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Business Observer Thursday, Sep. 3, 2009 12 years ago

Respect the Elders

Senior housing isn't immune from the economic downturn. Two of the best operators on the Gulf Coast discuss the trends in their industry and how the recession and the Baby Boomers will change retirement. If you thought the recent health-care debates were raucous, you haven't seen anything yet.
by: Jean Gruss Contributing Writer

Senior housing isn't immune from the economic downturn. Two of the best operators on the Gulf Coast discuss the trends in their industry and how the recession and the Baby Boomers will change retirement. If you thought the recent health-care debates were raucous, you haven't seen anything yet.

Peter Dys and Guenther Gosch have the fine-tuned political instincts of mayors.

In fact, the retirement communities they run on the Gulf Coast are like small towns, complete with homes, restaurants, performance halls and hospitals. They even sell their own debt to finance new projects.

Called “continuing-care retirement communities,” Shell Point Retirement Community in Fort Myers and The Moorings in Naples are great economic indicators because they touch on so many aspects of consumer consumption. Dys and Gosch have been running these communities, respectively, for several decades, which make them elder statesmen of the industry.

These are no small operations. Shell Point has about 2,100 residents, 850 employees and generated $78.2 million in revenues in its most recent fiscal year. The Moorings has 700 residents, 550 employees and annual revenues of $49.7 million in the most recent fiscal year. Both are nonprofit organizations.

What's more, the leading edge of the Baby Boomers is starting to retire and both Dys and Gosch are seeing notable trends that business and government should watch carefully. Both men have this warning to elected officials who want to overhaul health care: The heated debates that took place this summer were just a taste of what's coming from the generation that took to the streets in 1960s.

Show me the financials
Continuing-care retirement communities like Shell Point and The Moorings generally offer residents lifetime care in exchange for a large, nonrefundable sum of money plus a monthly fee.

For example, residents at Shell Point pay an entrance fee between $103,000 to $535,000 and a monthly fee that ranges from $1,309 to $4,448, depending on the size of the unit they choose to live in. Initially, they live independently in apartment-style units. Later, they might need more help with tasks of daily life and move to the assisted-living facility. Finally, they move to the skilled-nursing facility for full-time care. At The Moorings, entrance fees range from $800,000 to $1.8 million and monthly fees cost between $2,000 and $6,000.

The idea is that residents pay a large sum up front to hedge the risk that they'll live a long time and will need expensive nursing care in their last days. Continuing-care communities hedge their risk too by hiring actuaries and charge accordingly.

But residents must be confident that the retirement community will be around when they need it. With today's growing life spans, that could be decades away.

The economic downturn slashed the value of homes and investments and has made prospective customers more skittish about parting with such large sums of money. “It has produced a much bigger challenge,” says Dys, president of Shell Point.

In response to the economic situation, and for the first time in its 40-year history, Shell Point started offering more-limited contracts that offer lower-priced entry fees but shift more of the skilled nursing costs to the individuals. One contract offers a full refund but requires residents to bear the cost of skilled nursing. “People want the options,” says Dys.

Dys says Shell Point, which is run by The Christian and Missionary Alliance, debated whether to move away from the nonrefundable contracts that had been a hallmark of their business. “Do we move away from what's worked so strongly in the last 30 years?” Dys wondered.

As it turns out, most customers end up choosing the nonrefundable, pricier option that covers any future skilled-nursing care when they analyze the choices. But the alternative choices attracted prospective customers. “Had we not offered it, [prospective buyers] would have walked out the doors,” Dys says.

Although The Moorings doesn't offer an alternative to the traditional CCRC price structure, Gosch acknowledges that Baby Boomers will demand more choice. However, 40% of the Moorings' revenues come from people from outside the community who pay for services such as skilled nursing and rehabilitation.

Still, in response to the downturn, The Moorings is offering 5% to 10% discounts to fill up some of the smaller units. “We have not been doing that very long,” Gosch says. “It's something we started in the last 30 days, but we are finding a much higher interest and more calls.” Shell Point also lowered prices on some contracts and ended the sale on July 1 after it proved successful.

Whether it's Boomers or the economic downturn, prospective buyers today routinely ask for a community's audited financial statements and tax returns, says Dys.

At The Moorings, prospective customers started quizzing Chief Financial Officer Dan Lavender on the community's financial health, especially after the fall of Lehman Brothers in September 2008. The Moorings has an enviable track record as being the only single-site CCRC in the country to have the top credit rating from Fitch Ratings and Standard & Poor's.

And prospective customers take longer to make a decision. “People used to make up their minds quickly,” Lavender. Now, it takes about three times longer before a prospective customer makes a decision to move in, he says.

Real estate and stocks
Dys and Gosch alike say the real estate market needs to rebound for their own communities to grow.

At Shell Point and The Moorings, many residents sell their primary homes to pay for the entrance fee. “The primary home market has to rebound,” Dys says.

However, the existing-home market is showing signs of a rebound lately as Boomers have taken advantage of buying lower-priced homes in Lee County. “That's a very positive sign for 10 years from now,” says Dys. Half of Shell Point sales come from people who moved to the immediate region to retire.

Then, the stock market has to rebound too because residents pay their monthly fees using investment income. “People got very, very scared and many of them did lose a lot,” says Gosch. The recent stock market rebound hasn't reassured prospective buyers. “Nobody can give us comfort that it's a trend that can continue,” he says.

Still, older people haven't completely stopped spending. “The older marketplace will pay a very reasonable price if they feel they get what they're paying for,” Dys says.

One selling point: the fear of inflation. The U.S. government has issued so much debt that many investors fear the risk of inflation has grown recently. “The benefits of a retirement community is that they have prepaid a great deal of their health care,” says Gosch.

Despite the recent slowdown in migration and competition from other states, Dys and Gosch are confident Florida will continue to get its share of retirees. “There is no doubt that the Baby Boomer generation is coming at us like a freight train,” Dys says.

But Dys says Boomers will be more demanding than prior generations. “They're not satisfied with being told that's the way it is,” Dys says. For example, they'll want a steak or a bath at the time of their choosing, not when they're told.

The Boomers' demand for amenities means retirement communities will get bigger. “Without fees coming in, you can't offer amenities,” Dys says. Shell Point has enough land for 4,000 residents, twice its current size.

Lower entrance fees and “fee-for-service” options will likely be more common, says Gosch. “There's going to be more of a transfer of risk from the community to the individual,” he says.

Choices lie at the heart of the current health care debate and that's likely to get more contentious as the Baby Boomers age. “They want lots of stuff,” Dys says. “That is not understood by policymakers.”

Politicians are just now getting a taste for what Dys calls the “flaming vengeance” that Boomers will rain down on legislators who take away health care choices. Retirement-community administrators already are seeing that activism when Boomers care for their aging parents. “The kids are the tough ones,” Dys says.

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