Pathway to Living’s New Leader Takes Novel Approach to Recruiting, Is Focused on Correctly Pricing Care

As many senior living operators have doubled down on growing their in-house recruiting capabilities, Pathway to Living took a different approach by outsourcing it entirely.

Like much of the rest of the industry, the Chicago-based operator was facing high turnover rates in its 48 communities across the U.S. Not only that, the company was also facing turnover among its corporate recruiters.

So about four months ago, the company — which is under the umbrella of real estate firm Waterton — took a novel approach to recruiting by deciding to outsource the process to another company, according to Pathway to Living Executive Vice President of Senior Living Justin Dickinson, who took the reins earlier this year after then-CEO Jerry Finis announced his retirement.


“If we’re not the first, I believe we will be among the first operators in the senior living sector to choose this path,” he said during a recent appearance on SHN+ TALKS.

Instead of corporate recruiters, Pathway is represented in the job market by around 10 to 15 employees who work for the recruiting firm but adhere to Pathway’s culture and branding. All of the employees are specialists in hiring health care workers, and handle sourcing, recruiting and onboarding for community employees, from frontline caregivers to executive directors.

Compared with how Pathway previously recruited workers, moving to an outsourced recruiting model has not increased costs since the operator did so in late March.


“We’re hopeful that will really help bolster the funnel in terms of the number of applicants coming in,” Dickinson said.

Outside of those efforts, Dickinson and Pathway are focused on growing and collaborating with Welltower (NYSE: WELL), which added 22 new communities to the operator’s portfolio in a $97 million transaction last year.

As for the year ahead, Dickinson’s big current initiatives include growing and maintaining the company’s margin, bringing the company’s entire portfolio back to stabilized occupancy levels and cutting down on the use of agency staffing.

We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:

— How Dickinson plans to achieve his priorities as the company’s new leader

— How Pathway is growing in the months and years ahead, including by working with Welltower

— The company’s unique advantage using supportive living facility (SLIF) certification

— Pathway’s multi-brand strategy and Dickinson’s philosophy regarding why it’s worth doing

Tim Regan: All right, Justin, let’s just jump right into it. We have a lot to cover today and I have a lot I want to ask you. You are now leading Pathway as EVP of senior living. What big initiatives are you working on right now? What goals do you have for the organization? Give us the big picture as you look ahead, what are you focused on?

Justin: Really the three main initiatives that I have laid out from an organizational perspective are one, performance; bringing the portfolio back to a stabilized occupancy percentage, certainly driving from our Covid low, which we’ll talk a little bit about later, I’m sure.

Rate, another big objective of ours. Continuing to make market-rate adjustments as needed in order to maintain margin. In an environment where we’re seeing a lot of cost increases and labor and nonlabor line items, we do need to adjust revenue. I know that’s been a big discussion, but continuing to address it to maintain margin is a big initiative.

Of course, agency. Driving down agency, higher wages. Paying these high wages to the existing employees is a much better alternative than paying a 2x or 3x multiple to the agency sources, really focusing on a departmental agency initiative. Then a pet project of mine that I’m particularly focused on now is around our care assessment, utilization, and pricing process. Ensuring that we have standard assessments across the portfolio that are priced right in terms of the care levels to the market and we’re assessing at the right frequency. A lot of clinical objectives at the top of my list right now.

Tim: You had mentioned a moment ago, getting back to stabilization. This is a good time at the top to check in on recovery efforts. Where’s Pathway right now with regard to its operations and its occupancy recovery efforts in 2022? Are you back to pre-pandemic occupancy? Do you feel like you’re getting close? What does demand look like out there?

Justin: Yes. Our low point after the pandemic or during the pandemic was around 70% portfolio-wide. We do have independent living, assisted living, memory care, Medicaid communities, as well as active adult. Seventy percent was where the portfolio was sitting. Happy to report that we’re back up to a low 80 portfolio occupancy percentage, which is generally where the portfolio was sitting pre-pandemic. Really excited to make good traction there.

Overall, from a demand perspective, we’re seeing our lead generation or just the number of leads coming in improve, which, in my opinion, signals a rising healthy demand for the product. Additionally, last month, we saw a record number of net move-ins within our portfolio. We’re optimistic that that trend will continue in terms of demand in the space.

Tim: I’ve talked with a lot of operators in the past few months about some of the things that are working to bring people into their communities. It seems like folks are experimenting with some really interesting things on the sales and marketing side. I wanted to ask you, what are you doing right now that’s really working to bring in those move-ins, leads and while growing your occupancy rate?

Justin: Yes. I think over Covid and the lack of move-ins and movement within the occupancy side, residents were continuing to elevate in their acuity spectrum. Their acuity levels were rising, their demand for our services were rising, but they weren’t moving into our communities.

That’s put us in a situation now where our resident base is in a position where they’re looking to move pretty quickly through the sales cycle given their elevated acuity which has increased during Covid. Training the team and working with the sales and marketing team to ensure we have a quick sales process assists with really securing more move-ins within our portfolio.

