Once beleaguered by low home prices, the life care model stages a comeback.
By Jeff Shaw
The Great Recession took its toll on the housing industry and most everything tied to it, and continuing care retirement communities (CCRCs) were no exception. But now this niche segment of seniors housing appears to have fully recovered and hundreds of millions of dollars are pouring into new development and redevelopment of CCRCs across the nation.
The payment model for CCRCs — which typically involves a senior selling his or her home to pay a healthy lump-sum entrance fee — is inextricably linked to the state of the housing market. When home prices crashed amid the downturn, entrance-fee payments became harder to come by, forcing some CCRCs and development companies into bankruptcy.
The Clare in Chicago was one of the more high-profile CCRCs to struggle during the recession.
CCRCs contain multiple levels of care — usually some combination of independent living, assisted living, skilled nursing, memory care, or all of the above — so residents can move along the continuum of care without having to move to a new facility. This results most of the time in a “horizontal” layout, meaning multiple buildings spread out across several acres of property in the suburbs.
The Clare, on the other hand, is an unusual case. The 53-story skyscraper is located in the heart of downtown Chicago, tucked into the hustle and bustle of one of America’s largest cities. Construction on The Clare began in 2006 during the height of the housing boom, but construction was completed in 2008 in the midst of a deep recession. The timing couldn’t have been worse.
A partnership led by Harrison, N.Y.-based seniors housing devel-oper Senior Care Development LLC bought the property out of bankruptcy in 2012.
“When we purchased The Clare, the debt level was close to $230 million. They were 32 percent occupied and had not repaid one dollar of principal almost 3 and a half years after opening,” says Brett Mehlman, chief operating officer of Senior Care Development. “We saw a beautiful, brand-new, iconic tower in the heart of downtown Chicago, which I doubt will be replicated in my lifetime. The problem we saw there was a pricing problem, to be quite honest.”
When it was constructed, The Clare was billed as one of the premiere luxury CCRCs in the country. Even with lofty entrance fees around $1 million, pre-sales were excellent, recalls Mehlman. But when the housing market crashed, the cancellations came rolling in.
The developers — The Franciscan Sisters of Chicago — were overleveraged on their construction financing and had no capital to fix the problem. With housing prices depressed and no ability to reduce prices or add amenities, bankruptcy was the only option for the community.
“They weren’t able to adjust the apartment pricing to the market,” says Mehlman. “They had no flexibility; if they didn’t sell apartments at the original price, they wouldn’t be able to repay their short-term debt.”
Mehlman, who was a lender in the sector for 12 years before moving to the ownership side of the industry, says the mistakes that The Clare made regarding capital structure were the same problems that led to the recession.
The big comeback
When Senior Care Development acquired The Clare, the company did so with all equity and no debt, which Mehlman says allowed it to make big changes “without a lender breathing down our necks.” This left the managers room to reduce prices and re-establish The Clare’s reputation in the community.
Refundable entrance fees, which at the peak averaged around $1 million, were lowered to an average of approximately $550,000.
“We reduced entrance-fee pricing 45 percent from the peak,” says Mehlman. “Entrance fees for The Clare were at two to three times the local condo market. We were able to bring them back to be closer in line with the local market.”
Other changes included adding a variety of contract types that further reduced entrance fees to expand The Clare’s affordability, and investing in key capi-tal improvements. Senior Care Development has nearly doubled occupancy of the community, and increased the number of private skilled nursing beds, which are at stabilized occupancy, often with a wait list.
The Clare is not the only CCRC seeing a resurgence.
CCRC developer Erickson Living currently has $500 million of new construction in progress, according to Adam Kane, the company’s senior vice president of corporate affairs.
The bulk of that investment is in renovations and expanding existing communities.
Kane says the focus on renovation is industry-wide for CCRCs, as financing for new construction is still hard to come by and many older communities are in need of updates.
“Building a new CCRC is a big investment and it’s complex,” says Kane. “Successful CCRCs are great projects for consumers and developers, but they’re hard to execute.”
Kane says the occupancy rate across Erickson’s portfolio of 19 properties is 96 percent.
ACTS Retirement-Life Communities recently announced plans to invest $300 million in CCRC development over the next two years, including reinvesting in its current portfolio.
“We typically reinvest back into our communities at the rate of about $55 million annually for various campus enhancements and upgrades,” says Michael Smith, corporate director of communications of ACTS. “Part of our overall strategy for future success is to continuously upgrade our campuses.”
Although there is solid growth now, developers and lenders alike are much more cautious about choosing business partners, notes Ed Kenny, chairman and CEO of LCS, the parent company of CCRC developer LCS Development.
“There’s much higher scrutiny on the quality and the sophistication of the developer, and how the CCRC is capitalized,” says Kenny. “The lending market is much more disciplined as it relates to lending practices in the CCRC — in our view in a good way.”
Properties get a facelift
John Diffey, president and CEO of CCRC developer The Kendal Corp., suggests developers mostly focus on refreshing existing properties to keep properties modern and avoid the costs of new construction.
“It’s important to keep CCRCs fresh and invigorated, changing, moving, contemporary, appealing,” says Diffey. “You have to be prepared to modernize as you go along. You can’t allow your communities to become stale.”
