Now that CEO Katie Potter has led Five Star Senior Living (Nasdaq: FVE) through a restructuring year, she is thinking bigger about the future of the industry and how the Newton, Massachusetts-based provider can succeed.
“How do we change and evolve our assets? It comes with making decisions in terms who you’re going to be and what that’s going to look like,” she told Senior Housing News during an interview at the recent National Investment Center for Seniors Housing & Care (NIC) conference in San Diego.
Potter was facing a massive challenge when she took the top executive job at Five Star at the start of 2019. With a portfolio of nearly 300 communities, the company was one of the largest providers in the country, but its financial and operational performance had suffered quarter after quarter, until its share price fell so low that the company faced possible de-listing from the Nasdaq. In late 2018, then-CEO Bruce Mackey raised doubts about its “ability to continue as a going concern.”
In this moment of crisis, Potter drew confidence from her knowledge of both Five Star and its primary real estate investment trust landlord, Senior Housing Properties Trust, now known as Diversified Healthcare Trust (Nasdaq: DHC). Having begun as outside counsel to the two companies, Potter became Five Star’s general counsel in 2012. During her time in that role, she gained a greater appreciation for the operating business and in particular the strength of the company’s workforce, she told SHN. That gave her the confidence to take the reins as CEO and begin executing a restructuring with Diversified that was completed in January 2020.
Although the company is now on firmer financial footing, an operational turnaround is still very much in process. Five Star grew largely through acquisitions over the years, meaning its portfolio is a diverse mixture of different types of communities. Potter and her leadership team are sectioning out the portfolio to create more unified operational structures and efficiencies for communities that have similar profiles, and recently went through a major hiring push.
Five Star’s portfolio also is changing through the divestiture of skilled nursing facility assets and the recent addition of the company’s first active adult community, in Plano, Texas. Active adult currently accounts for a “tiny” part of Five Star’s business, Potter emphasized, but she said that this is a growth area. The Plano active adult community is owned by DHC and operated by Five Star through a sub-management agreement with Overture, which has a large portfolio of active adult communities across the country. Five Star is gaining insight into the product type, and Potter likes the model for several reasons, including synergies with Five Star’s rehabilitation and fitness business, Ageility.
The foray into active adult is part of a larger push to offer more unique living options to the coming generation of baby boomers, Potter said. Though still early in the process of devising new operating models and physical plant design, she believes that Five Star and other senior living providers can no longer try to be “all things to a lot of different people,” but must make hard choices about what segments of the market they will serve and how they will do so.
The following interview has been edited for length and clarity:
Why did you take the CEO role given all the challenges that Five Star faced?
I’d been at Five Star for almost eight years before I took on the role, but my relationship with Five Star started prior to that. I was the outside counsel to the company and to DHC. So, I’d done a lot of work. When they offered me the general counsel position [at Five Star], I was pretty excited because I had been a transaction lawyer by training. Transactions … we get through those and then we move on to the next. I was always very intrigued by the opportunity to go in and actually stay with the business. So when the GC role became available, I remember Bruce [Mackey], the CEO at the time, said, are you interested? I remember laughing and saying, I’m not a health care lawyer, I’m a corporate lawyer. He [said], you’re smart, you’ll figure it out!
So, I went in in 2012, and my responsibilities just expanded from there. Obviously, I really had to learn the legal environment, the regulatory environment. I understood the public company world, but … got really close to the operations. I had opportunities to go out into the communities and meet the team members … the people who do the work for our residents are really exceptional people. When you meet them, when you hear their stories, you spend some time with them, I really saw that as a foundation. No matter what the company’s business was going through, as long as we had those team members committed to our residents, anything was possible.
So when the [CEO] role became available, and the board talked to me about it, I’d had some opportunities on the operational side, I felt like I really understood what our strengths and where our opportunities were.
Did your transactions experience help you see a path forward with a restructuring?
