Brandywine CEO: ‘Full-Risk Environment’ Demands New Capital Structures, Innovative Operations

Senior living operators are in a “full-risk environment” due to oversupply, labor and other headwinds, and this is leading to necessary disruption in how capital structures are designed, Brandywine Living Founder and CEO Brenda Bacon believes.

Specifically, her own experience in leading Brandywine has led her to reverse her position on RIDEA. As an entrepreneur, she used to be “vehemently opposed” to RIDEA, wanting to maintain closer control over her business. But she came to a different viewpoint in the face of highly challenging market conditions, and last year, Brandywine transitioned to a RIDEA structure with long-time capital partner Welltower (NYSE: WELL).

“You couldn’t give me a building with a triple-net lease that looked like it was fine and is going to be fine and [say], ‘Brenda, don’t worry about it,’ because it’s just not true,” she said on the Senior Housing News podcast, Transform, sponsored by PointClickCare.

Even as current market conditions are putting the squeeze on providers, Bacon also emphasized the pressing need for senior living owners and operators to collaborate on creating the next-generation product that will appeal to the baby boom generation. “Lots of money” will likely be lost by investors and management companies that make ill-considered moves before the boomer demand wave hits, but there will be a “happy ending” for those who can build senior housing that this next generation wants, Bacon predicted.

Bacon co-founded Brandywine in 1996. Today, the Mount Laurel, New Jersey-based company has a portfolio of about 30 communities across six states.

Highlights of Bacon’s podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts, SoundCloud or Google Play.

On her belief that senior living is experiencing a “sea change”:

First of all, I think sea changes are good things. We like to see change and progress. Who wants to be bored, doing the same old thing?

I think in our situation, we have no choice but to recognize the sea change. We’re pretty much going to spend, in my opinion, the next seven to 10 years servicing the kind of clients that we have now, which come from a certain generation. That will differ quite a bit from the generation that we’ll be serving 10 years from now.

We hear a lot about, what is it that the baby boomers want, and what should we do to prepare for them? I think the exciting part of it is because you don’t have this in most industries. We have 76 million new customers coming our way … all [those baby boomers] need a place to live, and we should position ourselves to be that place that they choose. But, I think it’s going to be a different kind of experience not only in the physical plant part of it, but also in the lifestyle … in how they use our senior living communities and what their demands will be.

… I think that baby boomers are going to be very definitive about where they want to live. I think this will be the first generation that will choose on its own where they want to live, and they will be telling their children where they want to live. Rather than their children telling them where they’re going to live, which is what we have now, with the adult daughter saying, “Well, mom needs to move here, or mom, I found this great place for you to move,” I think this is going to be mom saying to their adult child, “This is where I’m going to live next.”

On how Brandywine is serving current residents and adapting for the future:

Our customers now are, I think, looking more at the hospitality aspects of where they live, the interaction, the things to do, the reason they get up in the morning … They want activities, if you want to call them activities — activities is almost a word that sounds childlike, to me. When I think about our population now, they want to attend classes at the local colleges, they want to go see shows on Broadway. They may have beginning Parkinson’s or other physical ailments, but that doesn’t stop their passion, their interests, their mind from working.

… And so, to the extent that this industry started out with, we’ll provide a safe, healthy home for people to live in when they can no longer live at home, I think it is a much different situation already and will continue to be as we go forward … Senior living communities [will be] more like a neighborhood in a town. So, you would have 100 roommates, if you will, that you will share common areas with and interests with, and you may not like all of those hundred people that you live with, just like you don’t like all the hundred neighbors you live with, but you will find six or 10 that you do like.

On helping residents find their friends within the larger community:

We have a big effort going on in Brandywine now that wee call The Linking Project. The Linking Project is basically in that first 24 hours and beyond that, finding and connecting those people in your “small town,” your community, that have things in common, so that you immediately feel at home. In our community, say, if someone grew up in South Philadelphia, or their father had a store in North Philadelphia, or they went to one of the Catholic high schools or they played football or danced ballet or whatever, if you can find for a new resident coming into the community three or four people immediately where they have something in common and make sure they meet them — it doesn’t have to be like or anything like that, but just someone to talk to.

… They may not end up being best friends because you may end up choosing friends that you have less in common with, but it starts that process of making a connection with other people you’re going to live with, and I think that’s important.

On the fierce competition for workers:

In a full-employment environment, which none of us have every worked in before, when an employee can go and work anywheere for basically the same salary, or even a greater salary than you can pay, then you’re in constant competition for good employees. And when I say good employees, I mean that it’s not just a warm body. It’s not just the person who would just as soon go to Dunkin’ Donuts or Amazon — both fine companies — and not have to give the most emotional involvement, the commitment that you have to give if you work in the senior living industry.

So, we’re not only in a situation where we’ve got not enough workers in the workforce, we’ve got more jobs than we have workers, we then also have to skim down between that large group of workers to the kind of workers we need and that our residents deserve. So, it is a challenge for everybody in the industry, the creation of that culture that you need to keep them engaged and to keep the service level of hospitality and care up where it needs to be.

It’s not about towns and states necessarily raising the minimum wage and the Fight for $15. The fact of the matter is, most of our employees can go out right now and find many jobs in this area without hard work at all, to get to $15. It’s the market that’s driving it. So if we can’t raise our prices to our customers to meet the cost of providing the service we provide, then, you know, we’re squeezing margins, and squeezing them quite heavily right now.

