With the need for innovation gaining urgency, senior living owners and operators should throw out the playbook and the whiteboard.
That’s according to Scott White, CEO of real estate investment firm and Commonwealth Senior Living owner Invesque (IVQ.TO).
“Don’t even start with the whiteboard, start with just looking up at the sky and dreaming and thinking differently,” White said during a recent appearance on SHN+ TALKS.
The urgency to think differently comes from the fact that the boomers are now quickly entering the market, bringing with them greater demand but also new and more sophisticated expectations. And Generation X is “not that far behind,” White observed.
In addition, there are pressing labor issues to solve for in senior living, as well as a tremendous need to make communities more accessible to middle market consumers.
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
- Why Invesque had a record year for dispositions in 2021, and what the go-forward strategy is for the portfolio
- How Invesque’s affiliated operating company Commonwealth is addressing labor issues, rising expenses and other challenges
- Why he is writing a book, and how that relates to his leadership philosophy
- The need for entrepreneurship in senior living operations
Carmel, Indiana-based Invesque is a health care real estate company that invests in a diversified portfolio that includes independent living, assisted living, memory care, skilled nursing, transitional care, and medical office, and provides management through its subsidiary management company, Commonwealth Senior Living.
The following has been edited for clarity.
Tim: To start with, we’re into the second quarter now, so I’m curious how you’re feeling about senior housing specifically now versus at the start of the year when we were, obviously, in the grip of Omicron. Are you feeling more bullish, less bullish, about the same?
Scott: I’m considerably more bullish. Every day is a better day, and I’d be wrong to say or it would be inappropriate to say I am wildly bullish on the space, but when you ask on a relative basis, days are mattering.
We went through some very challenging times with managing Covid in the buildings and in the communities. We went through very challenging times with occupancy, we went through very challenging times.
We continue to and while I know we’ll talk more about that with labor, but every day gets a little bit better. Every day, it’s the proverbial spring, I guess. Here we are on April 20th, so spring is a good reference. There are budding shoots, so to speak. There are opportunities where we’re heading in the right direction. It’s going to take time. It’s going to take time, and I’m glad you didn’t ask me, and before you do, I’m going to tell you I don’t know how long.
The reality is, I don’t know. I don’t have a crystal ball, but the reality is every day gets better. I feel like we’ve learned considerably from what we’ve experienced, and today is better than yesterday, and tomorrow is going to be better than today.
Tim: A positive note to start the conversation, that’s always good. We can dig in a little bit to what Invesque has been up to. I know you had a record-breaking year, I believe, for dispositions last year. Can you talk a little bit about what your strategy has been in terms of what you’re selling, and do you anticipate more dispositions coming?
Scott: Sure. It’s the natural evolution of our company. When we were founded, we were founded in 2016, so we’re approaching six years. We started as a predominantly skilled portfolio, and I told the market when we went public that we were going to work very hard, very fast to build a highly diversified portfolio of cash-generating healthcare-oriented real estate assets, and that’s what we did.
Out of the gate from the public offering, which was in June of ’16, for the first three years, going through 2019, we were the fastest-growing public real estate company in all of North America. That’s all real estate asset classes and not just seniors housing or healthcare, but as you go across the full spectrum of multi-family.
Actually, a caveat, I think we’re the fastest-growing in the US and second-fastest-growing in Canada, so when somebody fact-checks me, I want to make sure that I’m being 100% accurate, but we’re among the fastest-growing, and that was by design.
We went out fast, we acquired, we built the portfolio. We were very small, and I think it’s very difficult in this space to really survive and have an appropriate cost capital as too small of an owner of assets.
We went at breakneck speed. We grew at about 42% per year annualized CAGR over three years. Then we got into 2019, and we started to look at a number of the portfolio acquisitions that we made, and we started to assess which ones within the broader portfolio just didn’t make sense, whether it was operator, whether it was geography, whatever the case may be. We started a process of culling and focusing our portfolio, and then Covid hit.
What did that mean? As everyone knows, in this industry, it really pumped the brakes on, one, our ability to acquire, there’s no doubt about that, but even more so our ability to manage the portfolio, to move things forward, to take care of residents, to take care of employees, to everything that we had to deal with. It was challenging, there’s no doubt about it.
During that time, the management team, with the support of the board, decided it was time to pivot our strategy.
We’ve already gone on record publicly announcing this, in that we originally set out to build a highly diversified portfolio of cash-generating healthcare and into real estate assets. By the way, I would still love to do that, but I need to be practical and realistic where we are right now in terms of our company and realize I don’t have access to a lot of capital for growth.
What do you do with that? Well, you can continue to have– Our portfolio is plus or minus 65% seniors housing, plus or minus 30% skilled, and plus or minus 5% to 8% or 9% MOB. I’m rounding here aggressively, so all that math is going to tell me I’m at 103%, I understand that. It’s hard to stay at that level and be a meaningful player and be responsible stewards of capital for investors.
We are now culling the portfolio and considering what to sell, when. We’re in no hurry, there’s no gun to our head. In fact, I think it would be foolish to rush and sell things. We’re selling as and when appropriate, and that’s what you just highlighted. We announced, on April 1st, a series of transactions. There are three separate transactions that we lined up that day, sometimes things just work out, we worked really hard to get those lined up.
When we sold a series of skilled nursing assets, both long-term care and short-stay transitional assets, earlier in the year or last year, we had sold some non-core or non-performing seniors housing assets, and that’s what we’re going to continue to do. We don’t have a timeline, we don’t have a specific sort of “By the end of Q3, we’ll be here. By the end of Q4, we’ll be there.”
