The Bottom Line: Cedarhurst Senior Living Gets ‘Back to Business,’ Nears 50-Community Mark

About 60 days ago, leaders at Cedarhurst Senior Living came to a realization, causing them to shift from crisis response to restarting enterprise growth on a foundation of operational stability.

“We need to embrace the world we’re in and figure out how to operate within it, or fall behind and lose opportunities,” CFO Stephen Wertman told Senior Housing News.

The company has made good on that intention. It recently transitioned three communities into the portfolio, is working through diligence on an acquisition, opened a newly constructed building on August 1, and has closed on two construction loans over the summer.


Cedarhurst is the operating arm of St. Louis-based The Dover Companies, which is an integrated developer, builder, owner, acquirer and management firm. Wertman, who serves as CFO for the entire Dover enterprise, believes the vertical integration gives the company a competitive advantage in the senior living marketplace. Strategic market selection with a regional focus and strong clinical expertise are among other differentiating factors that are helping the company adapt to the challenges of Covid-19.

Today, Cedarhurst operates 41 communities, offering independent living, assisted living and memory care. The company plans to add nine more this year and next. In this installment of SHN’s Bottom Line series, Wertman also discussed how the pandemic has affected operating expenses and capital markets, and the increasing importance of financial data to operational decision making.

The following has been edited for length and clarity.


How did you start working in senior living?

I started my career in public accounting. I worked for Arthur Andersen for a number of years, earned a CPA license. After Arthur Andersen, I worked for 12 or 13 years in banking, most of those years with Citibank, first in New York and then in St. Louis. I have some family here. And then I worked in community banking for a number of years, after working at Citi. So, all that time in banking was focused on finance, risk management and commercial credit, primarily. [I had] a number of senior housing clients. The industry, the space, just really, really resonated.

I think as an auditor, as an accountant, as a finance person, and as a banker, you can apply all those skills to pretty much any industry. Seniors and care specifically was just really appealing because it made the underlying work that much more meaningful.

So, I really dove in, from a banker’s perspective, to learn the business. Then, I had an opportunity to join a regional skilled nursing organization in a CFO role. I was there for about four years. I loved the care, loved the role, but there were some industry headwinds that were pretty rough, and long-term, I was looking for a slightly different fit. I had an opportunity to meet Joshua Jennings, Dover’s CEO, and hit it off. There was a need at the right time, and I joined the Dover team about two-and-a-half years ago as CFO.

What were your first priorities when you joined Dover?

I came in to respond to two needs.

One was our CEO was functioning as a CEO/CFO. As the business was growing, he recognized that the organization could use a bit more from that CFO role, and split it out. That’s what created the opportunity for me, and allowed the role to develop organically rather than in reaction to any acute, particular need. There were and continue to be strong finance teams within each business unit, and we’ve grown them.

The second need was our acquisition fund, to help get that idea a little bit more formulated and launched.

Today, what does your role consist of?

We are an integrated health care organization. Fully integrated. We’re a developer, we’re a builder, we’re an owner, we’re an acquirer and we’re an operator. So, we’ve got an in-house development company, construction management firm, private equity fund. We also acquire buildings, and Cedarhurst Senior Living is our largest operating business.

There are about three or four different areas where I focus. Basically, strategic guidance and leadership for each of the Dover businesses. I help evaluate and lead diligence on new business opportunities and new investment opportunities. I work on equity and debt raising, and bank and investor relationship management. I also help run our Dover acquisition fund, which is the vehicle through which we acquire communities to complement the growth through development and construction.

We believe that full integration gives us a couple of distinct advantages. First and foremost, alignment that allows us to not only develop and build in cost-conscious ways from an owner’s perspective, but also design a building with a feedback loop that comes from the operations.

That integration also allows us to underwrite and evaluate opportunities really fully. We have a saying around here: We think like owners, because we are. So, a lot of things that you see from a pure-play third-party operator, it’s just not our business model.

What were your top priorities for 2020, and how did Covid-19 change those?

Our growth strategy was threefold: growth through ongoing development and construction; growth through value-add acquisition opportunities through our fund; and growth through strategic joint venture acquisition and management opportunities with a couple of key capital partners. I call those our three primary growth strategies and focal points heading into the year.

Naturally, like everyone else, we took a pause for a couple months and did a lot of inward focus, understanding Covid and trying to get our arms around it, and then pivoted to really understanding how to operate within that universe.

I think we’re all continuing to learn, but we made a fundamental realization about 60 days ago. We need to embrace the world we’re in and figure out how to operate within it, or fall behind and lose opportunities.

We challenged our team to figure out how to keep all the safety protocols and all the appropriate precautions that have been put into place, to keep those going, but also how to facilitate business, which really leads into what we see as an ongoing opportunity for the rest of this year and as we head into 2021.

