Episode 105: Middle Market Housing Strategies for 2023

Intro: [00:00:05] Welcome to Senior Living Visionaries, a podcast for senior living leaders who are looking to stay ahead of the curve in the industry. On this show, we feature leaders and innovators in senior living who are pushing the boundaries and creating new effective services and solutions. And now let’s settle in as host Jennifer Drago connects us with today’s guests.

Jennifer Drago: [00:00:31] Hello and welcome to Senior Living Visionaries. We are broadcasting live from the Phoenix Business Radio X studio. And on this show, we showcase leaders and innovators in the field of senior living who are shaping our future. I’m your host, Jennifer Drago. I’m a strategy consultant and CEO of Peak to Profit.

And today, I’m so excited to welcome our guest, someone that I’ve known for a few years now. And it’s Jon Fletcher from Senior Housing Partners, which is a division of Presbyterian Homes & Services. And I’ll let you tell us about Senior Housing Partners in just a second. But Jon joined Presbyterian & Senior Housing Partners in 2018 after serving on its board of directors for two years. He has $2 billion of project development and financing experience.

And honestly, I don’t know anybody who knows this stuff that we’re going to talk about today better than Jon. He has specific expertise in multi-unit housing, mixed use, and suburban and urban development. He’s a frequent speaker on the topic of multifamily senior housing, multi-site brownfield and middle market real estate development. He’s also an eight-year Army Veteran and a 40 under 40 winner from the Minneapolis Business Journal. I’m sure many other accolades to come, Jon. And you’re so young, but you have so much vast knowledge and experience. So welcome.

Jon Fletcher: [00:01:56] Yes. Thank you so much for having me. Glad to be here.

Jennifer Drago: [00:01:58] You betcha. And so tell us a little bit more about your role with Pres Homes and then also with Senior Housing Partners, if you would.

Jon Fletcher: [00:02:05] Yeah, certainly, absolutely. So I’m a Senior Vice President with Presbyterian Homes & Services that lead our strategic growth and real estate development team, which is focused on helping to expand the mission of Presbyterian Homes. But also, we provide services to other organizations across the country, primarily nonprofits, and helping them to expand their senior living. So we provide consulting services and whatever is needed to help these organizations meet their own goals of expanding across the country.

Jennifer Drago: [00:02:34] Perfect. Thank you so much. And that’s actually how we met, through a consulting project. And really interesting. So let’s first set the stage for what’s going on in our industry. In case somebody isn’t in the industry, and just happens to be listening in, we know that the folks who are turning 65 and older today, there’s about 10,000 of them every single day. And we know that they have a different financial status than the generations that came before them. The baby boomers perhaps don’t have as many pensions, may not have as much retirement funding.

And so we have this issue where we have a number of people who are going to need senior housing and senior services, but yet, are in a different financial category. So we call them middle market. So they’re truly middle income. They’ve probably been middle income earners in their life. They probably still fit into the middle-income bracket.

And we as an industry need to figure out where they’re going to live and how we can take care of them, what services we can deliver to them, because there’s going to be so many more of them than there are of the folks who are going to be caring for them and servicing them. And we already know not enough product. There’s not enough housing product. Even if we built every minute of every day from now and then, between now and when they’re already hitting 65. But when they truly need services, we know we can’t fill that gap.

And so what I love about the work that Jon does is they’ve really perfected the model of middle market development as it relates to senior housing. He knows the formulas. He can tell you about how they produce financially. And so as an industry, I think you’re going to find this conversation very helpful today.

So, Jon, let’s start out with — I’m going to — I’ve kind of talked about how I define middle market, but how do you define middle market as it relates to senior housing? What are we really talking about?

Jon Fletcher: [00:04:31] Yeah. That’s a great question and it’s a big one in the minds of kind of everybody in senior living at this point. So much of the product that has been built to date has really focused on kind of the barbell ends of the spectrum in terms of the typical CCRC community, which is maybe targeted towards more upper income households. And then you have obviously a lot, not enough, but a targeted effort towards affordable housing at the lower end of the income spectrum.

And so really the question is what is or can be built for folks that fall in between that. And I would say it’s kind of a simple idea in terms of the missing middle, but it’s complicated to define and complicated to finance or it can be complicated. And so we’ve really tried to boil down how we define middle market by taking the different income bands and not just segmenting them by household income or household resource availability, but instead really trying to focus on that in conjunction with what are the financing sources available.

