Operators pursue unit conversion strategy

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Two senior living operators are taking different approaches to unit conversion in an effort to make their portfolios more profitable, according to comments made during first-quarter earnings calls this week.

As Capital Senior Living changes independent living units to assisted living and memory care units, Five Star Quality Care is converting skilled nursing beds to high-end suites for rehabilitation. Meanwhile, real estate capital firm Welltower remains bullish on skilled nursing.

“Our conversions of independent living units to assisted living and memory care units … continue to show timing progress,” Capital Senior Living CEO Larry Cohen told those listening on a May 3 earnings call. As of March 31, the Dallas-based company operated 126 senior living communities with the total capacity for 15,800 residents.

The effort has been good for the bottom line, said Carey Hendrickson, Capital Senior Living senior vice president and chief financial officer. A total of 400 units were changed by mid-year 2015, he said, and in those communities, occupancy grew from 82.4% pre-conversion to 89.5% as of March 31. Also, revenue in these communities increased 13% in the first quarter of 2016 as compared with the first quarter of 2015, and net operating income increased 17.2%, Hendrickson said.

An additional 100 independent living units were converted to assisted living and memory care units by the end of 2015, he said, and they are in the process of being leased. Two hundred more units should be changed by the end of this year, with additional projects being considered, Hendrickson added.

Skilled nursing to rehab

Meanwhile, Newton, MA-based Five Star continues to convert existing skilled nursing beds in its continuing care retirement / life plan communities to high-end rehab suites, targeting younger Medicare beneficiaries for shorter stays.

“Our modern units with amenities, coupled with our food and concierge-like services, make us a preferred provider in the markets where we have these units,” the company's president and CEO, Bruce Mackey, said during a May 4 earnings call.

As part of its Rehab to Home initiative, the company expects to complete a conversion project in South Carolina within the next few months, recently started a new project in Indiana and plans to begin another one in Arizona soon, he said.

As of March 31, the company owned, leased or managed 274 senior living communities with a total of 31,051 units in 32 states.

Skilled nursing valuations ‘remarkably consistent'

And Welltower remains bullish on skilled nursing. The area represents the best value on the sales side, Scott Brinker, executive vice president and chief investment officer, told an analyst during the company's May 3 earnings call.

“Despite sometimes wild volatility in the public market, private market valuations and skilled nursing have been remarkably consistent,” he said.

Scott Estes, Welltower executive vice president and CFO, said that the Cleveland Clinic is building a new hospital in Avon, OH, a suburb about 40 miles west of the city, that will include a skilled nursing facility to be operated by Select Medical.

“That, to me, is a good indication of where the future might be going, and it validates the fact that the sector is not going away — when you have one of the finest hospital systems in the world now putting skilled nursing not only on their campus but actually attached to the building,” he said. “The view from talking to the major players who will survive in the hospital sector is that they want to see a strong skilled nursing industry. They know it is part of the future and part of their ability to manage profitably under an ever-changing reimbursement environment.”

(The regional hospital is expected to open in November, but the Cleveland Clinic Rehabilitation Hospital in Avon, adjacent to the land on which the regional hospital is being built, opened in December in affiliation with Select Medical. With 60 inpatient rehab beds, the facility “is licensed as a hospital. It is an acute rehabilitation center, not a skilled nursing facility or long-term acute care facility,” according to the Clinic's website.)

Conversions not end of story

Capital Senior Living and Five Star are doing more than convert units to try to positively affect shareholder value.

In the first quarter, Cohen said, Capital Senior Living purchased five senior living communities — primarily assisted living and memory care — in Wisconsin and Florida for a total of $64.4 million, and it expects to close on three more communities for about $74 million in the second quarter.

“And we have a strong pipeline of near- to medium-term targets,” he added. Capital Senior Living signed confidentiality agreements covering 41 properties valued at a total of $780 million in the first quarter and is determining which of them it would like to own, Cohen said.

The company also sold off five communities in three states in the first quarter; the move allows the company to “sharpen our strategic focus and strengthen our operations in our geographically concentrated regions,” he said. The company has no plans to sell anything else in its portfolio, Cohen said.

Over at Five Star, Mackey said that the company did not buy any senior living communities in the first quarter but continues to look for opportunities where it already has communities.

Five Star has, however, expanded or is in the process of expanding existing assisted living and memory care communities in Texas, Maryland and Tennessee, expects to start construction soon on a 100-unit independent living community in Tennessee and is thinking about constructing a memory care building in Delaware, he said.

After the first quarter ended, Five Star agreed to manage two senior living communities for Senior Housing Properties Trust, Mackey said. The communities have a total of 125 units. “We also expect to enter into a management agreement with SNH in the second quarter of 2016 for a senior living community located in Alabama which has 163 living units,” he said.

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