Additionally, we’re seeing, at least within our portfolio, the paid referral sources moving away from the larger place for moms and into the more local, more regional, paid referral sources. Improving and developing our relationships with those types of folks has helped quite a bit. I would say additionally that we’re seeing our residents or prospective residents be not as price sensitive as they were in the past.

They’re not being really upfront with our heavy concession packages and that is something that’s also helped us, not necessarily secure more move-ins but financially in terms of the costs of the movement, it’s helped greatly.

Tim: It’s all interesting to me, but regarding that last part when people are more comfortable with pricing, do you think that’s because they understand now more of what operators are going through with elevated expenses? Why do you think they feel that way now?

Justin: I think there’s a lot of reasons. Inflation and interest rates are top of line right now. I think whether it’s an apartment user or a loaf of bread at the grocery store, the rates for those services are going up and users’ expectations are going up proportionately.

Also, we’ve seen just the general, of course, the labor story play out in front of us. I think those are two large examples that are really front and center in the end user residents’ mind that helps to justify the higher costs.

Tim: I know that Pathway has some different brands in its portfolio. First, give us a state of play on what your portfolio looks like and how you segment this out among your different brands, but also just tell us more about how you see the growth of those going forward and what you’ll focus on.

Justin: Yes. Currently, Pathway operates under three main brand umbrellas. Each brand has a separate and distinct purpose and a separate and distinct audience. For us, the three are our Victory Centre, which is an affordable model, primarily in the Chicago metropolitan area that serves a Medicaid population under the supportive living facility or SLIF certificate process.

The second brand we have is Azpira, which is a mid-level private pay brand that we have operating in multiple Midwest states.

Then Aspire, which is the highest-end brand also operating in multiple states, private pay as well. Moving forward, from a growth perspective, to address that portion of your question, we are looking to leverage our various brands in markets that make sense for them.

I think about it as having various arrows in our quiver and we can take out the tool or the arrow that makes the most sense for the opportunity that we’re working on. I think it’ll be on an as-needed basis that we leverage our brands.

Tim: I’ve talked with operators about the why behind creating brands and there’s an interesting range of philosophies out there. What are your thoughts on the reason why you would create a different sub-brand or how you would create that brand and where you would position it? I’m also curious as you look across the industry, do you feel like more operators should be doing stuff like this?

Justin: Each brand has a separate and distinct operating model. An operating model means that there’s a different expectation for revenue and different expectations for expenses. Training the team and having a dedicated focus towards each brand, in my opinion, is an advantage. Having a distinct team for each brand is an advantage to the extent your model can sustain that. I think that gives us a leg up in terms of the corporate support structure that we’re able to provide into each of those brands.

As it relates to other operators and is that a strategy they should consider, obviously everyone’s strategy is different. Having different brands is a more resource-intensive process where you have to support each brand independently. That said, it also opens up different segments of the market that you may choose to target each brand with. I think that the costs and the benefit would just need to be weighed individually for the prospective operator.

Tim: That makes sense to me. Thank you for sharing. I mentioned at the top of the talk today that you grew your relationship with Welltower here in the industry. With those 22 communities added last year, I wanted to check back in on that. How are you working with Welltower now? What things are you working on together and what do you feel like that relationship will enable you to do in the future?

Justin: Yes, Tim. As you noted, our relationship with Welltower really kicked off in June of 2021 with the closing of 22 secondary and tertiary market and Medicaid communities, primarily in the state of Illinois. The state of Illinois governs Medicaid communities, in the sense that they have a certificate that each operator community must have in order to collect Medicaid revenue. That certificate is called a supportive living facility certificate, or a SLIF certificate.

We’re working with Welltower through the management of these communities. They’re smaller so they’re a little bit more difficult to drive margin, but that said, there’s a lot of opportunity given the natural supply and demand and balance within the SLIF market. What I mean when I say that, is that there are only a certain number of supportive living facilities certificates given out in the state of Illinois, specifically I believe there’s 155 of them. Fortunately for us, or unfortunately, depending on how you look at it, there’s more demand for those Medicaid services than there is supply.

Occupancy doesn’t tend to be an issue in these communities, but when you look at the utilization rate of Medicaid and private pay in terms of the percentage of each type of resident that’s utilizing those services, it becomes a topic of discussion in terms of management to try and keep each at its healthy margin. We’re working with Welltower on a lot of initiatives around that. Overall we were working well with Welltower, no pun intended, and look forward to a future relationship with them. Hopefully, growth would be included within that.

Tim: I want to talk to the extent that I can about those 22 communities. This is a follow-up, what is most challenging about getting that margin right? What are the biggest hurdles to doing that? To the extent that you can talk about it, what is some of the blocking and tackling involved there?

Justin: The big thing is just the utility or universal worker concept, which we’ve really had to push. Given the low number of units, these are 45 to 65 unit communities, and inherently revenue’s limited.

With a relatively fixed expense load given regulatory requirements, you’re forced in situations where you really need to get creative with labor. Finding individuals that are willing to do multiple jobs and good at doing multiple jobs, and finding out what the wage scale is for that is tough.

