Discovery Senior Living is pushing to reach pre-pandemic occupancy levels by the end of Q2 2021, and Co-Founder and CEO Richard Hutchinson is optimistic after strong months for sales leads.
“The beginning of this year certainly didn’t help … January, February was a little tough, but March exploded, April exploded, and I think we’re on the way,” he said during a recent SHN+ TALKS appearance.
To reach that occupancy goal, Discovery put in place an initiative called “Full Circle,” and is relying in part on a new, centralized sales center that recently went into operation. Metrics are promising so far, with the inquiry-to-tour ratio up substantially.
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
— Why Hutchinson believes industry leaders need to “stop drinking our own Kool-Aid” and focus on increasing penetration rates
— Discovery’s recent 16-property acquisition, and the plan to “scale, not fail” through regional brands and management structures
— The benefits that Discovery’s home health care company brings to its senior living communities, and the future of the vertically integrated company
— How cap rate and staffing expectations are changing as the industry evolves
Bonita Springs, Florida-based Discovery Senior Living operates a portfolio of 70 senior living communities across 15 states.
The following has been edited for clarity.
[00:01:38] Tim: Let’s jump right in, and I’ll just ask you the question that seems to be at the top of everyone’s mind, which is, do you think that we’ve hit bottom in terms of COVID-related occupancy loss in senior living?
[00:01:54] Richard: I thought you were going to give me a softball. Actually, I do. I actually think we’re going to see in the second quarter that we’ve hit bottom and bounced and started to make that turn. I will tell you, [the industry] is fragmented on its recovery. At least for us. You had mentioned we’re in 15 states, so we have visibility in many of the different regions of the country. I think we’re doing pretty well.
I guess the great news there, Tim, is I don’t really see a huge loss in demand, and I see all of our KPIs, our key predictive indicators, are suggesting there may have been a little bit of pent-up demand, especially in the more independent living products.
I feel pretty good about our prospects in Q2. As we go forward beyond that, I will tell you that from a Discovery standpoint, we actually have a program called Full Circle, and we’re looking by the end of Q2 to have made up the deficit that was created since the beginning of the pandemic for our portfolio. We’ll see how that plays out. The beginning of this year certainly didn’t help that. January, February was a little tough, but March exploded, April exploded and I think we’re on the way.
[00:03:13] Tim: Full Circle, is the goal to get back to pre-pandemic occupancy — where you were before a year ago?
[00:03:21] Richard: Shocking, right? Well, we’ve been fortunate. Yes, is the answer.
We’ve been fortunate. At the bottom, which, believe it or not, occurred after the second wave in early January, we were about 480 basis points off from where we were pre-pandemic. We had taken the philosophy throughout the pandemic that we were going to be open for business and we were going to do what we do, which is — and I don’t mean to minimize it — but treat the virus, in the situation we were in, as another obstacle that we need to overcome. So, we’re pretty proud.
[We were] 480 basis points down at our low, today we stand about 290, just under 300 basis points down, but with tremendous momentum going into Q2. Some communities will make that full circle. Most will make it, some may take a little longer, depending on the circumstance or region, all that good stuff, but we’re certainly on the way.
[00:04:21] Tim: Interesting, and Full Circle is something that was created specifically with this goal of a pandemic recovery?
[00:04:30] Richard: It was building off the intensity we wanted to approach recovering, and there’s a couple of different reasons.
The obvious one that everyone thinks about are the financial and the economic reasons to recover, but also I think there’s some real reason to do it for the benefit of residents. I think visitation and those things, as we started to open back up — it’s amazing to me and I know my colleagues agree, how well we did as an industry through this — but the lessons we’ve learned and I think the consumers learned some lessons too, [about] the socialization, how important is socialization. I’ve got to tell you, we’re seeing it now, we’re seeing people, if we have an event in a state and in a community that can be opened up, they are very well attended, we get a lot of leads from those type of events. People are craving that social aspect that seniors housing provides more so than I think a lot of people had thought.
[00:05:34] Tim: Can you describe Full Circle a little bit in terms of how it’s organized? Are there different kinds of pillars? Is it sales and programming, et cetera?
[00:05:46] Richard: It is. It’s really all of those. Full Circle is a team goal, and as you know, everything starts with your lead generation. Before you can get to full circle at the end of the second quarter, by the end of the first quarter, you need to be full circle on your lead generation capabilities. We are obviously a super analytical company and we know our metrics really well. We know how many leads it’s going to take to meet our plan, let alone increase the occupancy in all these places.
It’s been incremental over time and it’s actually been in place since September, believe it or not, because it’s going to take a little time, and again, we’ve gotten a few curve balls thrown our way during that [time], but we’re on track.
It starts with our marketing programs, how we do that, and then, of course, sales initiatives, bonuses. We are obviously super performance-oriented, and structuring some of that performance incentive around that [Full Circle goal], and then, of course, the onsite ops team, opening up as aggressively and safely as possible and making sure that experience is absolutely top-notch, and then firing on all cylinders.
I think there’s a psychological aspect to this, Tim, that’s really important for our team members. Having that hope, having that knowledge that there’s a plan in place to get back to where we were prior to the pandemic, it’s psychologically healing for our team members, our leaders. It’s been a tough year, so I think there’s a psychological aspect to it that’s very beneficial for the entire organization, and that’s why we did it.
