With a recently announced development joint venture with Welltower (NYSE: WELL) and a strong occupancy recovery underway, Kisco Senior Living Founder and CEO Andy Kohlberg is bullish about the future.
“We’ve averaged three-and-a-half times the number of net move-ins in 2021 than we did in 2019 … It’s gone surprisingly well,” Kohlberg said during a recent SHN+ TALKS appearance.
Occupancy is back to around 90% across Carlsbad, California-based Kisco’s portfolio of 20 communities, with the rebound roughly even across different levels of care.
Kohlberg is cautious about how labor pressures will affect 2022 performance, but his outlook is on the long term — that’s why he is willing to develop new communities now, despite costs and complications related to supply chain disruption, inflation and other factors.
And, he is committed to continuing Kisco’s innovative approach, including the creation of a technology platform to support a more customized resident experience.
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
— Background on the Welltower JV and plans going forward
— Kisco’s “corporate lattice” program and other workforce initiatives
— How Kisco approaches technological and operational innovations
— Plans for a more personalized resident experience
— Why Kohlberg believes occupancy recovery has been strong
The following has been edited for clarity.
[00:01:40] Tim: Can you talk about the company a bit; what are the competitive differentiators, the things that Kisco does best?
[00:01:54] Andy: We started our management company in 1995 and, before that, we acquired our first property in Virginia Beach in1990, which we still own today. We’ve been doing this for quite a while, and I think the thing that differentiates us is the quality and longevity of our staff, our unique culture, and the warmth and friendly environments we create in every community.
I think that we’ve succeeded in having a consistent culture. A lot of companies have areas or regions that have really strong cultures, but we focused on culture from day one and I think that’s what differentiates us – consistency and quality of our staff and our culture throughout each of our 20 communities.
[00:02:49] Tim: Let’s begin by talking about some recent news that I think garnered a lot of attention: the formation of a developmental venture with real estate investment trust (REIT) Welltower. How did this partnership come about, and what projects are currently underway?
[00:03:07] Andy: The conversation started I think more than 10 years ago. We were talking about the site in Raleigh with Welltower and became very close to doing a transaction, but it didn’t work out. They chose to develop the site with another developer, but they called us back about five years later, so we redesigned the project that is now the Cardinal at North Hills and entered into a joint venture development partnership.
Just recently, we announced the joint venture development of the Carnegie in Gaithersburg, Maryland, which is 300 units of independent assisted and memory care, which we just started construction on a few weeks ago.
[00:03:59] Tim: What does that development pipeline look like now? You have other additional projects with Welltower that you’re considering, or that are in the works?
[00:04:09] Andy: Yes,we’re currently looking at a number of sites with Welltower, but we don’t, and never really have, had a pipeline there. The communities and the sites that we look for in terms of development are few and far between and are located in urban environments. There just aren’t a lot of those around. It’s very difficult and it’s not really our strategy to have a pipeline.
However, we’re opportunistic in terms of development. We have a number of expansion projects underway of expanding existing communities in Walnut Creek, Orange, Raleigh and in Virginia Beach. At a number of locations, we’re converting assisted living wings to memory care wings.
We’re usually always doing a few major renovations or expansions, but we don’t have a development pipeline, per se. We’re more opportunistic in terms of finding a site and doing it. These are very large sites that take a very long time to get entitled and built and very expensive. There are two projects we’re doing with Welltower, over $300 million combined.
[00:05:23] Tim: So, it sounds like you have a philosophical preference to do continuing care communities. Is that accurate?
[00:05:31] Andy: Yes, we do. Like the continuum, we don’t really do standalone assisted living or standalone memory care. We like large campus communities with independent assisted and memory care. We also have two communities that have skilled nursing. Then we have a number of communities that also have villas or cottages on the campus, but we tend to gravitate to large campus projects, providing a continuum.
[00:06:01] Tim: What fee model are those? Entrance-fee, rental, or a mix?
[00:06:06] Andy: It’s mostly rental. We’ve got one entry fee community in Palm Beach Gardens in Florida, the 350 unit entry fee CCRC that we acquired, but most of our communities are rental.
[00:06:22] Tim: It seems like a difficult time right now. Construction costs are high, supply chains are a mess. Are you experiencing some of those pressures or challenges with some of these expansion projects or developments that are underway, and is it making it harder for you to find those opportunities that you’re looking for?
[00:06:44] Andy: It is. I think we were able to lock in the construction costs on both of those projects before the recent supply chain issues hit, but having said that, construction is difficult – more difficult now than it was a year or two ago. It is a challenge, but if we were to start those projects today, it would be a lot more expensive and a lot more difficult. We experienced fortunate timing because development has gotten more difficult for the reasons you mentioned.