The goal is longer-term, and I use the phrase ‘longer-term’ very specifically to end up more as a pure-play seniors housing owner and operator.
Remember, we’re also an operator, we’re not just an owner, we own Commonwealth, which is a sizable part of our story, and I know we’ll talk more about that. That’s where we were, what we’ve been doing, and where we’re going.
Tim: I got a question from the audience. Were most of the dispositions skilled nursing?
Scott: Yes, most of it. Certainly, the last tranche that we sold in the beginning of this month, literally, three weeks ago, is substantially all skilled.
Tim: Got it. Can you maybe elaborate a little bit on what’s behind the trimming of the skilled nursing exposure? Do you feel like the asset class is riskier today than a few years ago? Is that pricing that you’re seeing in the market for those types of assets or some other factors?
Scott: No. It’s really none of the above. It’s very much, “I need to reflect on where we are as a company and where I’m going to go.” As a leader of a company, I can’t just sit there and say, “Well, here’s where we are,” I need to think about where we’re going to go. When you have a portfolio that’s diversified across skilled seniors housing and medical office building without the ability to grow, what do you do with the company?
We have decided the best way to create shareholder value with the support of our board is to say, “Well, we’re not likely to grow in a meaningful way in the short to intermediate term.”
I do have aspirations to grow in the long-term, but right now, if I’m being realistic with our access to capital, we’re not going to grow in any meaningful way. You could either hang out stuck in neutral and hope the world changes, or you can be proactive. We’ve decided to be proactive.
How do we decide to be proactive? Well, we said if a vast majority, as I said, I think 65%-ish of our NOI comes from seniors housing, it’s probably not the right starting point.
Yes, we are selectively eliminating some assets there that are non-performing or non-core to what we’re trying to do. We’ve also changed some operators, but longer-term, I just don’t see us in skilled and maybe not even in medical office building.
Again, we’re in no hurry. I don’t want the message or anyone to perceive, “Oh, wow. By the end of the year, they hope to be out of all these assets.” That’s definitely not the case.
Tim: Got it. I guess I’m curious, on the other hand. Now have capital from some of these sales, too. Are you looking to grow selectively in senior living? Do you have a pipeline underway? What do you see out there?
Scott: Most immediately, what we’re doing with the capital is simplifying our capital stack.
As part of being the fastest-growing public real estate company in North America, from 2016 to ’19, we got pretty creative with how we finance deals. Pref, converts, debt, common, we have them all, a couple of tranches of the pref, a couple of different series of converts.
Right now, we’re focusing on simplifying the balance sheet. All the excess proceeds so far have gone to debt paydown, pref paydown, and I think you should continue to see that. We will selectively make small acquisitions, primarily bolt-on to the existing operators, primarily ways of enhancing relationships, and I think Commonwealth will be a big part of that story as well.
Tim: Right. I know you’re more bullish today than you were at the start of the year about senior housing. I think that’s great, but I have talked to some people who are really concerned about the labor issue, maybe more so today than even they were a few months ago. How are you feeling about labor, and are you seeing Commonwealth or any other operators that you’re working with doing anything to move the needle at all on recruitment and retention?
Scott: Look, labor is an issue across the economy. I understand it’s a very big issue in our industry. By the way, rewind 10 years ago, it was a big issue in our industry, and by the way, rewind 5 years ago, it was a big issue in our industry, and by the way, rewind the day before Covid, it is a big issue in our industry.
If you go back and listen to some of your podcasts or some of the panels that we’ve all been at conferences, I remember five years ago or four years ago, I can’t remember which conference I was at, and I spoke about the fact that one of the major issues that our industry focuses on is how we attract young people right out of school or even going into school.
How many people do you know are in high school today looking at colleges and “I plan to end up in the seniors housing industry, I’m likely going to end up somewhere in the skilled nursing business, so I’m selecting my college appropriately.” I don’t know a single person.
By the way, I have college-age children, so if anyone is in that mix, it’s me. I think that’s one of the issues that we as an industry have grappled with for years, the ability to attract people to the industry early on, to demonstrate what a wonderful career opportunity this industry presents.
Now, look, it’s not without its challenges. I don’t want to oversell and say, “Oh, coming to this industry is the greatest thing ever” because there are challenges, and we’ll talk about that, but it does present a wonderful opportunity for those that want to provide care, for those that want to help a part of our community and a part of our society that is growing. I think we as an industry have done a horrible job at marketing, at attracting.
How many university programs are there in seniors housing? I know of a handful, maybe not even a handful, maybe a finger or two-ful. I think that that’s a real issue. Then you layer on, and again, I think a lot of people forget this. The day before Covid started, we were struggling with labor issues across the economy. As I recall and I don’t pretend to be an economist, we had, if I remember correctly, 50-year lows in unemployment a couple of days before Covid struck.
You take an industry that has struggled with labor, you take an economy that had all-time historic low unemployment, and you smack it with Covid, and you smack it with an artificial, remember Covid wasn’t, by definition, an economic event, it created economic implications, but it wasn’t a natural economic cycle, you smack it with that and all the implications, labor’s a wildly difficult issue for the economy, broadly, for almost every industry that I know of, and yes, very much for our industry.
It feels like the number one topic everyone’s talking about right now as I read the industry regs and I listen to the various– Whether it’s podcasts or conferences, everyone’s talking about labor. There is no magic bullet. I wish I could tell you, “Well, here’s how we have fixed the problem.”
