From trainee to executive director to CEO, Nelson guides one of the industry’s largest companies.
By Jeff Shaw
While Joel Nelson may be the definition of a “lifer” with LCS — starting as a trainee with the company in 1986 and working his way up the ladder — he doesn’t believe that everyone needs to follow in his footsteps to reach the executive ranks.
Nelson, now CEO of the company, is both the recipient of a well-planned succession and a big believer in the practice. After taking the reins from Ed Kenny in 2018, Nelson has overseen several challenges.
In just the last few years, Nelson has been able to use the strength of the LCS leadership team to fill key executive-level roles with the company. He has also added external industry veterans and outsiders to replace longtime managers retiring from the company.
And a company this big needs strong leadership. In addition to being an operating company, the LCS Family of Companies includes a development arm, a management company, group purchasing business and a real estate private equity enterprise, as well as a nonprofit foundation.
According to the just-released ASHA 50 numbers, LCS is the third-largest operator in the industry, with 117 properties totaling 32,988 units. Rental rates are “across the spectrum, but heavily focused on the mid-high end of the market,” according to Nelson.
While we spoke to Nelson shortly after his ascension to the CEO role in 2018, Seniors Housing Business sought an update on how four years in the driver’s seat has shaped his views of the industry.
Seniors Housing Business: The last time we spoke four years ago, you had just taken over the CEO role. What has changed since then?
Joel Nelson: Another way to ask that is: What hasn’t changed? The world, and certainly the senior living industry, has seen lots of changes on many fronts.
But I’m pleased to share with you that our company has continued to grow. Our portfolio of communities under the ownership pipeline that our LCS Development team leads for us has continued to grow. We’ve also continued to have success on the third-party management and acquisition pipelines. While growth creates many challenges, the breadth and the depth of LCS has shined, particularly in the last three years.
Because we were continuing to have success on executing on our strategies, we elected to recapitalize the company. That transaction closed in 2021.
We were in a position of strength to do it, which was unique at that time. We wanted to solidify our future. Coming out of COVID we wanted long-term capital and a strong commitment so that we really could focus our attention on the long-term future of the company.
SHB: What were some of the details on that recapitalization?
Nelson: LCS is an employee-owned company. It was founded as a family-owned company in 1971, then the Weitz family put the employee-owned processes in place. When the Weitz family spun off two of their companies in 1995, LCS became 100 percent employee owned.
In 2010 we brought in outside equity for the first time, minority capital to start our development company and grow. Part of that 2010 recapitalization included the vision that we would need to bring capital in during 2020.
We had patient capital partners. McCarthy Capital had no exit end date or sunset period.
We brought in replacement capital, and all of the employees that are stock owners chose to roll forward their ongoing ownership in LCS. McCarthy stayed in. Redwood Capital, which has senior living experience, joined us. That was just a home run. We have experienced partners and the full commitment of our employees.
SHB: Are you willing to share the size of the investments?
Nelson: We will leave the amount undisclosed, but it’s as close to being a permanent capital as you can imagine. There’s not an end date or sunset period. We have really taken a very, very long-term approach. If you follow Redwood, that’s very consistent with its investments, particularly in senior living.
The right people for the job
SHB: You spoke in 2018 about trying to strike a balance in the company between people with deep experience within the industry, like yourself, and those from other industries who might have a fresh perspective. Has that continued and, if so, what have the benefits been?
Nelson: LCS has always taken great pride in our people. That’s really the strength of our culture. We’ve always spent time on succession planning. We invest heavily in building the bench and in hiring new employees under our development program to become future leaders in the company. We’ve had a very successful track record in that approach. I’m an example — I was hired as a trainee 36 years ago.
But we’ve also had great success finding leaders who have experience in other industries and can apply that to senior living. We have a lot of both. We always look both internally and externally. We want the best fit.
After an employee with a very long tenure retired from our development company, we hired Chuck Murphy in January 2020. He brought to us 25 years of experience from companies like Disney and GE Real Estate Capital. He brought great perspective to our leadership team.
It was a terrible time to join a senior living company, right as COVID hit, but it benefits us as we look out at the future of our real estate company.
There’s also succession planning. One of our executive vice presidents, Rick Exline, has the longest tenure in our company. He works with our CCRC communities. He is starting his 45th year in senior living with LCS. He’s planning to retire at the end of this year, and those are big shoes to fill.
