When Matt Clifton joined Senior Star in 2012, the company was in the midst of change. The provider was transitioning from a focus on independent living to more diverse care offerings, and it had recently forged a joint venture with real estate investment trust Welltower Inc. (NYSE: WELL), then known as Health Care REIT.
In his role as CFO, Clifton helped guide this evolution of Senior Star’s business model. By offering a fuller continuum of care, the provider has been able to enhance residents’ quality of life while becoming more competitive in the increasingly complex and demanding senior living industry, he said in a recent interview for Senior Housing News’ “Bottom Line” series.
In this interview series, SHN is connecting with senior living CFOs to gain greater insight into today’s financial risks and opportunities, and to learn how these leaders are helping guide their companies into an exciting but sometimes uncertain future.
For Tulsa, Oklahoma-based Senior Star, that future includes expansion, with the goal of doubling the current 15-property portfolio by 2025. While current market conditions make acquisitions tough, Clifton believes that the entrepreneurial spirit of Senior Star enables it to meet even the most ambitious goals. Clifton’s remarks also focused heavily on workforce initiatives and concerns — no surprise, given that Senior Star ranked No. 3 on the inaugural “Great Places to Work in Aging Services” list published last year in Fortune.
The following interview has been edited for length and clarity.
Between 2012 and today, it seems the senior living industry has become more complex. Do you agree, and has that changed the nature of your job?
I have seen things get more complex, both for our industry and our company.
Overall, from an industry standpoint, the last 10 years has seen a surge in investment and outside partners, which I think has created more complexity on the financial piece. You have private monies, public monies, a lot of players who are wanting to get in and out, versus if you went back 15 to 20 years ago … You’ve also seen the lending institutions get a lot more sophisticated, which I think has been a positive for our industry as a whole.
For us at Senior Star, during that same timeframe, our business model has changed a lot. When I came into the company, we had just recently closed on our partnership with Welltower. We were really evolving from what historically had been an independent living-focused company to being a lot more diversified, a multiple-levels-of-care company.
The Welltower joint venture began as a RIDEA arrangement for nine communities, with Welltower owning 90% of the partnership and Senior Star owning 10% and providing management services. Has the JV grown? What motivated Senior Star to strike that deal?
Our joint venture currently has 11 communities in it. So it has grown. And it is a 90/10 split.
Our joint venture with Welltower really closed at the end of 2010 … at that time, we really were trying to not only grow occupancy of new buildings and grow a larger platform for the health services side, but also, our partnership with Welltower was really an opportunity for us to start looking at how do we want to grow the company as a whole?
There were a lot of factors that played in. I think the biggest one for us is trying to find great partnerships that have a strong alignment of values. Before Welltower, there were various partnerships that we had had that were very successful. What we saw with Welltower and their team was an alignment of core values in how we look at the industry, how we look at business — the long-term nature versus a transactional-based relationship.
[The JV] also gave us an opportunity to grow our portfolio, give us access to capital for future growth, and really it was a support for us to get into broader, multiple levels of care with the assisted living and memory care parts of our business.
Senior Star has 15 communities overall, so there a few that are not in the Welltower JV. Do you like having a REIT partner but not having the whole portfolio in that structure?
Going back to your first question of, is the financial side getting more complex, I think you’re hitting on one of the areas that’s making it more complex. There are so many different partners.
The good and the bad is, every capital partner has different goals and objectives they’re trying to achieve for their investors. So, when you look at the public money like the REITs, the REITs have a very definitive investment thesis that they’re trying to achieve, and it’s not a one-size-fits-all. We have a great relationship with Welltower, and I believe we’ve served each other very well, and I’m looking forward to a solid, long future with them. But when you start pulling into entrepreneurial spirit and some of the things that have made us successful in the past, of finding distressed assets, if we found an opportunity like that, that may or may not fit into a mold that is in line with a publicly traded company’s investment objectives.
So, it doesn’t make the opportunity right or wrong, it’s just knowing there are other partners out there that have a business strategy that’s all focused on turnaround opportunities, and vice-versa, a lot of those companies are not overly interested in stabilized properties that have good, steady growth, whereas a publicly traded company, that might be right in their wheelhouse.
Having good partnerships and truly understanding what both sides of the table need or want in an investment is key in being able to grow the industry and truly have long-term success for yourself and those that are entrusting you with their investments and day-to-day operations.
Can you describe a couple moments of challenge or change during your time with Senior Star, and how you handled those situations?
Two things stand out for me.
One of them would be — and this is not unique to us, it’s the industry — how do you do the succession of leadership? How do we continue to attract and retain new talent that’s going to be future talent?
