To achieve economies of scale and keep up with complex healthcare delivery requirements, nonprofits join forces.
By Jane Adler
While the big healthcare REITs have been amassing seniors housing portfolios, a similar, but less publicized, wave of consolidation is underway on the nonprofit side of the industry. Nonprofit organizations are forming alliances to better compete in an era when size is an advantage.
The conventional wisdom today is that robust networks are needed to address the changes in how healthcare is being delivered. New technology to track residents and outcomes is a must.
Big organizations have the expertise to handle complex management and compliance issues. They also have the kind of purchasing and borrowing power that can keep expenses in check.
“Not pursuing affiliations at this time is the higher risk course,” says Paul Winkler, president and CEO of Presbyterian SeniorCare, a nonprofit aging services network based in Oakmont, Pa., with 53 communities. “It’s better to be proactive.”
Consolidation is on the rise among nonprofits. There were about 50 owner or sponsorship changes by nonprofits in 2014, according to Ziegler Investment Banking, a Chicago-based firm that arranges financing for nonprofit seniors housing and care providers.
With 36 transactions already complete through May 8, 2015, Ziegler expects more than 90 deals by year’s end.
The consolidation wave among both for-profit and nonprofit seniors housing companies comes at a time of robust mergers and acquisition (M&A) activity for business in general.
The volume of all M&A deals announced during the first quarter of this year was $902 billion, the highest first-quarter total since 2007, according to Dealogic, a New York-based consulting firm. Under pressure to reduce costs, healthcare was the top targeted sector with consolidation transactions totaling $126.5 billion.
It’s important to note that nonprofit organizations don’t use the phrase “mergers and acquisitions” to describe their alliances with other nonprofit groups. The legal process differs from a corporate merger.
An “affiliation” also allows the takeover target to formally retain its mission — often one of decades-long service to local seniors. However, nonprofits do acquire properties from for-profit companies. Many of these deals involve distressed buildings.
Acquisitions and affiliations take many shapes. Both small and large nonprofits are joining forces.
A big transaction awaiting approval is the alliance of Northern California Presbyterian Homes & Services, a large owner of seniors housing in the San Francisco Bay Area, and Episcopal Senior Communities, which has five continuing care retirement communities in northern California.
Catalyst for consolidation
During the Great Recession, consolidation among nonprofits was mostly driven by necessity. Organizations in financial distress had little choice but to find a partner with more resources.
Although affiliations still take place for financial reasons, many alliances today are a strategic choice, according to Lisa McCracken, Ziegler’s senior vice president of senior living research. “Organizations realize the benefits of scale,” says McCracken, whose office is in Lancaster, Pa. “Single-site operators have a hard time.”
The ability of multi-site organizations to borrow money at lower rates than small nonprofits is a big advantage. The ratings agencies that underwrite the bonds often used to finance nonprofit projects look more favorably on organizations with multiple assets because the risk is spread over a portfolio. “Their bond ratings are higher and the cost of their capital is lower,” says McCracken.
With an A+ rating from Standard & Poor’s and strong banking relationships, Concordia Lutheran Ministries borrows at rates of less than 1 percent. That has helped the Cabot, Pa.-based nonprofit complete 16 transactions.
Concordia owns nearly 2,000 units and has an annual operating budget of $158 million. The organization also owns a pharmacy company, a home care service and a hospice provider.
About three-quarters of Concordia’s purchases have been of properties owned by nonprofit entities. For-profit companies owned the others. All of the properties were under some financial distress, according to Keith Frndak, president and CEO of Concordia Lutheran Ministries. “We are able to dramatically reduce their cost of capital,” he says.
In April 2014, for example, Concordia acquired a rehabilitation facility in Monroeville, Pa. Then, in August, Concordia bought a skilled nursing and assisted living facility on the same campus. The properties were all in bankruptcy.
At the time of the purchase, the existing loan rates on the properties were 5 to 6 percent. But Concordia was able to renegotiate the debt, resulting in savings of about $1.2 million a year. “That’s an automatic win,” says Frndak.
The need for sophisticated operating systems is also driving consolidation. Complex managed care contracts are becoming more common. New Medicare rules require providers to implement and track quality measures.
A small skilled nursing facility operator may not have the resources to buy the systems needed to track the data required by healthcare providers. Hiring an information technology staff and a chief technology officer may not be possible either.
