For Aaron Koelsch, his involvement in seniors housing started early. His parents bought a nursing home in 1958 and raised the entire family — including all five of their children — on the property.
“We were born there, and we were expected to do anything from cleaning baseboards to giving care to cooking,” recalls Koelsch. “We always had a lot of work. Frankly, growing up in the industry, it didn’t seem very attractive to a teenage kid because we were surrounded by it 24 hours a day.”
But the disdain didn’t last long. After college, Koelsch launched his seniors housing career with owner-operator Manor Healthcare (later HCR ManorCare, which was recently acquired by Welltower). In 1988 at the age of 26, he built his first community, choosing Southern California for the location.
He began buying his parents’ communities as they approached retirement, forming the combined portfolio into Koelsch Communities in 1990. Delaware Plaza in Longview, Washington, which Koelsch’s parents built in 1971, was the first purpose-built assisted living community in the state of Washington, and is still in the portfolio today.
The company has since grown to 31 communities totaling 2,531 units in Montana, Idaho, Washington, Illinois, Texas, Colorado, Arizona and California. The properties primarily focus on memory care, with 24 of the communities and 1,595 of the units serving that niche. By comparison, assisted living accounts for 808 units, and independent living for 128.
The sister companies (in some cases literally run by Koelsch’s sisters) include operational brands JEA Senior Living, Fields Senior Living and Weatherly Inn Group. Koelsch Construction serves as the general contractor, and design firm JSK Design is owned by Koelsch’s wife Judy.
“We do our own development, we do our own construction, my wife does all our
interior design,” says Koelsch. “We’re a turnkey operation.”
In short, the breadth of the related companies helps keep an entire development project within the family.
Development as ‘growth engine’
Of the 31 Koelsch properties, only two were acquired and those “kind of fell into our lap,” says Koelsch. Developing properties from the ground up “is clearly the engine of our growth.”
What’s more, the company is stepping up its development efforts. Whereas Koelsch Construction formerly started one to two projects per year, the number of construction starts annually has increased to four to six, according to Terry Hanson, vice president of business development for Koelsch Communities.
Koelsch currently has five projects under construction totaling $154 million in total construction costs, says Hanson. “We also have two large projects breaking ground (in first-quarter 2019) for another $150 million. The size of the projects is increasing as well.”
On average, Koelsch memory care communities span 34,000 square feet and include 69 beds. The more recent independent living projects feature up to 135 units and 180,000 square feet.
The company is so confident in its new developments that it recently sold six of its communities for $134 million in a sale-leaseback transaction with healthcare REIT giant Ventas. The strategy behind the move was to unlock cash from the real estate to allow Koelsch to “push the pedal down on construction.”
“We have a good working relationship with Ventas and they’re easy to work with,” says Koelsch. “It bolstered our balance sheet to help us ramp up construction.”
Although Koelsch’s portfolio of communities is spread across the country, each region has a concentration of properties. For example, the metro areas of Chicago and Dallas each feature four Koelsch communities, with the Southwest and Pacific Northwest regions making up the balance of the properties.
Koelsch insists on grouping properties within a region for a few reasons. He wants executives from the Olympia, Washington headquarters to be able to easily visit all the communities. Each market must have a direct flight via Alaska Airlines. Within the market all communities must be close enough to support each other with labor and operations.
Despite the current spate of overdevelopment across the seniors housing industry, with new supply outpacing demand, Koelsch remains confident in the company’s development pipeline and pace of growth.
He cites low interest rates, a tight-knit group of about 100 investors and solid market selection as his reasons for that confidence. The “friends and family” investor group all meet U.S. Securities and Exchange Commission standards for qualified investors, enabling Koelsch to fund its projects without ever using institutional investors.
Typically, Koelsch funds its projects using 25 percent equity and 75 percent debt financing. Although the company prefers borrowing from regional banks, the size of the projects often necessitates the use of a national bank that has a specialized group for seniors housing.
Having a family of companies also helps on the development end. Koelsch’s full control over the construction, design and operations makes for a much smoother process.
“As opposed to having separate companies, each with its own agenda, we have only one house,” says Hanson. “Our equity sources like that we have everything under one roof.”
The advantages even flow down to the operations side, according to Eva Arant, the company’s senior vice president, who oversees the management end of the business.