We’re seeing a lot of opportunity because of our clinical backbone. We have really, really strong clinical teams, really strong operational teams that work in concert together, and that allows us to fully believe and embrace that we can handle that challenge. We’re seeing some folks that have a little more social/hospitality model that maybe aren’t as equipped to handle the challenges of Covid-19. We’ve seen some operators — some publicly, some we hear about through the grapevine — that have stopped move-ins. Not only in March, but currently.

We see that as [an issue of] misalignment. If a third-party operator wants to mitigate risk, they could stop move-ins, but that doesn’t align with the goals and vision of the real estate owner. Because of our integration, we’re able to see holistically that there’s a need to operate despite Covid and within Covid. We see ourselves as a health care organization. We’re part of the health care continuum. There’s a need for what we do. It’s our mission to be out there serving that need, and staying inwardly focused is not a fulfillment of that mission. That just wouldn’t be okay. And we have figured out ways to operate. We’re proud of what we’ve done.

I’ll just rattle off a couple things that we’ve done here recently to demonstrate that. We transitioned three communities into the Cedarhurst portfolio in the last 45 days. We’re working through diligence on an acquisition now that we plan to close in the next 60 days. We opened a newly constructed Cedarhurst on August 1. We delayed that opening a little bit due to Covid, but we opened that community on 8/1 and moved in our first handful of residents that very first weekend. We’re planning on opening another Cedarhurst development later this month. And we’ve closed two construction loans in the last 60 days.

So, we’re very excited about getting back to business. It looks a little different. There are precautions in place. It would be nonsensical to think everything’s completely back to normal. But we’ve embraced the opportunity to figure out how to lead and still fulfill our mission in this environment.

And the last point I’ll make on the topic is, from an opportunity standpoint, we think some of the government programs that have helped operators along for a while — and they were necessary and appropriate. But we think there’s a little bit of an artificial element in the market that, when it subsides, when those government resources pull back, we think maybe some challenges bubble up. And we think there will be some good acquisition opportunities for us. We’re prepared to move on those and spread our mission and meet the needs of more residents within our portfolio.

Speaking of the portfolio, can you describe how it’s grown to where it’s at today?

We are today in 41 communities and we will add at least another nine through the rest of this year and into 2021. We started in the Midwest with a St. Louis metro, southern Illinois concentration. We’ve expanded over the last number of years to broaden the coverage of our portfolio in the Midwest, the Mid-South and the Southeast. We’re in eight states today: Illinois; Missouri; Georgia; Florida; Kentucky; Indiana; Oklahoma and Kansas. We continue to grow from that core throughout the Midwest and Mid-South.

Sixteen of our communities we have either developed or acquired. We’ve got four communities that we developed and sold to a REIT partner and continue to manage. We’ve expanded the relationship with that REIT partner. That’s been a mutually beneficial relationship. They’ve elected us to operate an additional 16 communities over the last couple of years. And we’ve also partnered with a couple different private equity groups in joint ventures to acquire and operate an additional eight communities. Around 55% of our units are assisted living, about 30% are memory care and 15% independent living.

So, in addition to being a vertically integrated developer/owner/operator, you do third-party management?

We really don’t see ourselves as third-party operators. We think the typical third-party operator looks to push cost to communities and enrich or drive profitability at the management company level, which is a fundamental misalignment between the community owner and operator … Even where we don’t own real estate, we think like real estate owners in terms of how we approach the management of the community from an operating standpoint and a financial standpoint.

What are some competitive differentiators of Cedarhurst’s buildings and operational approach?

We take a lot of pride in what we build. We’d like to be the very high end of what we call a middle market, secondary market, suburban type of offering. We’re not looking to be the chandeliers type of offering in an urban metro. We’re looking to be the nicest building in the secondary and suburban market.

We’re very big on what we refer to as “the grandma test.” Would you or I have our grandma in the community? If the answer is no, we’re either not interested, or we’re going to do the significant capital improvement work necessary to change that answer. We’ve passed on a number of acquisition opportunities over the years that on paper were good deals, where there were financial returns available, because you go into the community and tour it, and it just wouldn’t pass the grandma test.

We’re very clinically and operationally focused on person-directed care. That’s the care model that not only facilitates options for seniors but really responds to resident choices to encourage as much independence, dignity and individuality as feasible.

I think another thing that differentiates us from the inside-out is our culture. Our model is driven by our mission to create communities where each person feels loved, valued, supported and able to live their lives to the fullest. We really try to live that mission daily.

When we open a new community or acquire a new community or take over the management of a community, we have a process whereby our home office team and regional teams spend a lot of time in the community, not only supporting and guiding the team and ensuring everyone understands policies and what we do, but why. Another one of our internal terms is “Cedar-fying the community.” We turn it into a Cedarhurst. Unlike what we’ve seen from some of the larger, national operators that will just drop a regional person in for a couple hours, make sure the IT works and the phone works and then move on, we take a different approach to really ensure that we’re putting the right Cedarhurst foot forward, which we believe has a lasting impact on the success of the community from a resident care standpoint, a resident satisfaction standpoint, from an employee and team standpoint, and then ultimately from a financial standpoint.