A lot of the other operators were already in a process, so it seemed like it was our time, and as I started to think about what that might look like, I think I did have sort of a picture in my head. We had some discussions about what might be a next step for us at that time.
Now that the restructuring is completed, what are you focused on?
I think we have a chance to reposition the product. I think if you talk to most baby boomers, even independent living but certainly assisted living are places you go not by choice but by necessity. I think we as an industry really need to tackle that perception. We can do that through our resident experience and also our physical plant assets.
I think the other real challenge we have is team members. This is not an industry that people flock to. We have to do a great job talking about the opportunities and selling it to potential team members. It does take a special person with a particular emotional intelligence to do this work.
I think those are huge challenges but also opportunities for us to really make an impact. We’ve been servicing the silent generation for some time. I think people felt like they have good sense of what that product was, and everybody talks about the customer changing, and rapidly. You’ve got this huge boomer demographic … [senior living] has to support a lifestyle they’re ready to pursue. The statistics suggest that people are going to be working well into their 70s. My mom is 77 and she just retired last year. I think those are the kinds of things we need to be thinking about, and shift and pivot a little bit.
I think the other piece is, maybe an all-in-one product is not necessarily the right product for this entire demographic. I think that’s why you’re starting to see [companies] gravitate to the active adult area. It’s certainly less expensive, because you don’t have the services. But you could also create an a la carte opportunity based on all the expertise that we have.
Talk about the active adult operational model compared to typical senior living.
It’s definitely leaner. There’s no clinical component. The lifestyle component is more about coordination than about creation. The staff in our active adult is maybe five to 10 people, so much, much smaller. It’s a very different population.
I laugh because everyone calls it 55-plus. The average age is about 70. So, you really are starting to see that shift in acuity and age. We’ve seen it in the senior housing world. Even in independent living, the average age is in the 80s. It’s maybe active adult becoming what IL was 10 years ago.
But again, you have very different needs and wants with the customer. They like their freedom, they probably still work. It’s downsizing, it’s not moving into senior housing. So, we have to be careful about how we position and market the product, because I think if somehow it becomes senior housing … it won’t be as attractive.
In terms of services, we’re just testing out the Ageility product, and we’ve had some success. As a result, Ageility has started to develop more fitness-focused product rather than rehab. It’s grounded in rehab principles, but it’s more a fitness product. We offer personal training and fitness classes. That actually has taken off. So, we’re exploring that as a growth opportunity, and that dovetails nicely with our partnership with the National Senior Games Association. I think you’re going to see more partnership or coordination between Senior Games and Ageility.
Is Ageility in the active adult community that you’re operating?
It is. It’s also in other active adult communities that we don’t manage.
When you say active adult is more about coordination than creation, you mean that the operator facilitates activities and opportunities, but driven by what the residents want and request?
That’s right. They’re looking for ways to enrich their lives and their experience. They’re just not prepared for it to be a group activity, necessarily. I think they would appreciate the opportunity to connect with other people who may like the things that they like.
What I find interesting about this demographic is, my grandparents were involved in every group there was — church groups, Kiwanis, you name it. There was that kind of community-type lifestyle. The boomers are very different. They’re much more connected by technology. They’re not necessarily going to go to a cocktail party and try to meet somebody to go to the movies with or take a trip. So, when I think of the things that an active adult community is creating, it’s non-pressure type of connections. It’s like dating.
You’ve talked about how the Five Star portfolio contains a diverse collection of communities. Would you divide the portfolio into sub-brands?
We’re exploring that. I think it’s clear active adult needs to be thought about differently than senior housing.
We have such a diversified portfolio. As you probably know, Five Star grew a lot by acquisition, so the portfolio we have is so diverse. To create some standards and some efficiencies across the scale, we’ve talked about creating these segments, and then within that segment, what are the elements of the resident experience? And what kind of target customer are you targeting, so that when you walk into a particular Five Star community, you feel that similarity. Whether we actually go as far as to brand that, we’re still evaluating that.
