Many senior living companies are subsisting on renovation and repositioning as new development remains slow. As they undertake new projects, they are putting a lot of thought into what will get the most bang for their buck.
With projects usually totaling millions of dollars, operators must get return on their investment in some fashion, be it added occupancy, revenue or resident engagement.
Among the operators that have recently updated their portfolio is Roseville, Minnesota-based Presbyterian Homes and Services, which averages between four and six community renovations annually, according to Senior Vice President Jon Fletcher. Renovation projects often include apartment upgrades, common areas, and infrastructure improvements like mechanical systems, landscaping and building envelopes, Fletcher told Senior Housing News.
Another senior living operator in the midst of updating its portfolio is Onelife Senior Living which merged with Ally Senior Living earlier this year. The company is beginning a full renovation of its Middlefield Oaks community in Cottage Grove, Oregon, in which the operator updated amenities and common space and added more memory care units to the 15-year old property. Additionally, the company converted some of the existing memory care into space for assisted living.
“It’s never really been remodeled or renovated. It’s in a good market,” Onelife CEO Dan Williams said. “It’s pretty much in the 90% [range] of occupancy … What we want to do, though, is be able to remodel, renovate and then we’re going to look at raising the rent … we’re looking at any ways we can increase the net operating income (NOI).”
Real estate investment trusts, such as Ventas, have also been pouring in investments to update older buildings within their portfolios. The REIT has invested $300 million in 215 CapEx refreshment projects to enhance communities in its senior living portfolio since the beginning of 2022. According to recent financial documents, the projects helped the communities grow occupancy to outperform their respective NIC counterparts by 350 basis points.
Making it worth the cost
Though it’s often more cost-effective than developing from the ground up, renovating older communities isn’t cheap either. According to Fletcher, Presbyterian’s projects tend to vary from $20,000 up to $80,000 per unit and between $2 million and $15 million per community, depending on size.
And that doesn’t usually include newly added amenities. Instead, the costs are more to modernize older communities for new tech and upgrades that accommodate new programming.
“While not part of our physical upgrades, we also increasingly invest in life enrichment staffing to enhance and expand resident wellness through chaplaincy, fitness, activities and volunteerism programs,” Fletcher said.
Onelife is still working on renovations at Middlefield Oaks, with a total expected cost around $3.5 million. The project scope includes changing common spaces and adding in a bistro. The operator is looking to wrap up the work in the next 14 months.
Onelife is also undertaking the renovations with staff efficiency and operating expenses in mind. For example, that might include modifying a common area that was originally two separate rooms into one larger area so fewer staffers are needed to oversee it. The operator also seeks to update the community to make staff more efficient.
Onelife has plans to continue owning the building for at least another five years, which is the minimum amount of time the company anticipates it can recoup its investment post-renovation.
“We always look at what the best case scenario is going to be … we’re going to kill it, and we’re going to have 40% margins, and it’s going to be nice for five years, and we’re going to sell it,” Williams said. “I work with our CFO on that, and then decide if the worst case scenario is something we want to tolerate.”
These are far from the only operators undertaking renovation projects at this stage in 2024. For instance, senior living operator Eskaton is currently using the nearly $83 million in proceeds from a bond sale to update and modernize six of its properties, according to the Sacramento Business Journal. Planned amenities and upgrades include bocce ball courts, spaces for fitness and wellness, new dining spaces and new technology.
“What we see is that there’s just more interest in culinary experiences, for example the wine bar, the bistro,” Eskaton CEO Sheri Peifer told the Business Journal.
Ventas has also seen the results of its CapEx investments, which have included market positioning for Sodalis Senior Living, Sunrise Senior Living, Discovery Senior Living and Holiday by Atria. The Holiday by Atria brand has specifically been focusing on renovations in recent years, particularly in making common areas “more flexible” and multifunctional spaces for residents to utilize.
As of the end of the second quarter in 2024, the investments it made since 2022 have resulted in a 6.5% increase in revenue per occupied room year-over-year, a 530 basis point increase in occupancy on average and a 109% increase in move-ins compared to the previous year, the REIT said.
The REIT also has 80 completed projects that are in “early stages of realizing incremental NOI generation.”
Determining the ROI of renovations
Senior living operators determine the return on investment of projects through a variety of means. As a nonprofit, Presbyterian Homes and Services balances cost-effective housing and providing services for residents with the right margins to maintain operations and staff.
“We use replacement reserve funds accumulated annually to finance these renovations. Our goal is to maintain an average building age of about eight years, which helps sustain high occupancy and operational margins,” Fletcher said.
Fletcher added the goal with Presbyterian Homes’ communities is to maintain an average building age of around eight years, which continues to sustain occupancy and operational margins. Major renovations are completed in common areas on an average of every 12 to 15 years and apartments are renovated on a “slightly longer” intervals depending on the community.
With these goals in mind, Fletcher said the plan is for communities to remain consistent with local market conditions for 12 to 17 years.
“Projects aimed specifically at financial improvement, like combining smaller units into larger more marketable ones, typically deliver ROI within three to five years,” he said.
According to Williams, the plan for the Middlefield Oaks community is to determine where it can raise the rates following the renovations. At the moment, the current net operating income is around $450,000 in revenue. With the improvements in place, the plan will be to increase the amount to around $550,000 from increasing rates and bringing in new market rate residents to the more attractive and updating community.
Additionally, he noted renovations can be a great time to lower expenses through adding in more energy efficient utilities that lead to additional cost savings in the future.
“Depending on how fast the fill up goes, the remarket rates go and how much we can raise the value of the community … you can get [the investment] back in five years,” Williams said.