On triple-net leases versus RIDEA:

I learned a lot through the Brandywine experience … you couldn’t give me a building with a triple-net lease that looked like it was fine and is going to be fine and [say], “Brenda, don’t worry about it,” because it’s just not true. With respect to my colleagues in triple-net leases, I do think [this]— particularly in the territory we’re in now … where you’ve got more more supply than you have customers, you’ve got a labor market that’s very challenging, so in some ways you’re in full-risk territory, and you have a triple-net lease that no matter what territory you’re in, it’s going to go up 3% a year. So, it is totally agnostic about what may be going on in the market. And there is no sense of partnership about, “We’re in this together, and we’re going to figure out what’s going on in the market, and we’re going to together work to be the best, given the current market conditions, and be able to overcome those conditions.” So, we did change from a triple-net lease … there’s lots of disruption around this right now.

There’s also a lot of money still coming into the industry from private equity and other sources of funds because of the pure fact that, again, there’s going to be 76 million baby boomers. Now, there’s a lot of money that gets lost between now and then, in my opinion. The baby boomers, if they do choose senior [living], if we’re smart enough to build what they want to come to, then it’s going to be happy endings and things are going to be wonderful. I think in the meantime, our greatest chance of [being successful] is to form an alliance between the operating partners and the financial partners, where we both understand what our needs are, that we’re aligned in terms of common goals, we are able to talk honestly with each other. So that if you have a building that has been doing great for many years — has, quote/unquote, owned the market — and all of a sudden, there are two new buildings, with one one-and-a-half miles one way and one two miles the other way — sounds like I’m a bit familiar with this circumstance, right? — and they’re brand-new, shiny pennies … you’ve got three times as many apartments in that market, and there simply aren’t enough customers to satisfy that. You could be in this situation, you have a financial partner who says, “Wait a minute, what’s gone wrong here? This building used to be full with a waiting list, and now there’s 20 open apartments.” So, the assumption is, how are you going to fix this? What have you done, what’s gone wrong, you need to fix this, and you’re not going to make your covenant on your triple-net lease.

And, you might have the people who are putting up the new buildings saying, gee, I thought this was an A-plus market and we were going to fill up in a year or two years, and here we are sitting here filling up very slowly and we’re losing a lot of money.

I think all those things can happen, and they are happening as we talk today. I think being able to sit down with your financial partner, if you are aligned, [and say], “If you’re losing money, financial partner, I’m losing money as the operator.” And, often, we own a little bit of each person’s major part of the deal, and we talk reasonably about interventions, things that we’re doing, and be sensible that it may take two or three years for that particular building to be re-stabilized …

I think a lot of people get caught up in a relationship with their financial partner that does not allow them to sit down and say, okay, this is our situation here … I think we’ve got that kind of relationship with Welltower, where we are very aligned all the way through, as far as commitment to the company, the type of product, how we’re going to run it, the commitment to quality, the commitment on financial sharing for success, and the financial pain for failure. That makes for very honest relationships that bear wealth for everybody.

On the history of triple-net leases and how her position evolved:

It’s a very interesting history. I remember talking to someone about it the other day, because I was at dinner and we were talking about triple-net leases … I used to be vehemently opposed to RIDEA. I liked triple-net leasing, because I’m an entrepreneur, and most operators are entrepreneurs. So, you want to own your own bricks and mortar, you want to own your own operations, your P&L, you want to run your business. So, you would rather just pay an amount to someone for leasing the property, but you’re still calling the shots and taking all the risk.

… I think if all is good, then triple-net works out just fine. If the market is great, and you just pay your financial partner a check every month like you send to the mortgage company or to your landlord, it’s fine.

… Triple-net does not work when you have downturns or industry headwinds. So, when you had the Great Recession in 2008, triple-net’s not going to work. In the skilled nursing industry, which is an extremely hard industry to operate in, if they change the reimbursement rules, then triple-net doesn’t work because you can’t pay the escalators. Triple-net is a design that works when everything’s coming up roses. As soon as it doesn’t, then it gets very bad very quickly for all parties.

On the possibility of owner/operator tension as more providers transition from leases to joint ventures and RIDEA:

I do think that’s going to be something that we have to spend a lot of time and effort in. I’m a very transparent person, but I’m also a person that’s very command and control. So, if someone comes in, if my partner says, gee, Brenda, we’ve got some ideas, we’ve run some algorithms, and we’ve got people who can tell you how to better staff that second shift at The Sycamore, I know I’m not very receptive to that.

So, there are going to be problems where financial partners will say, well, now that we’ve got skin in the game in terms of operations and we don’t just have to worry about the lease payments, we need to get more savvy about how do you really efficiently operate these buildings? I think they do need to get educated about it. That education doesn’t usually come out of a book that they read and it doesn’t come naturally from what they’ve been doing in their life thus far, which is financial modeling [in] most cases. I think we’ve got to learn from our side about their responsibilities to their shareholders or to their limited partners and the quarterly reporting, SOX compliance, all off that. They’ve got to learn about operations and regulatory considerations and the hospitality and all the aspects of making a successful operation not only for your customer but for your employee. So, there are things we all need to learn, and the more we’re open to learning, I think the more successful the relationship can be under RIDEA.

Click below to listen to the complete episode:

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