So we’ve kind of broken down these submarkets into four sections. So really kind of very low income, which would be households that are earning 30 percent or less of median income. And that type of household usually has housing options that are 100 percent subsidized through grants, through tax credits, et cetera. There’s a low-income bracket then that is 30 to 60 percent of median income that’s supported through tax increment financing and then low-income housing tax credits.

And then there’s the high income. And we’ll come back to middle market. But then the high income is what we consider to be 150 percent or greater of area median income. And that’s really market driven. That’s the kind of the luxury housing product that you see kind of being built everywhere.

And so you heard a spend skip or heard me skip from 60 percent to 150 percent. That’s really how we define the middle market. It’s households that are earning 60 to 150 percent of area median income. And so just as an example, if your local market where you’re at has $100,000 median income, that’s households that are earning or are generating annuitized income of $60 to $150,000 a year.

What you run into is the challenge of there aren’t any sort of subsidies or government subsidies targeted towards that. Typically, you’re not able to generate enough income just from market rents to actually pay to support the debt service that’s required. And so you just kind of have this tweener status of all these households. You look at, you know, 20, 30 to 20, 35, all these households coming down the pike and just not enough housing that can be afforded by folks in that. So we generally define it as housing that is affordable to folks earning between 60 and 150 percent of AMI.

Jennifer Drago: [00:07:02] Okay. And that’s annual median income.

Jon Fletcher: [00:07:04] Yep.

Jennifer Drago: [00:07:05] Okay. So it’s going to be market specific as well.

Jon Fletcher: [00:07:07] Correct. Yep.

Jennifer Drago: [00:07:08] And so what I want to point out about that before we go into the senior housing aspect is, you know, middle market, it may be us, it may be the listener, it may be our parents, it may be — I mean, it is the firefighters, the teachers in our community. I mean, we know people in this middle market.

And it’s Jon’s mission to make sure that those folks have a place to live at the time that they need that place to live. And as an industry, it’s our job to figure out also how to provide services to that middle market. So tell me in general, how does operating a middle market community differ from operating a market rate community? What are some of the main differentiators?

Jon Fletcher: [00:07:53] Yeah, it’s a good question. There’s a lot of similarities, but also a lot of differences between middle market versus a classic like type-A community. I think number one is that there needs to be significant focus on operational efficiencies, and a strong focus on resident needs versus organizational wants.

And kind of the funny example is there’s these great communities and organizations that just have a desire to provide all kinds of services and hospitalities for residents. You might have this conversation of, well, if we only had like a director of pickleball success available to our residents, they could be amazing and happy and fully engaged in pickleball. That’s probably true, right? If you had someone just focusing on that.

Is that necessary? Maybe not or maybe it could be an a la carte option. And I’m just saying that in jest. But, you know, it really comes down to how many staff are on site. At the end of the day, for middle market, one of the key goals is to try to keep rents affordable for these households. And rent pricing really comes down to just a simple balancing equation. What can residents afford to pay versus what is required to provide staff with competitive wages that allow them to live and thrive?

And the reality is that the larger the pool of staff is, which is the most significant portion of your operating expenses, the larger that pool of staff is, the bigger your rents need to be. And so we just need to be really realistic around what do residents need versus what do maybe we as an organization feel like residents need or we want to provide in order to provide over the top service?

So staffing is one of them. Also, really trying to fight the urge to over monetize buildings. I like to tell people that with mid-market communities, we want to try to provide, we want to try to achieve a simple and pleasant hospitality. Right. Again, providing what they need going above and beyond in the hospitality when we can.

But just being realistic, I think a great example or comparison is if you think about like in the restaurant industry, you have all different types of restaurants, but in general, you can kind of boil it down to there’s fast food, there’s fast casual or quick service and then there’s fine dining or full service.

We’re trying to hit that midpoint of fast casual and which is going to be providing the healthy meal options and good quality customer service and a lot of a la carte options. But it’s not necessarily bringing the white tablecloth out every single time. And I think that last point, too, on the a la carte options, that’s probably another really key differentiator in mid-market communities as well is just that giving residents choices around what types of service packages and hospitality offerings they want to accept or opt into I think is really key.

You can kind of think of like a cruise ship as well, where the level of expectation around hospitality and services is very high across the entire cruise ship. But the reality is that when you get onto the cruise ship, you can have the choice of do I want to have the largest cabin? Or do I want something more modest? I can maybe choose to have XYZ service brought in versus full service, et cetera. So having a lot of a la carte options I think is really key as well.