[00:07:25] Tim: Do you think you would expand through acquisition in 2022 or 2023 given the development?
[00:07:32] Andy: Yes. Throughout our 25-year history, we’ve always wanted to maintain a balance of acquisitions and development. Again, we’re fairly opportunistic, even on the acquisition side. We don’t have a plan to buy 5 or 10 communities of the year over the next five years. We do have strategies in terms of which locations and type of product and all that. We have a pretty narrow niche that we stay within and don’t really need to be buying properties or developing.
We just do it when it makes sense. If it doesn’t make sense, we don’t do it. You mentioned the difficulty of construction. Now, we’re looking at what this community is going to be like 10-15 years from now. That’s why we try to build in high-varied entry markets. Costs are a little bit higher right now. It doesn’t scare us because we think that down the road, it’ll be a full community, and we’ll know whether prices are up, say, 5% or 10%, 10 years from now, isn’t going to make that much of a difference.
[00:08:50] Tim: We recently hosted our BUILD event here in Chicago and heard a lot of talk from those in the industry who are developing senior housing right now in this environment. Some of them, Atria CEO John Moore, and Maplewood’s Greg Smith, mentioned that if you can develop in this environment, you should really step on the gas because not everyone can, and you’ll have that advantage in the coming years. Sounds like you concur.
[00:09:14] Andy: I do. We didn’t really don’t step on the gas and do lots of them like some of our competitors, but we share the same philosophy, that now is a good time to develop because over the next three or four years, there will be less development happening than in the prior decades. That’s why we look 10 years out. So, we agree that now is the time to develop. Our strategy is only in eight-plus locations in high barrier to entry markets.
[00:09:47] Tim: I think I saw in the press release about the Welltower JV, you mentioned that the cardinal at North Hills in Raleigh has maintained 95% occupancy over the last five years and returned to 100% in September. I thought that was impressive. Curious if you can talk about why you think this community has been so successful, even through COVID.
[00:10:11] Andy: To start with, it’s just a fantastic location in North Hills, and it gets back to what I just said, an irreplaceable location and an A-plus market. The CCRC campus has high-quality services with a full continuum of care, the rental basis is really attractive to people. A lot of the prospects, we’re looking at competitors, have a half a million-dollar entry fee. We don’t have an entry fee.
They really like the flexibility of having the quality of an entry fee CCRC in an incredible location with the flexibility of a rental model, I think. Then, on top of that, we have a great management team. Our executive director there has been with us almost 20 years now, and then the Forbes Five-Star training, where I believe the first senior living community in the country at The Cardinal at North Hills to get the Forbes Five-Star hospitality designation.
The quality of our staff is exceptional. The clientele there really demand that. It’s one of the reasons we stay full. Then during Covid, we were very proactive with pooled saliva testing and testing everybody twice a week, both residents and staff. That said, you have to get a little bit lucky with regard to Covid testing. We’re very proactive in terms of keeping people safe with proactive testing. And, when we found cases, we were able to isolate very quickly and not have it spread.
[00:11:50] Tim: In terms of the appeal of the rental model, in my mind, the benefit of doing an entrance fee CCRC with a life plan contract is the guarantee of the continuum. Is there something like that in place, even on a rental basis, or is it more as availability allows?
[00:12:12] Andy: Residents have priority access to skilled nursing. It’s a very high-quality skilled nursing facility that’s in great demand. There’s no guarantee of fixed pricing like some of the life care models you mentioned. It’s pay as you go. The fact that they have their first entry into skilled nursing is an attractive component of the CCRC.
[00:12:39] Tim: You mentioned the Forbes Travel Guide designation, can you elaborate on that? Explain to folks what that is.
[00:12:46] Andy: It’s a service that you sign up for with them based on the hospitality model. They’ve tweaked it a little bit for senior living. It’s really just an enhanced training program for associates. There’s 25 basic components of customer service that everybody goes through, and it’s ongoing training. Then, there are more elements of service beyond the 25. It elevates the whole customer service and experience for the residents like one would get at a luxury hotel.
[00:13:19] Tim: I’m curious, also, I think a component of The Cardinal at North Hills community is that Amazon Echos were deployed there. Is that right?
[00:13:33] Andy: Yes, we’ve tried a number of different products, K4Connect and Amazon Echos, and a number of things. One of the things we’ve realized over the years with technology is that the majority of residents are not embracing it. There is approximately 20% to 30% of the population that love it and embrace it, though.
