Enterprising operators fill void in underserved tertiary and rural markets, but risks abound
By Jane Adler
While the big markets get the lion’s share of attention, some senior living contrarians are finding success in small places. Often overlooked by large companies, small and rural markets lack a variety of basic services for seniors, which can create opportunities for owners and operators willing to take the risk.
Turning a profit isn’t a slam dunk, however. Operators face a number of challenges. Small markets usually have ample amounts of available land, making them ripe for competitors. Workers can be hard to find. And profit margins are slim.
The formula for success comes down to picking the right town and site, offering an appropriate product at a reasonable price, becoming an integral part of the wider community, and providing services that may not otherwise be available to local elders, such as healthcare coordination.
“Operators in rural markets have a lot of advantages,” says Debbie Howard, CEO at Senior Living Smart, a consulting firm based in Sandwich, Mass., that works with small senior living operators. “But you have to know what you’re doing.”
One fact stands out: small markets abound. About 16,500 U.S. towns have a population of 10,000 or less, according to the website Statista. These places obviously don’t make up the bulk of the country’s population, and many are suburbs of large urban areas. But they do represent an astounding 84 percent of all cities and towns.
What’s more, there are 1,557 towns with populations that range from 10,000 to 24,999. Many of these smaller towns in outlying areas may have an older skilled nursing facility, but they often have no assisted living property, which presents a big opportunity.
‘A great place to be’
Dallas-based CP Homes, for example, is growing quickly by targeting towns with populations ranging from 5,000 to 20,000. The company already has nine assisted living buildings in Texas and Alabama, and will open a 10th property this summer in Athens, Texas, a town of 12,700.
The buildings operate under the Country Place Senior Living brand created 13 years ago by developer Jack West. CP Homes entered the senior living space in 2011 when it acquired a controlling share of the brand from West, who continues to own 12 Country Place properties in Kansas.
CP Homes currently owns 50 land sites throughout the South, in places such as Altus, Okla. (population 19,500) and Wynne, Ark. (population 8,300). The communities have been identified as towns where the company will expand
at the appropriate time. The company’s website says that its standardized building footprint will allow easy entry to thousands of small and rural markets throughout the country.
A typical property consists of 24 assisted living suites, along with common areas. Rents average about $3,500 a month.
The company looks at a number of factors when selecting sites, including available real estate, cost to build and competition. Those factors are balanced against the size of the local senior population, wealth distribution and the overall need within a particular community over time.
“Underserved markets are a great place to be,” says Jill Lentini, director of operations at Country Place Senior Living.
A similar strategy is unfolding at Dominion Senior Living, formed two years ago to target secondary and tertiary markets. Based in Knoxville, Tenn., the company owns and operates three communities and has six more underway with several others in development. The communities are all located within a four-hour drive of the company’s corporate headquarters.
“We like these smaller markets,” says Josh Crisp, vice president of Dominion. Smaller markets tend to be underserved and usually have little competition, he notes.
Small towns also happen to fit Dominion’s mission as a faith-based company with a grassroots culture that takes the time to build the local relationships important in rural places. “That’s one reason larger owners and operators overlook smaller markets,” says Crisp.
Dominion is concentrating on development today partly because suitable acquisitions in its target markets either don’t exist or aren’t available. The company has five prototype building designs of 40 to 64 units, with different footprints and mixes of assisted living and memory care apartments. Project costs range from $5.5 million to $8.5 million. Traditional bank financing is used to fund the projects.
The prototype chosen depends on the results of market studies that include an analysis of local incomes, the senior population and competitors.
“We spend time learning the needs of the community where we build,” says Crisp. Most of the selected markets have plenty of demand, he adds. But household incomes may not match those found in urban areas. “It’s a reason we don’t see many other developers in these markets,” explains Crisp.
Picking the right product
Buildings in small markets don’t generate as much income as those in large markets — another factor that limits competition. The buildings themselves tend to be small, and the rents and margins are lower, sources say. However, expenses aren’t as high either.
For example, Cottage Senior Living owns and operates 458 assisted living units, about half in primary markets and half in smaller locales in the Southeast. The company is based in Huntsville, Ala.
The location, size and design of the product are key to success in small markets. The company prefers locations in the main part of town, near the grocery store and services, such as a senior center. “In a small community you have to have access to other resources,” says Cliff White, president of Cottage Senior Living. And while it might be easier to find sites on the outskirts of town, he thinks an infill-type location that’s highly visible to the community is necessary for success.
The company’s buildings feature a plantation-style design with a big front porch to create a feeling of Southern hospitality. The buildings typically span about 18,000 square feet and include 27 studio apartments, each with 230 square feet. Rents average about $2,000 a month, about $500 less than the average monthly rents at the company’s buildings in big markets.
“Anyone who enters a town of 10,000 people with 70 units of assisted living is looking to lose his shirt,” says White.