Jennifer Drago: [00:11:09] Okay, great. And so this is really important, Jon, I think. And for providers, if they don’t currently operate middle market and when you and I first started working together, I worked for a provider that was a multisite CCRC provider and we didn’t have any affordable, we didn’t have any middle market. And we were really trying to figure out how to bring middle market into our service, our continuum.

And you explained to us very early on this is a very different product. You need to think differently. You need to staff it differently. While we might be able to purchase some services from the parent organization, this is a different staff, a different level of service, if you will. I mean, like you said, the customer service is still great, but the amenities are a la carte and less than you would see in a typical CCRC. Is that something that you work with clients a lot on trying to manage different levels of their housing?

Jon Fletcher: [00:12:07] Yeah, absolutely. I think several years ago, the discussion was a lot more around how do we design the buildings to meet mid-market kind of, I would say standards, but mid-market price points, right? How do we adjust the countertops and the cabinets and the flooring. And those things like all do add up. And we want to be really thoughtful and intentional around what that design is.

But, especially over the last three to five years, the conversation has really shifted from how do we design the buildings to how do we design the operations to make sure that we’re able to maintain the margin that’s needed? I mean, that’s the reality at the end of the day. Again, it’s how do we balance what residents can afford versus what is needed to provide for staff to be able to thrive.

Jennifer Drago: [00:12:51] Yeah. And so let’s jump to that question because to be honest with you, when I was working with my last provider, and we were trying to figure out if middle market fit for our organization and there was a big concern about how it would perform financially. So let’s talk about how mature middle market housing, senior living projects actually perform financially when they’re operated the way that you describe.

Jon Fletcher: [00:13:17] Yeah. What’s really interesting is that middle market communities actually tend to be some of the best performers. And I think a lot of folks when they first get into the discussion of middle market, well, it’s going to take a lot of financial resources. We’re going to have to subsidize this forever. We don’t think we want to go down that route. Can we afford to do it?

But the reality is that in our portfolio of housing, middle market is by far our most stable. It’s our most successful operating platform. In general, it’s stabilization. We expect to achieve EBITDA of 50 to 55 percent on our newer communities, which is great, generates cash on cash returns of 10 to 12 percent. We typically see IRRs in the 16 to 22 percent range.

So very market competitive and we expect those communities to be contributing financially to the organization. They should not be a drain on existing financial resources, or you shouldn’t need to be putting foundation dollars. If anything, your mid-market communities should be able to kick back to the organization to support other benevolence initiatives.

Jennifer Drago: [00:14:22] Wow, that’s awesome. And those numbers are even higher than I remember. I’m sure you’ve told me that before, but wow, that’s amazing. And so what is that period of stabilization from the time you’re developing, putting a shovel in the ground till we actually are stabilized?

Jon Fletcher: [00:14:38] Yeah. I mean, so from first concept to kind of handing over the keys and starting lease up, it’s usually between four and five years just to kind of hand over the keys. Usually, it takes about a year or two on the pre-development side, call it a year or two, depending on the size of the building for construction, another year or two for lease up.

But then once you get into operations, we usually like to see stabilized operations within about 18 to 24 months. So call it by year three of stabilization, you’re seeing positive cash flows and stabilized operations. So fairly quick.

And one of the things that’s really nice, too, about mid-market communities is that because your price points are modest, at least initially they’re modest and very market competitive, you’re typically seeing your stabilized occupancy in the 95 to 99 percent range. We typically see very high occupancy. We actually have many communities that are 100 percent occupancy. And the primary reason is because modest rents have helped to de-risk the investment. Since you have that high occupancy, you can really afford to keep your rents modest over time. It’s just kind of a self-perpetuating, self-fulfilling prophecy of how do we keep our rents low. So it’s really a nice investment.

Jennifer Drago: [00:15:52] And so you’ve shared with me that at Pres Homes, middle market housing represents about 60 percent of your overall housing. So how many properties is that?

Jon Fletcher: [00:16:03] So we have about 65 communities or about 10,000 units in our own portfolio that we own and operate. And yeah, so about 60 percent would be middle income, about 20 percent upper income, and then 20 percent low income or subsidized. And we do that intentionally to provide a diversified stream of income, diversified resident base in terms of who we’re serving. We just try to diversify across different platforms. Also, the diversity in payer source, right? Private pay versus subsidized versus any sort of agency or federal or state subsidies. So it’s a good blend.