Commonwealth has been very creative throughout the pandemic and they ran some sweepstakes and fun things for our employees to generate the more shifts you work and the more involved you got, you got more entries into various sweepstakes, we gave away a couple of cars.
Commonwealth gave away a couple of cars to employees as ways to generate not just retention but as ways to build a culture. For me, more than anything, the best way to retain people is building the right culture. I understand that money matters, I understand that work conditions matter and those are issues that our industry grapples with. I said before, it’s a wonderful industry to have a career in.
I also need to be realistic and honest and say, in a lot of cases, the wages are challenging, the working conditions are challenging. Look, we think we do an exceptional job at this, but it is a difficult business and a difficult industry. I think the best way that you attract and retain people is by building and focusing on culture. It doesn’t solve all problems, in fact, quite frankly, if we’re being honest and we’re looking in the mirror, it actually doesn’t solve a lot of problems.
At its core, people join companies and organizations and associate with people that they want to spend time with, and they stay because they feel wanted, they feel like they can contribute, they feel like they have a voice, they feel like they’re making a meaningful impact. That’s how we’re focusing on it.
Tim: Got it. Correct. Along with labor, I think the other thing that I’m hearing a lot about right now, in terms of concerns, is inflation and the effect that’s having.
How are you feeling throughout the Invesque portfolio, and what do you expect in terms of, is it going to stay about the same, worsen, ease at all, in the coming months?
Scott: Yes, again, I don’t pretend to be an economist. I think I’d really be putting my finger in the air and telling you what I read in the journal this morning. I’m not sure that I’m the best guy to comment on how much inflation there’s going to be or how long it’s going to last. Here’s what I could say is that it is, again, permeating every industry, this is not unique to our industry.
In fact, as I watch inflationary numbers and I watch the headlines, it feels like I’m seeing it a lot more in other industries, i.e., food and energy and transportation than I am in our industry, but there’s no doubt it has implications, and it’s all related.
When you think about the incremental inflation in the food industry, you right away say, “Well, Scott, you’re providing three meals a day to all your residents. That has implications.”
I got it. When you talk about transportation and energy, well, you want to keep the lights on in your buildings, and you have transportation services, that matters. What I think is happening right now and what we will continue to see happen, in my opinion, is there’s no doubt labor costs have been on the increase.
There’s no doubt raw material costs, whether it’s food or supplies, and so forth, have been on the increase, there’s no doubt that in order to maintain a viable business model, in order to maintain a level of margin that makes businesses work, you have to raise prices.
Then it becomes this vicious cycle of your input costs going up, so then you raise prices, which means the input costs for someone else go up, and so on and so forth.
Again, I don’t pretend to be an economist, so I will give all the footnotes, disclaimers, and so on and so forth, a good lawyer does. My own opinion is that inflation is the reaction to the artificial hit that Covid provided in our economy.
Again, we had very low unemployment and a humming economy the day before Covid hit. You had an artificial slap, an artificial event, i.e., Covid, that was not, by nature, an economic event, not part of a natural economic cycle.
Under a number of things, you underspent money during Covid, i.e., individual consumers, which meant you over saved to a certain degree, the federal government pumped dollars in for various reasons, there were so many artificial stimuli during a non-normal economic event that I think we’re seeing all the implications of that.
I don’t think it’s part of what would’ve otherwise been the normal cycle, and I think we’ll come out of it. Again, I’m reluctant to say whether it’s three weeks, three months, or three years, but I don’t think it goes on forever. In fact, I’m fairly certain of that. I think it’s something that we’re grappling with today, but over time, and my guess is over the next 12 or so months, it will become considerably less of an issue.
Tim: I guess then it follows operating margins should improve as inflation goes down, but I’ve also heard from some other people that they think certain costs, like labor, for instance, which is wage rates, are going to be permanently higher.
I’m curious what you think of in terms of the future of senior living margins. Do you think that we can get back to pre-pandemic margins?
Scott: Here, look, that gets back to the point I made before. When your input costs go up, then you have to pass that along as someone else’s input costs, i.e., that’s going to be passed along as rent. Well, I think it’s a little bit more challenging in the short term as it relates to government reimbursement. Government reimbursement doesn’t always keep up with, in my opinion, I’m not sure everyone would agree, some people would say that it is very much inflation-adjusted, in my opinion, government reimbursement doesn’t always keep up with inflation.
As it relates to the more private-pay side, I do think a lot of those costs are going to get passed along.
As you think about it, you think about a resident that maybe has to sell their home to enter into a seniors housing facility, they are, right now, getting top dollar for that home. That translates into the ability to pay more rent, which translates into the ability to pay more to employees, which also translates into the ability for those employees to spend more on their food and gas, and so on and so forth.
It’s very much all interrelated. Our industry, while it has idiosyncrasies and it has unique aspects, it’s part of the broader economy, and I really fundamentally believe, in a lot of respects, it behaves the same way. Again, some people will point out to me the government reimbursement element of it, the healthcare-related element of it. In the end, when you step back from a macro perspective, I think it behaves fairly similarly to many, not all, many other industries.
Tim: Interesting. I’m going to read you back a quote from one of our previous conversations, this was back in May 2019 at that point.
Scott: Uh-oh, I wonder what I said.
[00:20:34] Tim: We were talking about your portfolio composition, and 10% of the NOI at that point was from medical office, and you said, “Over time, we may look to other asset classes all within healthcare.”
I guess I’m curious where medical office fits in today and then it sounds like you’re very focused on private-pay senior living, but I guess I want to confirm that and see if you are interested, even theoretically, in other healthcare assets and what those would be.
