Trustwell CEO Cohen: Inflation Has Silver Lining for Margins, Obsolete Buildings a Growing Issue

Under the leadership of senior living industry veteran Larry Cohen, Trustwell Living has refined its playbook and been on a growth trajectory since last year. Cohen believes the company will expand its acquisition platform this year as the company focuses on top-line growth and building back occupancy through intense optimization efforts.

He also pointed out that high inflation — despite the challenges it presents — could result in longer-term margin growth by helping operators set rental rates at higher levels.

Four of the five properties operated by Trustwell Living were acquired last year as value-add acquisitions. Since then, the company has seen a steady build-back of occupancy and margin thanks to investing heavily on labor and integrating technology to aid in operations efficiency.


That comes as Trustwell Living is managing expenses “extremely well,” Cohen told Senior Housing News.

“Our main focus for 2023 is continuing this growth in occupancy and top-line growth and sustaining the stability and the operational excellence that we have on the expenses,” Cohen recently told SHN Editor Tim Regan during and SHN+ TALKS interview. “I do think we’ll start to see margin expansion and we’re seeing better demand and we are definitely seeing less supply.”

From tackling a $1.1 million agency labor budget to spending $5 million on renovations across four properties, Trustwell Living is optimizing operations for the future. From creating all new systems within its customer relationship management (CRM) tool, revamping marketing and its electronic health records (EHR), care plans and financial protocols, the company is putting its money where its mouth is.


By implementing technologies and systems for visitor management, and curating its Google Business Profile, Trustwell Living is “making environments that are attractive for people to come to work,” Cohen said, while boosting each property’s value proposition.

He also shared his thoughts on industry-wide concerns and trends, including the issue of obsolete buildings, the benefits and drawbacks of being a publicly traded operating company and why some companies are too fixated on occupancy.

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

  • Trustwell Living’s optimization and growth strategies
  • How it transitions communities through an acquisition
  • Trustwell’s investment in staffing and leadership curation
  • The company’s biggest challenges in 2023
  • How Trustwell improved the resident dining experience

[00:00:06] Tim Regan: I am very excited to be joined by Larry Cohen, who probably needs no introduction if you’ve been in the senior living industry for a while.

Larry is the former CEO of Capital Senior Living, the company that is today known as Sonida Senior Living, but today Larry is leading Trustwell Living, which has five communities and more on the way. We’re going to learn all about what Larry has planned, what he sees on the horizon, and what he makes of the year ahead in a little bit.

I wanted to start with just a state of play at Trustwell. I know that you guys are moving along, you’re growing, but what are you seeing these days on the ground with regards to things like occupancy and move-ins? We’ve heard that demand is pretty strong out there, so what are you seeing on the ground?

00:02:30] Larry Cohen: Good morning, Tim, and hello, everybody. It’s great to talk to you again. We are seeing positive developments on the ground. As you mentioned, we have five buildings. Four are buildings that we acquired last summer that are more value add. One is a stable, independent living property that we acquired in December. We have seen a nice progression of steady increases in all of our key metrics, our tours, our inquiries, our move-ins, or deposits trending possibly.

I’d say that since the fall, we’ve been averaging about 200 basis points improvement a month in occupancy. We had very good February and are projecting a stronger March. A lot of hard work. We’ll get into discussion of, really the playbook, if I will, maybe a white paper at some point about the transition of underperforming properties to see them through stabilization and now in a growth mode.

[00:03:42] Tim: Yes. Well, we will certainly talk about that. I want to make sure I check in on the challenges that are going on as well. Obviously, there’s many opportunities out there, but still a fair share of challenges. Where are you still feeling the most pressure in your operations at Trustwell?

[00:03:57] Larry: It’s a great question. Our local leadership. Our team has done a great job. I am very fortunate to work and love working with a team that has collectively 130 years of combined experience in senior housing, and most of that is working together. It’s a treat. At least, I speak for myself. I’m excited to come to work every day and work with this team. It’s amazing. We bought our first building in May and June of 2022. Since that time, we’ve actually hired 197 employees at four buildings. We have taken buildings that had $1.1 million of contract waiver, reduced that by more than 75%. Last month we had 4.6 FTEs, Full Time Equivalents for contract labor. We have reduced turnover. Industry average is 60%, 65%, our turnover is running at 6%.

