Changemakers: Michael Joseph, Founder & President, Clover Group

Michael Joseph is the founder and president of Clover Group, a vertically integrated company specializing in developing and operating independent living for middle-income older adults.

With 40 Clover communities currently operating, the Williamsville, New York-based company is expanding rapidly, with partners including private equity firm The Carlyle Group and real estate investment trust Welltower (NYSE: WELL). In addition to its open communities, Clover has two more currently in the lease-up stage and seven more projects under construction.

Through the Changemakers series, Joseph discusses the pathway to serving the middle-market, with a particular focus on the integrated approach that he believes is needed to tightly control costs. He also discusses the future for serving the middle market, including through innovations in care made possible through partnerships with health systems such as Geisinger.

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Senior Housing News: Can you highlight a few changes that you have driven that you are most proud of, or that you believe have been most significant to Clover or the industry?

Mike Joseph: I think the greatest achievement we’ve done at Clover started with the very first deal. I think the greatest achievement is that we focused on a segment of the society that no one else focused on, which was the middle-income, independent living person.

The focus at the time and frankly until very recently was the wealthy — with either what was then called assisted living, or upscale senior communities like Del Webb-type places — and then the poor, where you had low- to moderate-income tax credit deals to provide senior housing, and subsidized nursing homes.

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What we didn’t have was anybody focusing on the healthy, middle-income person, who had very terrible options at the time. Their options were to move in with one of their kids, stay in a house that they could no longer really live in, or they would move into regular garden apartments where there were kids next door, families, or a young couple down below them and they’d play their music too loud.

I think looking at the senior market, focusing on this area, was and still is the best achievement we’ve done. We were able and are able to service a large segment of our society that didn’t have choices of what to do and where to live in quality housing with other people like them. It’s still a vastly underserved part of the housing market. I don’t think that’s going to change so fast.

What did you have to change from the typical way of developing and operating senior living communities in order to serve this middle-income segment?

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It was all about cost. The middle-income people have a limited amount of money they can spend. They have their Social Security and maybe a small pension, a little bit of savings, maybe they sell a house, but they tend to own the older houses, depending what cities they’re in.

For the middle-income market, the difference of $100 a month is I live there or I don’t live there. It isn’t a function of want, it’s can’t. We had to focus on how to build a product and deliver it to the market with, in my mind, a fixed rental rate that we could charge.

You’re doing the math almost backwards. Rather than saying, “What product do we want to deliver and what then will we have to charge for it?” we started with, “What can we charge for it?” Then we had to back into, “How do we deliver it?” That was the real challenge and still is the challenge today.

The most fundamental building block of this is the ability to deliver the product at the rent that the middle-income senior can afford. If Social Security is going up 1% a year, you can’t raise the rent 6% a year. You’ll price yourself outside your market quickly.

That’s the problem we had to solve, and it’s still the issue we deal with every day. If lumber prices skyrocket or if something else skyrockets due to COVID and due to trade wars and whatever else, we are sitting here scrambling every time. It’s like, “Oh, look at that. We got to drive some more cost out because we’re getting cost increases there.”

It’s an ongoing challenge and every business has this challenge. The ability to overcome those challenges is how you make money.

Can you talk a little bit about how you overcome those challenges? You’ve spoken in the past about the importance of your vertical integration, for instance.

The only way you can do this is, you have to be every aspect of the deal. You’ve got to be the land developer, you have to be the general contractor, you have to be the leasing agent, and you’ve got to be the manager. If you can’t do all the parts, especially when you go from the land through the construction, each person adding in their overhead will increase the cost to the point where it doesn’t work anymore.

I never had any intention of being in the construction business. When we started looking at this, we realized very quickly that if we weren’t in that business we would never be able to deliver the buildings at a price that would let us charge the rent we knew we had to charge, or that we could charge. I think that’s critical to our middle-income market success.

Can you think back to a time when you tried to change something and it didn’t work out the way you wanted it to? What did you learn from that experience?

We haven’t done deals that failed, knock on wood. We’ve had deals that took longer to lease up, but once they were leased, they remain 94% or 95% occupied. We would say, “Okay, we probably shouldn’t have gone in that market because instead of leasing up in a year, it took us three years to reach where we wanted to be.” But look 10 years back and we’ve stayed 94% occupied for 10 straight years.