Scott: Yes. When we went public and for the first three years, that’s a great quote, I’m glad I said that because it’s consistent with our strategy, so at least I was messaging the exact strategy, which was to build a highly diversified portfolio of cash-generating healthcare-oriented real estate assets, broadly defined, and we were exploring other asset classes.
Now, as I self-reflect, look in the mirror, and I’m realistic about where we are as a company, we just don’t have a lot of capital to deploy. We have to be selective in how we’re going to deploy it, so we’re going to be more narrowly focused. I think it is unlikely, I would never say never, at the right price, everything is available to purchase, and everything is available for sale, right?
If someone were to offer me an opportunity to enter a new asset class at an artificially low price that made sense and we had the capital to do it, we would do that, which strategically doesn’t make sense. When you have a finite amount of capital to start spending and diversifying into random asset classes without the ability to build scale, it just doesn’t make sense, so I think it is unlikely that you’ll see us enter new asset classes.
I think it is unlikely that you’ll see us grow our MOB portfolio, that was something I was very keen to do initially. I think it is highly likely you’ll see us continue to concentrate and enhance the portfolio concentration around seniors’ housing.
Tim: How much do you think your capital position and just this overall shift in strategy back from 2019 is a function of Covid versus just the way that your portfolio came together versus other factors?
Scott: Oh, it’s all the above. I think it’s an easy excuse and a wrong approach to just say Covid caused all problems, whether it’s for me or for any industry. Covid was something that happened and something you need to react to. For some people, it created opportunities; for others, it created headaches. I think, for us, it certainly created some problems.
I think we were not scalable enough at the time where now without the ability to continue to scale, it either puts us stuck in neutral, or you need to pivot your strategy, we chose to pivot our strategy rather than get stuck in neutral. Look, some things were pre-Covid.
Some assets weren’t performing pre-Covid, and those were all things that we dealt with, some of it before Covid. We made some operator changes before Covid, we made some personnel changes before Covid. That’s a natural evolution of our business. I wish I got right 100% at the time, but that’s just not true.
Tim: I’m interested in this next question because I think just today, Cindy Baier, the CEO of Brookdale, rang the New York Stock Exchange bell on the occasion of the release of her book about Brookdale’s Covid experience, so I don’t know if this is a trend in the sector that leaders are writing books, but I know you’ve got one upcoming.
I think the title is Mr. Life is Too Short Guy: Making Every Day the Best Day Ever. I think this is interesting if you can talk about why you wrote the book, why you are writing it, or what the main messages are, and how this all relates to your leadership at Invesque.
[00:24:05] Scott: I got to be honest, I’m excited you asked that question because this is a big project of mine right now, it’s something that I’m passionate about. It is not directly about Invesque, but it’s certainly a big part of how Invesque was built. It’s a big part of how we as a team manage Invesque today and what makes part of Invesque special. I don’t think you’ll read a lot about Invesque in the book, though.
The book is very much predicated on spreading a message of positivity, of gratefulness, of happiness, of the ability for each person to wake up every day with a positive thought. I often challenge people, and it’s amazing how many people can’t answer this when I say, “What was your first thought when you woke up today, Tim? Do you remember what your first thought was?”
No, and most people don’t, but that’s a small, proactive, deliberate thing that each of us can do to say, “You know what, I’m going to wake up and be like, ‘Wow, I’m on Tim’s show today.'” Seriously, I’m not making that as a joke, “That’s a wonderful opportunity. I have an opportunity to talk to peers in the industry. I have an opportunity to spread my message. Wow, I’m going to have an amazing day. Oh, by the way, I’m going to spend some time later in the day and have dinner with my family. That’s amazing.”
Unfortunately, too many people wake up and are like, “Oh my God, I got like 26 calls today, and I got this appointment, and I hope I can avoid talking to so and so.” Why do we set that tone for the day?
My book, which as you mentioned, actually, I’ve tweaked a little bit. It’s called Life is Too Short Guy: Making Every Day The Best Day Ever. It’s about focusing on positivity, it’s about having fun, enjoying life, smiling.
You realize that from the time you’re born, plus or minus, and I’m using a little bit of rounding on math, you have about 42 million minutes in your life, and that sounds like a lot. When you realize you sleep about a third of it, you’re down about 28 million minutes. For most people listening to this right now, you’re probably halfway through that. Now, all of a sudden, you take that 28 million minutes, you’ve got 14 million minutes.
By definition, some of those minutes just are going to be challenging, there’s going to be illness, there’s going to be things that are outside your control. When you boil it all down, maybe you have 10 million minutes left in your life. What are you doing with them? What are you doing? How are you using them? Are you grateful for the opportunities that you have before you? What about interacting with social networks and peers?
How many friends have you reached out to lately? By that, I don’t necessarily mean building massive scale and everyone’s a friend, I mean true friends. How many people that you haven’t spoken to in a while that you just checked in? How many people have you said thank you to today? How many strangers did you bump into that you maybe got to know their story today, that random person, maybe, in one of the facilities?
How often have any of our listeners walked into a facility and introduced themselves and said hello to somebody and learned about their story? These are all the themes that I’m going to talk about.
I’ve had the opportunity to interview dozens of wonderful people, ordinary people that have had major setbacks in their life. I call them major aha moments, people that have dealt with significant illness or death or changes in careers or maybe not even negative, maybe they’re just “You know what, this is what I want to do in my life. Life is too short, I’m doing something different,” and I’m going to portray a lot of those stories.