But, yes, I think active adult would be a different brand. I also think memory care is something … you know, we have an award-winning memory care product. It hasn’t been looked at in some time, and I think there’s some opportunity there, with some of the changes in research around dementia and Alzheimer’s, to really think about the product, how it can evolve.
What is the brand on the active adult that you’re managing?
We actually sub-manage it to a company called Overture. So, it’s their brand and we’ve worked with them because it’s such a new business for us. We may continue to work with them. We’re evaluating. It’s a very new line of business for both us and DHC.
Is Overture affiliated with—
They’re part of Greystar.
In terms of upgrading and evolving the physical plant, can you describe how capex is being apportioned and what types of projects are being undertaken?
We’re working on a holistic capex plan. DHC, I think they’ve said publicly, they’re focusing about $1,500 per unit in regular capex, and then we’re looking at other larger projects.
I think as we work through that plan we’ll be able to say more publicly, but they’re definitely prepared to make the investment. I think under our old structure, we weren’t investing probably at the level we should have been, so there’s a little bit of catchup to do, which I think is consistent with many operators. But, right off the bat, that was something that when we talked about restructuring that we knew had to be addressed, and they’re totally prepared to support us.
It’s case by case, whether a building gets a fresh coat of paint or something larger?
It really is. We’re divesting our skilled [nursing] and looking at the CCRCs. I think we’ll look at them on a case by case basis to determine whether there’s opportunities to reposition specific parts or the whole thing. So, there’s a lot of discussions about, in light of the new customer base and in geographies with new competition, what’s the best path forward for a particular community.
Five Star struck a partnership with the MIT AgeLab, directed by Joseph Coughlin. How is that going?
It’s a great opportunity for us. First of all Joe is like a force of nature. We get access to their research, which I think we have found invaluable as we work through some of these strategic thoughts. We also have the benefit of partners that are also engaged in the Age Lab. So, people who are like-minded, like us trying to see the future of the longevity economy, from our different lenses. And then there are ways we can partner together to serve this demographic, like the OMEGA project. They have done it at MIT for several years now — essentially, bring in high school students, and they go through an education process of how to develop intergenerational programming. They also talk about careers in aging.
So when we saw the blueprint for this, we thought, wow, wouldn’t it be great if you can do that in Five Star communities? It could potentially create really unique and innovative intergenerational programming, enhancing the resident experience because you’re getting a different mix of people into the community, and then also create a pipeline of talent for us.
We had students who participated over the weekend in our event in Nashville who [said], I didn’t even know senior living was a real career path. We’re hoping to keep those connections. We do also, as part of our program with them, offer college scholarships for students who develop and implement intergenerational programs. It doesn’t have to be in our community … we’re just trying to foster and show that this is a real career path.
How do you see Five Star differentiating itself from the competition in the future?
In the past, senior housing has been successful in being a lot of things to a lot of different people. Inevitably, with competition — I’m not just talking about competition in senior living, I’m talking about competition from technology, from health care, everybody sees this demographic as a huge opportunity. So, how do we differentiate ourselves not only amongst [other operators] but from other industries trying to meet the needs or desires of this demographic?
I don’t think we’re going to have a choice. In terms of what we’re doing at Five Star, I think we’re really starting to think about how we take our successes, our expertise, and leverage that into other product lines or different offerings within our communities. How do we change and evolve our assets? It comes with making decisions in terms who you’re going to be and what that’s going to look like. That can be hard and requires thought and research. AgeLab has been invaluable. Not only has the research been helpful, but that group is very much a thought partner. So, I think that’s evolving for us. We have some ideas, but I think it’s also evolving for others in the industry.
That must feel like a risk to some people, to pick a lane rather than trying to meet this whole larger market?
You are taking just as much of a risk by not doing anything. You say, I’m going to keep my product the way it is. I think that’s making a choice. I think we’re all going to be in a position where we have to start making those choices.