The problem is the rest are either neutral or really don’t embrace it at all. You end up duplicating a lot of services. We could provide the menu online or the calendar of events, but then you still have to print it out for the 60% of the people that don’t want to do it online. You end up supporting both platforms. It’s duplicative and oftentimes expensive.
Our philosophy around technology for residents is to start with technology that they don’t have to interact with that can help them in their daily lives. For example, a sensor under the bed that automatically turns the lights on when they get up. We’ve experimented with smart homes, and shades that you can go up and down, or heating you can use from your phone, like I said, some of them love it, but the majority of them don’t.
We’re focusing on technology that can really enhance the lives of the residents without them necessarily having to interact directly with it.
[00:15:00] Tim: Do you see that changing at all? I guess I’ve heard people for years, I guess, saying, “Well, this is going to shift as our resident base changes.”
[00:15:10] Andy: I do think it will shift, but I think it’ll take a lot longer than most people think. It will shift over time. We’re seeing a larger percentage of the people engaging with technology, than 5 or 10 years ago, but it’s still the vast minority. Like I said, until you get the vast majority of the resident population embracing it, you’re doing duplicate services.
We’re trying to go the other way, in terms of increasing our efficiency. We’re trying to do that in a variety of ways without the resident having to engage directly in new technology they don’t understand and they don’t like.
I was once doing a focus group with residents like I’ve done for 25 years. I picked on one of the gentlemen who looked like he was the youngest in the group. We had just implemented high-speed internet at that community. I asked him what he thought about it, he looked at me and said, “I’m 90 years old, I’ve got nothing to do. Why do I want high-speed internet?” He said, “I’m in no rush.” That really typifies the mindset of a lot of people, they just don’t feel the need to do a lot of it.
Obviously, now they understand they can connect with their families, and some things they couldn’t do otherwise, especially during COVID, Telehealth is helping. Again, it’s not the majority of residents that embrace it. We’re having to find other ways to engage with them, the technology without them directly being involved.
[00:16:49] Tim: That’s a funny story. I’m curious about the backend operational side, in terms of technology, are you finding more success there with regard to staff efficiency?
[00:17:03] Andy: Yes, absolutely. We’re really focused on that, a software platform that is very user-friendly. Some of the technological things that we’re doing, like a few of our communities, are using drones to check the AC units on the roof, instead of having to manually climb up a ladder and check AC units. We can do it much more frequently or cheaply.
If we see there’s a problem, then we can go up manually. Those are the kinds of things that save labor costs and help us become more efficient and still have our staff time to interact with the residents, which is what they’re hired to do and what the residents love.
Another example might be robotic vacuum cleaners. You can clean the hallways at night, rather than someone manually doing it during the day. Those are the types of things we’re trying to engage with to make the operations more efficient, and yet still have a high-touch interaction with the residents because that’s why they move in.
[00:18:09] Tim: So, even though a majority of residents aren’t interacting with the technology, are you integrating the backend infrastructure so that you can deploy more technology, should residents demand it?
[00:18:32] Andy: Yes, absolutely. I don’t think anyone knows what the future of technology looks like. But if we build the infrastructure in, we’re building in as much flexibility as possible with bandwidth and all the other things at a very high level. That leaves us the flexibility to adopt whatever platform of the future is most viable and most attractive to residents.
[00:18:59] Tim: I’d like to shift gears a little bit here and ask you a big-picture question. I recently talked to Jim Pusateri, the CEO of True Connection Communities, doing one of these SHN+ TALKS. He made a comment that the senior living industry, he thinks, has been relatively unchanged for the last 30 years, but it’s about to go through a period of significant transformation. I know you’ve been in the industry for about that same timeframe. I wanted to check in with you and see if you agree with that.
[00:19:31] Andy: Well, I certainly think that that pace of change is accelerating. I have seen a fair amount of change over the 30 years I’ve been in the industry. I would agree that the pace is certainly accelerating and Covid has accelerated the pace of that even further. Who would have ever thought we’d be serving everyone meals in their apartments and figuring out how to do that over the course of a week or less and needing to do that when we shut down all the dining rooms.
That allowed us to figure out a whole new way to deliver quality meals to everyone’s apartment. There are a lot of things. Telehealth is another that really blossomed during Covid and how we facilitate that for residents and their physicians and families. There’s a lot of things that have been accelerated over the past few years and certainly during Covid. I agree that the pace of it will increase even further.
Then, as we discussed earlier, you’re going to get a new generation of customers coming in five or 10 years which will definitely accelerate things. We see that the future generation of customers coming in is going to have a different profile. We think they’re going to be more willing to spend money on themselves. The silent generation typically has been reluctant to spend money on themselves, and save it for their children or other uses.