Richard Funk, our senior director of operations management, is also retiring after 35 years with LCS. We looked both internally and externally and were able to promote Greg Williams, a 24-year veteran with LCS. He still has a long runway ahead of him, and he’s committed to senior living.
In both cases we found internal candidates to fill the positions. Sometimes we need to look externally for specific talents.
Our national business development team has experienced a lot of growth. With the retirement of Earl Wade, our senior director of business development, we tapped Joe Weisenburger from Welltower. He’s very well connected and he really knows the industry. But we also had an internal candidate that was very strong, Zane Bennett. We put them together and they’re leading all our business development moving forward.
It’s a good position to be in, and it’s an area that we spend a lot of time on. We are very diligent about giving people opportunities.
SHB: As we face a huge labor crisis within the industry, what is LCS doing to fight through that issue?
Nelson: It’s a battle. You have to be on it every day. One thing we have done is gone to regionalization — clustered recruiting teams so we’re out closer to the communities.
Each individual community might not be able to afford its own recruiter. For example, we take Chicago and put in a recruitment team. It’s all about responsiveness, responsiveness, responsiveness.
It’s tough for our industry. People need a job and have a lot of options. If we don’t act on leads immediately, we lose an opportunity to bring someone to our industry.
We also raised our awareness of, and intensity on, retention. We have to listen to our employees and create the work environment that will keep them in the industry.
Third, we must put effort into getting our future generations introduced to senior living. We work with universities, junior colleges and high schools. Those programs will give those young adults the opportunity to experience senior living.
We have multiple interns that are high school- and college-age kids here at the home office, and also interns that think senior living might be an area they might want to study in college. It’s been a great recruitment tool as we fill our future executive director training program. We have seven or eight in that training program, and five or six of those were interns before that.
Lastly, we’re exploring meeting the employees halfway on certain things. It’s going to require greater flexibility on our part as the employer.
What does that mean? Is it different work schedules? A higher degree of part-time work? Is it cross-training across departments? There are a lot of different steps that can be taken that will make us more attractive than McDonald’s. It’s doing a lot of things and being creative in the market in which we find ourselves.
Diverse business lines
SHB: Through the ASHA 50 counts we can see that both ownership and operations have grown over the years. How have you grown the other aspects of LCS?
Nelson: We have a family of companies under LCS. Our fastest growing company is our real estate company. Today we’re now approaching 60 communities that we have ownership in, about 40 percent of our portfolio. That will continue to be a big part of who we are in our organization in balance with our third-party operations.
Two companies have really expanded and continue to grow. One is Care Purchasing Services (CPS), our national procurement company solely focused on senior living. That’s unique because from the very beginning it was for the good of the whole industry. We have clients within CPS that are industry competitors and friends, where we can bring the buying power to small regional players, or larger companies by partnering for procurement, supplies and purchasing.
Today, CPS is about half internal and half external with other industry providers. We have over 280 vendors in our procurement program. The real focal point is food, but it also includes pharmacy, therapy and medical supplies. It really is the whole gamut, ranging from capital expenditures to day-to-day operating supplies in every space that touches senior living.
Our second company seeing big growth is LCS Development. Historically we always said if LCS isn’t managing the property we don’t develop it, and we don’t reposition one of our properties if LCS isn’t the developer. We pivoted a bit under the leadership of Chuck Murphy because we were getting a lot of inquiries about third-party development opportunities.
LCS Development has continued to see growth not only in communities that we will own, but also third-party repositionings and expansions for communities that are not managed and will never be managed by LCS. That’s really broadened the market for LCS Development.
Our third-party client might be a small regional company that doesn’t have a development infrastructure. It might be a one-off situation. We did a large, ground-up CCRC development out West, for example. We developed the property and got it up to stabilization, but the operations were executed by our nonprofit development partner.
Another growth area is our own internal insurance captive. It’s a real value-add to those communities that LCS is managing and/or own.
Hexagon is the name of that company. Following Hurricane Andrew, when Life Care Services was managing a community in Miami, we saw an opportunity to be more assertive in managing the risks in those communities we manage or own. We designed the program to be an added benefit to our management services and today we have the majority of communities who are in the program.
The captive really serves as a reinsurance company that shares in the first layer of risks specific to workers’ compensation and liability.
This aligns the manager with the owner on best practices and safe places to live and work. Today, the program offers the full spectrum of insurance including property, liability, workers’ compensation, automobile and more.