[00:07:32] Tim: You mentioned it all starts with lead generation. We have heard in some of the public calls with some of the companies that they are seeing lead gen come back to pre-pandemic levels. Are you already there, or are there parts of the country that are there and parts that aren’t?
[00:07:46] Richard: Great question, and perfect observation.
We, in total, our enterprise, believe it or not, is actually ahead of the lead generation we had in the first few months of 2020 on a monthly basis. March and April are through the roof in lead generation. There’s a lot of reasons for that, but it is geographically based.
Moving into more of the health care settings, the assisted living and things like that, one thing that people didn’t realize the impact of is all these professional [referrals], both paid and unpaid, but mostly the unpaid professional referrals that all of us live on in a lot of these communities. They were shut down and they were restricted during this whole pandemic. Very difficult.
It doesn’t mean they didn’t have clients that had a need, it just means they weren’t executing on that need with their daily routine. Opening back up is the most important thing and most correlated thing to being successful in that channel. And of course, you have your digital channels and all those other things, but in our more need-based product, it’s really important. It’s very correlated to the local opening.
[00:08:55] Tim: You mentioned that you’ve seen maybe more pent-up demand on the independent living side, and I’ve heard from other people that they’re seeing the needs-based side come back more quickly. Why do you think you’re seeing the trends you’re seeing in the IL side?
[00:09:12] Richard: Well, I think on the IL side, it’s certainly that socialization aspect, and making sure that we open up those and have the events, and all the reasons why a lot of people move into independent living.
I know you’ve heard me say this before, that it’s really important that people understand the impact of socialization on our seniors. That independent living side, if we have an event, it’s packed, and again, you have to do it safely, but people are willing to give a little sacrifice to have a lot of social interaction right now. I think living at home, so to speak, with only your core family, when you’re talking about people that are used to going out and eating with friends and doing those things and having that social interaction, that’s tough.
And I can tell you personally, I have pent-up demand to go out and socialize and do those things, and I’m sure you do as well.
A lot of our large independent living, heavy experiential-oriented communities are in Florida. Florida’s been open for a while, and clearly [there is] great weather [there] and people are used to getting out and doing things. That’s helped us, for sure.
On the care side, on the needs-based side, we’ve seen a lot of activity in that, but I’m going to be honest with you, we’ve been fairly consistent through this pandemic on the activity. I think we had some move-out spikes a little higher than normal, and some of them [were] especially in memory care, but that’s recovering pretty quickly as well.
[00:10:55] Tim: This was a question I had for a little later, but maybe I’ll jump to it now since we’re talking about lead gen and sales. Relatively recently, Discovery announced that you created a centralized sales center. It sounds like maybe that has happened in the midst of this Full Circle initiative. Can you talk a little bit about what this sales center is, and the thinking behind creating it at this point in time?
[00:11:21] Richard: Yes, I’m happy to do that.
It was actually thought about three years ago. As we think about our future, and we think about the communities we operate, we started out in, and our DNA was more [in] the heavy resort-style, very large communities. As we moved into some mid-market communities, looking at the sales process and the sophistication that we bring to bear on that, it was a very difficult proposition for a lot of these communities to be able to adopt that level of sophistication in the sales process.
Just from a pure personnel standpoint, some of these communities have one salesperson. We’re not used to that in the larger communities. So, if they go on vacation or something, there’s real choppiness in how that lead generation is converting through to sales, to tours, all the way to move-ins, [how that process] is being performed.
You could see a high degree of correlation between an open what we call critical position, which is an SLC or a sales counselor or another position, and a fall off or at least a dip at times in occupancy. We decided we need to address this. If we’re going to play a bigger role in a mid-market product, we need to think about how to best support those guys, along with our larger communities.
Here’s the bottom line. Some people have tried it already with third parties. If it’s important to our business, I am definitely a control freak in that regard. I bring those types of things in-house and that’s what we decided to do, control that.
At first, it was going to be a six months roll-out and then we realized the challenge of the hand-off and all these other things that needed to occur seamlessly so the customer wasn’t feeling like it was a clunky process. We ended up taking a couple of years to develop and we were about ready to roll it out, let’s call it the first quarter of last year, and that got paused a little bit.
We were able to muscle our way through it and get it done, and now at the end of the day, it always comes down to math for us. Our sales contact center, our metric, I’m not telling anything proprietary here, our metric is we want 50% inquiry to tour. That’s our initial metric, our initial sales conversion metric. You generate your leads, you get a 50% inquiry to tour, and we have the what if’s. What if we could improve that to 60%? If you take 1,000 leads and you funnel it through all of our metrics — and I don’t want to get too math-y on you — if you funnel it through metrics with 50% inquiry to tour, 35% tour, all the way in to move in, at a 12% close ratio all in, if you just change your overall inquiry to tour by 10%, you’re averaging six more move-ins for every 1,000 leads you have.
The folks that might be on the call with us right now know how many thousands and thousands and tens of thousands of leads we generate per year, and you can do the math on what that means.
Here’s where the fall-off happens, Tim, is people will call the community, they won’t get the right person, someone will be out on lunch … A lot of the time your indirect customer, the adult children, are calling or visiting after hours, and the way our industry is constructed is, you’ll make an appointment with the sales counselor and they’ll muscle their way into those appointments as best they can, but there’s weekends and things like that.
