The independent living retirement community is less labor intensive than assisted living and skilled nursing facilities. Independent living staffing has always been more related to its position in the market, with the more expensive and amenity-rich communities having more services and staff. But since most of these communities are either unlicensed or have no mandated staffing requirements, there can be a wide variety of staffing levels, both in numbers, training and coverage. Even so, independent living communities are not exempt from the pressures of rising labor costs. One company, Holiday Retirement Corporation, has abandoned its live-in manager staffing model. With increased levels of frailty in independent living, are these changing independent living staffing models a disaster waiting to happen?
The independent living retirement community market has not been the center of attention for the seniors housing sector for quite a while. It has been assisted living and memory care, both from an acquisition market perspective as well as the development market, that have dominated everyone’s attention. There are many reasons for this, including the need-driven focus, smaller investment required, and the preference by consumers for this community type compared with the previous, and more expensive, alternative of a skilled nursing facility. But assisted living and memory care have always been more labor intensive because of the care and supervision required. And with labor costs going up, investors have focused on whether rent increases can match cost increases.
A few decades ago, the independent living market was much larger than the assisted living market, which was just beginning to take off with a few cycles of development growth. That has all changed, but independent living continues to perform well, with rational levels of new development, and an openness with that development to be more than an independent living retirement community. According to NIC MAP, fourth quarter inventory growth was just 2,689 independent living units, compared with 6,634 for assisted living. For the independent living market, this represented a small 1.9% year-over-year growth in inventory, something very manageable. In addition, independent living occupancy increased by 10 basis points sequentially in the fourth quarter, and it was the only sector of the three (AL and SNF being the other two) to show an increase. We would think that this would bring more multifamily developers into this segment since it is less operationally intense. The problem is that not only is it harder to forecast demand, but these communities also require a much larger capital investment and a longer fill-up time. One interesting statistic from HCP, Inc.’s (NYSE: HCP) fourth quarter results was a breakdown in same-community net operating income growth by property type for its seniors housing operating portfolio (SHOP). Assisted living posted -0.5% change in NOI from the fourth quarter of 2015 to the fourth quarter of 2016. Its independent living SHOP portfolio, however, posted a 10.1% increase while its CCRC portfolio had a whopping 27.2% increase, which we assume was impacted by entrance fees. The point is that independent living is performing well, but that doesn’t mean that changes are not coming.
Independent living staffing models have always been more related to its position in the market, with the more expensive and amenity-rich communities having more services and staff. But since most of these communities are either unlicensed or have no mandated staffing requirements, there can be a wide variety of staffing levels, both in numbers, training and coverage.
We had always assumed that all full-service independent living communities had coverage all night, whether someone at the front desk or elsewhere in the community, regardless of the level of rents. We have recently found out that this is not always the case, partly because it is not required and the community is often viewed more as apartments with no restrictions on what the residents can do or when. That may be fine, as long as the residents understand this is the case, and until something goes wrong.
It has been about 10 years since the Holiday Retirement Corporation portfolio was sold to private equity firm Fortress Investment Group (NYSE: FIG) at a then record low cap rate. Holiday was a no-frills independent living model with a unique staffing structure. It had two live-in managers, usually couples, and usually a “senior” manager and one “junior” manager who was in training to become the senior manager in another Holiday building. It was definitely a unique model, but one that the residents apparently liked because there was always someone there to address an issue all day and night, and often the managers became friends with the residents because in many cases they were close in age or similar backgrounds. It just worked. As company founder Bill Colson once told us, “You’ve got a man and a wife who have to get along together, and you’ve got another man and wife who have to get along together, and you’ve got four of them who have to get along together. But it’s so perfect only an idiot wouldn’t run one of those businesses that way. I can’t even dream about not doing that.” He did admit it was terribly hard to manage, but it worked, and worked very well. But now, it is coming to an end, and there may be some ramifications.
A few years after the Fortress acquisition of Holiday, new management toyed with the idea of moving the live-in managers out, partly because we are sure they thought it was difficult to get these couples and screen them properly, but also because it would free up two units that could be rented out for another $50,000 or more in annual cash flow. That, in theory, would result in more than $500,000 in increased value. Then they could hire three people to do the work of the two couples, but with free rent we have to assume their salaries were much lower than what a non-live-in would make. As a private equity firm, increasing value is really what it is all about for their investors. As we remember, it didn’t go over very well with residents at the time, and the change was mostly abandoned. Until now.
Most of Holiday’s properties are now owned by various healthcare REITs, including New Senior Investment Group (NYSE: SNR) which owns more than 100 Holiday operated properties (SNR is controlled by Fortress), so they have a stake in what happens with this change in the Holiday model, which has already begun. It apparently started as a result of the change in labor rules and overtime hours, subsequently abandoned at year end and probably for several years with the Trump administration. However, that has not stopped Holiday from going through with the change. Publicly, everyone is putting a good face on it, but we have heard that it has not gone over well with some residents. In fact, we heard that in one community a few dozen residents were either threatening to move out or already had because they liked the live-in manager model and that was what they signed up for. It is hard to determine if this is a serious revolt, or just something that residents will have to get used to. But having your neighbor be the one in charge, and available 24/7, makes for a different environment than an executive director who leaves at the end of the day and may not be there on weekends. We only know of two companies that employ the “Holiday” model, and that is Hawthorn Retirement Group (two live-in couples and some of the original Holiday team), and Resort Lifestyle Communities (one live-in couple), which builds its properties with a very detailed Zip Code analysis. As far as we know, both companies plan to stay with it.
One of the other issues we have heard is that there will be no one on duty at night, whereas before you could wake up whichever couple was on duty if you had a health emergency, a broken pipe or any other problem. The residents liked that feature, and some even moved in because of it. If it is true that there will not be an overnight manager, we believe that will expose Holiday to unwanted liability problems in the event of a major health issue. Yes, residents can always call 911, but that is a very different environment for that 85-year old. In addition, all we have heard for several years is that the Holiday residents are more frail than when the company was sold, and that frailty means more health emergencies. Who is going to open the front door for the EMTs?
We bring this up because as the acuity levels at licensed assisted living communities have risen in the past 10 years, the same thing has happened at many unlicensed independent living communities. With occupancy across the spectrum either remaining flat or declining, everyone is fighting for census. That means providers are admitting residents that they might not have 10 years ago, and keeping residents that they would have recommended to move to another level of care 10 years ago. This usually results in more accidental deaths, falls, and trips to the ER. This also means more lawsuits, and the trial attorneys have taken notice.
One company in Virginia recently lost an arbitration case for $900,000 when one of its independent living residents spent four days in bed with fliers piling up outside her door after something cracked in her shoulder and she couldn’t reach the phone or get out of bed. In the company’s defense, there were multiple unintentional human errors by the staff that are understandable when explained, but just because someone is “independent” does not mean there should not be a daily supervisory role. The community’s check-in system for independent living residents did not work in this instance, and a new system has now been implemented that would have prevented the past tragedy. The point is not to cast blame on this provider, but to bring up the discussion that there is an implied level of supervision, even in independent living communities where residents can do as they please when they please, and if providers don’t want to accept that responsibility, there will be plenty of trial attorneys waiting to make them take responsibility. And then comes the licensing and regulations, something the industry certainly doesn’t want. So, is Holiday without its live-in managers, increased levels of frailty, and a restive resident population a disaster waiting to happen? We hope not, but we also hope management takes seriously what could be a major culture change, and understands what needs to be done. It certainly is not Bill Colson’s company anymore.