SHB: How is your general growth strategy balanced between development and acquisitions?
Nelson: We are opportunistic in both development and acquisitions. Sometimes, because of the acquisitions market and the capital markets, one will be more favorable than the other.
We’ve had some success on the acquisitions side over the last couple years. But cap rates are low, interest rates are low and lots of private equity capital out there has made the acquisitions market pretty frothy. There’s aggressive pricing, from our lens.
At the same time the opportunities for development have been slowing down. We have the capital and had success in our development strategy, mostly on the rental side of the business. We have a tendency to do a larger, full-
continuum product. That’s continued. But supply is not getting easier and interest rates are rising. Land acquisition is still challenging right now.
What we do anticipate, with interest rates rising, is that cap rates will see an incline, which will create opportunities for acquisitions.
The other opportunity for acquisitions comes from the fact that, while many owners and operators throughout the industry have experienced similar success, not everyone has done so. Those few that haven’t succeeded, there’s a market out there to acquire those assets and bring our resources to stabilize those communities.
We don’t do an either/or strategy. We do a both/and strategy. It’s largely based on the capital markets environment.
Rowing upstream
SHB: What affect did the COVID-19 pandemic have on the company as a whole, and what does the path forward look like?
Nelson: It had a lot of impact on the company. It was the toughest thing I’ve been through as a leader, and tough on all fronts across the companies.
Thankfully, we’ve seen great market recovery. Our product has been validated and affirmed by our residents, based on surveys and inquiries, which has resulted in increased occupancy approaching a return to pre-COVID levels.
We expect many of our communities will come back up to full stabilization relatively quickly. Those that took a harder hit, we’re seeing sales velocity above pre-COVID rates as well as inquiries. We expect to pass pre-COVID occupancy in 2023 across the portfolio.
The path forward is an interesting one. Supply numbers are certainly intriguing between now and 2030. Supply is a bit challenged on the development side, so we hopefully have some pent-up demand. Those are the positives. We’re very bullish on the next decade.
The current times of inflation and the ongoing workforce challenges make that path forward a bit bumpy.
The challenge is pricing to stay competitive. The only way we can manage our staff expenses is to look at new efficiencies and rate increases. We’re looking at double-digit increases, or close to it, for 2023. If not, we’re going to see continued eroding margin pressures despite getting back up to stabilized occupancy.
On the labor side, we all talk about it. There are a couple things that have happened that hopefully will result in a rebound.
The only way we can grow is to be fully staffed at the front line. We need the human touch. Every month our net open shifts are going down, but it’s a challenge. We’re factoring in double and triple wage increases in our plan for the future.
On the professional side of the business, whether it’s IT or finance and accounting, everything’s extremely competitive. Part of that is we don’t have enough new workforce coming in and we have a lot that retired or went to the sidelines and have not come back yet.
As an industry, if there’s one thing that can slow our growth it will be our inability to attract the workforce to take care of the growing demand.
SHB: What have been the impact of inflation and rising interest rates on how you do business?
Nelson: The impact is short term, and the result is compressed margins. There’s no immediate solution. We have to pay what the food inflation and the supply costs are. But that isn’t an automatic pass-through to the residents.
Many resident agreements are annual. So, when you see both supply and labor costs increasing, that results in eroded margins to the community. No question about it, inflation is having a negative impact across the board. We’re going to be playing catch-up in 2023 and 2024.
Rising interest rates are the same thing. That’s an impact on cash flow. I worry less about interest rates, though. I don’t think we’re going to see double digits. Money will still be relatively attractive as it relates to capital and long-term debt.
It helps that we are pretty conservative and have low leverage. Low leverage allows you more flexibility to negotiate interest rates more aggressively. We have some very good capital partners that give our debt services placement team the flexibility to get the best rates out there.
But interest rates are going to make development harder. Ultimately, that just drives down returns for our investment partners and ourselves.
I’m optimistic that it’s a short-term bump, not a long-term impact.
SHB: What does your usual leverage look like?
Nelson: We always have 30 to 40 percent equity in deals. If we’ve got a very stabilized, always-full community coming up for a refinance, we’d maybe leverage up, but not by much.
SHB: When we last spoke, we asked you if there was something people in the industry would be surprised to learn about you. You mentioned that you’re a high school and college wrestling official. Is there anything else that might surprise people?
Nelson: My wife, Lisa, and I are expecting our first grandbaby, which will be an exciting part of the next chapter of our lives.