We think that the next generation will want more choices in terms of dining and dining venues and wellness programs. They’ll be much more open to fitness programs and a variety of things, all of which are going to be more prevalent, I think, when the next generation of customers moves in.
[00:21:42] Tim: When you say that you think the next generation will be more willing to spend money on themselves, the implications of that is that the demand for private paid senior living might go up, or even within the model, do you think there’s more opportunity to charge on an à la carte basis for various services and amenities?
[00:22:01] Andy: Yes, I think there’ll be more opportunities for à la carte and I think they’ll be wanting more à la carte services. They won’t want to pay for things that are bundled in the rent that they don’t really care about. That’s what I meant by wanting more choice, they’ll be willing to pay more for what they want, but they’re not going to want to pay for things that they don’t see as value for them.
One example that we see a lot is a mother and daughter coming in for a community experience or a tour. The 90-year-old mom says, “I’m not ready yet.” The daughter says, “Well, I’m ready to move in right now.”
The younger generation is more willing to spend money on themselves and treat themselves to some luxury items, whether it’s a massage or other things for their own wellness and benefit, this generation in our communities now is unlikely. Even though we offer it at a number of communities, massages are not all that popular. I think the next generation will value that much more highly.
[00:23:22] Tim: Another trend that I’ve been hearing when I talk to people about this future consumer is that they also want, not only more options, but a more personalized experience, they’re looking for customization and for their provider to really know them. Do you agree with that?
[00:23:41] Andy: Absolutely. We’re building a whole resident care application that we’ve built in-house to really take advantage of that. A lot of the hotels, if you check in, again, they know your name, they know some of your preferences, it’s in the database. I absolutely agree with that premise that there’s going to be more customized programs, and customized services that people will want and demand. That’s one of the differences that I see in the next generation moving in.
[00:24:13] Tim: When you mentioned the care app that you’re building, would that app contain user-level information to suggest activities or programs for a specific resident?
[00:24:26] Andy: Right, so we can track that there are 20 people who love gardening, and we can do special gardening events or bridge classes. Whereas, another community might only have one or 2 people that love bridge, and another community might have 10. We can customize our wellness programs around the resident preferences at each local community.
[00:24:50] Tim: Our first audience question: Managed care adoption has become an increasing trend in senior housing, especially as a result of pandemic stressors. Do you have any appetite for partnering with companies who can provide managed care plans like ISNPs for your residents? Have you thought about starting your own Medicare Advantage plan?
[00:25:13] Andy: Yes, we’ve looked at all of that for our population and our strategy right now. It’s not something we’re focused on. We have had one or two partnerships with ACOs in Florida and where we’ve had continuum of care with skilled nursing, it tends to make more sense. In a purely rental independent living/assisted living community, it makes less sense but we have looked at it. We don’t think it’s viable for us right now, but in the future, it’s something we’re going to continue to look at to see if it’s viable.
[00:25:50] Tim: Do you think short of becoming an insurer, that there are ways to increase onsite or coordinated care? I’ve talked to some providers who are partnering with health systems wherein a resident can pay for access to a clinician?
[00:26:12] Andy: Yes. We definitely believe in that. We have a project for 2022 to launch some partnerships with local hospitals to do any health system to do exactly that. It tends to be in the higher end communities and the larger communities where you have a bigger pool of residents to offer that service too, but yes, we think that will be very much in demand and that’ll be part of our strategy going forward at certain locations that are large enough and dense enough and high varied entry markets with a great hospital nearby.
[00:26:47] Tim: Let’s move to occupancy and occupancy recovery. I don’t know if you can share your current average occupancy, but I’m interested in that and if you’re seeing any patterns in terms of where occupancy is recovering faster or slower from the pandemic.
[00:27:07] Andy: Yes, in 2019, prior to Covid, we were around 90%. We dropped down at the lowest point to the low 80% range. Now, we’ve already recovered all of that. In the last seven months, we’re back up to 90% or so, and so we actually anticipated at the low point that it would take 24 to 36 months if we went back to our pace that we were doing in 2019.
We’ve averaged three and a half times the number of net move-ins in 2021 than we did in 2019. We’ve made up that occupancy three and a half times quicker than anticipated. It’s gone surprisingly well. We’ve been shocked at how quickly we’ve rebounded. It’s been interesting, as it hasn’t been varied among the different product lines of IL, Al and memory care.
