This article is sponsored by Plante Moran Living Forward. In this Voices interview, Senior Housing News sits down with Living Forward Partner Dana Wollschlager to learn how senior living providers can drive board governance to successfully execute repositioning projects — such as leaning on a development advisor and delivering full transparency – and a look at the five types of repositioning projects that board members favor.
What are the primary reasons a senior living provider would seek the assistance of a development advisor?
There are two reasons. First, they’re not experts in the world of real estate, which is a dynamic, complex industry that requires a tremendous amount of expertise. An ability to leverage those individuals who understand that and work in the space every single day will help manage and mitigate risk for our clients.
Secondly, they absolutely need to stay focused on their day-to-day operations. As a former operator running multiple communities, I can say from experience that when administrators or executive directors take their eye off the operations ball to manage a project, oftentimes their operations get into trouble. It does not take long to have receivables skyrocketing or to have quality challenges if you’re not paying attention.
At the highest level, why is board governance and engagement such an important piece for senior living providers as they get started on their asset repositioning journey?
It’s not just about board governance. It’s also about board engagement, which is critical to the success of any asset repositioning journey. Those not-for-profit board members have a fiduciary responsibility, and they steer, or should steer, that organization towards a sustainable future by adopting the sound ethical and legal governance and financial management policies as well as ensuring that the not-for-profit has the adequate resources to maintain its mission. That’s why they exist.
How do you ensure that board engagement?
It’s the board’s responsibility, and it’s the management’s responsibility. We spend a lot of time with our clients to help them strike that balance with their board. You don’t want your board getting so involved that they’re choosing which soup to serve on the menu. But you do need them to stay engaged and be invested in managing the organization’s long-term strategy and holding the management team accountable to those outcomes. The best way to encourage the right level of engagement is to have a documented vision and plan, then to have the management teams keep the board informed of the progress.
We had a client that we were working with that really did not engage his board enough, and that was intentional — he didn’t want them involved in it. They got about three quarters of the way through the design development process, probably close to a million dollars in design consulting fees, before he took it to the board.
They had a $16 million project projected, but the board said, “No, we don’t support a $16 million project. We will only support $8 million. Now go back to the drawing board and start all over.” That was a real problem.
What are the best three methods operators can take to sell board members on a new vision?
There are three things in this exact order. Number one, they need a strategic plan. Absence of a plan, the likelihood of success is pretty slim. They need to embrace the fully integrated strategic planning process that provides an engagement and collaboration both for the board members and the executive leadership team so that they can together define and prioritize a vision for the organization. You’re not going to boil the ocean in one day, so let’s prioritize what we can get done.
Number two, they need to be proactive. If they sit back on their laurels, their competitors are going to pass them by – a lot of the not-for-profits are seeing that.
And number three, they have to be fully transparent with the board and educate the board about their plans. When you look at the amount of development that has happened, new development and new construction that’s come into the market areas, the for-profits are outpacing the not-for-profits exponentially. It’s not just enough for a board member to show up and hear about the COVID-19 crisis — they really need to understand the industry as a whole and all of the things that are influencing the success or challenges that an organization is having. An executive director or a CEO being fully transparent with his or her board allows for that communication to happen.
Where does governance rank in the tasks required for asset repositioning?
It’s extremely important, and it is the responsibility of the board to hold the management, CEO and executive director accountable for their actions, but they also need to empower them to lead and make decisions on behalf of the organization. Again, it’s striking that balance. But equally as important is to have processes and policies, especially reporting mechanisms that a board can look at to make sure that their executive leadership team is doing the right thing, consistent with their expectations.
Do you find board members are more open to some types of repositioning as opposed to others? If so, what do they favor?
I think they favor these five types of projects:
- Converting semi-private SNF (skilled nursing facility) beds into private rooms
- Converting SNF beds to IL (independent living) or AL (assisted living)
- Expanding IL to prepare for the boomers
- Eliminating SNF to add more IL, AL, memory care, active adult or middle-income product
- Expanding and growing into new markets — creating a “hub and spoke” model
We’ve got over two dozen projects that are in the development pipeline with clients all across the country. By and large, our clients are focused on converting semi-private skilled nursing rooms into private skilled nursing rooms or long-term care rooms, or converting skilled nursing beds into either AL or IL. It’s not easy to convert it into IL, but if you’ve got a newer long-term care facility or SNF, you can often take two skilled nursing rooms side by side and convert those into decent-size, competitive assisted living units.
Folks are doing these repositioning projects because they need to adapt to the market conditions, but also to create solutions to the staffing challenges because those other products and services are less intensely staffed.
What holds board members back from repositioning? And what are some of the excuses that they use to explain what’s holding them back?
First, they often don’t want to address the challenge of doing a facility assessment on their older buildings to try and get a sense of both the existing capex needs and how easily they could convert the building to something else. That price tag often gets in the way. They’ll look at it and say, “We might as well just tear this thing down and start all over,” because they believe repositioning is just too complicated.
We’ve got a couple of projects where we’re doing that right now, where we have to not only logistically figure out how to relocate residents multiple times, but also having to pay to do that. There’s an expense associated with that. When you’re taking those long-term care beds offline, you’re losing a ton of revenue.
Second, you need to take off the right number of beds to balance the staffing that you have. Generally speaking, for every one skilled nursing bed that you take offline, you need three housing project units in order to offset that revenue. Boards get reliant on that revenue. They’ll say, “Oh, my gosh, that’s a lot of revenue we’re losing,” and the response to this is, “Yes, but look at the margin.” They focus on the revenue, but it’s their margin that they need to focus on. That’s another reason they hold back.
Lastly, what is the pathway that not-for-profit boards can follow to ensure success for their communities in 2020, and what’s the best way that operators can guide that governance necessary for that success?
They need to have a strategic plan and then also create alignment around that organization’s overall vision. It isn’t sufficient to continue as business as usual. You need to figure out who your organization is today and how to maintain that relevance into the future.
I would say too that if their strategic plan includes asset repositioning or growth for the organization, then they really need to embrace a fully integrated development process where the board has opportunities to evaluate critical go and no-go decision points so that a project doesn’t get sidetracked or hit speed bumps, and they should also really do a critical assessment of their organization’s strengths and ability to do that internally. If they don’t have the resources internally, they shouldn’t leverage the expertise of a development advisor who does this every single day.
Editor’s note: This interview has been edited for length and clarity.
Plante Moran Living Forward provides development advisory and owner’s representation services that address the evolving real estate, development, and construction needs of senior living communities. To learn more about how Plante Moran Living Forward can help your business, visit them at pmlivingforward.com.
The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact [email protected].