Nonprofit providers consolidate, grow cautiously and seek efficiencies to continue serving seniors.
By Jane Adler
Nonprofit senior living providers face the same market forces as their for-profit counterparts, but nonprofits are putting their own spin on how to address operational challenges while fulfilling their mission.
Operating margins have been squeezed and consolidation among nonprofits is an ongoing theme. The organizations hope to realize the benefits of scale to reduce costs and boost productivity. Mease Life, for example, completed its affiliation with Acts Retirement-Life Communities in October 2023. Based in Dunedin, Florida, Mease is a continuing care retirement community (CCRC). It joins Acts’ network of 27 CCRCs in nine states across the East Coast.
Nonprofit operators are mostly focused on regional strategies. Expansions of existing communities account for much of the new nonprofit real estate growth.
Ground-up development has slowed with a rise in the cost of construction and a scarcity of capital. Lending guidelines are stricter and interest rates are higher. The interest rate on a bank construction loan rose from about 3 percent in March 2022 to approximately 8 percent in October 2023.
Deal volume involving fixed-rate, tax-exempt bonds — the vehicle often used to finance big nonprofit projects — is down overall about 20 percent since March 2022. But volume is down 40 to 50 percent in the higher-yield markets, according to Dan Hermann, president and CEO of Ziegler Investment Banking in Chicago.
“The higher interest rates have made planning for new projects more difficult and essentially eliminated refinancings, which usually make up 25 to 35 percent of financing volume,” says Hermann. “As market participants become accustomed to these new levels — which are essentially at about 30-year averages — and as construction inflation continues to come down, we expect to see fixed-rate bond volume and bank activity in the senior living market pick back up in 2024.”
The workforce crunch has eased a bit, though nonprofit groups, like their for-profit equivalents, are refocusing their efforts on employee recruitment and retention practices. That means higher wages, better benefits and clear career path opportunities for employees at all levels.
Meanwhile, nonprofit senior living providers continue to sell off their freestanding nursing homes. Many CCRCs have downsized their skilled nursing footprint.
New CCRCs often do not even include nursing care. Instead, healthcare services are brought to the resident’s unit, or very frail residents move out of the community to a separate nursing facility.
Some for-profits are turning the tables. Texas-based Regency Integrated Health Services transitioned its portfolio of 63 skilled nursing facilities to a nonprofit model. Now known as Wellsential Health, the organization is currently the largest family of nonprofit skilled nursing facilities in Texas. An October press release stated the change will provide access to more funding sources, including grants and donor support.
Demographic tailwinds
Nonprofits expect to enjoy the same tailwinds as the for-profit sector. In the next 10 years, the U.S. population age 75 and older is projected to grow by another 11.7 million individuals, according to Ziegler. Currently, there are approximately 23 million people age 75 and above, according to the U.S. Census Bureau.
“Nonprofits are ready to grow,” says Ziegler’s Hermann, who recently spoke at France Media’s InterFace Seniors Housing Midwest conference in Chicago that attracted nearly 170 industry professionals. “We are working on 40 assignments.”
Big, nonprofit, multi-facility systems have recovered in the wake of the COVID-19 pandemic, with occupancies in the 90 percent range or higher and cash on their balance sheet, explained Hermann. He emphasized that the focus is on exploring merger opportunities or expanding existing campuses.
Covenant Living, for example, is expanding its CCRC campus in Northbrook, Illinois, just outside of Chicago. Three buildings with a total of 36 carriage homes for independent seniors will be added to the community. Entrance fees start at $470,000 with an average unit size of 1,400 square feet.
Groundbreaking will occur before the end of the year, according to Jay Hibbard, senior vice president at Covenant Living. “It’s a popular product,” he says, noting that 32 of the 36 units are already reserved. Seniors are looking for more space and a modern design, he adds.
Based in Skokie, Illinois, Covenant Living owns and operates 19 communities in 10 states. Fifteen of the properties are CCRCs. The remainder are rental properties, along with a skilled nursing facility in California.
“We are in expansion mode,” says Hibbard. The organization is about to launch sales of a cottage-type product at its campus in Grand Rapids, Michigan. Expansions at two other campuses are in the design stage.
Covenant Living is the eighth largest nonprofit, multi-site senior living organization by number of units on the 2023 LeadingAge Ziegler 200 report. Like other big nonprofits, Covenant Living is also reviewing potential acquisitions and affiliations with other nonprofit groups. “It’s a viable strategy for continued growth and financial stability,” says Hibbard.
Covenant Living has completed three acquisitions since 2019. The communities are in Tulsa, Oklahoma; Evanston, Illinois; and Keene, New Hampshire. All three properties are close to other Covenant Living communities.
Nonprofits prefer to expand in markets where they already have a presence. The strategy can build further brand awareness and realize operational efficiencies.
The Keene and Tulsa properties were acquired out of bankruptcy proceedings. The business failures were triggered by pandemic-related challenges, including low occupancies. In the case of the Keene property, there was a delay in the opening of a healthcare center. Since the acquisitions, Hibbard says the communities have stabilized.
Consolidation continues
There were 30 affiliations or acquisitions among the nonprofits in 2022, according to Ziegler. Seven new communities were launched.
Nonprofit providers Front Porch and Covia formally completed a merger in April 2022. The combined organization, operating under the Front Porch name, has 20 market-rate communities and 32 affordable communities. Most of the portfolio is located in California.
Front Porch has 3,200 employees and 7,500 residents. Community programs serve 10,000 individuals throughout the country.