When developing a new property, Kendal always makes sure there’s extra space for incremental growth and expansion as the needs and demands of customers change. One Kendal facility recently upgraded its 34-foot swimming pool, which was sufficient at the time it was constructed but is “just a big bathtub today,” says Diffey.
Although the “silver tsunami” of baby boomers moving into seniors housing is still a decade or more away, the relatively younger demographic profile of residents in CCRCs means the wave will hit this segment of the business earlier than others. Residents usually enter CCRCs at a younger age because it’s a lifestyle decision, rather than based on medical need, says Kane.
Part of the revamped post-recession growth strategy of Erickson Living is to keep the company’s income diversified.
“In the past, CCRCs would just live off entrance fee appreciation. We’re very focused on making the operations high quality and profitable so we’re not totally left to real estate appreciation,” says Kane. “This is really an operations business. The real estate appreciation is on top of that.”
The growth of CCRCs will always pale by comparison to growth in the assisted living, skilled nursing and memory care segments because of the specialized nature of the model, says Kenny of LCS.
“Even in the best of times, there are only 20 new CCRCs built a year,” says Kenny. “It’s clearly a niche product appealing to a certain segment. It’s not for everybody, but for those that are comfortable with the entrance-fee model, it really has a place.”
The CCRC model requires patience, says Kenny, because of the eight to nine years it takes for development and stabilization. This often keeps large REITs and lenders from exploring the model too deeply, but “for someone with a long-term perspective it can be a really good investment opportunity.”
Era of the educated consumer
As seniors become more and more Internet savvy, CCRC developers should be prepared for a much more thorough vetting by customers than in the past, says Kendal’s Diffey.
“The consumer is far better educated,” he says. “The folks that are looking at communities have not looked at two or three, but 15 or 20. Being top-of-game consistently is really, really important.”
Many prospective residents wisely choose to spend a night in the community before making a decision to live there, which was previously rare, adds Diffey.
The large commitment inherent in the business model means long lead times where potential residents look at the community in extreme detail before moving in, says Erickson’s Kane.
“Our customer spends a lot of time kicking the tires before they make a purchase,” he says. “We see our customers spend a lot of time shopping, a lot of time with us learning what life is like living there. That’s a big differentiator versus other senior living options.”
Despite such scrutiny, the CCRC model is stronger than it was before the recession, says Bill Silbert, director of marketing and public relations at Kendal. The housing market crash made many customers realize their own vulnerability to economic forces. A growing number of seniors see CCRCs as a stable and guaranteed investment since some entrance-fee plans come with a large refund for the resident’s family upon death, says Silbert.
“Instead of interest waning during the recession, we actually saw the opposite,” says Silbert. “People seemed to be more interested and more anxious to gain a better understanding.”
Kendal’s Diffey uses a hypothetical example of two seniors each investing $500,000 to illustrate the point. If one senior invested half the money in real estate and half into the stock market in 2007, while the other person put everything into a life care CCRC entrance fee with refund, who was faring better in 2010?
“The person who’s in a solid CCRC has seen no erosion of his investment and continues to have his care paid for the balance of his life,” says Diffey. “The biggest risk one can take in my estimation is to be overinvested in real estate just prior to needing long-term care.”
Different strokes for different folks
The demands voiced by a more diverse and knowledgeable consumer have also shifted the nature of the CCRC model. Rather than one purchase price and model for everyone, developers now offer a variety of payment and refund plans.
The traditional entrance-fee plan is still the standard. But now there can be a full or partial refund of the entrance fee to the resident’s family upon death. All plans usually include some level of monthly fees as well.
Senior Care Development’s Mehlman says this opens up opportunities to serve a wider variety of needs. Residents with less money can now move into an upscale CCRC if they’re willing to forgo the payout, or keep the extra money and invest it themselves in other ventures.
A CCRC rental model has also gained some traction. Of the 18 CCRCs slated to open within the next year nationally, seven will offer some variation of a rental model, according to Lisa McCracken, senior vice president of senior living research for investment bank Ziegler.
“Among those CCRCs with a blended contract mix (entry fee and rental), the majority of residents, about eight out of 10, still select the entry-fee option,” says McCracken.
ACTS offers multiple contract types, including the all-inclusive life care contract, a 50 percent refundable plan, and a rental plan that the company bills as a “preview to life care.”
“Those that do initially choose to test the waters with the preview plan typically end up selecting life care,” says ACTS’ Smith.
Some CCRC developers commit more strongly to the rental concept, such as Denver-based Christian Living Communities, where one-third of residents have opted for a rental plan. Rentals allow residents with a wider variety of incomes to experience the benefits of a CCRC.
“Those who rent are satisfied,” says Cindy Hogan, president of Christian Living Communities. “We are careful to manage the cultural expectations so that all residents consider the continuum of economic offerings to be positive, offering variety and serving many.”
Hogan also notes that entry-fee residents are more engaged in the CCRC lifestyle and governance than rental residents because entrance-fee residents have a sense of ownership in the community.
All the variety makes CCRCs a very diverse choice even from community to community. Senior Care Development’s Mehlman says such variety allows a demanding consumer to find a lifestyle that’s a perfect fit.
“Every community offers a different flavor of continuing care,” he says. “One thing that we always say is if you’ve seen one CCRC, you’ve seen one CCRC.”