Jennifer Drago: [00:16:37] Yeah. And I wanted to point that out because as Jon’s sharing that those EBITDA numbers and that IRR, it’s not one building that had really good experience. I mean, that’s your portfolio, that’s kind of your average performance in your middle market portfolio. And so that’s pretty impressive. I just wanted to point that out.

So let’s talk about current market conditions. What is that doing to middle market housing development in terms of our interest rates or construction costs, our staffing shortages? Where are we at?

Jon Fletcher: [00:17:14] Yeah. Well, there’s no secret that high interest rates and construction costs right now are challenging the entire development industry, not just in mid-market. But especially for nonprofits. You know, basically just margins are getting squeezed. And so on the nonprofit side, while the demand is very high, a lot of folks are pausing their developments. So not necessarily canceling work that’s in project or in process, but they’re pushing pause, waiting to see how the economy stabilizes over the next year.

But what’s been interesting at the same time, folks recognize that we might be going into a bit of an uncertain season. But at the same time, they’re recognizing that pre-development work typically takes one to two years for a project to get ready to go. And so we still have either for ourselves or for our partners that we’re working with, they’re still taking this opportunity now when the market is uncertain to maybe put a shovel in the ground, they’re taking that time to start doing all the pre-development work, the market research work during the plan drawings, because again, that can take one to two years to sell.

So that way, if and when the market returns, you’re ready to go with a shovel in the ground and you can then meet the market. Basically, if you wait until the market looks good to start having this conversation, you’re already late. You’re going to be like three years late. And so we’re fairly big proponents of let’s get rolling on the pre-development work. It’s a fairly low cost of entry in terms of doing the pre-development work, but you could save a ton of time.

Jennifer Drago: [00:18:35] Yeah. And we also are seeing some providers, if they’re fortunate enough to have cash on hand, maybe banking some land that they know they want to develop on and so they can start that planning work as well, right?

Jon Fletcher: [00:18:47] Yeah. Great time to buy land. And obviously it’s site specific, but just in terms of construction costs are high, interest rates are high. And so there’s less competition for buyers out there. And so if you have the wherewithal to put in an offer, a competitive offer, you can usually get reasonable deals now. And I say reasonable just in comparison to what pricing we were seeing, and in comparison to potentially the pricing you’re going to see in the future if interest rates come down. So land banking again in select situations makes a lot of sense.

Jennifer Drago: [00:19:20] Yeah. And that’s something else that Senior Housing Partners helps its clients with is selecting the right piece of land if they don’t already have a piece of land in mind. So good to know. And so let’s bring our crystal ball out for a second. So we know we have lots of people in pre-development and maybe holding on actually getting their construction financing and starting their construction project. Do you anticipate that when interest rates decline, that we’re going to have a kind of a backup in the pipeline and end up with some shortages and needing more construction Labor?

Jon Fletcher: [00:19:55] I think so. And like you said, we’re crystal balling at this point, but at the same time, you can’t help but look at this and say there’s a lot of work that’s been paused that’s going to need to be built at some point. Just like in the last recession, if construction work slows down, there’s certainly concern that you might see another exodus of construction labor.

And if you combine that exodus with this pig in the pipeline of projects that need to get built, it could be a pretty big whiplash in terms of you have high interest rates. And then as interest rates come down, suddenly construction costs skyrocket because all projects want to get in the ground, but there’s not enough labor to execute on it. And you’re just also hoping that supply chain issues have been resolved, we’re still seeing supply chain issues around major mechanical systems for buildings. Electrical switchgear is a big one.

And so it will be interesting to see where things go. And you hate, as a developer, you hate to try to time the market because you never really get it right, but you are just trying to be ready to move quickly. And so I tell folks try to get yourselves in a position where you can move within 120 days of the market conditions looking good.

Again, like I said before, if you wait until the market feels comfortable for you to start working, you’re going to be late. You’re going to wait one to two years until your plans are ready. You’ve got to be able to move in 90 to 120 days, basically the time it takes to close financing.

Jennifer Drago: [00:21:15] Yeah, perfect. So for providers who already know middle market is in their future or additional middle market housing is in their future, you’ve given us a lot of things that we can be doing now while we’re waiting for interest rates to drop so that we’re ready to go. Are there any other strategies we should consider in light of the current market conditions such as acquisitions?

Jon Fletcher: [00:21:37] Yeah, that’s a great point. I mean, so like right now with return on cost spreads being really compressed due to high interest rates, it’s natural to look out there in the market and say, okay, new development can come with some risks around costs and labor et cetera. But if there’s communities that are already operating, it’s already kind of shaken out obviously the development risk. You understand the staffing, you understand how it’s performing, you can make some operational tweaks if you wanted to. But then in terms of expanding your portfolio, you price the acquisition based on how it’s performing currently.