When I look at a lot of the individuals that I would consider founding members of our industry back 20, 30 years ago, how are we finding the talent to replace them as they start to transition? That’s something that [Senior Star founders and principals] Bill and Bob Thomas identified well before I came on board — how do we create an executive management team that is continuing to take the reins into the future? I think they’ve done a very successful job of that, and it’s constantly evolving. Since I’ve joined, we’ve had executive members who have retired, and the thing we’ve tried to do at each one of those points is say, what are we needing for leadership for the future and how do we find that talent and plan ahead for it — with culture being a very important aspect of leadership within our company.
How do we attract young talent into our industry and really make this sector of the economy something that people realize has a lot of attraction and upside and career growth? I think programs like ASHA’s Rising Leaders is a great example of that, trying to get more people engaged with the aspects of our industry, not just the individual aspects of any one business.
I wouldn’t expect succession planning to be top of mind for a CFO, necessarily, even though leadership changes impact financials. But there’s an idea that the days of the CFO as a chief accountant is dated, and nowadays, CFOs must have a big-picture strategic outlook. Do you agree that that is the case, and is your focus on succession planning an example of this broader outlook?
I think that’s a very good description of the role change.
While accounting definitely has to be a key part of any business, to track your results and provide that fundamental data for making decisions throughout the organization, the key to success for a CFO, I believe, is bringing a broader strategic picture to it.
Succession planning, to us, starts with being at the community level and working its way all the way to the top. It has to be an ongoing process of grooming talent or looking for talent and building an organization of players who can be flexible in the roles that they have, and not have any one area that is very pigeonholed or siloed off, not having a working knowledge of how others really interact and contribute to the collective success of the organization.
You said two things stand out for you, in terms of challenges and changes you’ve worked through. If succession planning is one, what’s the other?
This is more of a personal piece to me. The bulk of my career prior to Senior Star had been in commercial lending and being part of a much larger, more structured organization. Coming to Senior Star, which has a very strong foundation in an entrepreneurial spirit, it’s been refreshing but at the same time it causes people — myself included — to step outside of some comfort zones.
What’s an example of stepping out of your comfort zone?
A great example of that is in our fundraising for Alzheimer’s. Six or seven years ago, we set our initial goal of, I think, $150,000. It was very easy to say, that’s an impossible goal, how are we going to do that along with everything else? With that entrepreneurial spirit, [we ask] how do you set goals and change the thinking of an entire organization to look at those lofty goals as being attainable? We worked on that year after year. With time, you let down your guard and say, I’ve got to embrace this method.
What you’ve seen over the last five or six years is a very similar associate base in our company move from $150,000 to $250,000, and this past year, we raised almost $700,000 for Alzheimer’s. I use that example because it’s reflective of how we tackle a lot of things in our company. What is it that we want or need or have to do, and it’s not always an easy process, but how do you get to that like-minded approach to say, we can do this, now how quickly, to achieve excellent results?
Where do those funds go?
That’s fundraising for the Alzheimer’s Association, both our local chapters and the national association.
How has the company managed to meet those fundraising goals?
As a company, we focus with our associates, from a philanthropic piece, on two major initiatives. One is United Way, and that’s where we ask our associates to personally give time and money.
The Alzheimer’s Association is the second one. The big driver to being successful is looking beyond our four walls. It was changing the approach to fundraising to say, our ask of our associates is to go out and raise funds from others. The main driver is email campaigns, reaching out to our contacts, whether you’re asking for $5 or $5,000. The thing that always touches me is getting that unexpected large donation from someone in my campaign, and getting a note that says, in this past year, I’ve been affected by Alzheimer’s with a loved one.
Turning to financials, where do you see margins under pressure in 2019, and on the flip side, opportunities for cost savings and driving revenue? Are labor costs top of mind?
From a labor standpoint, I do think the pressure on wages exist. I’m still a little undecided on how strong of an impact they’ll have on our financial statements. Part of my hesitation on that is for the last four or five years, we have had an internal initiative of creating almost an internal minimum wage to start driving up the minimum that an associate can earn. So, we’ve been trying to stay ahead of the wage pressures that are coming toward our industry.
With that said, the availability of quality labor will be an issue for all of us as we compete with one another and the hospitals and non-industry employers out there.
We recently were honored with being recognized by Great Places to Work. While we were honored, we stepped back and said, okay, what do we need to do to continue to earn this with our associates? How do we create benefits packages or flexible work schedules or better work environments, manage your training? All those things weigh into the decision of an associate to work for Senior Star or someplace else. How to attract top talent is probably a larger concern for me than the labor pressures themselves.
Looking overall at margins, I think that one of my concerns will be insurance prices, with the natural disasters that have occurred. We’re all susceptible to rate increases, whether we’ve had claims or not, because the industry has had large claims overall. Same with the health care industry. Those are two very big expenses that are necessary, that you don’t always have full control over.
Now, I like how our industry is trying to find cooperative approaches to buying power. I think those are going to be keys to finding the right fit for operators, that you can go in and start controlling your costs with some larger buying power than you can have as an individual player in any one of these markets.