The new consumer, what do they want to do? They want to purchase things online. They want a lot of their experiences immediate and online and just by nature of what we do as a business, it’s so personal. We don’t often have coverage. So, this sales contact center is open from 7:00 in the morning until about 10:00 at night. It automatically gets forwarded any calls where the sales counselor may not be readily available, and they act as the initial sales counselor. Right now, and it’s early, but right now we’re seeing a very large increase in our inquiry to tour and beyond the 60%.
It’s very early, so we don’t have enough data for me to make any statements on that yet, but the early indication is we’re meeting the customer, we’re increasing our speed to lead, and we’re doing it in such a way where the handoff is seamless and the customer experience has been better and our metrics are starting to show that.
[00:16:03] Tim: You mentioned you’re a very pay-for-performance-style sales team. Can you describe that a little bit, what those incentives look like?
[00:16:12] Richard: Yes. It wasn’t that long ago — well, not that long ago for me, I guess — 15 years ago, we were literally 100% commissioned. Believe it or not, the labor laws changed where we couldn’t be 100% commissioned anymore in our environment, but we had to pay at least a stipend, and it was only until probably four or five years ago that we even changed that. Now we do have a heavy emphasis on pay-for-performance, but not all of the communities. We aren’t so prescriptive that everybody is going to go pay-for-performance.
Again, this is this realization that Discovery has been successful in what it does and that’s an important piece, but as we evolve into other markets and other product segments, we don’t want to be so arrogant to think the way we did it in this community in this style is the perfect way to do it forever. We do have some communities that have less pay-for-performance, but I will tell you we are still super heavily emphasized on pay-for-performance.
[00:17:18] Tim: It seems like every year, we run the same story, which is someone did a mystery shop of senior living communities and they’re appalled at how hard it is to get someone on the phone. Year after year after year. It sounds like it was a difficult and long process for you to create this call center, but the pain point seems so obvious to me. I wonder why the industry doesn’t do that more, or why pay-for-performance maybe isn’t more widely adopted as a senior living sales strategy.
[00:17:50] Richard: I will tell you it’s — you had said it, the pain points and things like that, but also, it’s about scale. There’s a certain scale you need to have to be able to do this and I think some of the folks that had tried in the past tried to third-party that. I think that’s a mistake, and I’ll tell you why, because I see this as an advantage not only in just the basic sales process but also all of the attendant things that a sales contact center can do.
For example, when we had the freeze-out in Texas in January and early February, we were able to convert that sales contact center to a communication center, and contact people, so it gives you this nimbleness and flexibility inside your organization. But you need to control that. If it’s third-partied, we lose that control.
The other thing is, we are very nimble when it comes to messaging. From a sales contact center, there could be a promotion. It could be information about our competitive set in the marketplace that we want to sell against; because we have all professionals in there, that’s all they do, we can get a script, we can put it up there and they can be talking to prospects fairly immediately.
The other side of the equation, Tim … it’s that huge amount of leads that you generate over the years, and they sit in a database. And you’ve probably heard this before: “Oh, we have tons of leads in the database, we’re going to do a mining campaign, and all of these other things.”
Rather than doing this, “Hey, we need some more leads. Let’s go do a mining campaign,” your sales contact center, on the off chance they’re not on the phone, can be doing that routinely. That’s part of their process. That’s what they do every day, so you end up with this steady stream of leads and then move-ins every month from your database that you can count on. I don’t know if you’ll get into a question about buy cycle, but some amazing stuff has happened in the buy cycle during this pandemic. I hope it holds, but I don’t know that it will.
[00:19:55] Tim: What’s happened to the buy cycle?
[00:19:57] Richard: It has shrunk tremendously.
I’m so excited about our buy cycle, the shrinking of the buy cycle. Again, I had mentioned 15 years ago, I’ll go back 20 years now, 20 years ago, we have timed our buy cycle on independent living, and it was 18, 19 months for your average person from inquiry to move-in.
Today, I just got off the phone in a regional meeting, and in that region, 77% of their independent living move-ins came from someone who’s contacted in the last 90 days. That’s an amazingly short timeframe.
Throughout this pandemic, we’ve seen that. Now, why I say I don’t know that holds: I think it speaks to that pent-up demand. There’s a lot of people willing and desirous to execute quickly. Obviously, the home market … the home selling market right now is great too.
That shrinking of the buy cycle, I think there is some stickiness to that. When you look at the consumer, their process now to purchase our goods and services, it is shrinking. It is following the general trend of immediacy and a desire to get what they want right now. I think that’s all good for the industry, but we have to react.
The sales contact center, to go all the way back to what your question was, there’s a reason for that; speed to lead, being able to have a live chat on your website at all times is super important. As this industry matures, the competition is sophisticated. They’re doing these same types of things, you have to be able to evolve to react to that.
[00:21:45] Tim: Great, that’s all really interesting, I think. Earlier this year, you acquired I believe it was 16 communities in the southwest from Healthpeak, and you’re using that to create a new brand, Morada. Can you talk about how that strategy is getting off the ground with that sub-brand? Are there any other regional brands that have been created since then?