So a lot of risk has been taken out of it. And the reality is like assuming you’re buying an existing middle market community and depending on the quality of the property and the quality of operations, it wouldn’t be out of the ordinary to see a discount of 30 to 50 percent versus new construction. Right.

And that’s assuming you’re buying a ten-year-old building, a 15-year-old building, maybe it’s kind of a B+, A- type building, but perfectly appropriate for a middle market community. Even if you have to invest some money in deferred capital or deferred maintenance, that’s totally fine. Even accounting for any additional investments you need to make to maybe bring it up to date, you’re still acquiring at a cost basis significantly below new construction.

And so even for ourselves at Presbyterian Homes & Services, we are in the process of acquiring communities right now just because it makes sense based on capital markets. But then at the same time, we’re still preparing for when development makes sense in the future.

Jennifer Drago: [00:23:02] So amazing. That’s a really good point that maybe some weren’t thinking about. So I hope that we’ve got them thinking today. So what are some strategies that are important when you’re developing a successful middle market community?

Jon Fletcher: [00:23:17] Yeah. Honestly, I always tell a lot of folks there’s not one magic bullet. It’s a lot of little things. There’s a lot of kind of one percent things that you can do that add up to making 20 to 30 percent difference versus a market rate community. And I think we have a white paper that will be included with this or linked to this that lists about 20 different tips and strategies, but I pulled out just a few kind of key items that I would share with folks as they’re looking to build a middle market community.

And so for the first one, from the get-go, focus on design and operational efficiency. I try to hammer this home as much as I can. You want to be targeting about 60 percent rental efficiency. So about 60 percent of your building square footage needs to be going into rentable space, right? Housing space. And that includes parking as well. So 60 percent. And it’s really funny how specific that number is.

If you get down to like 57 percent, your performance is probably not going to work. So be targeting 60 percent rental efficiency. If it’s less than that, you likely have too much space dedicated to amenities. And if you have too much space, you want to be thinking about how can I consolidate some of those amenity spaces to be multifunctional?

I’ve shared this before. I think they’re — not I think, I know there are too many spaces in buildings that are dramatically underutilized. We think about like community rooms, for example, right? Even if you consider yourself highly programmed and you have two events a day for an hour and a half going on in a community room in your building, that’s every day.

So over 700 events a year, that sounds like a really high utilization. That’s still only about 12 percent of the hours of the year, right? So 88 percent of the time you have this big expensive space that’s just doing nothing. How can you combine that with maybe theater time later in the evening, like play a movie? Or how can you use that large space to do group fitness? So you have to be thinking about operational and design efficiency.

The other thing I would say is, and this is a really key item, is that over time to maintain a successful community, you need to be really focusing on how do you keep your rent increases down. Right? So many folks will try to match their rent increases to what the local market is doing as opposed to maybe what CPI or inflation is doing or opposed to what your operating expenses actually require.

And so we really encourage folks to focus on doing rent increases that match your expenses and not what the market would allow. And what we find is that over time that housing prices and rents are actually increasing. It depends on the market but call it like one to three percent faster than actual expense inflation.

And so over time, let’s say you’re able to save that one or two percent a year over a period of ten years, you might find yourself 15 to 20 percent below market without even having really tried very hard. Right? You just kind of stayed responsible with your expenses and then you just have a natural competitive advantage built in.

And I would say the third one, and this is a little bit more specific and frankly, a little bit more targeted towards CCRCs. But in a mid-market community, think about phasing out or completely eliminating like unit customizations. Right? And I know that’s a really specific item, but things like having to have all of these like one off customizations around the unit turns that can cost tens, if not hundreds of thousands of dollars, and that take weeks and months to turn over, that’s lost revenue. You can’t be that inefficient on your unit terms.

And so when you’re designing and operating communities, trying to focus on picking high quality neutral finishes that appeal to a broad range of tastes and all that combined, it will speed up your construction timeline, it will reduce your variety of materials, it will speed up unit turnover, so more revenue so you can keep your rents lower and it will dramatically simplify the number of maintenance folks you have to have on staff, right?

So that’s just kind of 2 ideas out of 20 in the white paper. And again, some of them are more broad and some of them are more specific, but each one of them kind of adds up to hopefully helping.