I’d say that we are very stable operationally. We have brought in new EDs, new sales directors, new activity directors, clinical, nursing, many of whom actually worked at these communities in the past and they started to hear a buzz, “Who is Trutwell? What’s going on here?” They’ve come back to work with us. As I said, I really feel very, very fortunate to see the progress that we have made with buildings that were challenged, neglected, starved for capital, and different cultures of how we operate.

Our focus right now is, obviously, continuing on the operational strengths that we’ve created. We really are feeling that our numbers are coming in, actually, at or below budget. We’re managing our expenses extremely well. It’s really top-line. We’ve really focused on growing the occupancy sales and marketing liquidity. We, actually, redid our website already. We’ll have a new website that will, hopefully, launch this month.

We’re very focused on improving SEO, SEM, all the sales and marketing strategies. We have expanded relationships with referrals for this and other intermediaries in the markets in which we operate. We, actually, have rejoined marketing programs with a large rehab and home healthcare company. All those pieces are coming together now. Our main focus for 2023 is continuing this growth in occupancy and top-line growth and sustaining the stability and the operational excellence that we have on the expenses.

[00:07:00] Tim: You mentioned coming in below budget, which is something that I think a lot of operators wish they could say right now. That is great. I want to talk with you about how you’ve achieved that. I am curious though, where are you still seeing the most cost inflation in your operations? Maybe let’s set wages aside because I think that’s just a given. What else is still elevated right now?

00:07:22] Larry: Well, let’s talk about the balance sheet, income statement rather. Okay? 60% of expenses and maybe 65% today is labor. Now, we expect labor costs to grow this year, probably 5%. The other major component of food, we have a large organization that we work with, which is a group purchasing organization that we worked with for 22 years at Capital Senior Living. They give us economies of scale, great services. Our food is, actually, coming in right on target.

As far as food inflation this year, maybe 3%. That’ll be gradual throughout the course of the year. The other big expenses are utilities and the weather has cooperated so that utilities have been in line. Taxes, insurance, our real estate taxes, we pay mostly in the rears. We just got bills for this year and they’re right on budget. I’ll talk about insurance because that’s a big issue I think for this industry, particularly property insurance.

There’s been a lot of catastrophic events that have happened around the world that have impacted property insurance. Part of our strategy in where we operate is understanding the local dynamics. Part of our strategy in where we operate is understanding the local dynamics. We’re not on the coasts. We’re not in Florida. We may have some winds in Kansas, Illinois, but we really don’t have the exposure to catastrophic weather. We think that insurance will stay very much in line this year. Our other lines of insurance are either flat to down. That’s a good thing.

As I said, we are really in very good shape. I give kudos to our team. 197 new employees. That, in addition to the onboarding of the 44 employees that we hired in December in Tennessee, and the other employees that we onboarded when we got these buildings last summer. Either already had comments from peers in the industry, others who visit the building saying that they’ve been so impressed, they’ve seen some of the strongest leadership teams that they’ve ever seen in the industry.

From the expense side, yes, there’s inflation. We understand there’s inflation. Obviously, interest growth rates will continue to rise this year. I think that we’re looking at a fairly stable environment on the expense side this year. From speaking to people like NIC last week and from what we read, I think some of the labor pressures are starting to wane as well. I think we’re starting to see some stability throughout the industry, which is very helpful on the labor front.

[00:10:26] Tim: That’s great. I’m glad that you mentioned the NIC Conference. Obviously, I think you probably know what the NIC Conference is, but we’re talking about the National Investment Center for Seniors Housing and Care. They had a spring conference in San Diego. We were both just there. Lots of good, interesting things there, so I’m sure we’ll talk about some of those. All of this leads me though, to margins. The last two years have really shown as to why you are so laser-focused on margins. They’ve become so much more important, I think, to operations during this pandemic. Here we are, 2023, the labor environment’s different, the cost environment’s a little different, although it sounds like you all are achieving a healthy margin. Tell us more about how you can do that? What your thoughts are for achieving a healthy margin and what you should be doing these days.