It’s been surprisingly consistent across all three product lines. They have all bounced back simultaneously. I’ve just looked at our graphs of the three product lines and they’re incredibly consistent. They dropped pretty consistently and came back pretty consistently without a lot of variance between the three product lines. They’ve been very surprising, frankly.
[00:28:38] Tim: Do you attribute that to anything? Do you think it was just a function of pent-up demand or specific things like Kisco was offering or…?
[00:28:49] Andy: Yes, it was a combination of things. I think, first and foremost, I mentioned earlier, the pooled saliva testing. I believe we were the first company in the country, not just senior living, but the first company in the country, to do pooled saliva testing. The reason I say that is because we were the first client of the first company that got FDA approval in August of 2020. We started a week later after they got that approval.
That created a sense of safety and security. People were telling their friends how often they were getting tested and how safe they felt. Word filtered out over time and there was a delay, obviously. People didn’t all of a sudden start moving in. In March of 2021, we did experience the pent-up demand that you spoke of.
The other thing we did was hire a lot more sales directors. We hired about as many as 15% more sales people than we previously had. Then, the third thing we did, we had a new messaging campaign around Kisco Confidence that took advantage of our testing and safety and security, and how we were the safest place to be because we were doing so much testing and isolating as soon as we identified someone as positive. It really worked, the combination of those three things I think were a huge factor in our rebound, rebounding so quickly.
[00:31:08] Tim: I guess we should explain for anyone who’s confused about it, the pooled saliva testing measures means that a group of people are tested on mass, and then if there’s a positive, someone in the group has it.
[00:31:16] Andy: Exactly. You could test up to 100 people, for a very fairly inexpensive cost and you can vary the size of the pool. We could take an assisted living wing and test everybody in that pool, knowing that if it came back negative, everybody living in that area was negative. If the test came back positive, then you have to test everybody in the pool.
We could play with the size of the sample up to 100 and be very confident that the PCR testing was still a very accurate level of testing. We were doing lots of people at each community, once or twice a week. It really helped reduce the number of cases and, more importantly, reduce the spread, because we were able to identify them so quickly.
[00:32:08] Tim: Let’s talk about labor a little bit. I think that’s really top of mind for everyone right now. We talked to you and early senior housing news talked to you in early 2020. This is before the pandemic and you said that you thought the labor environment at that time was the hardest that had been in 30 years of being in senior living. I’m curious, do you think it’s even harder now?
[00:32:31] Andy: I do. It’s a lot harder and you’ve heard the term “the great resignation.” It’s real and it’s difficult to find high-quality staff. It’s clearly the biggest challenge. People don’t show up for interviews. We have a vaccine mandate and some people don’t want to get vaccinated. That eliminates a fair amount of the workforce. It’s just a huge challenge. We talk about it every day, every week, trying to come up with new ideas but it’s a real challenge.
[00:33:04] Tim: Is there anything you’ve done that you think has moved the needle at all? Have you raised wages?
[00:33:10] Andy: Yes, we’ve done all those things, raised wages, paid some signing bonuses. We’re rolling out a whole new enhanced benefit package, four weeks paid sabbatical for all managers starting in January. We’re doing a relocation program for associates that want to relocate and work in another community. We’re doing 10-year pay, enhanced sick pay, maternity leave enhancements, lots of things, wage increases like I said. We’re going at it from every direction we can, but it’s still a huge challenge.
[00:33:51] Tim: One thing I wanted to check in on was, something I recall from a few years ago, a corporate lattice program. Is that still happening?
[00:34:00] Andy: Yes, career lattice is a program we’re still doing. We took a hiatus during the worst of Covid, but we’re still doing the program and it’s mainly for frontline associates who just have a desire to enhance their career and it may be going up a career ladder. Career lattice is the ability to expand your role while staying in the same role.
It entails frontline associates learning about other departments and shadowing, and working in another department for a period of time. Once they complete the first phase, they get a raise in pay and then there’s another phase and the third phase. It’s an expansion of their understanding of their role and the role itself. Then some of them do get promoted, but they can get more pay while still staying in a similar role to the one they were in before they started the program, and it’s been great.
We do it in small numbers. You can’t have 20 people doing it all at the same time. Five to 10 at any time is ideal. There are three stages. We have people going through the programs at different times. It’s just small numbers, but it’s been very well received and people really appreciate the personal development opportunities that we give them.
[00:35:18] Tim: Have you seen it help at all from a retention standpoint?
[00:35:21] Andy: Yes. We don’t have the exact numbers, but clearly, people appreciate and stay with us longer knowing that they can enhance their role, enhance their pay without necessarily becoming a manager, which not everybody wants to become a manager.
