New Perspective CFO Novaczyk: Controlled Growth Will Surmount Industry Headwinds

As with many who enter senior living, New Perspective Senior Living CFO Ryan Novaczyk’s story is personal.

He and his family cared for his grandmother Betty in their home, who was diagnosed with Alzheimer’s, Novaczyk told SHN. For seven years, Novaczyk and his parents kept Betty busy: doing chores; participating in arts and crafts; activities and social events; everything they could think could to keep her engaged and occupied.

“Most of the time she fell asleep because she was tired, not because she was [medicated],” Novaczyk said. “Seeing that experience first-hand inspired us to do this for others, on a larger scale.”

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Ryan Novaczyk worked on Wall Street at the time. His father, Todd, had a background in hospitality. His mother, Sherry, worked in interior design and architectural support. None of them saw quality care options for other seniors dealing with dementia. So the Novaczyks decided to launch New Perspective from the basement of their home.

Today, the Eden Prairie, Minnesota-based developer, owner and operator has a portfolio of 22 communities across Illinois, Minnesota, North Dakota and Wisconsin serving nearly 2,200 residents, with a goal toward serving 10,000 seniors by 2025, he said in a recent interview for Senior Housing News’ “Bottom Line” series.

Throughout its growth, New Perspective has remained a family affair. Todd Novaczyk serves as the company’s CEO, while Sherry heads its design and architecture arm. Ryan worked part time for New Perspective before joining the team full time in 2008, leaving Wall Street behind.

“Our growth happened through evolution,” Novaczyk said. “It looked more interesting to build a business than what I was doing before this.”

To reach its 2025 goal, New Perspective plans to have as many as five new developments in its construction pipeline per year while also looking for opportunistic acquisition opportunities.

This interview has been edited for length and clarity.

Would you say it’s true that senior living has gotten more operationally and financially complex over the last few years, and if so, how has that placed new demands on you as a CFO?

The age of residents continues to increase. Their needs and the acuity continues to increase. Compared to five years ago, our care-related revenues are double what they were, reflecting how intensive the health care side of the business has become.

That introduces a whole new set of challenges to the business model — 60% to 65% of our costs are coming from labor. It’s been a strain on resources, further compounded by the tightness in the labor market. It makes it harder to find and retain staff, and there is a financial impact on the business.

When you started with New Perspective, where was the company and what were your main priorities?

In the beginning, it was my dad and me in the basement trying to raise accredited investor funds and bank debt, learning from folks and reading as much [about the industry] as we could. He was full time, I had another job and was helping out when I could. We’ve grown it to what I consider to be one of the most sophisticated operations in the country.

As I got more involved with the business, I joined full time in 2008. I’ve seen everything from the very beginning of the company, with my dad doing the lion’s share of the work. We made progress, and put together a great team and programs for the number of buildings we had at the time. When you get to 10 properties, then 15 and then 20, then the headwinds arrive.

Those headwinds will abate, and there are signs of some loosening in some of the labor markets. A couple years ago, we knew if we were going to achieve our goal of 10,000 seniors, we needed to shore up the platform.

In addition to everything else we’ve done, we looked at our experience and rewrote every policy, procedure, form and manual we use. We’re around 80% standardized now, with 10%-20% accounting for state and local flair. Having standardized processes there is essential.

Can you talk about one or two or three moments during your time with New Perspective that were moments of particular challenge or change, and how you worked through or are working through those challenges or changes?

First, I always come back to navigating the past couple years with the macro headwinds and the labor and wage pressures, and what we’ve done to address that.

We’ve always had fantastic culture here. It is the strongest it’s ever been. I’ve got my partner [New Perspective COO] Chris Hyatt and [Todd Novaczyk] to thank for that.

We committed a long time ago to a concept of servant leadership. The concept of transactional management does not work in the current environment. We’re serving five generations in our workforce right now. We’re not done yet, but getting team committed to servant leadership has had a tremendous impact on our people and organization. It’s only going to get stronger from here.

How are you thinking about costs/expenses for 2019? Are there items on the balance sheet that are of concern, or areas where you expect to make significant investments, or achieve any cost reductions?

We’re digging deep wherever we can, turning every stone over to find every penny to redirect some of those dollars, and not just into wages and benefits, although that’s part of the equation. We’re investing more into leadership training, development of our team members, career pathing. We found in some cases, these have better impacts on turnover and retention figures.

It’s constrained our resources, so we’re more vigilant than ever searching for non-value added costs to take out of the business. That’s very different than unilateral cost cutting. It’s more surgical in nature, and the entire senior team is participating. Last year we cut $600,000 in non-value added costs and we expect to match, or exceed that this year.

On the pure investment side, we’ve done some ROI-related remodels: refreshing some buildings. Sometimes it improves results. Other times, execution is the issue. One area where we have seen some improvement, and we’re only a few months in, is lighting system retrofits — replacing fixtures and installing LED bulbs. We’re seeing some savings there, compared to the same time last year. It looks promising.

