SRG CEO Grust: Senior Living Providers Still Inventing a Business After 3 Decades

Three decades after the senior living industry got off the ground, providers are still “inventing a business,” SRG Senior Living CEO and Co-Founder Michael Grust believes.

The next evolution of the industry will see leading providers broaden their offerings across the continuum of care, in his estimation.

“We need to be all things to a lot of people,” Grust said on the latest episode of the Senior Housing News podcast, Transform, sponsored by PointClickCare.

SRG has been making strides to meet this objective. Over the last few years, the Solana Beach, California-based provider has rolled out a new wellness program called Zest; a coordinated care program called Assure; a Medicare Advantage-related collaboration with CareMore and Welltower (NYSE: WELL); and a virtual reality study with Rendever.

The overarching goal is to make senior living communities a more attractive option for active seniors and then supporting better aging im place through comprehensive programs and services. This vision is a far cry from the more basic congregate housing model that prevailed when Grust joined the industry in its early days — but operating a senior living community has never been simple, he emphasized.

It’s a lesson that would-be operators should take to heart, as Grust is also concerned about “add water and stir” management companies that are chasing fees in today’s frothy environment, with capital flooding into the sector.

“There’s been perhaps a discounting of how complex it is to build a management company and have not just the systems but the culture,” he said.

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

On today’s challenging operating environment:

As I’ve often said, we’re inventing a business. To identify this as a cycle or a repeat cycle, [that] isn’t the case. I believe that we’re evolving as an industry.

Post-recession, we were dealing with the economic concerns and constraints where people just didn’t feel they could … sell their home to move into our environments. It was more [a matter] of generating revenue, if you will — filling up buildings that were underwritten in a specific way to fill up over a certain of time. Ultimately, there were a lot of buildings that were struggling for that reason and that reason alone. I wasn’t necessarily what we’re facing right now. What we’re facing right now is a surge in developments. There’s an inequality between supply and demand right now. Everybody is hopeful that the baby boomers are right around the corner, when they’re really not here yet.

And the labor environment, you know, this is a complex business. It’s health care, hospitality and real estate, and we live with our customer 24 hours a day. We’re obligated to deliver on a promise … it’s a tough environment right now … it’s an environment where you have four or five communities all vying for employees. What is going to be the lynchpin to get somebody to select you? Employees have a lot of leverage.

… It is a confluence of events that has made this a very challenging but still invigorating environment, because it’s still an industry that’s got great opportunities going forward.

On whether supply pressures are easing in assisted living:

It’s a market to market situation. We’re in California and certainly there is, I still think, a lot of headwinds in our particular markets in northern and southern California. We’re in Arizona. I would say Arizona, in my opinion, the bottom is behind us. We’ve actually started out the first quarter very, very strongly in all our assets in Arizona. We’re very encouraged there. But, to your point, it’s a market to market situation. I know NIC has suggested that there may be a bottom, but I think that perhaps has to be identified in each particular market. It’s just different in each particular market.

On whether compressed margins are the new normal, given labor trends and other factors:

I wouldn’t accept that as a new baseline. Clearly, margin compression is something we’re facing right now, when there’s oversupply and rate growth is being challenged.

Unfortunately, in certain markets, people are building new products, and I scratch my head sometimes because they come in and build it with cost of construction being what it is, it’s surging in some markets at still-incredible rates. I read a statistic the other day that the cost of construction is going up 1% a month almost in Texas. We just opened a building in Texas, and to a certain extent, we experienced that at the tail end.

I still think we need to create some efficiencies, because you need to generate certain returns, not just because of your capital structure — at the end of the day, the value of our assets and the consistency of our delivering on a promise from a financial perspective is going to be born from our operational efficiency.

It’s not a given that we’re going to be able to grow revenue but we have to continue to strive to do it. We are, as a company, melding in technology for efficiency. The data we’re gathering now is more complex and powerful in terms of helping to make managerial decisions and staying on top of things relative to that.

So, I’m hopeful with supply and demand stabilizing and, truly, a market that we still believe — with the growth of the 80- to 85-year-old population — is going to grow exponentially.