I’m far into the book, but I have a long way to go. I hope to finish it up toward the end of this year, and I have a publication date in January.
Now, tying it to Invesque, it’s very much tied to our culture, and it’s very much tied to why we try to attract certain people to our company and why people generally stay in our company. We’ve had wonderful retention in our company because people are proud to be part of who we are and what we’ve built.
We’ve been acknowledged for the last three years in a row as one of the best places to work in Indiana, which is where our corporate headquarters are. If you look at our website, I think you’ll find something interesting. It’s funny when I interview people, they often ask me about it because they don’t see it on many websites. “What are some of your core tenets?” Every company lists their core tenets, but we list five, and by the way, some of these you’ve seen on others, family, teamwork excellence.
The two that we list that catch people a little bit off guard that they often ask me about is that we list positive energy and fun. Of the things that are important to us, our culture, our people, what we’re trying to accomplish, we care a lot about positive energy and fun, and those are some of the themes that you’ll see in the book, which will be launched or released hopefully in January.
Tim: I guess this ties back also to the conversation we were having earlier about staffing and creating culture even within senior living, I imagine. To what extent do you think that Invesque aligns with the operators that you do because you share this sort of philosophy?
Scott: Oh, no doubt about it. Look, I’ll start with Commonwealth. Actually, I’m only going to talk about Commonwealth because we own them outright, and I’m somewhat reluctant to list other operators. It’s like listing your favorite child, you have to be careful you don’t miss one or two in there. We love the operators we work with, we’re very careful to work with operators that we do align culturally with and that we do align and see a vision with.
Commonwealth, I talked about Invesque being acknowledged as one of the best places to work for the last three years. Commonwealth, too, has received a number of accolades and awards. The management team there, Earl Parker, is just fantastic. We’re very much aligned in terms of vision and strategy. He manages that company and permeates values. They, by the way, have their own set of core values.
We haven’t pushed down the Invesque values, but they’re very much aligned.
Whenever I have the opportunity, I’ll be down to Virginia, I guess, in about three weeks. Whenever I have an opportunity to get to corporate to meet with the people, to get out in the buildings and spend time with the frontline employees, you could just tell. I’ve been in enough facilities across the country, both in the US and Canada.
You know the companies that have the right culture, that have the right leadership, that set the right tone, that care about their people, really care about. Don’t just put up on the website “Our people are number one.” Anyone can do that, but how do you treat them? When are you there for them? How do you take care of them? How do you give them– It’s hard for me to answer this specifically about Commonwealth because we’ve only owned Commonwealth now for I guess about three years.
As you rewind in the Invesque history long before Covid, and everyone’s talking about work from home and flexible work arrangements, by the way, I’m the CEO of the company, and I don’t live in Indiana. If you want to talk about setting a culture and setting a tone for– you’re an adult. We treat people as adults, and we did this long before Covid. Now it’s very, I guess, trendy, acceptable, work from wherever, work from home, flexible work schedules.
We did that five years ago. We knew that very much part of my belief of you attract and retain the very best people, in fact, there are people on our team that would not have joined our culture or our company but for the fact that when they were recruited, we had an understanding, “You work from where you want to work when you want to work, how you want to work, you’re accountable.”
This isn’t loosey-goosey. You show up to work once every couple of weeks and get a few things done. You’re accountable. You have goals, you have responsibilities.
We hire mature, sophisticated, qualified adults that we trust. We don’t micromanage, we don’t oversee. We give them the ability to make decisions on their own. Everyone on our team is wildly empowered to make decisions. We push down decision-making authority in a very meaningful way. Those are the types of cultures you want to be a part of, and I think I see that a lot in Commonwealth as well.
Tim: Terrific. You are an entrepreneur, and senior living is an industry where we have a lot of entrepreneurs still leading businesses that they started sometimes decades ago. I have heard from investors that they perceive a lack of quality operators in the space. I’ve also heard it might be becoming harder to start an operating company. Do you think the space needs more entrepreneurial energy? As you’ve been looking for operators to work with, do you perceive a lack of quality there?
Scott: First of all, it’s a very difficult business. We talked about that before. This is a very operationally-intensive business. This is a very sophisticated business. It’s very difficult for someone without any expertise to come into the business. With that said, I absolutely love entrepreneurial spirit, entrepreneurial mindset, and entrepreneurs in every industry.
Entrepreneurs are what drive the economy. Entrepreneurs are what create new concepts and new ideas. I think one of the things every industry lacks, even the most sophisticated of technology industries, is enough innovation. There’s always an opportunity for more innovation. There’s always an opportunity to think differently. One of the things that we as an industry, I think, get stuck in, and we’re all guilty, mea culpa. I’m just as guilty as “Here’s how we’ve done it. Yes, the margin, we’re going to tweak this.”
What if we could attract more people that don’t care how we did it but look, instead, how we could do it, how we should do it, how we will do it, dream big, dream differently, think differently? It’s easy for me to say in this podcast format, you could say all that, but to get right to the crux of your question, absolutely, we need more entrepreneurs. I’m not going to comment on the quality of operators in the industry.
Like every other business, it’s a wide range. We love the operators we partner with. We think they’re very high-quality. I acknowledge it’s a very challenging business, and sometimes regardless of how good you are, it is just difficult.
I think one of the things that our industry could really use right now is a significant innovation. Throw out the playbook that we have today, even throw out the whiteboard.