In March, Presbyterian SeniorCare formalized its affiliation with Presbyterian Homes of Lake Erie, which owned three skilled nursing/assisted living facilities. Presbyterian SeniorCare had provided services to the Lake Erie organization for seven years and managed it for the last two years, an assignment that included repositioning several seniors housing campuses.
The affiliation broadened Presbyterian SeniorCare’s market, extending its services into western Pennsylvania. “It really makes great sense,” says CEO Winkler.
Presbyterian SeniorCare also recently partnered with Presbyterian Senior Living, which provides seniors housing in the mid-Atlantic region of Pennsylvania, Maryland, Ohio and Delaware.
The alliance includes a joint venture project — the conversion of a religious order’s motherhouse into affordable apartments for seniors. The project, Mt. Nazareth Commons in Pittsburgh, opens this summer.
Creating larger service networks allows Presbyterian Senior-Care to work more effectively with insurers and healthcare providers. Three skilled facilities recently implemented a new software system to manage bundled payments. Two other facilities were slated to launch the system this month.
The use of electronic health records and sophisticated information systems are essential for the implementation of best practices, and to meet the expectations of healthcare partners, explains Winkler. “We are addressing a rapidly changing market.”
Mission oriented
Nonprofit organizations often cite their mission as a reason for a new affiliation to facilitate expansion.
Episcopal SeniorLife Communities started out in the 1980s with a single-site skilled nursing facility in Rochester, N.Y. Since then the organization has grown to include six campuses with a variety of seniors housing options, including assisted living, low-income apartments and memory care facilities.
The group’s strategy is to provide affordable services and housing in Rochester and the suburbs that ring the city. The housing is geared toward middle-income seniors.
The group works with existing community organizations to determine what other services are needed and how to collaborate while minimizing cost.
“That’s our mission,” says Loren Ranaletta, president and CEO of Episcopal SeniorLife.
In November 2013, the group bought a vacant church and school near Rochester in Greece, N.Y. The structures were converted into 73 affordable apartments for seniors. Rents started at $725 per month.
Last March, the group bought Pinehurst, a 68-unit independent living property near Rochester in Honeoye Falls, N.Y. The property was purchased from a multifamily developer. “We wanted to build on community commitment we already had there,” says Ranaletta.
Episcopal SeniorLife owns an assisted living facility nearby, which can take residents from Pinehurst when they eventually need more care. Pinehurst currently offers a full service package with transportation, housekeeping and meals. No personal care is provided.
In an effort to keep prices affordable, Ranaletta plans to offer a la carte services at Pinehurst. Residents would be able to select and pay only for the services they need. “We want to put some choice on the table,” says Ranaletta.
Nonprofit operators admit that the process of integrating two organizations can be a challenge. After purchasing the Pinehurst property, Episcopal SeniorLife quickly installed its own financial information systems.
The building had little technology, so voice mail, email and nurse call systems were added. But the integration of services is an ongoing process. Work is still underway to blend food and maintenance operations.
As with any merger, culture change is another hurdle. Nonprofits strive for a smooth transition by including members from both groups on each board. “They become part of our organization,” says Winkler of Presbyterian SeniorCare.
But it’s often difficult to introduce new rules and procedures at a property. Existing staffers may be resistant to change. Although fewer workers may be needed after a consolidation, it may be difficult to realize economies of scale because nonprofits are reluctant to fire long-time workers whose welfare is often part of the nonprofit’s mission.
Episcopal SeniorLife retained all the employees at Valley Manor, a retirement community in Rochester that had been owned by another nonprofit organization. An affiliation agreement was negotiated that allowed employees, many with long records of service, to retain their seniority and full benefits.
Employee education after an affiliation or ownership change is important too. “We do an enormous amount of training,” says Concordia’s Frndak.
After Concordia assumes control of a property, a senior Concordia executive is assigned to the facility for two years. Concordia also sends in an educational team. “We conduct hundreds of hours of training over the first six months,” says Frndak.
Looking ahead, nonprofit owners and operators expect consolidation to continue. They think small operators will find it increasingly difficult to compete.
Today, insurers and healthcare providers are focused on the performance of skilled nursing. But assisted living and other housing providers will eventually be asked to help reduce healthcare costs and improve outcomes.
“The only way to survive is to have deep affiliations with a range of providers,” says Winkler. “Those who wait until it all shakes out are at great risk.”