Welltower Pushes for Disruptive Improvements to Senior Living Operations

Senior living providers generally excel at caring for residents, but many operators could make “truly huge, shocking” improvements in how they run their businesses.

This is the perspective that Welltower COO John Burkart shared last week, speaking at the Citi Global Property CEO Conference.

The event shed light on how Burkart is approaching his role at Welltower, after joining the REIT last year. Previously, he was a leader at multifamily-focused Essex Property Trust (NYSE: ESS) for 25 years.

In this week’s exclusive, members-only SHN+ Update, I analyze and offer key takeaways from the remarks that Burkart and other Welltower executives made at the Citi conference, including:

• Burkart brings a no-nonsense approach to operator relationships, and is not shy about expectations and leverage that Welltower holds
• Sales is an area particularly ripe for improvement in senior living
• Watermark’s merchandising push also shows the promise of more sophisticated business practices

Operator relationships

Since joining Welltower, Burkart has played his cards close to the vest. On earnings calls, he has alluded to opportunities for value creation through operational enhancements, many driven by data, but he has declined to elaborate further.

Last week, while he still did not reveal much about the specific operational initiatives that he is focused on, he spoke more bluntly about the extent to which they are needed. And, he was more open about how he has been communicating and working with operators in Welltower’s large senior housing operating (SHO) portfolio, which encompasses more than 800 communities.

Acknowledging that he has had a steep learning curve on senior housing, Burkart described starting conversations with operator CEOs by encouraging them to “talk to me like I’m a five-year-old.”

“Most of them actually have a very fascinating story — it typically relates to a family member, as to why they’re even in the business,” he observed. “So when you look at what’s going on, they do a phenomenal job of that one differentiating piece of the residential portion, which is the care … that’s where their passion started.”

Saying that he respects this commitment to care, Burkart noted that other aspects of the business are “really not their forte.”

It’s in these other areas that Welltower is striving to help operators raise their game, and Burkart believes the result will be transformative.

“When you talk about the other aspects of the business, the marketing, the value proposition, the asset management, these things, the opportunities are huge, truly huge, shocking, that’s why I say it’s disruptive, it will fundamentally change the business and how people interact with it,” he said.

As for implementing these improvements, Burkart said he usually doesn’t have to “push too hard,” given that most operators see the substantial competition in the marketplace and are eager to gain advantages.

But he did describe one instance in which an operator CEO was receptive to what Welltower brought to the table, while the rest of the operators’ leadership was less enthusiastic and even “passive aggressive.” Burkart explained his response:

“So, I just left the office, and the CEO says, ‘What are you doing?’ I said, ‘Well, I’m done. It’s not worth my time, there’s other operators, I’m going to work with them.’ That had a pretty big impact. They changed the game pretty rapidly.”

I find that anecdote telling. It shows the power of Welltower’s scale — enabling that declaration of having many “other operators” to work with — and also the confidence that the REIT’s leadership has in the company’s control over who is managing its communities, thanks in large part to contracts implemented before and throughout the Covid-19 pandemic.

“At the end of the day, if we want to take properties away, we will; it really is no different than fee management multifamily,” Burkart said. “It’s a fundamentally different contract than what people are used to from the past, where they had much, much more control.”

I think Burkart’s candor on this point is refreshing; he is being transparent about a fact that is no secret. Welltower’s decision to transition 20 properties away from Silverado — widely considered a gold-standard memory care operator — certainly drove home this point throughout the industry in 2019.

That Silverado move shook many operators who I spoke with at the time; they expressed their concerns that too many high-quality providers were putting their future in the hands of Welltower and other REITs due to the growth of RIDEA.

I’m sympathetic to those concerns, but I also think that operators might need a wake-up call, because Burkart is not just blowing smoke when he says that business practices throughout the industry are in drastic need of improvement. And, the latest iteration of the Welltower RIDEA 3.0 contract does include richer rewards for operators, including more handsome promotes and other incentives for performance.

With expenses rising, workforce pressures reaching critical levels, the health care system evolving, consumers becoming more demanding, and more institutional capital entering the market, the senior living provider of the future must be able to deliver the highest quality care while also running more watertight businesses.

I think Welltower can be a valuable partner in creating this provider of the future, but operators who work with the REIT must know that they are joining up with an “extreme fiduciary” — as CEO Shankh Mitra put it at Citi — that is bringing high expectations for performance and a willingness to trade out operators. And as Burkart’s anecdote makes clear, operator CEOs are well-advised to be sure that their whole leadership team is on board with the particular pressures — as well as potential benefits — that working with Welltower will bring.

Some of those pressures will come from Welltower, which is clearly a hard-charging organization. At the Citi conference, executives described Welltower associates trading weekend emails out of sheer excitement.

I think the REIT must be cautious about minding the line between motivating operators and holding them accountable, versus imposing its will and its own corporate culture.

But some of the pressure on operators will come not from Welltower per se, but the strains of implementing change — Burkart noted that “people are people” and change is hard. Senior living operators must be prepared.