That’s no different than any other platform, but it’s just really exasperated in this specific scenario given the lower revenue and higher focus on margins. That would be, I would say, the number one thing that we’re focused on. Is just creatively staffing and coming up with the right wage scale for these communities.

Tim: It seems like there’s a lot of operators these days talking about benefits of working with REITs and the way that you make that happen. For our viewers out there, what would you say is the key to a good relationship with a large REIT like Welltower? What are they looking for from you? Maybe to turn that question around also, what are some of the things you look for from them?

Justin: I think a relationship with a REIT and a relationship with any other business partner is no different. Transparency, accountability, honesty, flexibility, they’re all core tenants of a good business relationship. We try to exude those with our REIT partners. We have more REIT partners than just Welltower. I think, REITs, in general, are large holders of real estate and they have a lot of data.

You need to be flexible when you work with them and you need to not be as rigid as you might be in terms of an approach with other partners just because they’ll come to you with a lot of data. You have to be open-minded and willing to accept any suggestions they may have. Which again, no different than any other business relationship you might have.

Tim: Yes, that makes sense. We have seen during this pandemic some senior living operators launch new in-house services. Things like staffing agencies, I’ve seen in home care. It seems like there are some really creative ways to boost service offerings in communities or try to expand service offerings into the wider community.

Does Pathway have any plans to do that? Do you guys do something like that already? Tell me more about how you see in-health services benefiting you, during a time when it’s sometimes hard and costly to use some of that.

Justin: Yes. I think for us right now, it’s prioritizing our efforts. Right now our efforts are agency, revenue, and occupancy. Those are top line.

When any organization has too many goals, I think they tend to not hit most of them or at least as many as they think they’re going to. As it relates to growth into adjacent services, is it interesting? Yes. We have a captive demand base of residents that could leverage home health services, that could leverage pharmaceutical services, that could leverage a number of tangential or ancillary services that we could participate in from a business perspective.

Right now we need to focus on, like I said, the core tenants of our core business which is occupancy rate, and right now agency, unfortunately. I think in the future, you’ll see us continue to explore those opportunities but certainly not at the forefront of our initiatives right now.

Tim: Great segue to talk about staffing. Obviously, it’s no secret that agency staffing is one place where operators are seeing a lot of pressure on the bottom line. I wanted to actually check in with you, other than the agency, although you’re free to elaborate on this, what are some of the other pressures that you’re seeing? Has anything gotten easier? I remember last year it seemed there were thoughts that maybe it was reaching its peak. I don’t know if that happened, but talk to me about the state of staffing and all the challenges that it brings at this juncture in 2022.

Justin: Yes. Definitively the largest issue we’re facing. We’re increasing wages over our approved 2022 budgets, which were approved in the fourth quarter of ’21 because of continued movement in the space. There’s a limited candidate pool just due to burnout and competition, et cetera. Then on top of that, we’re seeing high turnover rates also because of burnout. It’s definitely top of mind for us as we manage margin.

Some things we’re doing to address staffing? We have outsourced our entire recruiting department and gone to an RPO or recruiting process outsourcing model. If we’re not the first, I believe we will be among the first operators in the senior living sector to choose this path. Whereas we engaged with the outsource firm they have, 10 to 15 individuals that are dedicated just to our account, that are specialists in health care recruiting for CNAs, CMAs, LPNs, RNs, et cetera.

They’re managing our sourcing and recruiting and onboarding process for all positions ED level and below. We saw from a cost perspective that it was relatively neutral to the in-house recruiting platform we had and they had an increased focus and attention to detail on that space. We’re hopeful that will really help bolster the funnel in terms of the number of applicants coming in.

In terms of keeping the staff that we have, we have moved over to a digital scheduling platform, which isn’t necessarily groundbreaking news in the space but it does enable us to have a feedback loop between the open positions and those positions that our new recruiting team needs to fill. Instead of the communities doing a lot of this on paper, which unfortunately, is the way that happens a lot of time in our space, it’s all digitized and so there’s that immediate communication feedback loop.

Then also, as many others are exploring the gig-based shifting process, there’s a number of firms out there that do that, and I think as user preference shifts we need to adjust as well. Those are some things we’re doing to attract more candidates, address market wages, and retain the candidates that we have.

Tim: The outsourcing, the recruiting, that is interesting. You are the first or among the first operators I’ve seen doing this. You mentioned cost is one of the reasons you do that. Are there any other reasons why you would choose to take a path like that? Also, was it hard to give up some of the control in recruiting? It sounds like they’re very capable and specialized, but during a tough time, I could see how that would be hard to give up, hand over the keys in that respect. To the extent that you can elaborate on some of that stuff, tell us about the why and then whether doing that is hard to do.

Justin: Yes. A little bit of the how, the why is definitely specialized, dedicated folks that have been in the healthcare space understand the positions we need to hire. They’re doing so at effectively a cost-neutral basis. We had also not only been facing retention issues at the community level but retention issues at the corporate level, and specifically, we were seeing turnover within the recruiting positions. In order to address all of those types of issues, we decided to outsource it.