[00:22:28] Richard: Yes, I’m happy to chat about that.
It’s no secret how I feel about brands, and it’s not about Discovery as a brand. I like to think we are a brand and we have some value, but it’s not about that to our consumers. Inside the industry, Discovery certainly has a good name and we’re proud of what we’ve accomplished. Outside of that, when you get down into a secondary market and mid-market type of product, Discovery is not what they’re going there for. They’re going there for that local flavor, that local experience. By putting a Discovery name on it, I don’t know that that adds any value. In fact, in some cases, it might detract. “Those guys in Bonita Springs, Florida, they don’t know what’s going on up here in North Carolina.”
You look at that, and then you look at regional operators who have done well over the years, and we all say, “Wow, a great operator.” We lived through it. When you’re 25 or 30 communities, you have enough scale to run a meaningful business and have a meaningful platform, but it’s not so big that you can’t be intimate. It’s not so big where your top management of your company isn’t involved in day-to-day decisions.
As we scaled, and you’ve heard me say this before, I’m always thinking about scaling and failing. I do not want to scale and fail. What we decided was, at the end of the day, especially in the mid-market products, we’re going to break up our enterprise into national brands — those in primary markets that we feel will have a distinct value, no matter where we go — and then our regional products, which have a flavor of being smaller, more intimate, more local. Then, we’re going to create these sub-management companies.
I call it a brand, but at the end of the day, Tim, what makes us unique and how we’re approaching it is not the brand from an advertising standpoint, or marketing standpoint, it’s about the management of those communities. We actually create a full vertical.
We’ll have a division president that has a full management company, and then some of the more higher-level resources they can access through the home office. We think that’s just a better way to do it as we go forward, and keeps the decisions very local, and keeps that flavor local, and then again, yes, you can market the local brand and it will create its own brand value from that standpoint, but it’s really about how intimate you can be in its management.
I’d mentioned this before, and I think this is most important, we have to check our ego at the door. What we did for an Aston Gardens 350-unit community in Florida that’s resort-style, large continuum, we can’t force those processes on a mid-market brand. It just doesn’t make sense. We have to check our ego at the door and say, “You know what? This one may operate a little differently than how we do these others. That doesn’t make it wrong. It just needs to be focused.”
Then lastly, and probably most importantly, and this is giving away a little bit, but my entire management philosophy is one of repetition. I want people to not have to be unicorns. I don’t want to have to find a unicorn out there that can run a 350-unit campus in one town, [as well as] two towns over, [in what] might be a smaller town, run a 60-unit assisted living and memory care. Those people that have that type of skillset and knowledge are rare. What I’m trying to do is create products that are alike, and then every day, they can get up and focus on that segment of our marketplace.
The industry is broad, and just repeating that process day in, day out, what works, what doesn’t, will make them better. That goes for everything, but in particular, our conversations about the brand. That’s my philosophy, is to try to reduce the responsibility and make it repetitive enough, so you become great at it, and not go ahead and try to find that unicorn, which we all struggle with, trying to find a unicorn that can do everything for everybody. What ends up happening is, probably someone listening to this show ends up recruiting them away to go to something else, if you can find that unicorn.
[00:27:02] Tim: You brought up “scale, not fail.” Just this morning, I was working on something that made me think of that phrase, because we just had that news from Diversified Healthcare Trust and Five Star that they’re transitioning 108 communities out of that portfolio to smaller operators. Capital Senior Living has shrunk from, I think, almost 200 communities [editor’s note: 126 communities] to 60 or something the last few years. Brookdale, since the merger, has shed hundreds of communities.
These aren’t the only companies that I think have gained a lot of scale and then have drastically drawn back, but they’re all publicly traded. I wonder if you think that that’s related, and maybe I’m asking you to speak to specific companies you don’t want to, do you think that’s maybe bad for the industry, that operators that are public have pressure to grow and they do so in a way that isn’t sustainable?
[00:27:59] Richard: I don’t know their stories well enough on why they did those things, but certainly the end result isn’t a great look for our industry.
Oh, by the way, I’m a super contrarian. I believe you can scale and not fail. I believe there’s a way and a method to do it. Obviously, our regional sub-brand management process is part of that. Yes, it’s unfortunate that they’ve had to shrink, but I think that’s part of the evolution. As the industry grew, trying to understand how you — what is the right time for consolidation is really the question, and how do you manage that consolidation? Unfortunately, I think there’s been some missteps in how that has happened.
Again, I don’t know the particular companies’ stories you talked about and what happened there. For us, I can tell you we’re cognizant of that. We’ve lived through 25, 30 years now that I’ve been in here and seen that happen. A public format isn’t necessarily bad. It’s managing that public format that you really need to understand and be prepared for. I’m not saying they weren’t prepared because, again, I don’t know their circumstances, but clearly going backward is not good and it has left some feeling out there that an operator will struggle being a public company under the pressure of earnings. I’m not sure I’m all the way there.
[00:29:36] Tim: Have you ever mulled taking Discovery public?
[00:29:40] Richard: Yes, but that’s one of those things, thinking about the future, that’s way out there in the future, and what would that look like.