“Because our construction and design teams have all worked together so long, we can have really open discussions on what’s working in a building — from lighting to the way we decorate,” says Arant. “We’re able to continually mold our communities to become better.”
Passion for memory care
It’s a common refrain among brokers, investors and lenders in seniors housing that standalone memory care is struggling. Given that this niche is generally panned at industry conferences, one could easily conclude it is a sinking ship.
But by all accounts, Koelsch Communities has a track record of success in the standalone memory care business and plans to add new communities to the markets it already has a presence.
According to Koelsch, with solid programming and careful market selection, there is still plenty of demand for the product.
El Rio, a Koelsch memory care community that recently opened in Central California, was 93 percent leased within the first year. A new project in Seattle, Cedar Creek, was 50 percent leased before opening. In Chicago, 30 beds at Northbrook Inn were pre-leased before the facility opened (Koelsch memory care communities average 68 to 72 beds).
Although the company is diversifying its portfolio and trying to add more independent living, Koelsch Communities is still a fierce believer in standalone memory care.
“If people weren’t showing up we’d have to rethink our strategy a little bit, but we continue to fill,” says Koelsch. “We’ve slowed down our development, but we have not stopped and don’t plan to.”
Design and programming account for part of the success. Koelsch memory care communities all feature retro designs, including 1950s-style kitchens and retro cars as a form of reminiscent therapy that encourages memory through nostalgia.
“Our job in memory care, as we see it, is to live in our residents’ world. It’s not their job to live in our world,” says Koelsch. “Our residents live in their older memories, not their newer memories. They remember the kitchen they grew up in. When they can step into a kitchen like that and we can bake cookies, it helps us in our work with them.”
“The classic cars are meant to be climbed into,” adds Koelsch. “It’s okay if they get scratched a bit. They aren’t showpieces.”
The result, according to Arant, is noticeably better outcomes for residents.
“When residents have agitation or anxiety, we’re able to take them to these areas we’ve created that are calm. The kitchen is a big piece of it. The kitchen is the heart of the home where everybody gathers.”
Arant loves that standalone memory care allows all the staff, training and programming to focus exclusively on one type of resident. When everyone in the building is solely and fully committed to helping those with memory care, the results for residents improve.
“We’re able to focus all our training, our programming, everything on quality of life for those with memory issues. We’re able to take our knowledge and just focus it on that, instead of having different levels and shifting our training,” says Arant.
“Our customers want to know we specialize in enhancing their loved one’s quality of life. Being able to continue to operate standalone memory care is very important to me.”
The company built its first freestanding memory care community in Vancouver, Washington in 1991, Koelsch points out. “We’ve been focused on memory care service for a very long time. God willing, we’ll be able to continue that moving forward.”
A family culture
Just because your last name doesn’t match the name of the company doesn’t mean you’re not family. Koelsch prides himself on his relationship with his employees. He is particularly close with each community’s executive director — even texting them late at night with ideas, and sending handwritten notes to each one frequently.
“I can remember working for a public health company and they were kind to me, but they had 20,000 employees,” says Koelsch. “People want careers, but that’s not the No. 1 thing they are looking for. Money isn’t it either. The No. 1 thing people are looking for is to know that what they do matters, that they count.”
Making the staff feel like family has led to an extremely lengthy tenure for one worker in particular. Robin Baker, a 45-year employee, has held several positions at the company over the years. She currently serves as concierge and lead receptionist. Her photo hangs on the wall at company headquarters as a tribute to her long service.
Don Barber started with the company in 1993 as a 16-year-old dishwasher. He’s now a regional director of operations, and has never worked anywhere else.
“We strive very hard in all our communities, at every level, to always train, identify and grow our leadership from within,” says Arant. “We’ve got dishwashers that are now executive directors, caregivers who are now marketers. We’re constantly looking for growth within our company.”
Such a strong focus on labor stems from Koelsch’s family history. He started his life living in the basement of a skilled nursing facility, and worked every job that a community offers. He knows what it’s like to be on the front lines.
“Aaron’s been in the trenches,” says Hanson. “He’s been the marketer, the executive director, the caregiver. He’s done it all, and he knows the day-to-day challenges each one of our folks goes through. That really sets the culture.”
Because of this background, Hanson notes, the company’s focus is on operations first, and the business, finance and real estate concerns follow accordingly.
“Building nice buildings is great, but it comes down to loving residents,” emphasizes Hanson. “That culture, from my experience, is pretty unique.”