Of all the recently announced transactions related to Healthpeak’s (NYSE: PEAK) senior housing exit, Discovery Senior Living’s acquisition of 16 properties is especially noteworthy.
That’s because the deal brings Discovery’s portfolio to nearly 70 communities and makes the company one of the 10 largest senior living providers in the United States by unit count, according to 2020 data from Argentum. Bonita Springs, Florida-based Discovery is also using the acquisition to launch a strategy of creating regional sub-brands.
The news places the spotlight on a company that has been around since 1994 but has been particularly active in the last few years, striking partnerships with capital providers while also moving in new directions operationally, all in a bid to succeed where other companies have fallen short.
“There are plenty of examples in this industry of companies that have scaled and failed, as we call it internally,” Discovery CEO Richard Hutchinson told me last year, in an interview for our Changemakers series.
There will no doubt be a lot of industry scrutiny of Discovery going forward, to see whether the company is added to the list of those that “scaled and failed” or whether Hutchinson and his leadership team succeed. If they do succeed, Discovery could demonstrate how to increase senior living penetration rates, confirm the effectiveness of multi-brand plays and other industry trends, and emerge as a market leader in the post-pandemic landscape.
These are 3 pillars of the Discovery approach:
Harnessing data to evolve operations
About five years ago, Discovery launched a business intelligence (BI) group within the company, and in our reporting, Hutchinson consistently points to the formation of the group as a turning point.
The BI group came about when Discovery leadership gave up on the hope for a single, “magical system” that could gather company-wide data, manipulate it and spit it out in a “usable format,” he told me. Instead, the company turned to dedicated team members who work with an array of technology — some purchased, some built internally — to collect, analyze and report data. As of last summer, the team consisted of five people.
Many senior living providers are making moves to become more data-driven. I think Discovery was a little ahead of the curve when it created its BI group, but the company also stands out for its willingness to change how it operates based on its access to data.
From my conversations with Hutchinson, I believe that willingness to change stems from his conviction about what future consumers will want: more optionality, to have a more personalized experience of senior living, driven by their individual needs and lifestyle preferences.
Discovery has been moving to create this “experiential living” model. The more sophisticated data analytics and reporting allows the provider to unbundle its services, creating a “Flex Choice Spending” program that allows residents to choose from a menu of options and only pay for the services they want and need.
This type of pricing is only possible by having the data to appropriately price each service, Hutchinson stressed to me — “or else you go from a 40% margin to 20%.”
The ability to unbundle should help to drive affordability for residents, who will not be paying for services that they do not utilize. On the lower acuity end of the spectrum, Discovery is creating communities under the “Discovery Place” brand, which are located in mixed-use settings with a la carte services. The idea is that residents can take advantage of surrounding “live/work/play” amenities to supplement the services they pay for in the senior living community, enabling rents as low as $1,800 to $2,300 a month.
And the unbundled approach is being applied across the whole care continuum, including in the SHINE memory care approach that Discovery rolled out in 2019. Hutchinson believes that the unbundling of services achieved through business intelligence is key to driving up senior living penetration rates by making the product more accessible.
“I think part of the reason why we’ve only had the 5% penetration for 20 years into this space is because of that price sensitivity,” he said.
Aligning with capital providers
The formation of the BI group helped support the company’s growth, as Discovery expanded at a clip of about 30% a year between 2013 and 2019, through a mix of acquisitions and ground-up development.
And, the data-driven approach also has supported a widening array of partnerships with sophisticated capital partners, who expect visibility into key metrics.
In the last two years, Discovery was involved in transactions with a number of public REITs, including Healthpeak; National Health Investors (NYSE: NHI); and Welltower (NYSE: WELL), with that deal including an exclusive $1 billion development agreement. Other capital partners include private equity firm Kayne Anderson and non-traded REIT White Oak.
With this diverse roster of deep-pocketed partners, access to capital is not a constraint on Discovery’s growth. But perhaps more important to success will be how well Discovery maintains alignment with these various entities.
Hutchinson philosophically is committed to the owner/operator model, and so Discovery’s capital partnerships are structured as joint ventures. In addition to keeping skin in the game, Hutchinson also has spoken on several occasions about setting clear expectations with investors and ownership groups that Discovery is committed to innovation, which comes at a cost.