They increase their pay and understanding. They appreciate just understanding what other people in the community do. A lot of the time, if they’re in care, for example, they don’t have any idea what’s going on in dining. They really appreciate learning about the kitchen and the foodservice program.
[00:35:58] Tim: Has it either led to anyone changing permanently to a new position laterally or creating, not a universal worker, but people who can work multiple positions?
[00:36:11] Andy: Yes, we’ve had people go from care to dining, and dining to care, and lots of changes as a result of the program. That’s part of it, is to really give people an understanding of other departments and they may learn that they have more of a passion for another department than they thought. It’s been nice to see people grow from those experiences.
[00:36:37] Tim: Looking at 2022, do you anticipate any easing of these labor pressures? Or do you think it’ll be here for a while?
[00:36:48] Andy: I think it’ll be here a while. We’re certainly budgeting significant wage increases for all of 2022. I think it might start to ease in 2023. We’re assuming the labor market stays the way it is now for all of 2022 in our budgeting philosophy.
[00:37:11] Tim: We were hearing for a while, well, once the enhanced unemployment benefits go away, people will start coming back, then we heard, well, once school starts again, people will start coming back. Is there anything now that you’re looking ahead to say, “Well, once this happens, maybe people will start coming back.”
[00:37:30] Andy: No. I don’t have a crystal ball. At some point, I think there’ll be some relief, but I don’t know what will trigger it. Like you said, I thought all those things might trigger it as well. People have really re-thought their whole work-life balance. I think we’re in the middle of that rethinking and how it shakes out, I’m not sure.
I do think it’ll have to ease because so many people are not working right now or not seeking work or just getting income from other sources, whether it’s Uber or that type of role. I don’t think it’ll last forever.
[00:38:24] Tim: As you’re increasing wages, and I assume labor expenses are going up for other reasons as well, are you able to pass through some of those costs with higher rate increases?
[00:38:36] Andy: Yes, we’re really forced to deliver the same quality of services and care that our residents have become accustomed to. That’s really our strategy and our niche. We’re a high-quality service provider and we don’t want to compete on price and cut services at either quantity or quality.
The only thing that helps a little bit is the residents who hold real estate and stocks, and their investments have gone up as well. That eases the burden on them for some extent. I’m not saying it’s easy. We don’t take it lightly to have to do that. Our strategy has always been to deliver the highest quality services. As our costs go up, a lot of that has to be passed on to the residents. I feel like we don’t have much of a choice if we want to continue with that strategy.
[00:39:37] Tim: I’ve heard from others that residents seem to be pretty understanding about the need for the higher rates. Are you seeing that?
[00:39:44] Andy: Yes. If you can demonstrate to them that the bulk of their increase is going directly to the staff in terms of wages, they’re generally more tolerant of that. If they think it’s just lining your pockets or going somewhere else, then not so much. We take a lot of thoughtfulness in how we communicate to the residents and the transparency with which we do that and show them what the wage increases are and where that increased rent money is going to.
[00:40:23] Tim: Are you seeing any greater or lesser ability to drive street rates versus increases on in-place residents?
[00:40:32] Andy: We look at all of that on a market-by-market basis and make decisions very much locally from the bottom up. We’re small enough where we don’t have to say every resident in the company is getting 5% and every staff member is getting X. We’re very much locally driven and each community is very involved in the budget. Budget decisions are made on what’s happening in each local market, not on a national basis.
[00:41:03] Tim: With wages, I presume the new base rate for wages is going to be higher going forward. I think that there are other expenses that conceivably could remain elevated for a longer time horizon, things like insurance maybe. Do you think that, in the future, margins in senior living are just going to be more compressed than they were in the past? Do you think we can get back to a pre-pandemic margin?
[00:41:33] Andy: I think, again, that in some markets, I think it’ll be margin erosion more long term, and in some markets, you’ll be able to recover it through higher rent increases and some efficiencies like I spoke of. One of the reasons we like larger communities (200+ units), is because we can gain more efficiencies in larger campus communities, because we’re delivering.
We can spread the cost of an executive director over 230 residents instead of 60 residents. It is a more efficient operating model that tends to have better margins. To answer your question, I can’t answer it on a national basis, because I don’t know the answer. I think, in some markets, yes, margins will shrink over a number of years and in some we’ll be able to recover them.
[00:42:33] Tim: Going back to your growth trajectory; I know you said you’re opportunistic. Are there certain parameters though, regionally, where you want to stay in a particular region or are there any you wouldn’t go into? For example a downtown urban core?