In terms of the success of it and how we feel about them being a part of our team, they do have Pathway to Living email addresses, they’re externally represented as Pathway to Living employees. They’ve gone through onboarding and culture training for our companies. They understand who we are and they took four months to really stand up. We just stood up this process in late March, and they really took their time to do it right. I’m confident that it’ll continue to go well, early signs are trending positive.

Tim: That’s really interesting. Something I meant to ask a moment ago, where are you seeing the most pressure in terms of the positions that you’re hiring? Are there some positions that are harder to hire for others? I’ve heard obviously frontline caregivers, nurses, culinary staff sometimes have been hard, but where are you seeing the most pressure in your communities?

Justin: The care department and the dietary department are definitely top the list. Care being, by far and away, the hardest positions to fill and retain for obvious competitive reasons and the same reasons on wages we’ve discussed.

Tim: One of the concerns I remember going into this pandemic that I would hear about staffing was the senior living labor pool needs to be bigger. That basically companies are just trading the same employees over, and over, and over again, sort of circulating them, but the labor pool itself needs to get bigger in order to solve some of these problems in a more fundamental way.

Obviously, that is a big challenge. I don’t think anyone knows the big answer to that question. Do you feel like the senior living labor pool needs to be expanded, for one, and number two, how would you do that or how do you think the industry needs to do that?

Justin: That’s a great question, Tim. Yes, I do think it needs to be bigger. I think about the recruiting process in the funnel, just like a sales funnel. There are conversion ratios along the way and more people, more leads, the more applicants we can get coming into the top, the better the probability is that we’ll be recruiting more individuals at the end of the day. How we do that? What we’re doing is we hired the RPO firm who has established relationships with healthcare institutions, hospitals, et cetera, that may be– Those individuals are within the same ecosystem as us in terms of a care business, but maybe haven’t thought about senior living.

I think that’s one way we could do it. There are a number of others that I know are being explored as it relates to immigration and just expanding the number of individuals coming in from outside the borders. I think we’re putting our cards right now In the RPO model, and hopefully they’ll pay dividends.

Tim: Well, I’ll be interested to follow along and see how that works out. You talked about how that model has helped you stay on top of recruiting and retention. I wanted to check in back on that though, do you feel like– Is there something that you’re offering workers that is working in terms of recruiting and retention? You’ve mentioned wages, you’ve boosted those a little bit, are there other things that workers are looking for that you’re now offering them? I ask this because I’ve heard a lot of creative ways that companies are trying to reach prospective workers. I’m curious what you guys are doing?

Justin: Money talks. Of course, increasing wages to meet the current pressures. As I mentioned, we’re having to continually address what we’re paying our employees. Understanding that an incremental or dollar to wage increase for our community level employees, it pales in comparison to the cost of agencies. We just have to keep that in mind. More flexible scheduling, we offer 8 and 12-hour shifts.

An individual only needs to work three 12-hour shifts to be qualified as a full-time employee and get the benefits. Some people like that, they like to work hard for three days and then be a full-time employee and get all the benefits and work another job or do nothing for the rest of their time. Communication, big initiative of ours just in terms of creating omnichannel and communication programs for our residents, team members, corporate support team members.

I think team members want to feel like they understand what’s going on. Sometimes when they don’t, they get frustrated, burn out, and leave. Then one, not so novel but something we’ve implemented recently is just a system where we can effectively pay the employee immediately after they’ve completed their shifts. It’s not a paycheck loan process but basically a-

Justin: For those employees that are living paycheck-to-paycheck, it’s important to get the money as soon as possible. That’s a strong benefit that we’ve seen help as well.

Tim: That’s interesting. Are there other ways? I’ve heard among some operators talking about the need to better support frontline workers. Outside of things like flexible scheduling or better work-life balance, I’ve heard simply we need to give them better break rooms and uniforms and all sorts of stuff. Obviously, that’s one way to support workers. What are some other ways you think the senior living industry can better support those frontline workers and make them feel more purpose and engagement in their jobs? You’ve already mentioned a lot of this already, but what are you doing at Pathway along those lines to make their lives a little bit easier?

Justin: Yes. The obvious answer is culture, establishing a culture where people feel valued. I think now more than ever, workers want to hit the ground running. They want to hit the ground feeling like they’re adding value, whether they’re corporate team members or community team members. Whereas in the days past, and maybe it was understood that when you’re a new employee, you just sit with your head down and you train for a year, and you do what you’re told. That’s not the way it is now.

Giving team members immediate opportunities to add value, whether it’s a lot of value or a little value, it’s value. I think that’s something that we’re continuing to do through culture and just giving individuals a line, drawing a line in the sand, or explaining to our team members how to be successful. I think, in general, successful individuals are people who are minded like they want to be successful will follow the line. They’ll do what they’re told in order to become successful.

If they’re not given a line, if they’re not told how to be successful, then they’ll just wander and become frustrated, burn out, and leave. Being very clear about paths forward to promotions or wherever their career path may take them, we want to create that line for them, which is a big part of our culture that we’re driving.