[00:11:17] Larry:I’ve been focused on margin my whole career. I’ve been doing this for 35 years. The two most important metrics that I look at are margin and RevPOR, Revenue Per Occupied Room. Quite frankly, they are in hand-in-hand. A lot of operators are fixated on occupancy. I bought buildings from operators that just tell, “I’m 100% occupied every day.” My first response is, “You’re probably not raising your rents high enough, because you don’t need to be 100%.”

We look at this business, it’s operational intensive business, it’s all about labor and people and strong leadership. As I think about looking at margins and what’s happened, this industry, if you go back historically, we had healthy margins up through the over-building of the 1990s, a great recession and the housing downturn in 2008 to 2010. We were able to manage our expenses well, even though we lost occupancy and, actually, we’re able to improve our cashflow and our operating margin.

I think the first fact that really has impacted margins for the industry and has been exacerbated by COVID, has been the low interest rate environment that we experience coming out of the great recession. If you go back and think historically and go back, we were sponsoring, involved with state of senior housing every year since its first year in 1992. From 1992 to 2008, you can see rate growth of 4% to 6% every year.

Obviously, that changed during the recession and into the extended period of low interest rates, we saw rate growth that was maybe one, one and half percent, 2% in a low inflationary period. We were always able to generate a 50-basis point spread between rate growth and expense growth, have some occupancy gains, have nice same store and a wide growth. In fact, I went back and looked and in 22 years at Capital Senior Living, I think we may have had one quarter that we didn’t have positive NOI growth. It recovered the next two quarters.

I think that the industry has to focus on that. You had this modest regrowth, you had supply coming on after 2016, so you start to have supply pressures, you start to see some discounting.

We started to see pressures on labor starting in 2017, started to see the first piece of contract labor would come and go. Then, obviously, COVID where you had the impactful result of lower occupancy, fewer move-ins, obviously, more deaths, and higher levels of care. All those factors came together to compress margins considerably coming out of COVID.If I go back to my career at Capital Senior Living, from 1997 when I joined the company, we were 97% occupied with operating margins of 47%. We sustained EBITDA margins probably around 45% up through about 2016, 2017, and starting to see that margin come down, but still above 40% upon my retirement in 2018. I think that for the industry, we’re striving now to hit mid 30 margins, not mid-40% margins, which is very healthy.

Although our independent living building in Knoxville, Tennessee is healthy mid to high 40s. That’s doing really well, but the building is full. Again, so I think if you think about margin, a lot of it goes back to rents, what the average rents are in the buildings. I do think that one of the benefits of inflation, now I said this for years, has been the ability to start raising rent at 6%, 8%, 10% and greater. That will help reset the rent at many of the buildings that will help improve margins.

We do have a lot of inflation. It’s coming down some, but there is this differential on rate increases. This year the cost of living increased, I think it was 8.6%. We’re starting to see some benefit of higher rates that are helping push where we can the rates to the resident RevPOR. I do think we’ll start to see margin expansion and we’re seeing better demand. We, definitely, are seeing less supply.

Then the last component to this is obsolescence. I think one fact that is not spoken much about is that a lot of the older inventory or even some of the newer inventory just doesn’t work any longer. For the first time in my career I’m starting to see flyers and teasers from brokers suggesting changing the use of buildings to behavioral health or other uses. I do think that as we think about where we’re going, I think that the new supply is going to be fairly constrained particularly with higher interest rates further and concerns about building.

I met a good friend of mine at NIC. We were just having a nice conversation. He said every one of his development projects is on hold. Nothing is coming out the ground right now. That will give us some breathing room.