We’ve spent a good amount of time standardizing our software systems and technology. We have a couple projects yet to finish, such as our point of sale and Office 365 migration. So far, we’ve automated our HR and staffing, clinical needs, general ledger and facilities management, and telephone/VOIP. Wherever we could automate a more paper-based manual process with technology, we’ve done that. VOIP, in particular, will save us a ton of money and open another billable line for us.

Vendor consolidation is another avenue we’ve worked on. We’ve standardized our vendors and partners with groups that can serve our geography, and many national vendors have great local branches that can perform these services for us.

Are your margins under pressure this year, and were they under pressure in 2018?

We’ve been fortunate in that we’ve been able to push rates fairly aggressively. We’ve been north of 5% across the board for the past several years, which has helped us avoid market compression. We’ve been growing rates faster than our peers and controlling costs. Our costs year to date are only up 1%. Wages are higher, but the savings we’re finding are curtailing that. Our margins are up 4% year to date, all a result of the hard work that our entire team has done. This is the toughest occupancy environment we’ve ever been in as an industry, and it coincides with a tough labor environment.

How is the availability/cost of capital at the moment, do you expect any tightening of the debt or equity markets in the near term?

The availability of capital is fantastic. We refinanced two projects last month and we have not seen terms like [what we received] since before the financial crisis. The total number of lenders competing for this was astounding. While interest rates have been ticking slightly upward are now are planned to tick down, spreads and spread above LIBOR have compressed because of the volume of lenders entering the space. Some of the larger vendors who have been in the space for a long time are happy to replace debt that is rolling off their books. There are a lot of midsize lenders that don’t have the exposure they want and are being more aggressive.

As for the future, it’s tough to tell. We’ve seen some negative headlines in the industry, and there’s enough smoke there where investors and lenders are asking what’s going on. I think the industry is maturing and banks are being stress tested, which impacts companies in several ways.

It isn’t scaring off investors, though. Most of them are knowledgeable of what is happening in the sector. Long term, it will result in some good consolidation opportunities for us and other operators. We will continue seeing capital entering the space, but it will be more cautious and lenders will do their due diligence.

The sector has more capital available to it than ever before. It doesn’t show up in transaction volume, but good business plans have access to capital.

What’s your take on M&A and development at the moment? We are hearing that acquisitions are tough to come by unless you’re willing to pay a premium, with a lot of private equity chasing deals. How is New Perspective thinking about growth in the next 3-5 years to reach your target goal of seniors served?

We have our growth plan staged out. The infrastructure is built out including our executive and district teams.

If we could build ground-up only, we would. But we recognize that we can’t have a deep pipeline at any given moment because we would be overexposed if another downturn arrives.

M&A will be a significant part of the strategy. Portfolio sales aren’t happening because pricing is too high. Maybe that will change. We are seeing a lot of single asset deals, two-to-four asset deals. We completed an acquisition in February. We expect to complete a couple more, maybe three, by the end of the year.

But we have to be selective about our opportunities and be in the right markets. We have to ensure these buildings are well-maintained buildings from a capex standpoint, or if they haven’t that investing new capex is a significant part of the go-forward business plan.

Ultimately, the larger portfolio deal will present itself. We have a controlled plan for growth.

We may be seeing Medicare Advantage start to cover some senior living services. Is that on your radar, and do you have any plans to play in the MA space?

We’re paying attention to it. When it does pick up steam, we want to be a fast follower in that regard. With our current size, we don’t see ourselves as leading that effort. We want the bigger companies to prove it works, then enter the space.

The topic is not just with the payers. Health care systems are running into our sector quickly and see the intrinsic value we can bring in driving good outcomes in conjunction with them. There is a lot of care coordination that’s happening around our seniors, some of which we aren’t performing yet but are partnering with groups that are.

We’ll get involved with Medicare Advantage when the time is right.

Mission vs. margin is a theme in senior living and may be a challenge. Do you ever feel like you’re fighting to protect margin while others in the organization are freer to focus on mission? How do you define a healthy margin in this business and ensure that you’re striking the right mission/margin balance?

We don’t feel those pressures. Our finance and accounting teams are pretty tight controlling this. They get the mission — we have two former caregivers in our finance department. We view our job as to be a resource for the field to control costs and make good decisions.

We don’t look at the “right” margin, instead of return on invested capital and how well you are covering the costs associated with your capital stack. You can have a high-margin business but if you’re over-levered, you’re under water.

We’ve seen a trend of margin compression in the past five years, due to more care revenue and other ancillary revenues coming into the mix that are lower margin than room and board. You have to ask if you can have more care revenue and drive additional NOI dollars given those fixed costs, why not take that lower service revenue? It depends on the type of revenue, as long as it drives positive contribution to the bottom line, it boosts your ROI at the same time.

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