Thanks to a new recap from Lee Equity and Coastwood, Integral Senior Living (ISL) is now joined at the hip with Discovery Senior Living. The move has industry-wide implications, and echoes the example of Aimbridge Hospitality, which Lee Equity backed in 2013 and helped transform into the nation’s largest independent hotel management firm.
On the surface, the recap brings together two large operators that, combined, will manage 27,000 senior living units in 36 states. While that will create effectively the fifth-largest senior living operator in the country, the significance of the deal goes beyond scale.
Discovery and ISL now share common investment partners, but they will not be mixing financials or consolidating executive leadership.
Instead, Discovery Senior Living will act as a parent company to ISL and support the company’s operations in the same way Discovery currently does with its other entities, which include Discovery Management Group, Morada Senior Living and TerraBella Senior Living.
That is by design. Hutchinson over the years has noticed that senior living mergers are often “addition by subtraction,” meaning they result in a leaner combined entity. But that process usually takes a “winner and loser mentality,” he said, and ultimately can serve to weaken instead of strengthen an operator.
With the umbrella company approach, Discovery is blazing a trail in the senior living industry.
“I’m not suggesting we’re going to be the largest on the planet, but this is very analogous to that,” Hutchinson said, of how this strategy mirrors what Lee Equity accomplished in the hotel sector.
In this week’s exclusive, members-only SHN+ Update, I analyze recent moves from Discovery and ISL, and offer key takeaways, including:
- Hutchinson’s vision for supporting many different operating companies under one roof
- How Discovery is following the example of Aimbridge Hospitality before it
- Possible limitations to an umbrella organization for senior living
Following the Aimbridge story
Though the Discovery umbrella model is unique in the senior living industry, the company is actually following the example of Aimbridge Hospitality, which was backed by a large investment from Lee Equity and growth capital firm General Atlantic in 2013.
At the time of the deal, Aimbridge was the fastest-growing independent manager of hotels in the U.S. When Lee Equity sold the company in 2019, it was the largest such operator in the country.
Today, the Aimbridge footprint includes over 1,500 properties in 50 states and 23 countries. The company manages properties under 84 lodging brands, in addition to more than 90 boutique and lifestyle hotels.
Discovery was searching for a new capital partner with the help of Coastwood’s Dan Decker when Lee Equity entered the discussion, Hutchinson said. The capital firm had previously helped Aimbridge build and maintain an organizational structure centered on operating divisions that are categorized by geography and specialties.
In Aimbridge’s story, Hutchinson saw many similarities to what he was already trying to do with Discovery.
“Some of the things they’ve done with being able to take operating platforms and really infusing them with the resources necessary to become sophisticated and big and scale, we were like, ‘This sounds really good,’” Hutchinson said.
So, Hutchinson and Decker met with Lee Equity at Discovery’s Bonita Springs, Florida, headquarters. Hutchinson said he was particularly interested in Aimbridge’s journey from a small company with 14,000 hotel rooms under management to the current largest hotel manager.
“It was a no-brainer, they had the same vision,” Hutchinson recalled.
With Lee Equity on board, Decker and Hutchinson got to work looking for other operators who shared their vision of the future in terms of operating tempo and performance. ISL quickly rose to the top of the pile.
“As we bring in other groups hopefully in the future, we are really looking at, what is really working in communities? What are people’s points of difference? How can we leverage that?” ISL CEO Collette Gray said.
Looking down the line, Hutchinson said the plan for the new Discovery is to follow the Aimbridge strategy and adapt it for senior living — though he said he plans to be a “little rogue” with his execution.
“We’re somewhat following an outline that has been done before,” he said. “I think that’s important for everybody in this industry to understand — we are unique as we can be, but … we can learn lessons from other industries.”
The umbrella model
Hutchinson remembers the day “a long time ago” when he first sketched an umbrella on a napkin to illustrate his ideal management structure of a parent company and several smaller sub-entities.
Years later, he had turned that vision into a reality with Discovery and its various operating companies. Contrary to what the name implies, Discovery Senior Living has never been a true senior living operator, Hutchinson told me.
Instead, its purpose has always been to serve as a parent company and support office to a slate of companies including operators Discovery Management Group, Morada, TerraBella, a home health company and a marketing agency.