[00:18:11] Tim: Well, thank you for such a thorough explanation of your thinking about margins. I want to drill down again into margins and talk about something that I know you and I have talked about before, which is, when you come into a community, where do you see the biggest opportunities for improvements on the P&L? Is there an area that you look at first and say, “Okay, we can always probably find some savings in here, and here, and here.” What is that like for you?

[00:18:57] Larry: Well, it’s all about culture, mission, and training. You see a lot of contract labor out there. We still have contract labor. There still will be some use. Clearly, looking at the use of agency, what’s interesting is, there are organizations that have centralized operations and everything is at the home office. This is a very local business. Another aspect of our operating philosophy has always been to have strong leadership and give that strong leadership at the community level, the autonomy, the responsibility with the accountability to operate the business. Our role in the corporate office and the regional is always provide the best in our training systems. I think that people is really an important component.

The human element, not just the financial resource, the human resources, but making sure that you have the right leadership and that they are properly trained with the right systems, right tools and right support. We went into buildings that had, as I said, over $1.1 million of contract labor. When we spoke to the on-site staff they didn’t appreciate the cost differential between contract labor and permanent labor and they weren’t given the tools for recruitment.

It was always easy to call the agency and have somebody show up tomorrow. The biggest cost of contract labor is the disruption for residents and family. When we buy buildings from the first day that we file a licensure application, we go in and meet with the staff and residents. We also have Zoom calls with all the families of the residents. We introduce ourselves, we talk about our strategy, our history and what our plans are. The first comment I always hear is, “Can you get rid of those contract agencies?”

We go in and we focus on staffing, culture, training, systems. If I go back and look at the buildings that we’ve acquired, we spent a year at Trustwell before we bought our first building of just researching and on analyzing every tool available to senior living operators.

Our use of Wi-Fi, first thing we do is we have new Wi-Fi put in the building at closing, so that way we give new software and computers to the on-site staff. Then we implement these systems, and we train on the systems. A lot of it is the culture. That we go in and explain that we provide an environment where we expect the local leadership to take on the responsibility and the accountability.

[00:24:03] Tim: Thank you for sharing all that as well. As we were talking we got a couple of questions. This seems straightforward to me, but we got two questions about how you calculate your margins. Do you mind going over that for these audience members?

[00:24:15] Larry: Sure. Margin, very simply, is our net income after management fees and all expenses divided by gross revenues.

[00:24:26] Tim: Great. Hopefully, that answers the question for audience members, the two that asked.

[00:24:30] Larry: Again, that’s an operating margin. It does not include depreciation, interest expenses, cost to capital. It’s just all the operating expenses and management fee less your revenue gets you to net income, and that is divided by gross revenue.

[00:24:45] Tim: You had said that and I had heard the same at the NIC Conference last week, that perhaps some labor challenges are starting to let up a little bit. I wanted to, actually, ask you about what you’ve heard. Where are you or maybe what you’re seeing as well, where are you seeing or hearing that things are getting easier and how do you see all this trending?

[00:25:18] Larry: It’s a market by market. It’s a very local business. It’s market by market. I would say, we definitely see that. We look at a lot of acquisition opportunities. I’d say, yes, that it sounds like the labor front, still challenging. It’s less, it’s not as drastic as it had been over the last few years. It’s, definitely, moving in the right direction.

I say that I think that wages are rising. Part of that margin compression is that benefit packages and wages are adjusted to pay people fairly. They want to work in the environment in which we offer. It’s great to be able to attract mission driven staff. We hope that our employees are excited to come to work every day. That really helps, as I said, minimize turnover.

I do have the sense that there’s some of an adding of some of that pressures that we saw, particularly during the pandemic on labor and don’t forget, retail is having challenges now. You are starting to see some cutbacks at the more hourly wage, lower spectrum of a wage scale. You’re starting to see that there are some entry level positions that are available in some of these markets because of the effect that the economy inflation has had. Particularly on some of the the retail aspect.

[00:27:11] Tim: You had mentioned earlier that you’re seeing some folks come back to Trustwell communities when you’ve taken them over and you’ve changed things. That obviously alone seems like it’s a great recruiting tool…Is there anything else that you’re noticing is working really well for recruiting and retaining? You said your turnover was 6%, which is great. What do you think is helping to achieve those results?