Sean Kelly, former president and CEO of The Kendal Corp., was named CEO of Front Porch in March. “Scale matters,” says Kelly. “We have the ability to leverage that scale to generate value and efficiency.”
The Covia portfolio included a community in Los Gatos, near Santa Cruz, California. It was shuttered three-and-a-half years ago. “The buildings were obsolete,” says Kelly. The structures were built in the 1960s. Residents were moved out in 2019.
Encircled by a chain link fence, the property was a liability that required 24/7 security. The run-down property was hurting the organization’s reputation. “Something had to give,” says Kelly. “It was not working for us.”
Kelly quickly adds that the property has an incredible location on a hill with direct access to Santa Cruz Avenue, the town’s main street. Seeing that as a big advantage, Front Porch is redeveloping the site. Pre-demolition has already begun. The new project will be a market-rate, entrance-fee CCRC.
Front Porch recently closed on a 5,000-square-foot office building just down the hill from where the new project will sit. The office building will be converted into a marketing and sales center. The space will eventually include offices and lecture halls, serving as a kind of “front door” to the community up the hill.
“It will create interaction between our community and the wider community,” says Kelly. “We want to be an asset to the community as a service and educational resource.”
The project is a good example of another nonprofit trend also sometimes favored by for-profit developers. Senior living providers are seeking ways to engage the wider community. Interactions can build awareness of the product while also integrating residents into the social fabric of the town. The preferred sites are infill locations near amenities, services and healthcare providers.
Dining options for residents at the new Front Porch community will be available with local restaurants. The campus will also include a center for health and wellness for residents that will also serve people in the greater community.
Like most senior living providers, Front Porch is also focused on employee recruitment and retention. “We have to get this right,” says Kelly.
Getting it right means paying competitive wages and offering the possibility to develop a professional career in senior living.
“This is important work and folks want to work here because it offers them a sense of purpose,” says Kelly. “But we have to pay the freight.”
Market disruptions
Nonprofits have had their troubles in recent years. Friendship Village, the largest CCRC in Illinois, filed for bankruptcy in June 2023. Friendship Senior Options owned the property.
In a late October bankruptcy auction, Encore Healthcare Services of New York was the winner, paying $114.8 million for the 815-unit community in Schaumburg, a northwest suburb of Chicago. Encore is a newly formed for-profit entity.
Friendship Village is the nation’s 16th largest CCRC and can accommodate up to 1,000 residents. According to its 38-page Chapter 11 bankruptcy filing, the company had between $100 million and $500 million in liabilities, and about $10 million to $50 million in assets.
Friendship Senior Options also owned and operated GreenFields of Geneva, a CCRC in Geneva, Illinois. It was sold in June 2023 to nonprofit Lifespace Communities based in West Des Moines, Iowa.
The bankruptcy of Friendship Village raised questions about whether entry-fee refunds would be paid in a timely manner. The pending sale agreement includes provisions to repay current and former residents.
High-profile bankruptcies have made nonprofit operators rethink entry-fee contracts.
“Contracts have evolved,” says Tim Mallad, CEO of Dallas-based Forefront Living. The organization owns Presbyterian Village North, a large CCRC in Dallas; a hospice facility; and is about to open a CCRC in Plano, Texas. Forefront is also developing a new community in San Antonio featuring memory care and independent living. A subsequent phase will add assisted living.
Mallad says that prospective residents are concerned about refundable entry fees. “People want control of the entry free,” he says. As a result, Forefront Living offers more flexibility in its contracts with access to the refund if the resident needs it to pay for more care. “Residents expect transparency,” he says. “This is a complex business.”
Service contracts are also more flexible.
“Residents want to craft their own experience,” says Mallad. They can determine how often they want housekeeping services and how many meals they prefer.
Middle-market solutions
While for-profit owners and operators grapple with how to provide a product that middle-income seniors can afford and that makes sense for investors, the nonprofit EveryAge recently started construction of a project for this large swath of older people.
Named BellaAge, the community is located in Hickory, North Carolina. The building will feature 95 rental units for independent seniors age 55 and above. Rents for the one- and two-bedroom apartments will range from about $2,000 to $3,600 a month.
No services or meals are being offered. A building manager will be onsite 24/7. The community will include a yoga studio and demonstration kitchen and offer a range of activities.
“This project rounds out our portfolio,” says Kim Kilday, chief marketing officer at EveryAge, headquartered in Newton, North Carolina. The organization owns and operates three market-rate CCRCs, seven affordable housing projects and two PACE programs. Kilday explains that EveryAge aims to fill a housing need for middle-income seniors.
The $31.9 million BellaAge project is financed with a bank loan. No tax credits or subsidies are being used to fund construction. The community is scheduled to open in March 2025.
To lower project costs, EveryAge purchased a vacant downtown grocery store and is adding a five-story apartment building to the existing structure. The old grocery store space will serve as the common areas of the community. The location is close to nearby downtown amenities. The property is also near EveryAge’s headquarters and one of its CCRCs.
Like other nonprofit senior living organizations, EveryAge is expanding its continuing care campuses. Shared skilled nursing units are also being converted into private rooms.
Kilday expects future growth to mostly come from an expansion of home- and community-based services, such as home health and hospice care. These types of services can be brought into residents’ homes wherever they live so they don’t have to move to assisted living or a skilled nursing facility.
“We let people age in place,” says Kilday, echoing a trend in senior living. “People want to age how they want in a place they want to be.”