Hutchinson’s thinking is rooted in a mantra he has repeated many times over the years: “Scale, and not fail.” He believes that there are many pitfalls in the typical avenues for scaling in the senior living industry — pitfalls that can be avoided with the right organizational structure.
In Hutchinson’s eyes, too many operators consolidate into a single entity with the intention of being bigger and better. But in the end they spend time “reinventing the wheel” with regard to operations, and are ultimately not better as a result.
Under the Discovery model, each operating company acts as its own entity with separate financials and leadership. Instead of dictating community-level strategy, the Discovery corporate office is more focused on providing support and sharing best practices among the different platforms.
Hutchinson believes that decentralized structure will result in a vibrant ecosystem of different perspectives and strategies that the entire company can learn and benefit from.
For example, what works well in a TerraBella community might also apply to one operated by Discovery Managed Group or ISL. And vice versa. Meanwhile, both companies have the support of the larger Discovery back office, which can provide certain functions at scale, such as legal or standardized training, that a smaller operator might not otherwise have access to.
There is also the potential to add value through the growth of ancillary services businesses that align with the increasingly large portfolio of senior living communities. This already has been part of the Discovery playbook, with its small home care company, and would be similar to a strategy that is commonplace in the skilled nursing sector, where operators also own therapy, home health, dialysis and other businesses that serve their buildings.
“The thesis is pretty simple,” Hutchinson said. “We will absolutely create best-in-class supportive services that have never been seen in this industry at that level, and then we will feed that into each of these operating platforms.”
With its recap from Lee Equity and Coastwood, ISL is joining the Discovery family with that in mind. CEO Collette Gray is remaining in her post leading the senior living operator, and she now serves on the Discovery Senior Living board of directors.
By coming together with Discovery, Gray believes ISL is much stronger.
“Everyone brings different strengths; at the end of the day, we’re going to be able to take all of those, compile them and apply them to a larger operating platform,” Gray said.
As for the “why” of such a model, both Hutchinson and Gray see a stark need to do things differently as the industry approaches an operational “inflection point” in 2023.
As Hutchinson sees it, Discovery and ISL could have spent the coming period apart developing many of the same solutions to the industry’s problems — a process that he estimates would have taken years.
“But three or four or five years from now is not good enough. The inflection point and the opportunities are here now,” he said. “So combining these companies and then forgoing having to recreate the wheel … now is the right time to do it, and this is the right way.”
‘Fair amount of skepticism’
When news of the recap and partnership dropped late on Feb. 28, I initially was puzzled why the company would go this route versus a more traditional acquisition-merger, such as the blockbuster 2021 acquisition of Holiday Retirement by Atria Senior Living, with involvement on the real estate side from Welltower.
One potential challenge could lie in the leadership structure. When Atria acquired Holiday, Lilly Donohue initially remained on board as Holiday’s CEO, reporting to Atria CEO John Moore. That arrangement lasted only about one year, before Donohue exited.
The “umbrella” structure is different than the combination of Atria and Holiday, but getting the balance of support, accountability and autonomy right — particularly when two strong and experienced leaders like Gray and Hutchinson are involved — may not be easy.
Another potential challenge I see ahead is the fact that both ISL and Discovery are working with a long list of capital and ownership partners. While Discovery is ambitious about ushering in a brand-new model for senior living, at least some of that work will require buy-in from those partners.
Gray isn’t worried about that outcome. She pointed out that the ownership groups the new sister companies work with “will only benefit from those efficiencies and our ability to scale.”
“We don’t want to put a cap on the number of owners we will work with,” she said. “We want to work with folks who are aligned with our mission, and who we have synergistic relationships with.”
Hutchinson also noted that similar arrangements in other industries also sometimes have to contend with dozens of ownership groups of varying sizes and location.
“So, this has been well thought-through, with numerous conversations with both of our ownership groups and others to ensure we understood what they would value for future interaction and enhancement of services,” Hutchinson said. “Our thesis is to ensure the benefits of scale are visited on all constituencies, including our ownership/capital partner groups.”
While Hutchinson believes the umbrella model is a winning strategy for the future, he also expects to get a “fair amount of skepticism” over the new model. Part of that may be from operators who are still stuck in their old ways — “hence the need to do it in a different way than those of the past,” he said.
“This is why we purposely chose capital partners that had wonderfully germane experience to assist us on this journey,” Hutchinson said.