What are you seeing in terms of the availability and cost of capital?
There’s still an ample supply of capital in the market, especially on the equity side, as there continue to be new entrants into our space, both private and public. I think that’s going to continue to be strong, and unfortunately continue to keep cap rates on transactions very low, and prices up.
On the debt side, I’ve not seen a material slowdown in availability. But with Treasuries having increased dramatically over the past 18 months, you are seeing the cost of debt going up, and you’re seeing lenders get more selective of projects and more educated in their due diligence on what they’re willing to lend to. That, I’m seeing both on a national and local [level].
But I don’t see 2019 being a dramatic reduction of capital availability.
With deal prices being high, how is Senior Star thinking about growth? Anja Rogers, Senior Star’s CEO, has said there’s a goal to double the size of the company by 2025, is that still the target?
Right. In alignment with Anja there, we very much want to grow as a company, and we’ve got the resources dedicated to that from a deal structure standpoint.
Being privately held, we’ve never been a company that needs to grow for growth’s sake. [We are] very deliberate in what we’re looking to buy from a price and asset quality [standpoint], and how it fits into our overall portfolio. And just as important is, is there a long-term cultural fit? Those are key drivers to us.
Where do we see that growth coming from? I believe a mixture of acquisitions and new development. Our latest community opened a couple of years ago in Ohio, and we continue to look for new opportunities to build. But finding land is going to become increasingly difficult over time for all of us. And, where the capital markets take cap rates over the next few years will I think dictate a lot on the acquisition side.
The flip to that is, you’re starting to see more opportunities come to market that are newer builds that maybe never quite reached stabilization or were under-operated. Those start coming to the surface as new opportunities for established operators to go in and get the best of both worlds — a fairly new development that’s still an acquisition. I think you’re going to start to see more of those coming to market as well.
I believe Anja has said she likes larger memory care communities. Are those types of communities a focus, or is memory care in general a focus?
Memory care is definitely a focus for us, company-wide, on developments and acquisitions.
I would say an ideal development would not be a standalone memory care, it would be offering multiple levels of care. The perfect setting would be a mixture of independent, assisted and memory care. We look at that as well on an acquisition side, saying what are our opportunities to offer a broader level of care? It fits well with how our company has transitioned over the last 10 years, going from a very heavy focus on independent living to one that is probably 40% health services.
[We are] seeing the value to our residents of being able to offer that single campus with a continuum of care, where residents can truly age in place. It allows them to have a greater quality of life and allows us to be more competitive as an organization.
Another trend we’re keeping our eye on is increasing integration between senior living and the health care system, in terms of referral relationships and the possibility of Medicare Advantage plans starting to cover some senior living services. To what extent is that on your radar right now?
The first part of that, integrating partnerships, yes, that’s something we’re currently doing, as well as saying, how do we get better at it and expand it more from having informal partnerships in our markets with other health care providers? How do you have that integrated care that makes everyone more successful? We have seen success in that in some of our markets. It makes the overall partnership stronger and delivers a better product to the consumer.
The Medicare Advantage piece I think is going to take a lot more research. That has a lot of molding left to be done before it truly takes effect. All of us are trying to understand, how does that impact us and truly, as an industry, do we have to provide the right services so consumers can take advantage of those plans?
We hear the phrase “mission versus margin” a lot in senior living. As the CFO, do you ever feel you’re fighting to protect the margin while others in the organization can be more mission-driven? What is a healthy margin?
I think that’s a fair question, and in my role at Senior Star, I have two unfair advantages. One is that privately held companies, as a whole, have the ability to be more patient with margins than having to make a public earnings call. But, I truly think my greatest advantage is culture, and how we approach that balance.
If you look at our values, the first value we have is to fiscal responsibility. That means working to ensure that all of our associates, from our owners down to our executive directors, truly have a grasp on fiscal responsibility and how to read financial statements and [asking] how decisions that we make, regardless of how large or small, how is that going to impact the financials.
At the same time, we have a value of honoring our residents and driving an excellent level of care. So, that balance I think definitely exists. I don’t see how you can’t have that balance going on in any organization, but I really feel we have 1,300 people helping us to balance that equation out on a daily basis.
Did you envision yourself in senior living when you started your career?
No, I did not see senior housing in my future. Unfortunately, a lot of that was my own ignorance of what senior housing is, which ties into what we talked about earlier, how do you attract and retain talent into our industry?
Predominantly my career has been in banking, but also industrial engineering as a CFO. I knew of Senior Star from my lending career, but it was really just an opportunity that presented itself to meet with Bill Thomas when the role was vacant. I sat down with him and Anja and Bob, and started to understand what senior housing is, and what really attracted me was starting to see a common theme of a culture that resonated among the senior leadership of our company. It was more than words on a paper or website. Seeing that, and the entrepreneurial spirit, and comparing that to the lending industry, it had a draw to me and has yet to let me down.