Confessions of a Senior Housing Operator

High-quality senior housing operating companies are in high demand, as the industry has been inundated with developers and investors seeking steady management of communities they’ve built or acquired.

But these developers and owners don’t all know to play nicely with their operating partners, who are facing stiff challenges in competing for staff and filling units.

In the latest installment of Senior Housing News’ “Confessions” series, we heard from an operator about owners who interfere too much, the flawed “Field of Dreams” logic in the industry, and the most annoying things about technology vendors.

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The goal of this series is to share candid answers that might be hard–but helpful–for readers to hear. To encourage this level of honesty, the operator has been kept anonymous.

Do you work in the senior living industry? Do you want to participate in the “Confessions” series? Email me at: tmullaney@seniorhousingnews.com. Confidentiality will be maintained for all sources for this series.

As a third-party operator, what are your biggest pet peeves with building owners? 

We fully respect the time, sweat, and risk capital owners have committed into their projects, but it seems that many of them have a tough time making the distinction between being informed and being involved.

For example, they hire qualified management companies with decades of experience and then come into the building virtually every day to “help” manage the project (under the auspices of just trying to gain an understanding), which usually involves second-guessing the decisions of the management company and the onsite leadership. This in turn creates organizational confusion, which ultimately leads to morale issues and increased turnover, particularly among executive directors. While perhaps well intentioned, it really amounts to counterproductive interference.

We have also found that many executive directors, in their efforts to accommodate all parties, often begin triangulating the relationship between management company, owners, and themselves, which is also counterproductive and ultimately doesn’t end well for anyone.

We are all for collaboration among stakeholders, and clearly understand our reporting responsibilities and the owners’ need for timely, accurate information, but it’s very important that the owners understand their role, managers understand their role, and on-site staff understand their role.

As manager, it’s our role to tie it all together and maintain harmony in these relationships. This is easier said than done. Many owners have a very difficult time comprehending this. Particularly if the project’s progress is going slower than projected, they or their representatives tend to be at their building every day, often with the best of intentions, but often creating the unintended consequence of organizational confusion and dissension among the staff.

When you come in as an operator for ground-up developments, what are your biggest roadblocks for being a successful manager?

The biggest roadblock for an operator is generally related to the market, and the marketing of a community. Often this relates to a misunderstanding about pre-marketing and the need for pre-marketing.

Many developers don’t believe that you need to start marketing any sooner than a couple of months before you open. While we have shortened pre-leasing periods by a few months in recent years, we still need a solid six to eight months on the ground in the community prior to opening.

Many owners and sponsors do not believe that this is necessary because they have bought into the notion that [senior living] is “needs-driven” and if they have a need and you build it, they will come to you. Kind of a “Field of Dreams” approach. I keep a copy of that movie poster in my office as a constant reminder of this flawed logic.

Same question for when you come in as an operator for an existing building, a turn-around. Biggest roadblocks for success?

This is also, in my opinion, related to understanding the market, your place in the market, respective to services and amenities offered and having realistic expectation of achievable rates, absorption, and the length of time required to reach stabilization.

Many developers are believing that the absorption should be 6 to 8 months net, where in many competitive markets we are seeing 2-4 units a month [being absorbed]. This can cause considerable conflict between owners and operators.

We believe it’s very important to get an accurate if not conservative market study and update it continually. Particularly in highly competitive markets many operators are offering incentives such as waived community fees, discounted rents, rate locks on rent and care fees, and other incentives to attract prospective residents. So often the rate that is published (and quoted in a market study) is not the rate that is being achieved in the market, which in turn can give a developer a false expectation from the onset.

Other roadblocks include staffing. Hiring and retaining qualified staff at all levels has become more difficult in recent years.

Executive Directors’ salaries are approaching six figures or better (plus incentives) in most markets, and there’s fierce competition for them at that level. Line staff are very difficult to recruit and retain. This is further compounded by increased benefits costs. It’s very difficult to strike a balance. If there is a shortage and employees don’t feel valued, they will go down the road for 25 cents [more] an hour.