Tim: I remember before this, and staffing is, you know this, it’s no secret that staffing has been a long industry challenge. Long before the pandemic, this was a challenge, and people were sounding the alarm about the lack of workers in the future. I wanted to ask you, are you worried that this is a staffing crisis that’s going to last for a long time? Just given the fact that the industry was so focused on this before, so focused on this being a long-term issue, are you worried that this is going to be with us now for months or even years in the future?

Justin: Yes. I think the fundamental issue here or one of the fundamental issues that drove the Great Recession and this change in corporate or community level workforce culture is the fact that Covid took the power away from everyone to make decisions that they wanted to make. For example, going to a prom, going to a graduation, going to work, anywhere, Covid restricted that. That left the only remaining big power choice that all individuals had was where they work, what do they do?

I think people took a lot of time to evaluate that and think about what makes them happy and how they want to proceed in their career. To answer your question, I think that mentality is here to stay. I think that we as employers need to address a more flexible workforce, a workforce that wants to add value both monetarily and altruistically. I think we need to create an environment for people to want to be successful. It comes back to culture.

Do I think that the staffing shortage is transitory? Not so much, but I do think that hopefully, there will be some stability that comes to the craziness in the care departments in terms of the shortage of nurses and things of that nature.

Tim: I want to switch gears a little bit and talk with you about technology. Obviously, offering a robust infrastructure for technology and offering platforms for doing that, it’s part of the table stakes these days. I think it’s no secret that residents and their families are just looking for this more and more. How are you at Pathway thinking about technology, both in what you pilot and how you spend it, and also what you’re implementing in your community?

Justin: Yes. Technology is something we’re always looking to improve on, to improve on the experience of our team members, our residents, and our resident family members.

One specific example or tool that we’re working on right now is regarding communication, which I mentioned earlier. It’s really enabling an omnichannel or a multiple communication approach from either the residents to the community team members to the corporate team members. It’s a distribution, it’s a communication tool that allows for distribution to occur through multiple angles.

I think that coming back to whether it’s culture for the team members, it’s awareness for the resident family members, and the corporate support, folks like myself, we just want to support the team members in the field. That’s driving communication down from the top regarding policies, procedures, new updates.

Things like that are, in my opinion, really, really important to keep people informed and happy. We chose a few communities to pilot this program in and we’ll see how that goes as we continue to think about rolling it out throughout our portfolio. Like I said, looking for all ways to improve the experience for all of our stakeholders.

Tim: One specific technology that I’ve seen in senior living communities these days are these, and I’m not going to name the operators or the robot itself, but these little robots that zoom around in the dining rooms, delivering food from the kitchen to folks that are sitting down. What do you make of that? Are you exploring the use of robotics or anything like that in your operations?

Justin: Yes. I’ve seen those and I’ve seen other robotic applications. Specifically, in Japan, I know that they’re really pushing the boundaries on robotics. We are not exploring that now. I think they’re still the human touch that needs to be included, especially around food, which is the most intimate and arguably important time of the day for our residents. We want to make sure there’s human interaction there.

Tim: Obviously also collecting information, tracking data, this is really important during a pandemic, but I think generally the industry has gotten a lot more savvy in doing this over the last five years or so. How does Pathway collect information, track data, and what metrics are you tracking? What are you looking at?

Justin: Yes, that is a huge pet project of mine personally. No secret that, as you say, data is being used in all sorts of ways to drive business decisions. Currently one big project for me is we are moving our CRM, which is a sales and marketing platform. Our EMR which is the medication platform and the EHR, which is the health assessment platform onto a singular platform.

Whereas before they were on disparate platforms technologically wise. By moving them together, we’ll be able to output a consistent language of data to our business intelligence partners to help us come up with the right KPIs and metrics to track across the board. Some examples of metrics that we’re tracking today, obviously agency usage across all departments, all aspects of the sales funnel, as well as where our leads are coming from, all aspects of the recruiting funnel.

By going to the RPO model one, going back to the question you asked earlier, one advantage I didn’t mention is that we have access to a whole lot more data in terms of the recruiting process. We’ll be able to get really surgical in terms of how we approach the recruiting process. Care metrics, for example, missed meds, nurse call response times, overdue assessments, things of that nature.

Then on the maintenance facility side, open work orders time to respond. Really what I’ve done is try and think of each department as a separate business and what are the KPIs needed in order to manage that specific business. As opposed to just the typical top line sales funnel or lead gen or margin metrics, I think it’s important to get more granular. In terms of what I look for in a vendor that’s wanting to work with us on any technological initiative, is just that they’re flexible.

That they’re willing to work with us and not put us in a box and say, “Okay, this is what you know I have, and this is why it’s going to work for you.” “Well, let me tell you what I need, and then let’s discuss how we can come up with a collaborative solution.” I think that dialogue is much more interactive and beneficial to me than just putting me in a box because that typically doesn’t work.

Tim: Yes. I see a lot of tech vendors, a lot of them have a lot of value propositions. It feels like it can be hard to figure out, “Okay, why do I pick this one over this one?” Generally when you have all these different choices, what do you look for? What brings you the most value? What are you most interested in?