How has Covid-19 affected Cedarhurst financially?

I would say through the second quarter, we incurred more than $3 million in total, across our portfolio, between incremental labor and PPE expenses related to Covid-19. What has been true for us and a lot of the peers we’ve talked to is that April and May were the peak. Nobody has a crystal ball, so if in September or sometime later this fall, if there’s national or regional or localized spikes, everything I’m saying now could go out the window. But, we think April and May were the high points.

Nobody knew what challenges would be presented, and I think there was a significant reaction — appropriately — to throw a lot of resources very quickly [at the pandemic response] and make sure that everybody felt as comfortable, safe and supported as possible. We’ve started to dial in on, okay, what is really the need and what’s really the long-term plan around labor and PPE? We do still see an elevated expense load than prior to the onset of Covid, but I think hopefully we are on the other side of things in terms of April and May being the peak.

Some people predict that operating margins might take a 2% hit for the foreseeable future. Does that number seem reasonable to you?

I think that is a reasonable figure. I think the future gets a lot clearer after there’s an effective vaccine that’s been developed and is universally available. Everyone’s going to reevaluate at that time. But, I think 2% to 3% impact on margin for the intermediate term is a reasonable expectation.

Were you able to obtain Payroll Protection Program loans or any other government support?

It really depends on the partner or project. Some qualified, some didn’t. Some applied, some didn’t. Some of our partnership relationships returned the funds, because particularly early in the process, it seemed like new rules were coming out every day.

Do you foresee any changes to your development and acquisition strategy as a result of Covid-19?

For reasons unrelated to Covid, we have always felt that our offering fit the suburban and secondary market. That’s really what we pursue from a development and acquisition standpoint. Some of the challenging stories that we’ve read about what our colleagues are experiencing in the more densely populated urban areas, they’re saddening to read. We’re not insulated against Covid — I don’t think anybody is — but we think that the types of markets that we’re in, as a whole, are a little bit better off. We’re fortunate to have constructed a portfolio along those lines. We have no plans of changing the types of demographics and markets we pursue.

Any changes in the design of buildings that you’re developing, as a result of Covid-19?

For a long time, there was a trend in senior living toward constructing larger common spaces and more common spaces. We don’t think that there will be a drastic shift away from common spaces to trade that off for larger unit sizes, in anticipation of a forever future in which residents are confined to their units. We don’t believe that is where the industry is headed. It’s really contrary to some of the fundamental tenets of our offering, which is enriching residents’ lives through social and emotional wellbeing, which necessitates interaction among residents, caregivers, families and visitors.

Visiting spaces and outdoor spaces, those are things that we’re looking at very carefully right now, to identify any tweaks to our real estate that would facilitate more comfortable visiting options during times such as Covid-19, when indoor, close proximity visitations are not available.

How is the availability of capital and what are you anticipating for the rest of 2020 and going into next year?

Probably like everybody, we observed a real freeze. I think everyone was trying to get a grasp on this new and changing environment. But, we’ve seen things slowly opening back up since then.

From a debt standpoint, larger national players are probably still taking a wait-and-see approach. Still remaining pretty conservative. Regional banks, they’re also operating with caution, but those are the types of banks that we typically work with. We have a lot of longstanding, really solid, multi-project relationships with community and regional banks. They’re familiar with our approach, our mission. They’re continuing to partner with us. They’re asking a few more questions. They’re doing a little bit more diligence on projects, but they’re still staying active both on developments and acquisition opportunities.

I think over time, the large national banks will come back. I think equity is going to come back. Some equity has been sitting on the sidelines and there’s a need for that equity to be deployed.

Again, I don’t have a crystal ball, but I think slightly more conservative underwriting, higher levels of reserves, maybe higher guarantee expectations, those could stay in place for a bit, maybe until a vaccine is developed. I think track record is really important. If you’re starting out fresh today, you might have a hard time finding equity and debt. But, if you’ve got a proven track record, a competent team and the right resources behind a project, we think that equity is still there.

Frankly, it might be a good thing overall if some of those newer, marginal types of products are not getting done.

Are you relying on financial data more than in the past to inform operational decisions?

Absolutely. If you’re not doing that today, it’s going to catch up to you pretty quickly. We use data on a lot of different fronts. Off the top of my head, we measure the effectiveness of marketing initiative and sales efforts, we use a lot of data for labor management and non-labor operating expenses such as food and supply costs. We were able to use some of the systems we had in place already for data aggregation and digestion to keep tabs on Covid-19 expenses.

At the same, time we’re constantly pushing ourselves to do more. Our finance and operations teams are currently working on a couple of new and exciting initiatives to develop more easily consumable sets of data to help us monitor key metrics. But not only monitor it from the home office, but really drive the data out into the communities and get that data quickly into the hands of community leadership, in ways that the data is understandable and meaningful and empowers them to make decisions in real time.

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