Jennifer Drago: [00:27:23] Yeah. Thank you. And thank you so much for offering that white paper to our listeners because your expertise is evident and the fact that you put that all into a paper that we can all absorb and really learn more about how to do this right and how to do this well, I’m thankful that you did that for us. So thanks. Thanks so much.

Let’s talk — I know financing is a big part of your expertise and a big part of the work that you do. And so when an organization is thinking about a middle market housing project, what kinds of finance strategies are you seeing? What does the capital stack look like, so to speak?

Jon Fletcher: [00:27:58] There’s a lot of different ways to finance these projects. Every organization has their own, I’d say called best path based on what their limitations are, how much equity is available, what their credit profile is, the size of the organization, et cetera. But I would say if you have flexibility and if you have options, what we’re typically seeing is that to have a successful middle market community on the nonprofit side, you need to be targeting around 15 to 20 percent cash equity into projects.

On the for-profit side, we would expect folks to need to invest upwards of 30 percent cash equity into the deal in order to get the kind of market required returns. Going back to the nonprofit side, we typically encourage organizations to pursue tax exempt, bank qualified notes as a way to reduce interest rates. Those are usually very competitive as opposed to tax exempt bonds.

And there’s situations when a tax exempt bond makes a lot of sense or it might be even required. But to the extent you can pursue bank financing, we typically prefer that primarily from the reason that you’re able to, during the construction loan process, get a draw down structure. And we’re big advocates of a draw down structure in your construction financing as it helps you to save interest costs depending on the size of the project, that can literally be millions of dollars in savings. If you’re able to do a draw down financing versus a gross financing at the beginning.

And then typically as well on a bank deal as opposed to a tax-exempt bond, there’s a significant difference in the amount of debt service reserve funds that are required. The debt service reserve funds and the tax-exempt bond can add up to millions of dollars on their own. And these are all just, again, little pieces of the puzzle that keep adding up to one more kind of ding on making the deal work.

And again, that’s not to say that taxes exempt bonds are bad. We financed many deals with tax exempt bonds, but it takes a certain situation. So yeah, so if you can pursue a draw down structure, try to avoid significant reserve funds.

We also really try to encourage folks to try to maximize local support, talking with their local officials as to how mid market housing is a key part of the affordable housing spectrum. And then because it’s a part of that spectrum, are there local pots of money that might be available to support additional affordable housing in that 80 to 100 percent of AMI price point range to the extent you can get tax increment financing, that can help to support your project. Fundraising from donors or other organizations or institutions is obviously a great way.

And then also, if organizations are looking to get into the space, depending on their resources available, just taking a look at if there’s opportunities to partner with other joint venture partners that might be able to come to the table with additional cash equity in addition to experience and other resources. But there’s a lot of different kind of pieces to the puzzle. And so we would really just encourage folks, though, to explore all the options early on when they’re trying to build their capital stack.

Jennifer Drago: [00:30:55] Yeah, really good point, sir. You mentioned fundraising, which made me think of benevolence. And so I’m just curious how organizations, you know, are there benevolent funds that help to support when folks outlive maybe residents, outlive their resources and can’t afford their rent anymore? Or what happens in a situation where someone moves in and there truly are middle market, but things happen to their investments or suddenly they can’t afford their rent any longer?

Jon Fletcher: [00:31:24] Yeah, that’s a great and common question. So we’re obviously a nonprofit and so we approach it maybe slightly differently. But I mean, to be fair to a lot of for-profit operators, I see them operating in the same way, we’ll set aside a pool of money that can help to support residents that do run out of financial resources.

But what’s been interesting is that the percentage of folks that actually require support is fairly low. I believe it’s less than one percent or it’s in the single digit percentage. And so it’s not as high as folks might think or as operators, owners and operators might think. And part of that is because, again, the rents are slightly more modest. There’s an a la carte option that folks are able to pick and choose what makes sense in their budget. And so it hasn’t been as big of a challenge as folks might be initially concerned about.

Jennifer Drago: [00:32:15] Okay. You know, we didn’t talk about this early on, but of the projects that you’re developing, when we say developing a middle market community, it can be, and I think usually is a continuum, right? So you generally develop projects that have independent assisted and memory care. Is that correct?

Jon Fletcher: [00:32:34] That’s correct, yep.

Jennifer Drago: [00:32:35] And what’s the spread of units that make kind of the ideal sizing of a community?

Jon Fletcher: [00:32:40] Yeah. So for us, most of our communities are around 150 to 200 units overall. We like to develop what we call a mini continuum. So it usually has around 160 units of independent living, 20 units of assisted living, and 20 units of memory care, you know, plus or minus a few units in each of those. We’ve really found that that particular mix does a great job of allowing for the kind of natural continuum flow of health care needs for residents. Right.