I don’t think you can be pigeonholed and say, “I will always be private. I will always be public. I will be this. I will be that.” I think the opportunities that come in front of you will morph and change over time and you need to be flexible. Our thought process is simply, what happens? How does that work? Being a public company is another way, obviously, to use capital. What is the rationale for the capital is the question. Is it to grow and consolidate? That’s one path. There’s certainly a lot of ways to do that privately, for sure. Is it to partner with somebody else who is public and reverse merge into that? I don’t know. I’ve thought about it. We’re certainly not imminent on anything like that anytime in the near future. It is something that I’ve thought about and we think through as we think about scaling nationally.
[00:30:48] Tim: You brought up “experiential living” earlier, and that’s something that you and I talked about a lot pre-pandemic. Can you refresh people who are tuned in as to what your concept of experiential living is? How’s it working today? Has the pandemic changed your thinking around you at all? How much of the portfolio has this approach?
[00:31:25] Richard: That’s obviously one of my favorite topics ever.
The experiential living model is really about choice and customization inside of all your products and services that you’re providing. It’s really a different perspective on how you’re running your business. It is also very much in tune with the next generation consumer as the boomers come along. Building in choice, optionality, and customization is so important for our industry to evolve to, because that’s where our consumer is heading. That’s our take on it, is to try to figure out how to do that in a meaningful way. Things like our Flex Choice Program or our Shine Memory Care Program, or Fit Camp, or whatever we have, these are really geared toward that customization of customer experience.
I think the consumers are reacting really well to it. Obviously, during the pandemic, we certainly didn’t put our pencils down, by any stretch of the imagination, on that. We continue to roll out some programs to help emphasize our experiential philosophy. It did slow it down a little bit. You’re going to hear more about some additional experiential programs that are coming out later this year.
Again, it’s about being able to use all of the information we now have, the analytics. As you know, we have a business intelligence group, that’s all they do all day is parse out the economics of every service that we provide. Then, once you understand those economics, you can really start to modulate, make menu-type services available to folks.
[It’s] a little more difficult on the need-driven side, but there are meaningful ways you can customize people’s experience, and we have to. I had seen something recently … someone was talking about telemedicine and the impact of telemedicine on our business. My comment to them was simply, we’re not competing against telemedicine and the technology. We’re still competing against our number one competitor ever, and that’s the home, living in the home. Telemedicine is just one of those things that’s going to occur, and what’s evolving on that side of our competitive set that we need to just adjust to. To think we’re not going to have to adjust because we’ve been doing a good job, but the entire world around us is adjusting, I think that’s a mistake. I think we have to see this as an inflection point and move to that optionality and customization that our experiential living philosophy revolves around.
[00:34:08] Tim: Does Discovery have a home care company?
[00:34:10] Richard: We do. We have Discovery at Home. It’s one of those vertically integrated companies that are important to our business that I want to be able to own and control. They are five-star rated in the areas that they’re operating in. Pretty proud of that.
[00:34:28] Tim: I’m curious about this relationship between home and senior living, communal senior living, because I hear a lot of executives in this space say that the home is the biggest competitor for senior living. Also, there are some companies like Discovery that play in both worlds and have synergies there. We just saw this big deal with Brookdale doing a joint venture with HCA. On the one hand, there’s all this competition. On the other hand, there are these points where maybe they can cooperate. Where do you see things going in the future, and how much are they a competitor versus maybe not?
[00:35:11] Richard: The home health care that we run is exclusive to Discovery. It serves only the Discovery communities themselves. I think it’s a mental linkage that if you’re living in a Discovery-run community, you are home. In that context, we are serving them in their home, but their home happens to be with us.
I think using home health care agencies more broadly in their service to literally individual homes, it is also an industry that is prime for some consolidation. It’s an industry that I think will be buttressed over time by government requirements. Here’s why I say that. At the end of the day, if you look at our health system right now, the amount of money that gets poured into the bricks and sticks piece of our health system, as technology evolves, medicine evolves, care evolves, being able to keep somebody in their home and deliver there obviously is far less expensive for our healthcare system. But that competition isn’t going away. The home health care companies will continue to do that. They’ll continue to evolve.
There is a tightening on their standards, and I think that’s really important, and that’s going to leave an opening, but there will be synergy at some point where you have somebody at home, and they have their experience at home, but at this point in time, I don’t see, for quite a while, that person just staying in a home forever, then moving to a hospital system and then heading out. I think it is smart that Brookdale was trying to figure out a synergy between that stay-at-home [care] and the hospital system that they’re dealing with.
I got to tell you, I’m super pleased with our home health care company. They had the best year in their existence last year, and I think it does prove a lot about what they can provide for us. They also had the ability to provide wellness checks on our folks and wellness screenings and that was an important piece.
I want to circle back to that competition piece.
Look, I think you and I have even talked about this before. We’re at the mid- maybe 7%, 8%, if you squint really hard at the data, maybe you can figure out a way to say we’re at a 9% penetration or capture rate, utilization rate, in age and income-qualified folks. This industry has grown because demographics have grown, and we’ve stayed steady there. If we don’t want to devolve that into mid- to lower-single digits, we need to step up and evolve ourselves and provide something.
I think our focus as an industry needs to be squarely on what is it, the 91% to 93% of the population that we serve, sees that [product], says, “No, thanks, I don’t want to be part of that,” and stop drinking our own Kool-Aid and saying, “Hey, we’re doing a great job. It’s needs-based. We’ll get our share.” Then looking at our industry success in growth over time and saying, “Hey, that’s all going to continue.”