Justin: Yes. Data is at the top of our list right now, whether it’s across all the platforms or aggregating the platforms is there I think. In terms of making a selection on a partner that I want to work with, obviously I have to have a need for it, unless they’re selling me a product, which I haven’t heard of and maybe there’s a need that I didn’t know I have. Again, just being flexible with us and approaching our solution or our problem really as a bespoke issue rather than a more generic cookie-cutter approach.

Tim: I know that I’ve talked with Pathway for a while now about opportunities to reap in the middle market. I know that you all have some ways that you’ve tried to do this in the past, but I wanted to check back again on those efforts. Can you talk about the opportunities you see ahead to meet the middle market, and how Pathway can do that in its operations in the years ahead?

Justin: I think we’re one of the largest players in the middle market. Specifically in the Midwest we have the largest, if not the largest, top two-or-three largest certificates of the SLIF program in the state of Illinois, which enables us to build Medicaid. Our resident population is by nature a middle market. We’re continuing to explore opportunities to move our SLIF certificates over to communities that may have more of a higher-end nature to them.

Meeting the middle market Medicaid demand profile while also providing the higher products is something we’re exploring.

I think you’ll see us continue to explore those types of initiatives within the state of Illinois and then also states with the traditional voucher program, as it relates to Medicaid collection which we’re active in a number of others. It’s really a focus of ours and we continue to push on that moving forward.

Tim: Yes. What do you see as the biggest challenge to meeting the middle market? Obviously, there are challenges in doing this and you’ve come up with some creative ways to do this in the states where you operate, especially here in Illinois, but what are the biggest challenges to doing this in general? Where do you find the most challenging?

Justin: I think the revenue is subsidized in the Medicaid model and what I’ve always said is we need to figure out a way to subsidize the labor portion of this. You can do that via increased rates, which the state of Illinois, I believe is really on the precipice of doing right now, increasing their Medicaid reimbursement rates, which would be great for a middle-market margin, but I think that there needs to be a continued push on reimbursement rates.

I know Argentum and other industry organizations are leading the discussion in terms of trying to advocate for more reimbursement on the Medicaid model, which is our mid-market model right now. It’s really everybody’s. That I think needs to continue in ERMS and with fever in order for us to continue to be successful.

Tim: It’s interesting that you say that it’s everybody’s model.

I have seen other ways to meet the middle market than just this, but I do agree with you that this seems to be a very effective way to do that. For instance, sometimes I’ll see active adult communities saying that they are middle market. Truly they offer middle market rates, some of them start around $1,500 in some markets. Obviously, there’s no care component in those, but that is I think another way to at least get the housing component for folks.

I remember writing a story a few years ago about that big need. There was a study with the National Investment Center talking about all of the millions of people that will need middle-market senior living by 2029, which is only 7 years away. It strikes me that I could see an argument where the industry is not evolving enough to meet this need. I don’t want to put you on the spot again, but in your view, do you feel like the industry is changing enough to meet this middle-market need? Or do you feel like there still needs to be more movement here because we’re talking about millions and millions of people?

Justin: Just to clarify my response on Medicaid, I was specifically referring to the AAL portion. I don’t disagree on the active adult side, when there’s such a decreased expense load, you can really reduce your rates in order to achieve a similar margin or the margin that you need. I think that moving forward, there does need to be a continued push in there.

Folks like Clover and others in the active adult space have been really successful in creating a model and really building a product at a basis that will allow you to charge rates that are low enough to hit that margin. I think that’s where it really comes back to, is basis control and in your investment. If you bought an investment for a lot of money, you got to charge a lot of money to make a return on that, to your investors, whomever they may be.

I think that the struggle now, as it relates to that affordability piece, is with the rising construction costs and the supply chain issues, and material cost issues.

It’s hard for me to conceptualize a space where we can create a product for cheap enough or low enough costs where we can keep rates down. It’s not to say that the market doesn’t need it, Tim. I definitely agree. I think that whoever can figure out the modular construction or the tilt-up construction like industrial or that stuff will happen.

Whoever can figure that out first, I think will be successful in that market space because their basis is controlled.

Tim: Absolutely. What you just mentioned on the development side is a good segue into a question that I had about growth. I know that you and I have talked about how you look at growth Pathway both in interviews, and during our events but what’s your strategy for growth in 2022?

If you have any plans to branch out of your current markets or to try something new, this is a chance to tell us about it.

Justin: Sure, Tim. Really threefold and this isn’t anything groundbreaking but acquisitions, co-development, and corporate M&A are my big growth strategies.

From an acquisitions perspective, our thesis is threefold. One, these are kind of the filters I look at when I look at an investment opportunity from an acquisition perspective, one it’s in a market that we know and love and want to be in.

Two, is their ability to add value through development. That may be unit mix shifts, unit mix additions, any way to drive incremental value through the existing real estate. Then thirdly, obviously, we control a management company and we can add value via revenue shifts, expense shifts, care, all the things embedded within there that we do really well. Those are kind of my three lenses that I look at acquisition opportunities.

From a co-development perspective, we are really looking to partner with regional co-developers who are willing to entitle the land and partner with us moving forward.

Candidly, I don’t have a big appetite for putting our balance sheet out there for long periods of time to entitle deals, which can take years in some instances in California, for example.