The problem was we probably built too many units in that location. Not that there wasn’t demand, but we just overestimated how quickly that demand would grow. Those have been the mistakes. We’ve been very lucky. I work with really good people. We’ve really done a good job of not making that “Oh my God” mistake. We’ve learned construction lessons. In the beginning, we pooh-poohed some land issues, then in the end found out the work-around costs $300,000 or $400,000. Boy, that was a bad idea.

To me, anybody in construction is going to learn those lessons, where you just think you know better than what the experts are telling you. You got to get over that. We’ve all done that.

As far as outside the company, where we had real success early on was in convincing [public officials] in the early years, to make deals work. Rents were so tied to construction costs that we really needed help in real estate taxes and in sales tax to make the deals work. Otherwise, we just really couldn’t make them work. The returns were horrible because it was too tight.

Can you talk about how you think about putting your team together? Do you have to have a strong culture so that people don’t get too frustrated or leave your company as you go through changes, like vertically integrating?

The majority of us start our companies with very little money. Normally, if you think about it, you can’t afford to pay the people you would like to hire early on because you don’t have any money and your business hasn’t grown, so you typically are forced to hire people who are good people and who are hard-working. You know the limitations when you hire them and you know that if you achieve your goals, for some of them, that they won’t fit as you grow.

What you hope is you can find people who can grow with you.

What more do you need to build a team than that, to start? You get someone who can operate, you get someone who can take care of making sure the money is flowing and that we’re doing everything right and we’re paying attention. It freed me up to go out there and raise money, get banks to lend us money, get investors to invest with us, and then we would hire other people. My theory on people has always been you hire people, treat them properly, treat them as adults, and create as much of a family-type atmosphere as you can, given that it’s a workplace.

We have a tremendous amount of people who’ve been with this company for 15 to 20 years. If they’re good, that means they can go somewhere else. If they don’t, they stay, which means you’re doing something right because they’re not looking to leave. To me, that’s just treating them fairly. If you need a day off, take a day off. If you’ve got a family issue, deal with it. If we can help, great, if we can’t, then you’ll deal with it. I trust you can get your work done. If you’ve got to do it a different way, then do it. You don’t have to worry, “Oh, I can’t get another day off,” or, “My mother is sick and I need more time,” or “My kid is sick.” You got it. That’s the way we’ve always been. It was that way when there were four people and it’s that way now with 200 and growing pretty rapidly these days.

You’ve now got a very well-capitalized company with partners like Carlyle and Welltower. Can you talk about that change in the company and what it is allowing you to do?

What it allows me to do is as many deals that my company is capable of doing. Most real estate companies, I don’t care what business they’re in, are always in need of capital. It’s the nature of our business. From the biggest companies to the smallest companies, everybody needs capital. With us, now we have the ability to access more capital than we can use. We can’t build enough for what my two investors would like to do. The challenge then becomes, how can you scale your company up rapidly and yet not put it in a place where you start making mistakes?

The first part is you’ve really got to look at your team and decide if you have the right people. It’s one of those moments, again, when you step back and say, “Do I have the right person running this area? Do I have the right person running that area? What area of the company will the stress of the expansion [impact] the most?” Then you’ve got to fill in in that area.

We have 10 projects under construction right now and we’ll go into the ground this year with somewhere between 10 and 15 new ones. If it’s 10 or 12 this year, we want it to be 15 next year. With 15 next year, we want it to be 20 the year after. That’s really where our heads are at. That’s a lot of growth, a lot of building, and a lot of expansion, but it’s also what makes the job fun.

How do you think about technology? How is it integrated into Clover projects and do you see that changing in the years ahead?

Technology clearly impacts all of us. For example, we do a lot of leasing. We used to say we couldn’t lease to a senior if they couldn’t come touch it and feel [the space] multiple times. Now we’re finding that they’ll do it virtually. Instead of having to come to the project four times like they used to — where they would come with their friend and then their daughter and then their son — now maybe they come once, because they’ve virtually looked at it and have shown it to everybody.