I think we should go the other way. I think we need to push super hard to figure out what is it that we’re not providing that would make it more attractive for that 90% to 93% of people to say, “You know what? I wouldn’t mind that experience.”
What is it that the home is providing that we’re not? You can’t solve all of that, but at the same time, recognize that it’s a shortcoming, and it’s our obstacle as an industry that we need to figure out how to overcome.
I think our experiential living programs that are focused on customizing that experience for our consumer is going to be a big piece of that, but it’ll continue to evolve.
[00:39:03] Tim: Interesting. We’ve got our question from the audience. Can you explain a little bit more about why you went down the route of owning your own home health company, since we don’t see many operators doing that? Do you think you could offer hospice as well in the future?
[00:39:22] Richard: Yes. We probably could offer hospice in the future.
I haven’t gone down there because I think with where we are, the reason I went ahead and started our own home health care company — actually, it’s been around a while now, about six, seven years. It was frankly the experience that our customer was having. I walk into a community, I see a bunch of people with casual clothes on, walking around, interacting with our residents, and I’m thinking, “Okay, who are these people? How are they qualified? What are they doing inside my building, that I don’t know of? What is that resident’s experience?”
At first, it was more of a defensive mechanism. Like, “Okay. I want to make sure the quality our folks are getting is at a quality level that is reflective of living in a Discovery community. I don’t want my reputation, my brand, to overlap with whatever services ABC Home Healthcare Company is providing.” That was the initial piece. Then over time, it’s evolved into, how are those services complementary? So they become part of the fabric of the community and how it works. I’ll give you some examples.
We ended up with an analysis that we did that showed that we had 4% less annualized turnover in those communities in which our home health care company was operating versus those communities that had outside agencies. It’s that care connection, that desire to be accretive to that Discovery experience, that I attribute that to. Our focus on being five-star and all those other things, and then being helpful in crisis, or just being purely helpful to the communities, is why I continue to think having a home health care company works really well.
We are not everywhere. For example, we’re in 16 states. We’re not [home care] licensed in all 16 of those states and all of those regions, but we always have access … If an executive director has questions about their home health care company that may be operating in their community, they can always leverage that. Again, I think that’s just important from a controlling aspect to make sure you have that available.
[00:41:47] Tim: Then just as a diversified company, can you just give us a quick rundown? What are the different components of Discovery, because I think there’s some other ones as well, right?
[00:41:59] Richard: Yes, we have a development company, we also have a design company, which is solely focused on interior designs of seniors housing communities. We also have a marketing group, the Discovery Marketing Group. It acts as an external ad agency, which is really important, because graphics productions and things like that take too long in my opinion, and I want it right away. I feel like I’ve missed one company somewhere around. Someone’s going to call me after this and say, “You didn’t talk about me.” Again, if it’s important to our business, typically I like to have an affiliated company running it.
[00:42:40] Tim: Do you have, or would you consider having, a therapy company, like a rehab company?
[00:42:45] Richard: Sure. Yes, for sure. In fact, we’re running down that path as an adjunct to the home health care company that we have. Our wellness program, it’s evolved into Fit Camp, and Fit Camp is one of those experiential programs that’s really, really cool. You guys will see a bunch of advertising on it soon, but again, it’s part of that evolution.
[00:43:08] Tim: I’m curious about the diversification of the company because, on the one hand, you’ve described yourself as a control freak. It gives you a lot of control over the quality across the whole company. But also looking ahead, I’ve heard from people that as try to figure out how the industry evolves, how providers start to meet consumers in new and different places, in order to serve them in ways that they’re not being served right now, that big 91%, some of that might be outside of traditional communities, or it might be within communities, but in new ways.
If you have a diversified company that has all of these different components, especially service components, like home care, therapy, or things like that, that could give you the flexibility to become this aging services company, broadly speaking. Is that in your mind as a strategy?
[00:44:08] Richard: It is actually, in a certain way. Maybe not the way you’re thinking, but certainly … I’ll just give you a quick example. It’ll illustrate it pretty well.
Right now we have somewhere to the tune of 140-something-thousand leads in our database in total. These are all seniors who have expressed some level of interest, right? We know where they’re at. They’re in their homes, they’re living their lives, they’re aging.
Having these various companies at some point being able to reach into the database and say, “Hey, how can we help you where you are?” as a stepping stone to ultimately getting into a Discovery community. I can see that happening and working at some point. We’re not there yet, but I can easily see that as something that we evolve to in the future. Not only does it give you a great prospecting advantage but honestly, it’s the right answer as America ages. I think you and I have had this conversation.
My biggest issue right now is staffing and the lack of focus on the required and the requisite health care providers, not only in our space, in our industry, but in the nation. I think some people got a little view of our little piece of the health care system that’s operating in this nation and how important that is over the last 12 months. Again, I think we can be part of the solution to the country’s bigger health care system problem that’s brewing, and brewing really fast, with demographics that are about ready to overwhelm us.
Yes, I can see us going, we’ll call it upstream a little bit into that database and playing a role there.