Don’t even start with the whiteboard, start with just looking up at the sky and dreaming and thinking differently and saying, “We’ve always had doors in rooms.” I don’t know. I’m just trying to think of something ridiculous. Do we need doors in rooms? There was the shift from three people a room to two people to a room to one person to a room. What if we’re conceiving that all wrong in terms of the concept of a room?
How do you define a room? How do you define a facility? We’re constantly struggling, as we talked about, and I didn’t have a great answer, with labor costs, but are we thinking about labor wrong? Are we thinking about the types of employees we’re hiring? Are we looking in the wrong place to attract talent? Are we thinking about the wrong ways? These are all things that I spent a lot of time thinking about.
I wish I had more creative ideas, but I don’t think we do enough of that. I’d love to see more entrants into the space as operators, as owners, as service providers. What about things like pharmaceuticals? What about rehab? Are we doing that the best way we can? We’ve always done X, but stop what we’ve always done, what else can or should we be doing?
Tim: I like that “throw out the whiteboard” idea. Do you think that the urgency to do that is greater today than in the past, given that the consumer is changing so quickly?
Scott: No doubt. There is a greater urgency for a number of reasons. One, finally, the Silver Tsunami that we’ve been talking about for the last 29 years is finally actually coming to fruition, so there’ll be greater demand.
I think there’s a more sophisticated customer. Not only does the provider need to be more innovative and more thoughtful, but don’t forget that the consumers are going to be more demanding. They’re more sophisticated.
The current generation grew up in a world where they saw massive innovation, they saw changes, they see aging differently than a prior generation. One of the things that I would caution us about is, as we think about the current generation, why aren’t we thinking about the next generation because, by the way, not that far behind is a younger baby boom, and then the post-baby-boom consumer?
This is a forever industry. This is a forever business. The one thing that I know for sure is this business isn’t going away, it will change, it will evolve, it will look different, it will smell different, it will act different, but it’s not going away. How do we position ourselves to provide the best possible care and provide a product that consumers want? That’s the quintessential question. I guess I have the questions. I wish I had more of the answers.
Tim: We’ll go for at least 10 to 15 more minutes. Scott, while we are here, I want to have a go a little bit at regional operators. I think these are really hot.
They’ve been growing a lot, in the last year at least, a lot of properties changing hands going to regionals. It seems to me that Invesque is a believer in this model. Certainly, Commonwealth, I would define as a regional operator. I guess can you confirm that? Do you have a preference for regionals, and what do you see as the strengths there?
Scott: Look, we love the regional model, and that’s a big part of the Commonwealth story, but again, getting back to what I said before, I want to be careful about getting in the box. ‘Regional operator’ is a definition that exists today, but is it the right definition? Is it the right way to even think about it? There are wildly successful, very localized, the proverbial ‘mom-and-pop’ that everyone’s sort of, “Oh, mom-and-pops can’t survive. Mom-and-pops can’t make it.”
I think it’s a challenging business. I really do. I think that’s a fair assessment for people to say mom-and-pops are just very challenging to own and operate one, two facilities, but it’s been done. There are opportunities for very successful, entrepreneurial, innovative, single-facility, multiple-facility, very local, so forget about regional, to succeed. We’ve also seen national brands succeed.
Some people say, “Ah, the national model is impossible.” Healthcare is very much a localized business, and you have to make sure that you have feet on the ground in that location.
Look, we’ve seen it all work. I am very reluctant to place labels and say, “Hey, the way to go is regional.”
There’s no doubt Commonwealth is very regionally-focused. They’ve had wild success in the mid-Atlantic region, predominantly in Virginia, but then broadly branching out.
If the white opportunity presented itself for us to put Commonwealth on the West Coast, would we do it? Absolutely. They’re a highly sophisticated, demonstrated success. I think that success is based primarily on the management team and the processes and procedures they have in place and not based on being in Virginia. Do regional operators make sense? Yes. Do we buy into that model? Yes.
Are most of our operators regional? Yes. I think it would be a disservice to the industry and cut against what I said two and a half minutes ago about thinking differently and being entrepreneurial to give you a one-word answer and say, “Yes, regional operators are the best.”
Tim: We’ve seen a lot of capital flow into home care, especially since Covid started, and a lot of increasingly complex care being delivered in people’s single-family homes. I’ve heard different things from people in senior living and skilled nursing about whether this is a threat, whether it’s an opportunity to bring more complex care into these types of settings, communal settings. What do you make of the home care situation?
Scott: It’s an ongoing evolution of the industry. One of the things I’ve heard about for the last decade is, what used to be assisted living now is independent living, what used to be skilled is assisted living, skilled is considerably more complex than it used to be. Look, as a society, I am truly grateful, and it is wonderful that people are living longer, we are able to grapple with considerably more complex medical care.
Yes, there’s more complexity in skilled nursing because those residents would not have been alive a decade or two ago. That’s wonderful. By definition, that means that more people can stay home longer in more medically complex situations. I think that’s great. I think that’s great. I think it would be a disservice to humanity for me to get on here and say, “Wow, that’s a huge threat to our industry.”
I’ve heard people make arguments about why it doesn’t make sense to take care of people in their home. If we can take care of people in their home, take care of people in their home. When there are situations where they can’t be taken care of in their home, maybe they don’t have the right support network, maybe they don’t have the right social network. I think one of the things that I learned more than anything from Covid, both in our industry and more broadly, is how important social interaction is to humanity.
I think I took it for granted before that. You saw people, you waved, you said hello, you shook hands, you gave a hug, and that was just part of life. Then when it got taken away from you, you realized how important that was. Now you start to push that down into our industry and you say, “Well, XYZ resident is 82-years-old with a marginally complex medical condition and can stay home for a prolonged period of time.”