Hutchinson believes that all Discovery’s capital partners value this aspect of the company and understand the financial implications.
“That means you have to be comfortable with maybe a couple hundred basis points in the margin being eroded for R&D, if you will,” he said. “We invest in our beliefs longer term, and then try not to waver as the tides shift a bit.”
In particular, Hutchinson approaches new developments as laboratories for experimentation.
“Whether I’m developing at an 80% yield or a 10% yield, I always want a lab to experiment, innovate, do something different,” Hutchinson said. “And I’ve found over the last few decades that every time you do a new community, you just force yourself to think about what’s next.”
And even before the Covid-19 pandemic, Hutchinson said he was trying to set new expectations related to senior living occupancy and the ability to drive premium margins. The days when 97% occupancy was common might be gone, he told me in 2019, as the industry becomes more competitive and as the pursuit of affluent consumers shifts toward a focus on greater accessibility.
“We have to be educational to our capital providers that if you’re going to look at the state of seniors housing and you’re going to look at the upper decile operating margin and you want us to be there, that’s going to be difficult today,” he said. “We can, but then we have to have an 80-unit building in the middle of Manhattan where somebody can pay 10 grand a month.”
This is not to say that Discovery has given up on high-end senior living. The provider is continuing to operate and develop product at this price point, and in 2019 hired Bill Sciortino as COO. Sciortino previously spent 18 years with luxury CCRC provider Vi, and at Discovery is aiming to drive high operating standards across the portfolio while also serving as a liaison between the executive team and major investors.
Vertically integrated and diversified
Discovery’s expansion in recent years is underpinned by how the company evolved since its founding, with diversified services and a vertically integrated structure, including an in-house marketing company and design firm, a Medicare-certified home health agency and a therapy group.
This diversification strategy is defensive, as proven out during the pandemic; with senior living occupancy challenged, the company saw an “immense increase” in private-duty home care demand, Hutchinson said last fall.
Although Hutchinson says that Discovery is committed to a private-pay senior housing model, I think that having in-house health care offerings and exposure to the Medicare program gives the company a jumping off point for managing care through a provider network, if he decides to launch or join a provider-owned Medicare Advantage plan.
For the moment, he envisions Discovery playing the role of care coordinator through a concierge service, helping residents fully leverage their health benefits to tap into the company’s health care services or services provided by outside organizations.
Such a concierge could also increase senior living’s appeal — and drive up penetration rates — by taking the care coordination burden off residents’ families, who Hutchinson refers to as senior housing’s “indirect customer.”
Discovery’s diversification led to a company structure of largely independent entities. For example, when the home health company was created, Hutchinson says he separated it from the senior living division with a “wall,” and made the home health president “earn his business” by convincing Discovery’s executive directors that his agency should be a preferred partner due to its quality of care.
This approach was “clunky” at first but ultimately led the home health company to excel, earning a five-star rating from CMS and helping reduce resident turnover in Discovery communities by 4% annually, according to Hutchinson.
Discovery is now taking a similar approach in its multi-brand strategy, creating largely independent regional operations under their own banners, led by divisional presidents.
The thesis is that the sub-brands will bring the intense, hands-on management of regional operators, while they can tap the resources of the national organization, such as its marketing and legal teams.
Creating regional sub-brands while also operating national brands (with communities that are generally larger and more high-end) also is part of the effort to increase penetration rates; Discovery theoretically will be able to operate several communities in a given market, serving different consumer profiles.
Discovery is not entirely unique among the 10 largest providers in its strategic direction. Atria Senior Living also is vertically integrated, including an in-house marketing agency and homegrown tech, and is creating a multi-brand portfolio. Five Star Senior Living (NYSE: FVE) launched a therapy company in recent years, and CEO Katie Potter has spoken about the need to segment the portfolio and look beyond senior housing to other services for older adults.
These companies could be creating a template for the large-scale senior living company of the future, and they are all taking risks as they pursue some untested approaches. For his part, Hutchinson says he is prepared to pay some “dumb tax” for being an early mover. Some other providers might be watching to see how high that tax will be, but should also be asking themselves how high a price they will pay if they do not emulate or defend against the moves that Discovery is making.
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