Chelsea Senior Living is taking a new approach to growth with a focus on third-party management opportunities.
CEO and Founder Herb Heflich and President and COO Roger Bernier said in a recent interview with Senior Housing News that the company chose to pursue third-party management contracts given elevated interest rates and construction costs for new development projects.
“It’s a shift in strategy,” Heflich said. “With the time and the cost of development today, we’re in a much better position as a manager … and we can do much better for ourselves and the places we manage.”
Chelsea Senior Living’s current portfolio includes a number of ground-up developments. As of latest count, the company had participated in development for 10 of its communities, with an 11th community currently in the works in West Orange, New Jersey.
The Fanwood, New Jersey-based senior living operator’s shift from primarily growing through development to third-party management fits a growing trend seen recently in the senior living industry in which operators who once went full-bore on ground-up development are pulling back amid high construction costs and interest rate challenges. As they do so, they are focusing on optimizing portfolios and staying nimble for an uncertain future.
Chelsea’s shift in strategy also stems from the shakeup the industry has seen since the onset of the Covid-19 pandemic, which has made quality operators harder to find.
“We’re taking advantage of our reputation and people come to us looking for a good manager,” Heflich said. “We’re where the market is and right now as a manager, people are coming to us.”
Chelsea Senior Living has 23 communities in the northeast, over 18 of which are in New Jersey.
‘Shift in strategy’ driven by necessity, current market conditions
Chelsea Senior Living has partnered with a variety of ownership companies as it has grown, and that focus will continue as the company turns to third-party management.
Among the operator’s most recent partners is Capitol Seniors Housing (CSH), which late last year opened a community with Chelsea in Washington Township, New Jersey. The company is also partnering with CSH for a new-build West Orange, New Jersey community, and Bernier said there are “other projects on the blackboard” despite development remaining a tough prospect in the months ahead.
He estimated the company is receiving two to three calls a month for new management opportunities. As Chelsea takes on new third-party management contracts in the D.C. area, it will stay within 150 miles of its corporate offices in the region, according to Bernier.
“It has to be a good deal and it has to make sense with a legitimate partner,” Heflich added. “Some people have the money, some people have the land but without everything, it couldn’t happen.”
Other partners for Chelsea include Welltower (NYSE: WELL), PGIM Real Estate and Kayne Anderson.
Transactions in the last 18 months have been motivated by lenders with distressed assets seeking to exit or offload senior living assets. REITs, especially well-capitalized ones, are in a particularly strong position in 2024 given many of those same pressures. And as more companies are incentivized to buy properties, they will no doubt need new operators to manage them.
“It’s just the nature of senior housing right now to some extent,” Bernier said. “This is really market conditions-driven, and it’s much easier for us to go this route.”
For the time being, Chelsea Senior Living will not seek to raise capital or push new development so it can focus on working in alignment with its partners, current and future.
“We pick and choose the best position for us and how we can help our partners,” Heflich said.
Bernier said Chelsea Senior Living is still making progress in its recovery from the pandemic. Overall, he sees that continuing in 2024.
“I still see a recovery, it’s just slow and steady while it’s still very competitive in our marketplace,” Bernier added.
‘Modest-sized, regional company’
Chelsea will focus on gaining “more flexibility” as it grows and fills out regional footprints, Bernier said.
The company is not the only operator focusing on building out third-party management footholds in specific regions. For example, Discovery Senior Living currently has more such contracts than ever before with more than half of the company’s portfolio coming as third-party agreements.
“There’s plenty of work for us in this 150-200 mile radius that we’re comfortable with and this just makes sense for us,” Bernier added.
To aid in Chelsea Senior Living’s drive to be a more nimble operator, the company has partnered with technology firms to help streamline operations, including using WellSky’s analytics electronic health record (EHR) platform to glean operational insights and improve resident care. That partnership started last year and has helped staff track resident biometric data to create custom care plans that can be changed on the fly..
Another reason Chelsea Senior Living is looking toward third-party management is that its sweet spot for communities is typically smaller than what developers are looking to build, Heflich said. He noted the company prefers 75 to 80 units of assisted living, with memory care and independent living in separate buildings, having built a handful of the smaller offerings over the years, he added.
“We like a more intimate setting that is better for our residents,” Heflich said. “We look at the market, we look at the specific building and we don’t pigeonhole what we want to do and what we don’t want to do.”
In the future, Bernier said Chelsea Senior Living would become a “modest-sized regional company” with anywhere “between 12 to 18 properties in the region.” The company likely will undergo some more portfolio changes in the coming months as it evolves and grows.
“The providers who are the most nimble and flexible with certain aspects will be able to succeed and that’s what is most important: being able to be nimble,” Bernier said.
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