… The reality is, people have never lived so long. And, clearly, there’s going to be a lot of housing opportunities, and from an operating standpoint, operators continue to get better at what they do. [If] they’re committed to being a great operator. That’s an important element. The operating side of the business requires a never-ending commitment to get better at what you do. That means not just how you manage things from the financial side, but how you train, how you retain, how you deliver efficiently the services we are offering.

When there’s some stabilization to the revenue side and the supply side, I’m optimistic. I don’t think it’s the new normal.

On innovation at SRG:

I’ve been in the business 32 years. I got into the business before it was fashionable, if you will. We’re committed and excited about the future. Listening carefully. That’s one of our corporate mission statements, because the market will tell us what they want.

It’s broadening the continuum. We need to be all things to a lot of people.

I’m still a big believer in independent living. I truly believe, because it truly is a part of the quality of life … getting people to preemptively make the decision to move into a communal setting.

I’ve always said to the staff, we’re trying to create engagement, experience, joy and enrichment. Those are the sort of independent [living] promises you make, because at the end of the day, we’re recognizing that communal living and an engaged environment is a powerful catalyst for quality of life, and quality of life is truly defined differently by everybody. We’re going to let it be … everyone’s going to create their version of what quality of life is, and to be able to have a sense of self. It’s powerful medicine.

But as you move through the continuum, recognizing that people do age in place, we need to be compelling for people who are more need-driven. I do believe that relationships, being part of the health care continuum in a meaningful way, is critical. There’s no question that our relationship with health care providers, health care systems, is critical. The CareMore relationship and relationships like that, where you can address and act as a catalyst and give people access to physicians and other care in the convenience of their home, and be part of the health care continuum that recognizes the value of assisted living.

Now that we can show to hospitals that as you move into one of our communities, through our Assure program, the likelihood of them being readmitted is very, very low. We’ve been tracking it for years, and we create protocols when somebody gets discharged from the hospital; so, we become a meaningful part of people leaving hospitals and [we’re] creating an environment of wellness and preventive care that keeps people, we believe, from going to the hospital. The cardio, strength, balance and restore program that we have is meaningful, it’s data-driven, we’re measuring outcomes. It’s a very exciting element, trying to give people a compelling reason to select us preemptively. To move into one of our communities is a promise of quality of life.

You know, leaving your home is a very traumatic experience. We get that. It’s always been, “I’m not ready yet.” It’s what we’ve heard for 30 years. Need drives decisions … when I first got in the business, people didn’t know what we were. I would do focus groups. I was always fascinated to hear when the moderator would come back in the room and tell you, they’re not quite sure what this is. Is it a nursing home? Assisted living, in the early days, didn’t really exist. We were in a lot of ways guys in the apartment business that would add food service and … you’ve got yourself a congregate housing environment. That was a little hard for people to wrap their minds around. There were a lot of failed projects where people weren’t compelled to leave their home and move into a communal setting because they felt they were giving up their independence. They were giving up their sense of self and it was in a prescriptive environment. That was their fear.

Well, we’ve evolved as an industry. I think we’ve done a much better job messaging. And then obviously when assisted living became sort of the alternative to the nursing home, I think we addressed the aging in place, need-driven, episodic solutions.

So, as we evolve as an industry, it’s just extremely exciting … how to create a catalyst for living longer, better — as we say, this is one of our campaigns with ASHA — that should be our objective as an industry.

As we navigate the evolution of something and the invention of something, I think there’s going to be a lot of experiments, but you’ve got to be committed to the space. You’ve got to be committed to the complexity of the management model … We don’t need to capture everybody that turns 85. Certainly, as an industry, we need to be a solution for a market that is growing exponentially … we’re going to start to see a real surge in about six to seven years.

On his roots in the industry:

I was a home builder. Right out of college, I worked for a home builder in Chicago, and ultimately was hired away and worked for a company that had a master-planned community in Hilton Head, South Carolina. That was my first exposure to quasi-active retiring.

Ultimately, that same company … had secured a piece of land in Rancho Bernardo, California, outside San Diego. It was entitled for senior housing. I certainly recognized that it was something I’d never built before. It had a nursing home and it had independent living. It really didn’t have assisted living in a pure sense of the word, then. We built it, and then I realized that we outsource the operating side. The Forum Group actually ran it. But I caught the bug. I said, this has just fascinating potential opportunity, and started the company with my partner, Martin Fenton.

