The SeniorCare Investor: Consumer Financing Arrives--
ElderLife Financial Launches A New Tool For Providers
Although it may seem somewhat radical today, financing part of a resident’s monthly rental payment is something that may very well be common in the next few years for many people. After all, when car financing first hit the scene more than 80 years ago, many scoffed at the idea, and even though lower cost items had been sold on credit before cars, it was GMAC that truly brought consumer finance into the 20th century. Now, ElderLife Financial, based in Washington, D.C., plans to bring consumer finance for the elderly into the 21st century, and it couldn’t come at a better time.
We doubt there are any statistics to back up our claim, but we think it would be a good bet to claim that there are a number of people who either delay a move into an assisted or independent living facility, or don’t move into the one they want to, because they either can’t afford it or can’t afford it until they sell their house. Probably the only person who knows the answer is the marketing director at each facility, but that would be anecdotal at best.
Readers may remember when we first introduced ElderLife and its consumer loan program for the elderly several years ago. The company was founded in 2000 but went under the name Grannie Mae when it started testing the market. Seven years is a long time to get a product off the ground, but the founder, Elias Papasavvas, never lost faith in the concept and was convinced that he had a product that would eventually take off once he found the appropriate financing and, equally important, once the industry realized how it would benefit them. It appears that he has now succeeded in both.
After surviving on “angel” financing, limited staff in cramped office space and a tight budget, ElderLife recently secured about $4.1 million in equity financing, led by a large diversified hedge fund (to remain anonymous for now) that provided the majority of the equity. Other investors included Lunsford Capital LLC (founded by Bruce Lunsford), HomeStar Bank and a private investor who was part of the original executive team at Sallie Mae when it was founded in 1972. Sallie Mae did for college tuition financing what GMAC did for car financing, so you get the picture, but neither one of those vehicles (no pun intended) caught on very quickly. That may explain why it has taken seven years for ElderLife to get to where it is today.
The second part of the financing is the actual funding source for the loans to family members, which will be provided by M&I Bank FSB, an affiliate of Marshall and Ilsley Corporation, which is headquartered in Wisconsin and has over $60 billion in assets. M&I Bank has entered into a significant nationwide consumer financing agreement with ElderLife which can be tapped by consumers and their families for up to $50,000 per resident. The bank is able to do business in 47 states which is one of the reasons why it made sense for ElderLife to partner with them, and given its size it will be easy to increase the credit line as the loan portfolio takes off. With the financing in place, ElderLife recently hired Jim Pusateri as its head of seniors housing, who has a 17-year history working at several seniors housing companies around the country.
Here’s how the funding program works. When a family comes to visit a participating assisted living facility (this is the sector that will be targeted for now), they can fill out a credit application at the time of the visit or online at home on ElderLife’s Web site (www.elderlifefinancial.com). Within two hours, they can be pre-approved with loan documents sent the same day and funding, in most cases, available within 48 hours, subject to receipt of the signed documents and confirmation of certain qualified credit criteria.
The resident, and as many family members as want to, can be guarantors of the loan. Or it can be just the family members, which would usually be the children of the resident. In fact, people other than family members can participate as well. The loan will serve as an unsecured line of credit up to $50,000 and it is interest-only with a five-year term, but can be paid back any time. Each month, when rent is due, the family initiates the disbursement to the facility from the bank, and the amount can change month to month.
Even though the concept sounds simple and, in most cases, should be a no-brainer, there is a fair amount of education that needs to take place for it to work the way it should. From the facility’s perspective, the point of the loan program is to fill beds, capturing those potential residents who don’t return after a visit because of costs, financial timing or both. ElderLife’s management has informed us that the provider has to promote the funding program from within, with regional marketing directors at the large firms reinforcing the funding option time and again with the marketing directors within the facilities.
The availability of a “payment option” needs to be on the company’s Web site and price sheets (preferably prominently), because you want potential residents and their families to ask about it. This means, however, that the marketing director needs to be fully conversant in how it works, and comfortable with some of the details. Therefore, they need some training in how the program works and how to market it. The first “sale” is always the hardest, but once the marketing directors “get it,” and how it can help occupancy, there should be no problems.
ElderLife ran a pilot program during 2005 and 2006 to see how the actual mechanics worked, what the kinks were and what kind of consumer demand there was at this early stage. What they found was that the most common reasons people used the credit line for was as a bridge loan until they could sell their house, to fund the first month rent and move-in fee, or simply, they were past due on their existing rental payments. During the pilot, the residents financed as little as $3,000 and up to $45,000.
Since inception, ElderLife has taken in $2.0 million in loan applications, approved $1.3 million in loan availability and funded $800,000. While the average loan draw-down has been about $16,000, the average loan request recently has been above $30,000. They also discovered some minor problems which were easy to fix and, most significantly, learned how important the front line people are to get the funding option in front of the consumer.
The pilot program involved one to three properties operated by each of six different companies: Emeritus Assisted Living (AMEX: ESC), Five Star Quality Care (NYSE: FVE), Somerford Corporation, Commonwealth Assisted Living, Spring Hill Assisted Living and Americare. All of the facilities in the pilot were in the Maryland and Virginia area, which was intentional, with the exception of Americare which operates in Missouri. Apparently, these companies were instrumental in helping ElderLife work out some of the kinks and getting the program to the next stage.
There were about 15 facilities in the pilot, with varied results. In three of the facilities, average census increased by three residents during a 12-month period as a result of the program, and in one Emeritus facility the census increased by 5% (four residents) because of the funding option. Four other properties had one resident each sign up.
The success of the Emeritus facility, apparently, was a result of having a very strong marketing person who knew how and when to sell the product. ElderLife can’t stress how important this is to its success facility to facility. Several of the facilities had no takers for the loan program, but it was difficult to tell whether that was because there was no demand or whether it was a result of not being marketed well.
A 3% to 5% increase in census, especially when the facility is already “stabilized,” usually means that at least 75 cents of every dollar coming in will go straight to the bottom line. That is what the ElderLife program intends to do, and that is why it is a no-brainer. And compared with the cost to the provider, which we think is too low, it is really a no-brainer.
It is a classic case of missed opportunity if that potential resident slips away, and since few facilities operate at 100% capacity, we have to assume that over time this funding program will become commonplace. The fact that we have a weak housing market right now, which will probably remain weak through 2008, only makes it that much more essential today.
So the pilot program was a success, and management spent the next year obtaining the permanent financing they needed to roll out the program on a regional, but controlled, basis. Some of the additional companies that are expected to participate in the roll-out include Brookdale Living Communities (NYSE: BKD) and Horizon Bay Communities.
This roll-out will probably be on a regional or state basis for these companies, because it takes some time to train the staff, get it on the Web site and make it sound as natural as financing your next car. After all, 92% of car purchases are financed, and up to 60% of college students seek tuition financing, so 3% to 5% of the elderly using this kind of mechanism does not seem too aggressive. Somehow, we think in 10 years that percentage will be much higher.
Within a year or so, ElderLife plans to roll the program out to CCRCs and independent living communities, primarily for those potential residents who want to move but don’t want to wait for their house to be sold. Skilled nursing facilities may also be on the horizon, but that is trickier and potentially much more costly in terms of the funds necessary.
The only problem we foresee is that demand from providers will be so great that ElderLife will have trouble managing its growth and completing the necessary training at the facilities. We should all have such problems. And who knows, maybe at some point it will have enough clout to change its name back to Grannie Mae, and then KKR may come knocking on their door. In the meantime, if you are a provider and your name has not appeared above, you might want to get in line.