So on a typical annual basis, approximately 12 percent of our independent living residents are going to need to move into an assisted living setting or need additional care in a dementia care setting. And so by sizing those households of assisted and memory care appropriately to the number of independent living units, we’re naturally backfilling any vacancies that we might have.

And so then what’s really nice about that setting is that once you fill up your independent living or at least of your independent living and after the community is stabilized in a few years, the community just kind of self perpetuates its occupancy. And again, that just helps to keep your occupancy high, which allows you to have enough cash flow to keep your rents modest.

Jennifer Drago: [00:33:53] Yeah. And when you talk about a continuum and moving residents through that continuum as appropriate for their needs, do you have staff generally that are like a social services kind of person that’s on the staff of the middle market community? Or what kinds of staffing help with that?

Jon Fletcher: [00:34:13] Yeah. We do have household coordinators that help to assist residents as they transition from one level of care to the next. We do try to obviously keep residents in an independent setting as long as possible for their own benefit, but we do have either care coordinators or household coordinators or social workers that work in the community. As the community ages over time, there might be a need for more social support or social services support. But at least initially, at the outset, I would say there’s only a modest demand.

Jennifer Drago: [00:34:47] Okay. Perfect. And so if you were talking to a CCRC single site or multi site provider that doesn’t currently have middle market as part of its services or continuum, what would you tell them about, you know, we had concerns, we had some land on one of our campuses and we were trying to figure out do we put the middle market community next to a CCRC? Does that make any sense or is that going to be confusing to the consumer.

Could help with some operational issues, right, because we could share maintenance and things like that, but that may not work from a true marketing perspective. So when you work with CCRCs that don’t have middle market today, what kinds of recommendations do you have for them about how to put that new brand into their existing brand, or is it a separate brand?

Jon Fletcher: [00:35:38] We really try to encourage folks to, especially if they have a really strong brand and a really strong local presence to try to lean into that. If you’re able to leverage your existing brand, it adds a lot of value and creates a natural marketing efficiencies and brand awareness. But what you might consider doing is kind of think of it like a hotel, right? How a hotel chain or think of like Hyatt, for example, has 20 some flags that go from super luxury resorts and all the way up and down the food chain to something more modest and a more select service but they’re still all part of the Hyatt ecosystem.

And so there’s a level of expectation around regardless of what the community is, I expect that my bed is going to be made this way and service is going to be provided this way. The love of hospitality is going to be great, but it’s just maybe more options on the additional kind of a la carte pieces. So we encourage folks to think about maybe tiering the services or maybe tiering a brand, but still trying to associate it with that core brand as a way to leverage existing marketing dollars.

And then really, just from an operations standpoint, trying to find ways to leverage your operating infrastructure. So things like accounting, HR, transportation management, I.T., procurement, insurance, whatever it might be, to the extent you can leverage all that, you really kind of have to do that if you’re going to try to maintain price points where we’ve seen some organizations run into challenges that are trying to add a middle market community to maybe a more upscale brand.

Some organizations look at it and say, we need to stand up an entirely other organization because we don’t want to have any crossover, we don’t want any confusion, we want to have dedicated focus, but then you’re duplicating a whole host of kind of corporate infrastructure that just again adds cost. And especially if it’s your first community or you only have two or three of those communities, you just don’t have enough scale to make that work.

We’ve found that in order to get to a level of scale that allows you to regionalize kind of a new brand, you really need to be in that kind of $100 million of top line range that provides enough management fee revenue to be able to support standing up individual directors of HR and regional transportation or regional culinary and regional et cetera. So if you’re just getting started, I would try to leverage the infrastructure that you have, but maybe give it a distinctive subbrand as maybe the way to call it.

Jennifer Drago: [00:37:56] Okay. Really good advice. Jon, I’m going to let you tell us, are there any questions that you get asked a lot in this industry that we haven’t talked about today?

Jon Fletcher: [00:38:05] I think we’ve covered a lot of them. Again, I think the most common question that we get is just from boards that are asking how do we define this middle market? What are we actually trying to accomplish? And then maybe less so about the most common question, maybe more so the most common comment that I’m making is just to continue to remind owners and operators to kind of watch the shop on an operations basis. Right? Be careful not to get carried away with staffing.