Profit margins on the small-market properties are in the 10 to 15 percent range. That compares to about a 30 percent margin for properties in big cities, according to White. “The bigger the project, the bigger the return.”
White recently decided to tweak his small-town model, adding six units to the prototype. While the 27-unit properties maintain a high occupancy, he thinks a slightly bigger building will produce more cash flow without increasing expenses other than for staff. He figures the six additional units will generate an extra $5,000 to $10,000 a month.
Immersed in the community
Small towns and rural areas tend to be receptive to senior living operators, according to consultant Howard at Senior Living Smart. New buildings bring jobs, and small operators often buy products and services from local businesses.
Operators emphasize the importance of becoming a part of the broader community.
In Russellville Ala., for example, Cottage Senior Living has a company representative serve on the board of the local chamber of commerce. The company is a booster of the high school football team. “Our goal is to be part of the community,” says White.
That helps attract residents and workers, building operators say. And while the employee pool is smaller than that of large cities, workers tend to stay on the job longer, thus reducing turnover costs.
Senior living services are more of commodity in big cities, notes White. “All the buildings are pretty similar.” But, in a small town, he says, “you can create relationships.”
Karen Schacht, chief operating officer at Touchstone Senior Living, notes that residents of small towns have strong social connections. “Everyone knows everyone,” she says. Touchstone is based in Madison, Wis., and operates eight assisted living buildings in the state under the brand name of Sylvan Crossings. Rents at the company’s rural buildings are about $1,000 a month less than rents at properties in bigger cities.
Local residents in small markets consider the Sylvan properties to be part of the town, and a resource for families, says Schacht. “Being local is important to people.” The company’s rural buildings, except one, are 100 percent occupied and have waiting lists, she adds.
A challenge is educating the community about the concept of senior living. Local residents may not have had experience with the product. When CP Homes opens a new community, the company conducts an outreach and awareness program. Local residents are invited to building events. And company representatives attend community events, such as rodeos and festivals.
CP Homes also forges relationships with the local hospital as well as fire and police departments. “We become part of them,” says Lentini.
Pioneers of healthcare partnerships
Somewhat surprisingly, small and rural market operators are on the cutting edge of experiments with new healthcare delivery models. Small towns often have fewer medical resources, creating an opportunity for senior living providers to step in and fill the gap.
Based in Ardmore, Okla., Elmbrook Management Co. owns and operates six skilled nursing facilities and an assisted living property in rural southern Oklahoma. “I believe we will become community health care managers,” says Elmbrook President Tom Coble, current chair of the board of governors of the American Health Care Association (AHCA), a large industry group.
The company is taking steps to make that a reality. Elmbrook offers its own Medicare Advantage Health Plan. Electronic health records are used to chart resident care and measure outcomes. This is a necessity for skilled nursing operators, says Coble, since the Centers for Medicare & Medicaid Services (CMS) is moving to a fee-for-outcomes reimbursement system. “Rural areas think they are isolated from these changes,” he notes. “But as time marches on, we will be impacted.”
The company is also working to achieve software compatibility with the local hospitals and other providers. So when residents transfer to the hospital, for example, their records can be sent electronically.
Elmbrook is moving into home health and hospice care, too. “Expand-ing the continuum of care is one of the things smaller operators will need to survive,” says Coble.
Dominion Senior Living offers a care coordination model, acting as the interface between the resident and the healthcare system. “We’ve found that these small communities are not only underserved for assisted living, but also underserved in terms of healthcare access,” says Crisp.
Additionally, families in small towns tend to wait longer to move an elder to a facility, and often the length of stay is shortened because the senior is in poor health. “We are prepared to meet the needs of the high-acuity resident,” adds Crisp.
Healthcare providers and services are brought into Dominion properties. Technology is used to coordinate care. Electronic health records and point-of-care systems track resident services and results. “We put a lot of technology in our buildings,” says Crisp.
That gives Dominion many
of the same capabilities as operators in big markets, says Crisp, noting that the upfront expense of the technology is worthwhile because the systems help realize efficiencies and improve financial performance. “As a small operator, it puts us ahead of the game,” he says
The upfront cost of a software suite that includes electronic health records, and billing and marketing solutions can be as much as several thousand dollars, sources say. Operators can also expect to pay monthly fees of about $10 to $18 per resident.
Consultant Howard agrees that technology can be a big challenge for small companies in small markets. Her company links operators with the right technology and offers strategic and marketing resources.
Howard says the biggest opportunity for small operators is to make the transition from paper to electronic systems, which can be used not only to track resident care, but also to manage customer relations and marketing leads.
The cost of new technology may be an obstacle, but Howard suggests that operators consider how much time is lost processing paperwork by hand.
“You might be able to get away with less technology longer in a small market,” she notes. “But eventually, technology is non-negotiable.”