[00:42:53] Andy: We have a fairly specific criteria that we look for. Like I said earlier, high income, high barriers to entry markets, large campus communities that can deliver multiple levels of care. Our preference and priority is to build and acquire in markets we’re already in, but we will and have looked at new markets and we’ll go into new markets if the other criteria are met.
[00:43:52] Tim: It’s interesting because we’ve seen the growth of regional providers a lot in the last year. Kisco was mid-size, but not necessarily regional. You’ve got Raleigh, you’ve got California. And, you’ve got Hawaii.
[00:44:03] Andy: We grew up backwards a little bit. I was in California and we started in Virginia. We started bicoastal and worked the other way. We’ve always been a bit spread out, probably not the way you’d design something. As I said, we were opportunistic in the way it worked out. We are spread out but we’re small and we have a very targeted niche that we try to stick to.
[00:44:36] Tim: Do you think that’s important if you’re to be successful, if you are spread out that you have a product that is so specific so that, even if you can’t get to all your communities all the time, there’s a model that will help with consistency?
[00:44:55] Andy: Yes, I think it’s helpful. I just overall don’t think a big scale in senior living is all that helpful. I don’t think the big companies of 500 properties have any advantage over us at all in terms of cost or any other advantage. I just think senior living is a local business by definition and size of a company doesn’t matter.
[00:45:36] Tim: I assume the answer to this is that you’re happy with that narrow niche that you’ve pursued, but are you thinking about expanding into middle-market products at all or in other new directions?
[00:45:50] Andy: No. We know what we’re good at, and we know what we’re not good at and try to stick to what we’re good at. Not any more complicated than that. No, we don’t have plan to go mid-market or branch out too far from what we’re good at. I think that’s why we’ve been successful for a really long period of time through ups and downs is because we stick to our knitting and we know what we’re good at and we know what we’re not good at.
[00:46:17] Tim: One macro trend that I’ve been hearing chatter about is the growth of home care. I think we’ve seen an increasing amount of venture capital and other types of investors move into the home care space, more government money available to home care providers. Obviously, older adults have consistently said that that’s their preferences to age and their own homes. Do you consider the home care situation a threat to communal senior living? Or do you think about that differently?
[00:46:50] Andy: Not really. We know a little bit about home care because, when we bought two communities in North Carolina, it came with a home care company 25 years ago. We’ve kept it going, and we’ve tried to expand it at times, which didn’t work. We’ve contracted it again. We’ve expanded 10 years later to other communities and it didn’t work. It’s a really difficult business. That is a business that is completely driven by scale.
Now, technology is helping drive the cost down. The fundamental problem is you have fixed staffing costs, and residents who can choose to get more or less care on a weekly or monthly basis, then it just is very difficult to manage that ebb and flow and remain profitable.
In terms of your question, whether it’s a threat to senior living, we don’t really think so because, right now, there’s probably a 10% penetration rate of age and income qualified people living in a senior living community today. 90% of the people are not choosing us. There’s already a bulk of the population that’s taking advantage of home care if they want it and can afford it.
The people that move into our communities are primarily moving in because they want the socialization and the programs and the variety and the congregate living, otherwise they’d stay at home. Those people that would prefer to stay at home are going to get home care, but I don’t think it will diminish our product.
When I say our product, I mean our niche, I can’t speak to all the other providers. For our niche, it is a large component of independent and very advanced wellness programs. That’s why people are moving in. If they stayed home and got home care, they’re by definition saying they don’t want to live in a congregate environment with wellness programs and all that. The home care industry will take care of the 80% or 90% of the people that want to stay home, and we’ll do well, and they’ll do well.
[00:48:49] Tim: You started this discussion by saying you think that the consistent and strong culture of Kisco is really a competitive differentiator. I think, as we’ve been talking, it confirmed my impression of Kisco, which I think is pretty willing to innovate in terms of doing things like the pooled saliva testing and the various workforce initiatives and the technology initiatives.
I guess I’m just curious, maybe if you can describe that culture of Kisco in a little bit greater detail and particularly this willingness to innovate, which I don’t think we see in every senior living company, what do you attribute that to? How did you sort of foster that?
[00:49:30] Andy: I think, as I mentioned earlier, it’s a bit of a bottom up culture, rather than a top down culture. It’s a matrix culture in terms of management and the home office. We look at the corporate office, we call it the home office as a support center for the properties, and we work for them. They don’t work for us. Effectively, they pay our salaries through the resident revenue and management fees.
We’ve turned the pyramid upside down and really feel like the most important people in the organization are the ones that work at the communities and the executive directors are running their own business. We’re there to help and support them and guide them. Obviously, there are parameters of what decisions they can make, but we want to empower them to feel like they’re running their own business and they can make mistakes as long as they’re well-intended and well thought out.