[00:46:01] Tim: How does the payment system come into play here? I’m thinking specifically of Medicare Advantage because it sounds like you’ve got the data capabilities to produce data that the big payers are looking for. You’ve got a vertically integrated company with some health care capabilities that they would help you manage a whole patient population. Are you thinking about getting involved in Medicare Advantage, either starting a plan yourselves or partnering? How do you think about that?
[00:46:30] Richard: In the future, that’s all part of that where this could evolve to. We’re certainly not, in our near-term future … I think the hard part about a company like this, Tim, is making sure that as you grow, you don’t lose your identity while you’re running around taking advantage of all the opportunities, and you’re patient enough to go ahead and do it in piecemeal parts. I think the first thing to do is solve the scaling.
It’s impressive to have 70 communities in 15 states but that’s not scaled enough effectively to really get into something like what you’re talking about en masse. We have to focus right now on continuing to scale but do it effectively. Then as those offshoot opportunities occur, which I think they will, then we’ll be in a better position to take advantage of it on a macro basis, where on an aggregated basis, it makes more sense.
[00:47:29] Tim: How do you think about growth in 2021? Are you thinking that there are going to be acquisition opportunities out there for some of these regional brands? We’re hearing that there might be, as pandemic-related issues surface.
[00:47:44] Richard: Our opportunities to grow are plentiful.
We’ve got great partners and we’ve added a couple of new partners during the pandemic. And I’m not partner hunting. I’m not trying to get 20 capital partners. But the people that have joined the Discovery family, so to speak, they share the same philosophy. We’re going to have plenty of opportunities to grow. A lot of people don’t realize we’ve grown at almost a 30% per year annualized clip over the last five years.
The reason why we’ve been successful in continuing that pace is we put a lot of resources in what’s next. We’re always trying to develop the platform and I will tell you that I had already started developing the platform for the next stage of growth based on what I had thought would be the natural supply failure that occurs in a cycle. Now, the pandemic hit, and that accelerated a lot of that.
I think there’s a lot of good opportunities for us to partner with people, and I’m sure we’ll have our share of acquisitions this year beyond what we’ve already done.
[00:48:58] Tim: What’s your read on distress in the industry right now? Because it’s a little confounding to us, as we see surveys from groups that say, up to half of senior living providers, or crazily high numbers, could fail within 12 months, but then just day-to-day, we’ve reported on pretty few bankruptcies or severe distress sales, things like that.
[00:49:23] Richard: I think it speaks to, I guess, the commitment and the wherewithal of the operators and companies in the industry. Many of them have larger capital partners. That’s the construct that a lot of folks use. Those capital partners have been committed enough, dedicated enough, and frankly, well-heeled enough to be able to weather the storm and help these operators through.
You do have some … I am hearing of some real cracks out there where people are really struggling and they’re trying to figure out a strategic plan of exit. My overall feel is people have always been smart enough in this industry to create enough financial cushion for a rainy day. Unfortunately, I think over the past year that cushion is now near zero. If there was a third wave, fourth wave, I don’t know what wave we’re on, but if there was an outbreak again, I think you could see some of that distress really coming home and see some real failures. Thankfully today we haven’t seen a ton of them, but there are some out there.
[00:50:37] Tim: Larger companies you’re hearing are under that stress?
[00:50:42] Richard: I think some of the larger companies, they certainly have stress, but one of the things we’ve done in this last year that I’m sure they’re experiencing is really focus on the talent. A lot of the talent — I went on an acquisition spree, I tell everybody, in 2020, but it was for talent. Mostly for talent, not for properties.
You’re seeing a lot of real good, talented people move from company to company right now. Typically that means there’s something going on there, there’s something stressful there. That’s all I know, anyway.
[00:51:20] Tim: Got it. Maybe some big picture questions here as we get close to the end. If you had the CEOs of the 100 largest providers all in a room, all your peers today, and you could only ask them one question, what would you want to ask them?
[00:51:43] Richard: That’s a good question. You got anything for sale? No, I’m just kidding.
[00:51:49] Tim: That’s a good question.
[00:51:53] Richard: No, it might be a bit more about the industry. Which would be, what are you guys doing to meet the future customer? Because, as I had mentioned, staying static and just doing what we’ve always done and expect to get what we’ve already gotten, I don’t think that’s a formula for success. I’d challenge them to see what they’re doing to meet the future customer.
[00:52:17] Tim: I guess I had a second question, which maybe you just answered, which is, if you could tell them one thing, what would it be? Is that the message you’d deliver or is there something else?
[00:52:24] Richard: Actually, that one’s real easy. I would tell them I’m proud of them. I’d tell them all, I’m proud to be part of this industry and proud to be part of that group, and I’ve got to tell you why. It’s pretty simple. When the first few months of this pandemic hit, everybody was writing this industry off. You remember? Everybody was saying, “Communal living, horrible,” and all the news and press, and I’ll say it now, and I’m on record saying it then, “I think we were going to come through this with flying colors.”
Because I see it every day. I see the dedication, the professionalism, I see commitment. And to watch those 100 CEOs you’re talking about, to watch this industry completely subordinate its economics to the safety and welfare of the residents and the team members, that was perfect. It’s a perfect response and why this industry has great legs. It’ll grow into the future. It will evolve. Again, I’d just tell them, I’m proud to be a part of it.