“The speed of change is going to increase over and over and over again, I think it will be exponential in the coming years,” Burkart said.

A sales focus

Sales is one area that Burkart called out specifically as being in need of improvement in senior living.

He compared today’s senior living sector to the multifamily apartment industry circa 1970, when the sales process consisted of putting a sign in front of a building, with a time and date when the property would be shown. He said the message to prospective buyers or renters essentially was “don’t bother me.”

This is not so different from senior living currently, given that Burkart has tested responsiveness to customer inquiries and found that 0% to 50% of inquiries have typically elicited a response. His findings reflect data and experiences routinely shared by mystery shoppers in the sector.

I’ve beaten the drum for a new approach to senior living sales in the past, and have noted that providers such as Brookdale, Discovery and others have overhauled their practices in recent years.

But there’s still a long way to go, and I think that ownership groups are increasingly recognizing that this is the case. This was confirmed last week when I met with leaders at senior living sales enablement company Sherpa.

Sherpa has been working more closely with REITs, conducting a data analysis demonstrating that operators who utilize Sherpa generally outperform those that do not.

Whether it’s Sherpa or another sales platform, the point is that owners are seeking assurance that the sales process is more structured than the figurative sign on the building. I believe that more owners will start to find ways of incentivizing the use of particular tools, including through subsidizing the cost of adoption and implementation. Omega Healthcare REIT (NYSE: OHI) has taken steps in this direction with its investment in and partnership with certain technology companies.

Sherpa’s leaders have mixed reactions to this developing trend, given that they believe operator buy-in is crucial to the successful deployment of their platform and processes. But operators reluctant to change traditional sales practices should consider that their competitors are increasingly likely to be taking new approaches, whether at the behest of capital partners or of their own accord.

Indeed, some operators are taking the lead on “professionalizing” sales and are able to “stand up to their owners” and make the case for why traditional metrics of success — such as number of leads — need to be reevaluated, Sherpa President and Co-Founder Alexandra Fisher told me.

“One [pretty large] operator told me, ‘I’m able to sit up with my owner groups and say, ‘This is how this data is informing and changing my strategy, my sales strategy’ … And I think ultimately, that’s what owner groups want, they want to be told this,” Fisher said.

Watermark’s merchandising strategy

Burkart’s comments about “disruptive” changes that will fundamentally alter the senior living business called to my mind a conversation I recently had with Watermark Retirement Chairman David Freshwater, about how the provider is adopting merchandising.

While Watermark is a recent addition to the Welltower portfolio, the provider has been laying the groundwork for its strategy for years. Specifically, Watermark has been unbundling pricing, to address what Freshwater described as an “inherent conflict of interest” between residents and operators.

The conflict stems from the fact that residents are paying substantial monthly rates and therefore have high expectations. If they’re paying $5,000 a month, they might believe they should be able to eat steak every night, for example. But they don’t have visibility into all the expenses covered by their $5,000. Operators, of course, are guarding their margins and are therefore to some extent working against meeting their residents’ high expectations.

Watermark sees a solution as having a monthly spend-down that residents can use on a variety of services and amenities — everything from food to fitness classes. But implementing a spend-down requires that Watermark know how to merchandise; that is, determine and manage the margins on all manner of line items and sell those goods and services, from a trip to the salon to a glass of wine.

Freshwater shared this example of the learning curve involved: One of Watermark’s newest communities is equipped with a $22,000 espresso machine, but when he visited the community, there was no menu noting that espresso drinks were for sale, no merchandise or snacks at the register. Staff explained that they would prepare espresso drinks if residents requested them.

“That ain’t going to happen,” Freshwater observed. “… We are in the business now of selling.”

This is a “disrupting” idea in senior living but is commonplace in other industries, such as hotels, he noted.

And adopting these practices holds huge potential for senior living, not only in creating better alignment with customer expectations but in bolstering the bottom line. In fact, Watermark already is transforming dining from a cost center to a profit center, Freshwater said.

There are numerous complications and nuances of this new approach, but so far the company has been “pleasantly surprised.” One anticipated pressure point was the “use it or it lose it” policy on spend-down amounts each month; but residents have not complained about the policy, which Freshwater attributes to the fact that they can spend down on a variety of services and amenities, not just food.

Meanwhile, resident expectations are being met more effectively. For instance, residents at one community requested heirloom tomatoes on the caprese salad, and they agreed to a price hike on the salad as a result.

“They made that change, and it’s cool, they know what they’re getting,” Freshwater said.

Watermark is planning to roll this approach out across the entire portfolio. But it’s still early days and a relatively primitive approach to merchandising — Freshwater anticipates substantial upside as the company becomes increasingly adept.

“We’re at merchandising 101,” he said.

I believe that Welltower’s Burkart sees senior living at the “101” level in several aspects of operations. Getting to more advanced levels will not be easy, and in the coming years, the best operators will distinguish themselves by moving more quickly toward mastery than their competitors.