Looking for ways to short circuit that process and plant some seeds to grow our pipeline on a longer term basis. Because if we focus on just acquisitions, it’s lumpy. There may be a lot of activity out there but we may not be successful. We need to smooth that growth line out with co-development opportunities.

Then finally, from a corporate M&A perspective, I’m looking for opportunities to partner with management companies that would allow us to grow into markets that we’re not currently in, while I can provide to our partner management companies an opportunity to access capital. Maybe an opportunity to partner on some management company aspects. Really focused on those three initiatives this year to help us grow our book of business.

Tim: It seems like that is the hardest needle to thread in 2022. Can you drill down how you can make those development opportunities work given the high cost of construction labor, construction materials right now? It kind of seems like you need to find the exact right opportunity and kind of have the stars aligned sometimes. How does that work?

Justin: Exactly, yes. For co-development, I need to be proactive, not reactive. There are a lot of folks out there that are willing to pitch you entitled sites but it’s finding an entitled site that ultimately I know, I can get capitalized, we can get capitalized, and managed successfully. Those opportunities are in the higher barrier to entry market, specifically California, Pacific Northwest, the Northeast. I’m focusing our efforts from a longer term basis on regional growth in those areas.

The co-developers in a model that I’ve set up and kind of pitch to them that there’s a lot of risk that they bear. That co-developer needs to be very confident that they’ll be able to execute their deals. That’s kind of how we’re thinking about development.

Tim: Then on the acquisition side, I know that we talked a little bit about that as well and you said that things can be a little lumpy, which I’ve seen as well. I guess it sounds like you’re still seeing a lot of good deals out there. What sort of deals are you seeing, what are the opportunities look like that you’re seeing on the market right now?

Justin: I mean, two big buckets. A core bucket, which is trading at significant premiums to what, at least I would expect to pay. There’s a lot of capital out there chasing yield.

Cap rates in multifamily, industrial, and other adjacent asset classes are at all-time lows and investors are searching for yield. They look at senior and they say, “Oh, this is great. Maybe I’ll invest here, which is driving pricing out for deals that are cash flowing and investors can clip coupons.”

The other type of deal that we’re seeing on the market is the traditional value add. Whether that’s management value add, development value add, physical product value add. Oftentimes those are trading at a discount to certainly the core deals, but a discount to hopefully replacement costs. In which case we would be interested in chasing those and we just, at this point in time, we know our capital partners are really suited to handle the core type of investments in the returns that are associated with those. You of those two buckets we’re seeing too.

Tim: Another big future question, obviously the senior living industry is still recovering from the Covid-19 pandemic. You guys are substantially back to pre-pandemic levels, but I know that there are other operators out there that are still trying to climb that hill. How do you expect for the overall industry, how do you expect the recovery from Covid is going to play out over the next 12 months? What are you preparing for in terms of challenges that might pop up ahead?

Justin: Historically over the last two years, since March 2020, we’ve seen the summer months weighing a bit in terms of the caseloads. I’m hopeful and optimistic, that we will see vaccination rates continue to rise over the summer months. The population will be, in general, more prepared for the winter months, which is where we’ve seen the increased caseloads and that’ll have a broader impact on moving past the Covid-era.

The variant BA two or whatever that’s picking up in the Northeast does seem to be taking hold within our portfolio right now. Not significantly, but we are seeing an uptick in cases.

Nothing that’s overly concerning and certainly nothing that we’re not prepared for given what we’ve already been through. Like I said, I’m optimistic that we’ll be prepared coming out of this summer. We’re in a good spot right now.

Tim: I know that was a big worry for operators last year was will some of these restrictions come back to our communities? Specifically with regard to the restrictions are you optimistic that the days of 2020 and early 2021 are hopefully past us? Or are you worried that in some of these places we might slip back a little bit with regard to,

Justin: Again, optimistic if I were a betting man I’d bet that cities like Philadelphia, which I think just imposed a new indoor mask mandate I saw the other day. I don’t think that’s going to be the norm. I think that might be the exception, especially as we move into these warmer months where historically we’ve seen lower spread of the virus. I’m optimistic that we will not go back to the restrictions that we saw in 2020.

Obviously, you are included in this trend, but 2022 has so far, in my view anyway, shaped up to be a year of executive turnover in the industry. As there is this, let’s call it a new class of leaders in the senior living industry, what are you hopeful that they’re going to bring to the industry in terms of change or evolution or new ideas?

No doubt significant amount of corporate turnover within our space. Specifically, within the last, it feels, six months. Just a ton of movement. As we’ve discussed, there’s been a lot of burnout at the community and corporate level, which has led to turnover.

In my opinion, what we need in terms of an incoming class is an invigorated perspective on how we approach the problems that are persisting, but weighing and that is labor, Covid challenges, and things of that nature. I’m hopeful that we’ll get some fresh perspective and individuals that are eager to take on the challenge.

Tim: I’m not sure if you saw this panel at the recent NIC spring conference in Dallas, but there was an interesting panel with NIC chief economist Beth Mace and she was talking about construction and development in some markets and how— I don’t think that she thought that there was a risk of necessarily of overbuilding today, but she did see trends in some markets that construction is starting to ramp up again.