And even with all the best intentions when you’re conducting your underwriting and develop proformas, everybody goes in and is really on the same page in terms of this is going to be the best operated middle market community, we’re only going to have 20 FTEs in this community. And inevitably within six months of opening, it will just start to creep, right? It’s just staffing creep.

Well, if we just had one more here or one more here, and then within two years it goes from 20 to 40 and you can’t afford to operate like middle market anymore. And so we just really encourage people to be diligent and to stay focused on what the original intent was as opposed to personal preferences.

Jennifer Drago: [00:39:09] Yeah, really good point. Yeah. So, Jon, I just want to put a plug in for the work that you do because if you are an organization or a board member that is looking at middle market or strengthening your middle market, whether you have it now or you’re just adding it, that’s one of the things I love working about, Jon, is we started first with board education and staff education.

What does this mean If we want to go into middle market? What does it look like financially? What are kind of the tenants of success? Some of the things we’ve talked about today. So you were able to educate us. You were able to tell us, you know, again, help with site selection. You were able to do proformas and tell you based on this size and this mini continuum building, what should this look like at stabilization?

And I mean, you guys have it dialed down in terms of all the development work. You can work as a development partner if the organization needs that, right? So there’s so many things that Senior Housing Partner can do in this space to help providers. And so if you’re looking at a middle market opportunity, I just want to put a plug in for Senior Housing Partners because they really help to get us further faster because of all of your knowledge. And so I want to thank you for that. Thank you for serving our industry the way you do.

But let me let you give a moment to tell us where people can find you and how they can work with you. And of course, again, we’re going to always link those white papers so you can learn a little bit more about Jon’s expertise even from those white papers and reconnect with him later.

Jon Fletcher: [00:40:50] Yeah. Thank you. Folks can find me on LinkedIn or you can shoot me an email at JFletcher@preshomes.com, preshomes.org. And that’s probably the best way to reach me. Like I said, or through LinkedIn. Yeah. My email is JFletcher@preshomes.org.

Jennifer Drago: [00:41:06] Okay. Perfect. Thank you. And we did get a question on LinkedIn, so I’d love to ask you. Our resident’s — this comes from Yanni DeRose and I hope I didn’t mispronounce that name. Our resident’s interested in smart technology in this category, connected experience, voice controls and energy saving type devices.

Jon Fletcher: [00:41:25] Yeah, that’s a great question. I think on the energy saving side, residents have definitely been asking for that and are very interested. On the smart technology side, I think we’re still seeing that, at least the current senior population is still getting used to what the technology might allow them to do. And so I don’t think that operators or residents have been able to really kind of maximize what the technology allows.

And so for us, we’ve been taking a more kind of methodical step around what individual pieces of technology we should be adding in. But we haven’t gone, I would say, kind of full all in on as much smart technology as possible. I think, though, that will change the next 5 to 10 years but we’re just not there right now.

Jennifer Drago: [00:42:11] Yeah, that’s a really good point. Really good point. All right, Jon. Well, thank you so much for your time today and for sharing all your expertise around middle market. I hope the listeners have found this is interesting, as I have. And I tell Jon all the time, every time I hear him speak, I learn something new about this industry. But I’m just so excited because we know it’s such a need.

And to Jon’s point earlier, let’s not take our foot off the gas. Let’s keep going with those development plans. Let’s get these projects ready to put a shovel in the ground so that when the time is right, we can maximize on these opportunities to not only serve our mission for those nonprofits, but to really serve this truly underserved market or what will be a truly underserved market in the future. So thank you, Jon, for your time today.

Jon Fletcher: [00:42:58] Thanks for having me.

Jennifer Drago: [00:42:59] You betcha. All right. You’ve been listening to Senior Living Visionaries. Again, we’re recording live from Phoenix Business Radio X studio here in Phoenix, Arizona. I’m Jennifer Drago. And I hope you’ll join us next time as we continue to feature the innovators, disruptors, and best practices in the senior living industry.

If you would like to be subscribed to be notified when new episodes of Senior Living Visionaries comes out, you’ll get access to a copy of the transcript as well as the recording. In case you can’t grab these episodes when they’re live, you can go to seniorlivinvisionaries.com and sign up to be on our mailing list. Thanks so much. See you next time.

Outro: [00:43:42] You’ve been listening to the Senior Living Visionaries podcast and radio show where we showcase the leaders and innovators in the industry who are pushing the boundaries and setting the stage for the future in senior living and services. Join us next time as we share the bold ideas and breakthroughs of the industry’s most forward-thinking leaders here on Senior Living Visionaries.