The struggles of industry giant Brookdale Senior Living (NYSE: BKD) have raised questions about how big is too big. While they recognize that there are lessons to be learned from Brookdale’s post-merger troubles, some industry leaders still believe that large-scale operations are feasible, if companies can figure out smarter ways to grow.
After its 2014 merger with Emeritus Corp., Brentwood, Tennessee-based Brookdale became the largest provider the sector has ever seen, with about 1,100 communities. The majority of senior living operating companies are much smaller. In fact, about 56% of open senior housing properties were operated by small companies (that manage between 1 and 10 properties) as of the second quarter of 2017, according to the National Investment Center for Seniors Housing & Care (NIC).*
The senior living sector is still in a “fledgling” stage, mostly driven by entrepreneurs, and there’s a lot left to learn about how to scale up, Atria Senior Living CEO John Moore said Thursday at the NIC Fall Conference in Chicago. Louisville-based Atria operates about 200 senior housing communities nationwide.
Moore believes Atria and other senior housing providers can get larger over time, but they will have to rethink some conventional wisdom about how to run an operating company.
To illustrate his point, Moore shared an anecdote about visiting one of his senior executives, in charge of overseeing operations for about 30 properties. That executive subscribed to an idea about executive directors that is common in the industry.
“He had his feet up on his desk, and he said, ‘I have it figured out. Good ED equals good building,” Moore said. “And he didn’t work for us for much longer … I firmly believe that it’s [having] the right support and right training, the right tools to allow an ED to succeed, that equals a good company.”
In other words, the senior living industry tends to place too much emphasis on the personality of individual executive directors. Focusing on hiring super-dynamic EDs might work for building a portfolio of 20 properties or so, but it’s not a sustainable approach for creating a larger company, Moore believes.
“That transition is something the industry will have to make,” he said.
Here are some additional ideas and tips that Moore and other CEOs shared yesterday, for operators thinking about scaling up:
Keep regions manageable
Having, say, two-dozen buildings in a region is too much, said Paul Dendy, CEO of Milestone Retirement Communities. Based in Vancouver, Washington, Milestone operates about 80 communities nationwide.
Milestone is keeping its regions in the 6 to 11 property range.
Hiring the right people to oversee these regions is crucial, added Greg Miller, CEO of consultancy Greg Miller & Associates. He formerly worked for Toledo, Ohio-based skilled nursing provider HCR ManorCare and Marriott, where he focused on the hospitality company’s strategic planning, new hotel development and, later, senior living services.
An operator might be inclined to transition a successful executive director into a regional director role, but this transition is very difficult—probably the most challenging in someone’s career, Miller said. He strongly advised hiring someone with previous multi-property experience for this position.
“You’ll be lucky if your best ED can be a regional [director],” he said.
Dendy and Moore agreed, saying the skillsets for the two jobs are fundamentally different. An ED can be hands-on with every aspect of a community, but this is not possible for a regional director.
It’s similar to making your best salesperson a sales manager, Dendy said. The salesperson knows how to close a deal, but this is a different skill than managing people and systems.
Put a premium on culture
As it scales up, a company will necessarily be expanding its workforce. Defining a company culture and hiring people who share those values is critical—and companies need to act quickly if they make a mistake and hire the wrong type of person.
“No matter how much money that person is making for you, you’ve got to get rid of him or her, or people will know you’re not serious about your culture,” Miller said.
Moore and Dendy agreed.
“We call that helping people redirect their career,” Dendy joked.
Don’t get drunk on management fees
Atria is a pure-play senior living manager that operates buildings owned by real estate investors, notably real estate investment trust Ventas Inc. (NYSE: VTR). Moore has seen other management companies get into trouble because they focus too much on their management fees and not enough on driving value for their owners.
“Part of what’s gone wrong in scaling management companies is people have gotten drunk on the management fee and didn’t pay attention to the fact that you get hired to drive the bottom line,” he said. “If you pay too much attention to making a profit off the management fee, no one will hire you, if you’re not creating earnings growth for your owners.”
Atria bases financial incentives for its workers on how the properties perform for the owners, he said.
Dendy shared the example of a community that Milestone came in to manage, which was overstaffed and overspending on high-end dining and other amenities. This pleased the residents, and the staff were happy that they did not have to work very hard because of their numbers, but the owners had not made any money on the building for years.
Milestone explained to the residents and staff that the current situation was not working, because “all three legs of the stool” needed to be strong: residents and their families, staff, and owners all needed to be positioned for success. Eventually, the owners invited Milestone to take an ownership stake as well, because the new management approach was so successful.
*Editor’s Note: This article has been updated from a previous version that stated 56% of senior housing operating companies managed between 1 and 10 properties.
Written by Tim Mullaney