That’s a change that I didn’t think would happen. The marketing is different [as well]. It used to be that we would market through newspaper ads or flyers and senior centers and things like that. We don’t do that anymore. Now it’s all online.

You have to have Wi-Fi through the buildings. We look to more and more technology; we play with different ideas of what technology services we can offer. The idea of, if you could put mirrors in every apartment for the seniors who want to work out, would you do that? We never even thought about things like that in the past. We would have a small gym and those who wanted to go work out would work out.

Now you’re getting people saying, “I don’t want to go to the gym, I want to work out in my living room.” How are you going to handle that? This is middle-income we’re talking about. Forget the high-end. With all that, I would say it’s impacting us from leasing to living there, to the services. I think it’s everywhere. I believe that that will only become more so with telemedicine.

Meals can be delivered. We don’t provide it, but families can arrange for visiting nurses, meals on wheels, or food deliveries. How do they do all that? These people become technologically savvy and know that they can go online and order things. I think that it will only become more and more over time.

A lot of these changes lend themselves to aging in place, which relates to what Clover is doing with Geisinger in a couple of locations. Can you talk about the opportunities to change the paradigm of care deliveries for residents who aren’t living in a “health care setting” like assisted living or nursing homes?

What we start with is: What would stop someone from being able to age in place? What’s going to stop them is physical or mental, but most likely it’s physical first.

A lot of middle-income seniors will look at the doctors and say, “I feel good, I don’t need to go get a check-up. I am going to go see a doctor when I don’t feel well.” That’s backwards, because if you can see the doctor when you feel good, they can hopefully see things that are going to make you feel bad and catch them early. Therefore, my tenant stays better and physically stays in my apartment.

The health care system doesn’t want you showing up in the emergency room. That’s the worst place you can be for them. They want you to have preventive medicine. They want you to catch it before it’s a problem so that you don’t end up on their doorstep where the costs go through the roof, then they lose money. For us, we want to hold on to these tenants as long as we can. They’re great tenants, they pay their rent.

That’s the intersection here. It’s, “Let’s work together. We care about their diets. Can we start to influence their diets? How would we influence their diets?” These are things we think about. I’m not saying that we have answers yet. How do we influence their exercising? Can we incentivize people to exercise? I’m not talking about lifting heavy weight. How about just walking? People all follow their steps on their Apple Watches or on different wearables. What can we do to incentivize our people to walk the halls? Because every step they take is good for them and we know that.

It’s all those things that we’re trying to think about as we look forward in time because we do believe strongly that our apartment buildings are where this is all going to happen. Where is it going to happen? In the nursing home? No, because the nursing home is too late. You’re now at the point where they can’t take care of themselves.

Our people can’t afford assisted living. It’s out of their price range. It’s not going to happen. There’s no subsidies for it. They can’t afford someone to make them three meals a day. They would end up either in some public facility or the burden would fall back on their children. If we can figure out how to [allow them to] in place, if we can figure out how to keep these people healthy, who benefits?

I benefit as the landlord, so that’s very nice, but the community benefits, the health care systems benefit, the payers benefit. The payers don’t want to pay for them to be in a higher care area. It’s a benefit to society at that point. That’s what we’re trying to do.

The lack of similar products in the market is pretty amazing given the size of this demographic group, although maybe not amazing given the difficulties in getting this right. Do you think the change is happening fast enough or not fast enough given the wave of middle-income people who are on the way?

I don’t believe it’s going fast enough, but there are [major] barriers to getting deals done. They are infill sites. You’ve got to go find the land. If you take Buffalo, for example, the biggest growth in Buffalo has occurred in the northern suburbs and the eastern suburbs in the Buffalo area. If I were to take you to where the newest subdivisions are and where the newest apartment buildings are being built, we would go north and we would go east.

You can’t just take these projects and say, “Okay, the growth is east so we’re going to go out there because it’s easier, because there’s a lot of land. Farmland is being bought and rezoned in single-family and multifamily, we’ll just go buy a multifamily part.” Because nobody is living out there. The seniors won’t go there because it’s not where they live. They live closer to the older suburbs.

This has real barriers and that’s the problem for the middle-income senior population; given that they want to stay where they lived for the last 40 years or 30 years or 50 years, there’s not a lot of opportunities to build in those areas.