[00:27:44] Larry: Well, recruiting, we are using technology to help us with the recruiting, and that’s been very helpful as well as on managing our wage and hours and expenses. I think culture and mission have a lot to do with recruitment and retention…We aligned ourselves with great tools to help us in recruiting that has been very effective. I think that we’ve been very competitive in our financial benefits, our 401(k), healthcare benefits, wages that we budget, but we’re paying well due to accelerated payments to staff, which help a lot as well for the staff at the building. Then, creating an environment that people like to come to work.

For example, we’re spending $5 million on renovations right now across four buildings. We’re not only looking at resident rooms, common areas, we’re changing out workspaces. We’re looking at break rooms, we’re looking at nursing stations, site of vision. We’re making environments that are attractive for people to come to work…We’re very cognizant of the impact because the employees are so critical to the success of operations. We want to make sure that, literally, we’ve taken rooms and offices out of service and converted them into employee quarters and places that people can be comfortable and have work stations. We think now like in memory care or assisted living, where do we put the nurse’s station? Where are the access to their information, their files, but also having bright open spaces that are airy, that are comfortable, and they have great lines of vision to see what’s going on?

[00:30:44] Tim: That’s great… think this was something that was a response to something that you had said a little bit ago. Larry, they’re asking you to explain some more of your thinking behind the decision that you made. They said, “What was the main driver of purchasing a stabilized, independent living community, rather than a more value-add asset where presumably more value creation is to be had?” Then they asked, “Was it a good purchase price? Did it add cash flow to your portfolio, etc.?”

[00:31:19] Larry: Great question. We have an institutional partner that is a sponsor of funds, that historically have owned core class A multifamily assets. Because of my relationship, we started speaking about their interests of seniors housing. For their investor profile and the strategies, we’re looking at recently constructed class A stable properties with sustainable cash flow, and they’re wonderful. They’re beautiful buildings, they perform very highly. They provide a very sustainable cash flow to their investors, and we’ll buy some more of those…Very different than the value add, but you know something? It’s a nice complement. It balances out our portfolio, it gives us more scale. It, actually, helps us on hospitality, looking at some of the features that we are now incorporating into our assisted living and other buildings that have higher levels of care of bringing over some of the hospitality attributes of these higher performing newly built independent living buildings.

[00:32:51] Tim: Great, and thank you for clarifying that. What are some of the big consumer trends that you see prospects and adult children latching on to these days? The baby boomers are coming or maybe they’re here in some instances. What do you think they want out of our senior living communities?

[00:33:27] Larry: We, actually, use that data to understand the profiles of psychographics and other data points, understand who our customer is, who our resident is. Right now, I’d say, the baby boomers are still not coming in yet…The average age of our residents today is mid-80s. Some are probably in their early 80s. Now, in independent living the age span ranges from 68 to 92, average age is 79. Much more active profile, but still a lot of assistance mostly with ambulation, but very high performing, very high engagement and activities going on at the buildings.

I met with a colleague at NIC last week, who, actually, was the broker that sold us some of these buildings. He was, actually, in Kansas City three weeks ago, and visited the building. His comments were two. One, offering. Building looks beautiful, staff seem incredible, and I can’t believe the energy level in the building. Okay. That’s probably as equally as important. These buildings they have limited activities. We walked in, residents were almost half asleep. When we have activities, we take residents out to dinners, we have family nights, we have a lot of events.

Interesting, we have a lot of events that include families and they love it, and the residents love it. think about the buildings that we’re renovating today, what we’re doing with space, some of the challenges of older product that’s out there, we need more venues. We need more options, more choices, because our residents will demand it.

All-day-dining is something that’s coming. Some people are starting to look at that, but also whether it be a bistro, whether it be a grab and go, whether it be other surfaces that residents will expect, obviously much more activities, more cultural aspects, and different aspects of what goes into the programming. As I said, we really have taken the programming to another level.