Are you worried that the industry could find itself there or if it’s not careful with construction?

Justin: Yes. I think that’s always a concern. The first quarter of 2022 NIC data was released over the weekend. I was taking a look at it and I saw the trend lines of absorption and new supply continue to spread in a favorable manner. Meaning, new supply was dropping and absorption was. improving.

The data doesn’t seem to be indicating that now. However, it’s always a concern. I think one thing that might keep the new supply at bay is the interest rates and how they continue to move and increase direction. It’s just more expensive for people to do deals.

I think interest rates will have an impact on both the cost of debt and equity. In the near term, I’m not overly concerned, but we are approaching this wave of demographics that people have been talking about for decades. I think that also provides some confidence that we won’t be in a totally overbuilt situation.

Tim: Yes. We talked a moment ago about possible overbuilding worries. What are you worried about as you look ahead to the rest of this year? Where do you see the biggest challenges? Then to flip that one around, where do you see the biggest opportunities and what are you most excited about?

Justin: To me, the biggest challenges are external factors, specifically potential geopolitical issues. Certainly interest rates as it relates to inflation will continue to put pressure on our business. Hopefully though, the rising interest rates and addressing inflation will have a positive impact on wages in terms of the overall supply within the workforce.

I think that is a dual concern and an excitement comment, but something that definitively excites me is the consolidation within the space. I think through Covid, there’s been winners and losers and really before Covid, there were winners and losers. Covid exasperated the winners and the losers. I think that there will be consolidation within the space. As I noted through my corporate M&A goal, I’m looking to be a part of that. That excites me quite a bit, just in terms of helping others accomplish their goals and also accomplishing mine.

Tim: You mentioned the geopolitical landscape. Obviously that is something that I have not heard senior living operators worry about in recent years. With the Russian invasion of Ukraine, obviously, that has had ripple effects in business in ways that I think people saw and ways that people didn’t see coming. What would that impact be? Why is that on your worry list? Are you talking about supply chain impacts or costs?

Justin: Yes. We’re in a global economy, and a ripple effect over there is just as strong, maybe not quite as strong, but very close to strong as a ripple effect over here. Whether that’s fuel prices, supply chain, you name it. I think it could have trickled through impacts to our business model which touches so many things. We’re a hospital, we’re a restaurant and we’re a hotel all wrapped into one business model.

One of our communities typically, an operator will employ 50 to 70 FTE, that’s a lot of people, and they all do different things. We touch a lot as an industry and when there’s a disruption in the global economy, we will feel it in our P&L in someplace or another. That does concern me.

Tim: If you had the power to change one thing about the senior living industry, what would it be and why?

Justin: That’s a good question. I would try to change the perspective of the senior living job.

I think the senior living job, whether it’s community or corporate, comes with a connotation of maybe it’s not the most positive job. In reality, and especially as we talked about today, I think a senior living job offers employees the ability to give back, to add value altruistically, too.

There is a lot of money to be made in our sector, and there’s a lot of opportunity and I would hope to change that perspective over time so we can continue to recruit quality candidates again at the community and the corporate level, because it is a great career path. You can really accomplish a lot in our sector.

Tim: In what ways is Pathway thinking about education in terms of the workforce or education in terms of prospects? How do you educate folks? In what way can you do that? Can you let them know that this is an industry where they can find a career and it’s not just a job or what have you.

Justin: Yes. It comes back to drawing that line and giving people a path to be successful and explaining to them the benefits all along the way. That’s culture, that’s the purpose. How we do it, is we’ve created career paths and tracks for individuals with associated documentation, that it clearly explains where they could go and what the benefits are to help change that perspective, at least for our limited team member, perspective pool.

Tim: We have heard a lot in the last couple of years about how this notion of a rising tide lifts all boats I think. The thinking there that what’s good for the industry is good for everyone in it. I thought this would be a good chance for you to speak to the other operators out there or the other folks watching. What advice would you have to help rise the tide and lift all the boats right now?

Justin: My advice would be more specific to the operators and how we’re managing our portfolio and that is you can’t expect what you don’t inspect and leveraging data to make smart business decisions. The importance is impossible to overstate, investing in systems that will help to consolidate information into those key data points that you can use to manage your specific departments. As I said, not just the high-level top line business metrics, but really driving into the departmental KPIs is something that I would recommend to anybody and certainly something that we’re doing right now.

Tim: Justin, I also wanted to just turn the floor to you for a moment. Is there anything you wanted to tout or mention or something we didn’t talk about today that?

Justin: No. I don’t think so, Tim. We hit on a lot. We touched a lot of pieces of the business. I think this is a great conversation and thank you for the opportunity.

Tim: Yes, absolutely. Justin, thank you. It is always a pleasure to talk with you. Thank you Pathway to Living for making this happen and for a great discussion. Thanks to our viewers for tuning in. Don’t forget to catch us here in a couple weeks. We are going to have another SHN Talks for you but for now, thank you again for tuning in and we will see you soon. Thanks, everyone.

Justin: Thank you.

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