[00:53:23] Tim: What’s keeping you up at night these days or these nights from a business perspective?
[00:53:29] Richard: [laughs] Good clarification, from a business perspective. I have two sons that just graduated college so that would be the answer from a non-business perspective. Famously, I don’t like sleeping anyway, but when I do go to sleep, what makes me struggle staying asleep? Certainly, the staffing.
I’m going to throw this out there, and I shouldn’t be saying this nationally, but I even had a crazy idea about creating my own university that focuses on online certifications of health care workers and promoting scholarships, and coming up with those 100 CEO colleagues to go ahead and start promoting scholarships into that university for some people so they can get certified.
We need this labor force, and I don’t think the government has figured it out yet; it’s not going away and it doesn’t seem to be getting a lot better. In fact, obviously, the pandemic has added even additional challenges.
From my standpoint, what keeps me up at night is, as I think through the industry evolution, the pivot point, the meeting that customer, the baby boomers at 10,000 a day, and all that good stuff, I think about who’s going to care for them. Who’s going to provide that service, and what do we need to do as an industry to make that happen?
[00:54:48] Tim: On the labor front, I know that labor already eats up the lion’s share of operating budgets, but I have talked to some people on this question and they asked me a question that I don’t really know how to answer. I guess I’ll ask you, which is, they’re looking at the margins in private pay senior living being 30%, 35%, 40%, 45% and saying, “Why can’t you just pay your workforce more? Wouldn’t that really make a big difference in terms of solving some of this recruitment/retention challenge?”
[00:55:25] Richard: The reason you didn’t answer. it is not a clear answer to give. One, obviously, you have the push-pull. You have capital expectations. We have been on a [real estate] return basis. You have a certain risk-reward that you need to meet. It’s what you promised, so to speak, so you’re operating under that construct.
At the same time, you have these inflationary pressures. That continues to go but we’ve had this weird cycle right now, where the inflationary pressures on labor and in our other basket of goods continue to grow, despite what you hear in the press sometimes, but we had no pricing power to offset it. That will change. That absolutely will change.
I’m not a huge proponent of reducing the operating margin as the only lever to pull on all this. Eventually, the consumer will go ahead and feel some of this. At the end of the day, Tim, I am a proponent of paying people more. I hate when I hear from my regional folks or my brand managers that we’re in the fiftieth percentile on paying folks, as the place to be. I don’t think that’s the place to be. I think we can pay more … I will tell you, I challenge my folks to send me the numbers on the cost of turnover. Then do the analysis on what it would take to increase pay $1 an hour, $2 an hour for people.
What is that inflection? What is that pivot point? Where do those lines intersect? Unless they can tell me that, it’s hard for me to make a decision, but I think everyone needs to have that analysis in hand and figure out what it really does cost. I don’t believe, I am absolutely not resigned to the fact that your part-timers, your younger folks, they’re going to turn over at 60% to 100% a year. “It just is what it is.” You’re going to get 30% turnover of your department heads. I don’t believe that. I believe we’re missing something and we need to figure it out and to help that out.
I think we can be a great choice for folks in the labor market, and part of that is pay, for sure. All the intangible things, I think we already do pretty well. Why I say that is, otherwise we wouldn’t have had workers over the last 12 months. If it was only about pay in our industry, we would have had no workers by the time we got to today. We’re doing a lot of the other things but we need to address the pay piece at some point and do it from a data standpoint. Not just anecdotal, “Hey, let me try.”
[00:58:06] Tim: You mentioned the real estate returns being part of the issue, which have been quite good in senior living, I think, generally. I don’t know how you change this, but I’m hearing chatter about efforts at NIC and within the industry to try to quantify the value of operations and the capital needed on a consistent basis to go to the operator, which maybe would help resolve some of this, maybe help raise wages, maybe would change the calculus on real estate returns in some way. Do you think that needs to happen?
[00:58:44] Richard: Yes. It’s all part of the evolution, without a doubt. It’s part of the evolution. Look, I started in this industry back when … a 10% cap rate was normal. You can go up to 12% on yourself. We’re now arguably 600 basis points to 500 basis points lower than that now. It’s evolving and it will continue to evolve. As a sector and an asset class to invest in, [senior housing] continues to become more sophisticated, more predictable.
As we continue to do those things, the risk-reward balance will change and will allow us to compete better there. I’m happy that NIC is undertaking that study. I think it’s part of the evolutionary process. I think our capital partners understand at some point we have to address this to be successful. It can’t just be we’re at 95% occupancy without any pain and running around with 55%, 60% operating margins. That wouldn’t happen forever [laughs]. It doesn’t happen forever. I have that conversation a lot, by the way.
I think it’s part of the evolutionary process of our industry.
[01:00:05] Tim: Got it. Great. Well, I’ve really enjoyed this conversation. Do you have any final thoughts or messages to our attendees?
[01:00:12] Richard: Not really. I appreciate having the opportunity to chat with everybody. Everyone knows I have an opinion, I don’t mind saying it. I appreciate you having me on to ask me the questions. Again, just like I said, I’d say to the 100 CEOs, I’m pretty proud to be in this industry. This year has brought its stomach pain, but we’re going continue to drive on and do what we do and challenge the status quo.
I hope everyone else does as well, I feel pretty bullish about the future in this industry.