Try something new, if it doesn’t work out, learn from it and try something else. I think that’s a big part of our culture. Then the longevity of staff, I think, as I mentioned earlier, is a big part of our culture. When they feel comfortable and trust the home office to do the right thing and look after their interests, it allows for more innovation. Innovation breaks down when there’s no trust between management and frontline.
If there is trust, they know they can innovate, make some mistakes, and not be fired for it. I think that’s been a hallmark of what we’ve done for a long time.
[00:51:06] Tim: Now, I’d like to ask you the crystal ball question. For 2022, what are you most excited about from a business perspective, and what’s your biggest concern?
[00:51:25] Andy: The biggest concern clearly is the labor markets and just getting enough high-quality staff, as I said earlier, where our niche is really high-quality dining service programs and wellness programs and care service delivery. We need quality staff, not just anyone that wants a job just for the sake of a paycheck. We really want people who have a passion for serving seniors. The biggest concern is some of those are choosing to leave the workforce. That’s really the biggest concern.
In terms of the most exciting things, as I mentioned earlier, is a new resident app. We rolled out a care services app, both created internally with our own platform, and didn’t go out to any third-party providers. Just integrating those more fully to enable more efficient than more customized services we talked about earlier, is probably the most exciting thing coming down the pike.
[00:52:36] Tim: From the audience: Over the years, have you seen a change in the type of help your prospects need to get from where they are today to a Kisco community? Where do you see this level of service going as part of the occupancy and the onboarding strategy? That could mean either specific physical help moving themselves in or more metaphorical help and emotionally making that decision.
[00:53:06] Andy: I think both of those are true. We are seeing people need more help both on the emotional decision part and physically moving in. What we saw during the financial recession 10 years ago was a delay in people moving in. They were waiting, they were moving in a little bit older and a little bit frailer, and so they needed more help in all aspects of the move.
We’re seeing that now as well, but we’re also seeing an increase in the younger residents who really want a true independent living community. That’s not all communities, it’s not even all of our communities, but the more higher-end one with really large apartments with full kitchens and multiple dining venues and people who are driving and still active, we’re seeing an uptick in those people, in those communities where the product is really designed for that customer.
That customer isn’t going to move into a 500-square foot “independent living apartment.” They’re going to want larger apartments with full kitchens with the full amenities and an apartment as well as a full package of service amenities.
[00:54:35] Tim: I think you mentioned earlier that one of the projects that you have ongoing is a conversion of assisted living to memory care. Do you think that is a function of the rising acuity that you’re seeing, or is it specific to that market, that there’s just a memory care need or something like that?
[00:54:52] Andy: Now, we’re seeing a rise in acuity pretty much everywhere, and even a large portion of our independent living population has some mild cognitive impairment or memory decline as they age in place. We are seeing it everywhere, but we also see the possibility in the not too distant future of medicine coming up with some either, not necessarily a cure for dementia, but the delay of the onset of dementia in a segment of the population. We think that is going to be here within five or 10 years.
We’re building and doing everything we do in memory care to be able to convert to assisted living if necessary, if the demand starts to diminish through a variety of reasons. We don’t think it’s too far off for, as I said, a certain population benefiting from a delay of the onset of dementia here in the next decade or so.
[00:55:53] Tim: That’ll be incredible. One last question just on the development front. You mentioned, especially on the independent living side, the desire for larger units. This also came up at SHN BUILD. I think it was said that the most common mistake in development is making units too small.
I’ve also heard that there’s a demand for larger common spaces, especially in light of the pandemic, if you need social distancing and for dining, things like that. It seems like that might be putting some pressure on the development. Again, development depends a lot if you need to make everything bigger. Is that actually happening?
[00:56:35] Andy: We think the larger apartments are definitely in more demand right now. We think that’s a trend. Again, it’s not a trend everywhere, it’s been in trend where there’s really a community designed to attract that resident population. They have money, and they’re not going to move into a smaller apartment no matter how you price it. That’s not what they want.
There is a segment of the population that we’re designing for that does want larger apartments and is willing to pay for it and is able to pay for it in the markets we’re in, so we do see that. In terms of larger common space, is that, to some extent, we’re not designing our dining areas any bigger now because of the pandemic. We’re figuring out ways to provide multiple dining venues and multiple dining times.
I think people are going to accept reservations, which they wouldn’t have earlier, or do all-day dining and take some of the pressure off the main dining times. I think that’s a better way to go than just building bigger dining rooms. It doesn’t pencil, and I don’t think it creates a better dining experience for people.