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Last week, Garden Spot Communities announced a new affiliation with another senior living non-profit, Frederick Living. A quote from CEO Steve Lindsey caught my eye: “The era of the single-site and small-system organization is coming to a close.”
Most casual readers of Senior Housing News over the years would know that senior living companies are rapidly consolidating. That has been especially true for the senior living non-profit world, which has seen a steady trend of consolidation in recent years, culminating in record levels of M&A and community closures in 2023.
The issue is that many single-site and small-system organizations don’t have the resources and scale to go it alone, particularly due to the lingering effects of the Covid-19 pandemic — not to mention an array of other challenges and new market dynamics.
Lindsey believes in the words of futurist Bob Johansen, who has said that “the future will be a scramble: An asymmetrical patchwork of urgency, panic, imbalance, and hope.”
“That feels a little bit like the current reality of senior living, and we don’t see it changing as we go forward,” he told me.
As the senior living industry grows and evolves, many forces are shaping its future, from value-based care and the middle-market to the wants and needs of the incoming baby boomer generation. Given the financial demands posed by such forces, margin has never been more important to serving mission.
“The opportunity is for us to gain the economies of scale that are afforded a larger organization, but also harness the collective genius of a larger number of people all focused on a common mission. Further, it gives us an opportunity to take steps towards our envisioned future of ‘sparking a pro-aging revolution,’” Lindsey said. “Remaining an independent or small system just doesn’t provide the margin to focus on any of that.”
In this week’s exclusive, members-only SHN+ Update, I analyze this recent news and offer key takeaways, including:
- The realities of the senior living industry that are forcing operators to make tough decisions regarding growth and evolution
- Strategies small senior living operators are taking to gain scale
- How nonprofits’ quest to scale up through affiliation and mergers mirrors what hospitals and health systems have already done
‘Pressured to constantly reinvent the wheel’
Affordability, safety, quality, curb appeal — a modern senior living community must possess at least some of these qualities to succeed. New technology, new care needs and a rapidly evolving slate of resident preferences are pushing operators to have to break the mold again and again in search of their next customers.
One example of this evolution at work can be seen in Brookdale Senior Living’s (NYSE: BKD) HealthPlus program, which the company spun up in the aftermath of Covid-19 as a way to both meet the growing value-based care movement and secure a niche as an operator specializing in care for higher-acuity residents at the same time.
But Brookdale is the nation’s largest senior living operator with 672 communities in 41 states, and the company has cash reserves, as well as the ability to pilot new initiatives in a limited way before taking them to the whole organization.
In the completely opposite direction are single-site and small-system operators. Although they are subject to the same market forces as Brookdale and likely compete in some of the same markets, they possess typically far fewer resources and are completely beholden to local market forces.
All of this was true before the pandemic, both for nonprofits and for-profit operators. But the arrival of Covid-19 threw the industry into disarray and kicked these trends into overdrive.
“We have a large number of stand-alone communities or small systems that leave leaders throughout their organizations feeling somewhat alone, disconnected and pressured to constantly ‘reinvent the wheel’ in order to adapt to the constantly changing reality in which we exist,” Lindsey said. “This reality has never been more evident than during the recent past when we have all struggled to adapt to extraordinary circumstances of the global pandemic.”
To Lindsey and many others, the senior living industry is in a “new normal” that presents opportunity and risk. The risk is that operators that don’t change with the times risk falling behind or shuttering; but the opportunity is that operators can “choose to pursue collaboration as a means to create change in the world around us,” he said.
Strategies for consolidation
By joining with a larger organization, smaller single-site operators can gain scale and resources they need to stay both competitive and solvent in an increasingly complex sector, according to Lisa McCracken, outgoing director of senior living research and development at investment bank Ziegler. And the Ziegler data shows that 846 senior living nonprofit communities have consolidated operations in some way since 2015, a number that has only increased during the pandemic.
In fact, about 110 non-profit senior living communities changed hands last year across 70 deals, representing the most active year on record for communities closing or joining another organization through a sale or an affiliation.
But there is a risk in that philosophy. While operators are wise to seek opportunities to collaborate, such arrangements can also bring a loss of internal control — or worse, mismanagement and disarray as a newly combined organization looks to trim fat.
On the for-profit side of the industry, there has been a healthy fear of “stupid M&A,” in the words of Aegis Living CEO Dwayne Clark. And one need look no further than the infamous Brookdale-Emeritus merger that resulted in a years-long turnaround.
That is why Lindsey stresses finding a common mission and alignment. In the case of Frederick Living and Garden Spot, it was that both organizations share a belief that senior living is in service of a greater good. Both are also faith-based organizations with continuing care retirement communities (CCRCs).
That is also a strategy undertaken by other non-profit organizations, such as Transforming Age, which has amassed a nearly 70-community senior living and affordable housing portfolio, primarily through affiliations and M&A in anticipation of the senior living industry’s new normal.
“There are 50 million older adults coming down the pike that need products and services, and we want to be the trusted partner and platform to deliver those, together with our partners,” CEO Torsten Hirche told SHN in 2022.
Affiliation is just one way to build scale, however. Other organizations have added depth by collaborating not as a single entity, but multiple companies in search of a similar goal.
One example of that trend at work in the nonprofit sector lies with Novare, a loose-knit organization of nonprofits that enables its members to share some of the benefits of scale without giving away the keys to their finances or brand identity.
Chicago Methodist Senior Services, located in the city’s Andersonville neighborhood, has also spearheaded a similar effort by forming with other operators a therapy, rehab and pharmacy services company called Symbria; an organization that provides IT services called Parasol Alliance; and an accounts receivable cooperative.
For organizations thinking of seeking scale through affiliation, McCracken’s advice is to start now.
“What we do see is that there are organizations who are feeling the strain of a lack of scale and unfortunately, some wait too long to seek strategic partners,” she said. “When you are coming at this discussion from a position of financial and operational weakness, your choices are more limited.”
She also noted that not all markets are ripe for consolidation, as some have already undergone periods of consolidation; and she cautioned that a certain revenue size in a rural market is not equivalent to the same revenue level in an urban setting.
“At the end of the day, the provider needs to be on top of those local market dynamics,” McCracken said.
Parallels in the hospital sector
As single-site and small-system operators seek ways to scale, McCracken said they are doing so in a way that resembles the recent period of mergers and acquisitions from hospitals and health systems across the U.S.
“If you look at what has happened in the hospital sector, the same thing is unfolding in our space,” she said. “There are fewer standalone hospitals in the U.S. today than in years’ past.”
Recent data from the U.S. Department of Health and Human Services (HHS) showed that 347 hospitals underwent changes in ownership between 2016 and 2021. According to the data, 4.6% of hospitals were sold in that time frame.
Smaller hospitals with 26 to 64 beds were more likely to be acquired than larger hospitals, and hospitals with the greatest negative margins were over twice as likely to be acquired as those with the highest positive margins to be acquired, according to the data. Urban hospitals were also more likely to be acquired than rural hospitals, and long-term care hospitals were the most likely to be acquired.
But hospital mergers — like nursing home mergers — are a hot topic of discussion, and some blame them for price increases and service quality issues. I think senior living operators are not immune to this risk, especially as residents face potentially a third consecutive year of double-digit average rate growth.
As I peer into the future, I can easily see a world where many small senior living operators join larger organizations in search for better operations. But I also think they would be wise to take heed of what has happened in the hospital and health system space as they grow, and not let financial and organizational pressures lead to poor decisions that erode the consumer experience.