That’s wonderful. Let’s keep her in her home as long as we can, but bear in mind that that person isn’t getting the social interaction that they might get in a facilities-based delivery system. Again, I don’t want to say that there’s no place for home care, I think there’s a wonderful opportunity for home care. I think the longer you keep people in their homes, the better. Bear in mind that there are trade-offs.
You’re in your home and there’s a comfort level around that, but not having that social interaction, both with a broader range of caregivers in a facilities-based environment, you have a broader range of caregivers, and with peers, it’s so important.
As I look at one of the other lessons I took away from Covid, which is not specifically germane to our industry but I think an interesting parallel, I’ve had this belief, and I’m going to talk about higher education in America.
I’ve had this belief that I still do, by the way, that higher education in America is way too expensive, the business model is broken, too many people are going to school that don’t need to be going to school, they’re graduating and finding jobs that they don’t need, and that the model needs to be transformed and turned upside down and changed. I still believe that, by the way.
However, what Covid demonstrated to me really shocked me. For me, Covid was the perfect test case to say, “All right, look, we can deliver higher education across the world remotely in people’s living rooms. You really don’t miss a beat, everyone is still progressing toward their goal of earning a degree.”
What we learned is, there were students going on campus sitting in dorm rooms, instead of at home because they wanted the social interaction, and they were taking those classes.
The first opportunity they got to go back to school, they did. Rather than schools not making it, which by the way, was my belief, and I was wrong, I think schools have a greater level of empowerment because they realize that they’re delivering a service that’s associated with social interaction that’s vitally important to the consumer. Now, parlay that into our industry.
I think as you asked the home health care questions, it’s a long answer for you, but as you circle back to it, I think more and more people realize the power of social interaction, the need to see other people, the need to be loved and to share love and to develop relationships and acquaintances. I think that’s very powerful, and I think that’s going to be the proverbial pull and tag of let’s keep people in their homes as long as possible but realize the trade-off is the necessity, the human necessity for social interaction.
Tim: I want to talk about wellness. I think it’s become a huge buzzword in senior living. I’ve talked to a lot of people who say they’re reshaping their operations around promoting wellness, but it means different things to different people.
How do you define wellness in a senior living context? Do you see, in the Invesque portfolio, things that operators are doing to promote resident or staff wellness that you would highlight?
Scott: Yes. Look, I think wellness is like a lot of your questions, Tim, I think they’re broadly relevant to society. I know that our audience and what we’re trying to accomplish is “What does this mean for seniors housing?” but I’m not sure it’s vastly different. I think we, as a society, are more and more focused on wellness. I’m excited and proud that, all of a sudden, mental health has become a big topic.
I’ve watched this evolve over, I’d say, five to seven years. You rewind a decade ago and mental health, you couldn’t even find it. If you Googled ‘mental health,’ you might be the only person googling it and if you, God forbid, actually had a mental health issue or had to deal with mental health in your family with friends, it was taboo. It was hidden, it was something you’re embarrassed about.
Now it’s front and center. Everybody’s all for mental health services, and we’re proud to do that because that’s part of holistic wellness. Look, it gets back to something I’m talking about in my book: a holistic approach to happiness, to gratefulness, to wellness, but that’s one element of it. We have historically spent some time on nutrition and physical activity. Now, again, society, not just within senior care, you’re seeing more and more of a greater emphasis across the board on nutrition, on physical activity. By the way, this isn’t just relevant for residents, this is important for employees.
We talked a little bit about things we do at Invesque, we strongly encourage. In fact, we’re sponsoring an Alzheimer’s awareness race in a couple of weeks that I’m going to personally run in. It’s 5k. We reimburse all of our employees for gym memberships. We reimburse, to a certain degree, for mental health services. We provide a holistic approach to healthcare. This is all broadly-defined wellness. Now let’s bring it into seniors’ housing.
The same trends and the same demands that society is placing, it gets back to the question you asked earlier about the more demand in consumers, and how are we going to be able to deliver services? That consumer that is aging into our facilities has now grown up in a society where, and this isn’t directly germane to your question, but where technology’s really important, where wellness is really important, where consumer preferences are really important, yet many of the facilities and many of the business models were designed at a time that predated when society cared about technology when society cared about wellness when society cared about all of these issues that now we are much more germane.
There’s no doubt wellness is vitally important to society, to our employees, to our residents. When I say ‘our,’ I say that in an industry sense, I don’t think it’s unique to Invesque.
Tim: You brought up a good point in that physical plan and how well it can support wellness. I think, also, infection control is another issue that has been really brought to the fore through Covid. Do you think that traditional CapEx allocations are going to need to go up to elevate these communities to standards that they’re going to need to be in the coming years?
Scott: You just stumped me there. I’m not sure I have a great answer, to be very honest with you. Look, there’s no doubt that infection control is going to be vitally important, and it always should have been. There are lots of benefits. I can go on a whole call with you to talk about the benefits of Covid, but one of the things we learned about is the importance of infection control, making it a greater priority, being more proactive about it.
That doesn’t just come down to CapEx, that comes down to behaviors, that comes down to expectations. The simplest, cheapest, easiest form of infection control is a mask.
We, as a society, again, if you rewind two and a half years ago unless you traveled extensively in Asia, at least that was my only experience, you didn’t see people on a regular basis with masks.