Do you see a lot of new, first-time senior housing owners getting into the game these days? Is it a positive or a negative for the industry? Do they have realistic expectations?

Yes, in many markets there first timers ranging from mom-and-pop to CCRCs, all of which can influence the market and negatively impact absorption. While the tendency is to not take them seriously, we simply can’t ignore them, either, because they’re in the market and they are absorbing units that we might otherwise get.

Many of the newer entrants or operators in the market do not have realistic expectations, in that they may believe that lease-up to stabilization will go faster than it really will, and will take less money than they budgeted, so when they start running into trouble they begin cutting every corner in the book and just trying to survive.

In their efforts to survive, many of them resort to Medicaid, or discounts, or unrealistic cost cutting. It’s a pure case of oversimplification, in my opinion. They read the article or went the seminar that stated there are millions of people turning 65 or 70 every day and thing there is unlimited demand across the board, while failing to understand that, while “needs-driven,” it is first and foremost a market-driven business.

Not all seniors, in fact the clear majority, don’t have $5,000-plus a month to spend at a senior living community. Many first timers didn’t do proper due diligence, or fell in love with the pro formas and projections and didn’t take the time to fully understand the complex nature of this business, particularly as it relates to the relationship-centered nature of development and marketing. Many have underestimated the competitively intensive nature of staffing and marketing, not to mention the management intensive and capital-intensive nature of the business.

You do have a stake in some buildings but mostly you’re a third-party operator. What do you think of the owner-operator model, why haven’t you gone down that road?

We do take partnership interest in many of the buildings that we operate. For us it’s a personal choice. We also are third-party managers for faith-based and health care-based not-for-profits who simply want to pay for the [management] expertise, and their organizational structure doesn’t allow for [equity] participation in that way.

For us, it simply is a matter of staying in our wheelhouse and taking calculated risks and spreading the risk out over a number of properties. We would rather own minority ownership interest in multiple properties than 100% of a specific property or two. It’s a personal choice that we have made, to continue to follow this model as we move into the future.

What about scale? I think there’s a question about how big is too big, with Brookdale’s struggles over the last few years. Do you think it’s feasible to manage a huge portfolio of communities? Is senior living brand-able on a national scale?

Personally, I have never believed that bigger is better in the case of senior housing. Our experience has been that it’s very difficult to effectively control and manage all aspects of a community, including culture and engagement, in portfolios larger than 15-20 properties.

Which means if we had 100 buildings, we would probably break it into multiple divisions that are  relatively autonomous, and which match managers’ skills with the portfolios that they are being asked to manage. This may not be based upon geographic location but rather the needs or life stage of the business, affinity, and experience (stabilized versus startups, troubled projects, product types, et cetera).

These groups may follow all the same protocols, rules, regulations, policies, and procedures, but the span of command and control is very difficult to maintain effectively when you get past about 15-20 buildings.

Clearly it is possible to manage a huge portfolio of communities; the question is, it the most efficient organizationally, from a liability and profitability standpoint, to operate? Clearly Brookdale/Emeritus, all the large players, have had some measure of success in acquiring and assembling large portfolios, but it really comes down to span of control and could they be more efficient financially if they were to organize in a different way?

I have also never believed that senior living is brand-able on a national scale.  This is very much a local, referral-driven, relationship-based business. While I don’t think branding is going to hurt anyone, it is very costly to build, I don’t believe it particularly helps, and it may in fact make you a liability target.

Most admissions into assisted living and memory care communities are made based on referrals, the [community’s] reputation, longevity, and relationship with the on-site executive director and their staff. They are not based on a national brand like hotels or restaurants or other service industries. We perform thirty-plus market studies per year, and we’re in and out of hundreds of buildings or dozens of buildings, and we’ve seen no evidence that branding is effective on a  large-scale.