We decided that ultimately this was the future, and bought into a building that was under construction. A congregate building in Solana Beach, California, that the local developer wasn’t quite sure what he was doing, and neither did I, to be honest with you. We invested in, helped finish the building, and I actually ran it as an executive director. I said, there’s no better way for me to understand what this space is going to become and how to deliver the service side of the business then to actually jump in and do it.

It was just enlightening. It was invigorating and ultimately the catalyst for me to grow the company into both an operating and development company that we’re at today.

It’s been a fascinating journey … I always marveled in the early days when everybody was getting into the business and … a lot of the market research said everyone was going to fill up in 18 months. And I think everybody completely underestimated the complexity of the operating side of the business, and so everybody had fill-up periods that were extremely short and ambitious. We took on some opportunities as a receiver, some troubled deals, broken deals, so I got to triage a lot of projects. I got a lot of repetitions. Always with a reverence for learning and listening. There’s no secret sauce. It’s hard. It’s a tough business … it requires people that are passionate about the future and what the future holds.

On whether he always had the entrepreneurial spirit:

No, to be honest. Coming out of college, I loved the idea of being in the real estate business. I was always intrigued with building things, and developing and designing and creating environments. So, I wouldn’t say I had an entrepreneurial bug.

I was always an overachiever, in the sense that I was a very willful individual. I played sports for a long time. I always felt I wasn’t the most skilled but I had the will — it’s not the skill, it’s the will, kind of thing. I was also someone who loved to create a vision. I leaned on the creative side. But when it came to this business, I think it just tapped so many different possibilities for me. I got to create environments that were anticipating the future, not just building for today. Because we need to have a great shelf life.

So, creating an organization where I can feel that I’m not leading, but we’re collaborating. That’s always been my style. To answer your question, I wouldn’t say entrepreneurial, but I’m just a fairly passionate individual, and this gave me an opportunity to channel my passion.

On whether he expected more new operators to be founded recently:

Yes and no.

On the one hand, I’ve been very concerned, frankly, about all the capital on the sideline that wants to get into this space. Ultimately, in order to make the deal work, you need an operator. This is not to devalue anybody, any company out there, but there’s lots of operators that are just fee operators, that have to be part of the capital underwrite. “I’ve got an operator and this is their track record,” and they don’t necessarily have skin in the game. I don’t want to say they’re mercenaries, but they’re a little understaffed, for whatever reason. That’s the area of concern … And, again, there are lot of really great fee operators. But these deals come and you need an operator, right? That’s ultimately going to have a huge impact on whether or not you get your deal financed. And I’ve been a little concerned that people are starting management companies — sort of add water and stir kind of thing. Not to say there’s a gestation period on competent management companies, but there’s been perhaps a discounting of how complex it is to build a management company and have not just the systems but the culture.

And, lastly, there’s a lot of companies out there that I think scale has consumed them. You can be too big and fail. You will fail. This business requires understanding the nuances of the local market, it does require a tremendous amount of corporate support, and I don’t need to tell you, there’s companies out there that are just enormous and have lost touch.

The other thing … the company that I worked for [in the homebuilding business] was a public company. Sometimes, when the public markets are involved, that’s a tough, tough business. Real estate’s tough to be public. You need quarterly earnings and you need to be able to have good news. REITs can do it because they’re basically not operating. Being a public company as an operating company sometimes is challenging because of the very nature of real estate. Real estate’s the long term, and I always have been concerned and always will be concerned when you’ve got short-term capital — not short-term, but the hold period is short. Unrealistic. You raise a fund and dedicate it to a particular space, senior housing. The gestation period of a building, from the time you secure the land to the time you fill it up, and then all of a sudden, they’ve got to monetize their investment because they’re obligated to certain return. That’s challenging. That fuels a lot of overbuilding and it also sometimes can create some bad outcomes.

On his future outlook:

We are at an interesting nexus point as an industry. I’m extremely bullish on the future. We are, as I said, inventing something, and there are no shortcuts.

… We want to be a meaningful part of the health care continuum. There’s going to be a lot of learning to do. You’ve got to give it a try and see how it goes.

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