’t right for them, but maybe it’s right for one of their friends. As I’ve talked about, we’re pretty upfront about what our pricing is so that we’re not making somebody call a sales counselor to find out what pricing we offer.

We hear over and over again that moving into a VI community is one of the best decisions that residents made in their life and they wish they would’ve made it five years sooner, and so our goal is really for that wish to be granted for new residents. That’s what we strive for.

[01:01:06] Tim: Great. Well, those are great words to end on. Thank you, Gary Smith, for coming on TALKS. And of course, thank you to Vi for making this happen.

[01:01:24] Gary: Thanks so much, Tim.