Some of the smaller regional operators have had success in creating a local or regional or city-wide brand. For example, if you have six or eight buildings in a metropolitan area, there are certainly efficiencies that can be gained in administration and marketing and perhaps public awareness, but it’s really a local neighborhood business. It’s based entirely on referrals and referrals require relationships and mutual respect between the parties and a genuine personal connection.

Staffing is a huge concern for senior living operators these days, is it keeping you up at night? Do you see a coming labor crisis or do you think these concerns are overblown, and good operators can recruit and retain staff at the community level?

Staffing is a huge concern. Staffing does keep us up at night.

I believe employees are gravitating more toward local/regional owner operator players versus national operators, simply because they’re more personal, and they feel that they can make a difference, whereas in a large corporate structure perhaps they don’t feel that way, despite the company’s best intentions to do so.

I do think there’s a labor crisis coming in this industry. It’s getting very difficult to find qualified staff. In many markets we’re finding applicants with limited experience, English as a second language, and while they may be kind, honest and compassionate caregivers, many of these challenges make it very difficult for them to communicate with seniors or with their co-workers.

We’re finding that every community is competing for the same employees, so they will go down the street for 25 cents an hour and no apparent other reason. The loyalty among many of the caregivers is just simply not there. We’ve taken over buildings that have turnover rates of 100% or more annually, and I see that getting worse as time goes by, because there’s only a limited ability to raise rents in competitive markets. So if wages are going up and the rents aren’t, we all know how that turns out.

What about technology? As an operator does technology make your life easier or harder? What are your biggest gripes with tech vendors or products for senior living?

Technology is finally coming to a point where we have got past the “wow factor” into technology that can actually make operations more efficient and help promote better data, communication, and outcomes.

Much of the software created for this industry is simply adaptations of some other multi-family or nursing home software. Our largest complaints with vendors are that they are promoting and selling an end-to-end solution that frankly isn’t fully developed or integrated prior to going to market. Set-up times are often ridiculous and expensive. They may have five modules and only three of them work as advertised.

On the life safety side, nurse call, emergency call and other low voltage egress control systems are getting better, but nobody is creating an end-to-end solution in that space that is easy for the line staff to understand and to operate.

I do think it’s improving and will look completely different in 10 years. The caregivers and managers have enough to do in a day without having to stop what they’re doing and try to figure out how to fix a technology issue or to learn new software. Ease of use is everything in this business. If it is not easy to use, understand and control, it will become a liability.

And new competition is another hot-button issue. Do you see markets getting oversaturated with supply? Are developers being bone-headed or do you think there’s a demand out there for the shiny new product?

I see many markets being oversaturated with supply.

Standalone memory care is the perfect example. Development in that space is slowing down, but a couple of years ago, we were getting 10 calls a week of people who wanted to go into the memory care business, having never developed anything in the seniors housing space.

I presume they were lured by the high rental rates, smaller units, et cetera, without regard for the market competition, staffing costs and concerns, and other critical operational issues.

In recent years, we’ve spent more time talking people out of senior housing than we do talking them into it, particularly if they believe it is a real estate venture versus an operating business; or if they simply have unrealistic expectations about absorption, operating margins, and other performance metrics.

I do believe there is demand out there, but it’s necessary to take a very conservative approach to market analysis and to understand how you fit into the market and how you plan on executing in the market. We see a lot of people that develop very specific plans, at the first sign of trouble, they abandon the plan and go into the bunker mode, essentially panicking over what was a false expectation to begin with.

Many never gain traction as they are trying to chase the market, for example converting assisted living units into memory care without proper justification, or chasing the next big thing instead of just sticking to the original plan and finding the right people to execute it, and having adequate time and capital to get the project to a stabilized position

The biggest problem that most run into stems from the fact that they haven’t made any effort to differentiate themselves from the pack and therefore become one of many competing on location and price.

Frankly, they really don’t understand how they fit into the competitive set of the market or how to gain a competitive advantage through reputation and referrals. Unfortunately for many, referrals require relationships and relationships that are developed over years of experience, not weeks or months.

Previously in this series:

Confessions of a Senior Housing Architect

Written by Tim Mullaney