Now it’s so common that, look, it was just yesterday or the day before that we’ve eliminated them from public transportation. There’s the easiest line of defense in infection control, washing our hands and using whatever the antibacterial. These are basic levels of infection control. I think it comes down to a change of mindset. I think it comes down to prioritization. I think it comes down to a change in behavior. I think it comes down to a level of expectation. I’m not avoiding your specific question. I think it’s a broader answer. I don’t know whether it’s another $50 a bed a year in CapEx. I just don’t know.
Tim: Fair enough. Another issue that has been highlighted by Covid is maybe some broken relationships between capital providers and operators in the space. There’s been a lot of talk about misalignment there. Obviously, you can’t get any more aligned with an operator than owning it outright as you do with Commonwealth. As you look at other operators in your portfolio, how do you think about creating alignment the right way so that everyone’s on the same page?
Scott: Look, alignment’s so important in everything that we do, whether it’s dealing with employees, dealing with residents, dealing with life. People align to the goals that they’re trying to accomplish. When there are competing goals, by definition, it creates tension, and everyone wants to find success. Look, as you said, there’s no greater alignment than ownership of an operating company.
We’re fortunate in that we, very proactively and deliberately, chose not to be a REIT from Day 1. We own our operator outright, and there’s no discussion or debate or what have you on a monthly basis about rent or performance or so on and so forth. Now, there’s accountability for performance. There’s no doubt about that, but that’s the ultimate alignment. We’ve also been able to structure a number of things over the years with participating rents, with joint venture structures.
Us along with the number of our operators, they’ll share a small percent in the ownership of the asset, we’ll share some percent in the ownership of the operations, so opco or propco JVs. I realize a lot of this is difficult to do for more traditional REITs. I can’t comment on how REITs can better align, but for companies that have the flexibility, the more that you can create incentives to alignment. I’ve always gotten out of my way, even when I hire third-party providers. If we hire lawyers or bankers or whatever, I will highly incent for a successful outcome.
If you think you could sell this for $100, that’s fine. I’ll give you 1%. If somehow you could figure out how to sell it for $140, I’ll give you 3% for that $40 over the $100, and I’ve done that many times because if I give you 1% to sell it for $100, then the difference between $98, $99, $100, and $102 really doesn’t matter, but, man, if you can get to $140 and you’re getting 3% of that incremental $40, you’re going to fight pretty hard to get there. It’s amazing how setting up the right incentive structure gets behavior.
Tim: Right. We’ve got just a couple of minutes left to ask some big-picture questions to wrap up your top business goals for 2022.
Scott: Our top business goals, which I announced and we’ve talked about a few times, is to streamline our portfolio, streamline our story and streamline our balance sheet. This 2022 is all about simplification and coming out of 2022 as a stronger company with predictable cash flow, strong relationships, and a simpler balance sheet.
Tim: What’s keeping you up at night from a business perspective?
Scott: Not much, honestly. I’m very pleased with where we are as a company. I’m very pleased with where the industry is. There are always issues, right? If I said there’s no issues, everything is wonderful, then you should question my credibility, and that’s not what I’m saying, but there’s nothing that’s that pressing that I’m willing to sacrifice sleep. I say that tongue in cheek in a symbolic sense, but there’s nothing major, right?
We’ve already talked about labor costs and misalignment and inflation, and occupancy. Everyone’s talking about them. For me to tell you the same thing everyone else is talking about, that’s not what’s interesting to you. For me, that’s about driving the industry forward. It’s about creating long-term sustainable business models. It’s about honoring relationships and standing behind our commitments to our operating partners and them standing behind their commitments to us.
It’s about working together to find solutions and challenging situations. There’s no doubt about it. We’re all dealing with challenging situations, and if we’re all open, honest, and fair, we find solutions.
Tim: Great. What are some ways you think senior living needs to change in the years ahead?
I think we see a lot of strategies, a lot of people trying new things in how they operate these buildings and a lot of thoughts about what the consumer is going to expect and need. Can you, if you could, just paint a vision of the senior living community of the future to wrap up here?
Scott: Some of it we already talked about, and I think we have to be considerably more creative, aggressive and focused on the labor issue. I think we have to figure out how we attract more people to our industry. Our pipeline is horrible. It’s a tiny funnel. It’s very hard to have a lot of people left when you start here, I want to start here. We need to think about how we redefine roles, where we recruit and how we bring people into our industry, and then how we provide career opportunities and cultures to retain them.
It’s one thing to bring them in, it’s another to retain them. For me, labor is a very big area of focus. I think it solves a lot of problems, quite frankly. This isn’t new, this isn’t provocative, but we have to find that middle-market solution, right? Seniors housing is an expensive business, and there are so many people in the current cohort or current generation and the generation behind them that’ll age in without the appropriate resources to have the care that they deserve, and that’s problematic. That’s troubling to me.
I think that’s a wonderful business opportunity for someone to solve. I haven’t figured it out, I wish I did. For me, I think the two key areas of focus that our industry needs to stare up at the clouds for a while and think about is how we attract entirely different, new creative people to our industry, and how we retain them. Those are Bucket 1 and then Bucket 2 is how we provide a new, differentiated business model facility, how we deliver services to make it more reasonable and affordable so that it is a viable business, right? If it’s not a viable business, it doesn’t last, and that it can attract and provide services for a middle-market customer across the United States.
Tim: Great. I think that is a great note to end on. Scott, thanks so much. This was a really interesting conversation. I enjoyed it and thanks to everyone who tuned in. Best of luck to all of you in your endeavors.
Scott: Thank you, Tim.