We have redone our menus. It’s interesting. We brought out all new food service into the buildings. We use new technology for menus so people can see them and have good visibility during the day to know what’s being served through meals.

We form every building a Resident Council and a Food Committee the first month. The residents, actually, meet with our chef and our staff and have a say on what the meals will be.

Now we’re working with our food purveyor and chefs coming up with new menus and new recipes and food input, too, that dining experience. By the way, in my 35 years, we always scored high in resident satisfaction. For 22 years, at Capital Senior Living, we never scored lower than 95%. By the way, we’re now in the midst of creating resident satisfaction surveys for Trustwell, so stay tuned.

[00:38:31] Tim: Larry, we had a question. I’m not sure if you can shed more information on this, but they had a question if you could share any more information about either your labor PPD or your dietary PPD. I don’t know if this is information that you wanted to share.

[00:39:05] Larry: Yes, so our meals are about $8 per day, labor changes by venue. I think it’s about on average, I think care’s about $22 an hour, and then, again, the minimum wage top, typically, $15 an hour. Growth rates this year are probably about 5% on labor.

[00:39:26] Tim: Great. Well, thanks for answering that question. You just mentioned technology. Obviously, there’s a lot out there that’s really cool. I think we saw a lot of it at the NIC Conference last week. One thing that I see with technology is that there’s so much out there, it’s hard for me sometimes to figure out what’s useful, what’s not, what has a purpose, and what is maybe a novelty. I wanted to ask you, what technology do you see out there that you think shows a lot of promise? Is there anything that’s just over the horizon that you’re particularly excited about?

Larry: Well, we’ve implemented a lot of new technology in the buildings. Everything from how visitors are entering the building, use Accushield to come in, and how they go in through the visitor management process, which also helps, by the way, generate even Google reviews. It’s a nice complement to have on entrance. We’re using new technology for care plans.

It’s having a great impact on our assessments, the speed of our assessments, the ability to accurately assess residents. We have, actually, quality assurance metrics that we, actually, measure every month based on the data that we’re getting from our technology that’s very helpful.

One of the things that we just implemented, which is a great technology, is automated accounts payable. We’ve taken the human element out of bill payment where we can scan invoices, and it actually automatically loads into a journal ledger. The accountants are happy that they’re getting you the coding, they’re getting all the information from the invoice, and that subject to approvals automates the building process.

That is not only a great reduction of people hours but also the ability to really automate that process, and streamline it, and approvable. Because it does take away from the way that bills are input into our accounting systems to make sure that they’re accurately in there. As I said, we’re using technology for our meals. We’re using technology for recruiting. It’s been great, been a cost saver, and giving us really good tools for managing the daily staffing of our buildings.

All these components coming together, many of which are integrated, which is helpful so they can talk to each other and help each other. I do think that new technology, I think artificial intelligence … We’re looking at ways to use this data to make us better and more predictive and predictive analytics, particularly on the care side.

Something that I’ve been intrigued about and looking about for years. We’re looking at both in sales and marketing, how this information can be used to improve our search engine marketing, search engine optimization, and sale of the marketing tools. As I said, psychographics, and other understanding of who’s there, who’s other buildings, what’s attractive, what’s not, and what we can do to approve upon that.

Then, again, thinking about everything from falls to care plans, understanding comorbidities, and all these types of matters to project out length of stay, and staffing needs, and everything, but I understand what’s going on in the building. I think that we’re evolving where there’s a lot of great things that are starting to appear.

The one thing I think is also paperless documents. I think that’s something that it’s still amazing to me how many operators still use paper. How many residents still use paper for signing? It’s amazing. You move a parent into a senior living community, and you’ve got this lease agreement that you have to go through and sign. Yet everything else is using DocuSign or everything else to ease that process along. Those are improvements that we’re seeing in making communication aspects.

We’re rolling out family apps. All of our family members can use, on their iPads and their cell phones, they’ll have a Trustwell app. They’ll have all this information about their parent. They’ll see what their parent’s doing, understand who they communicate with. All those aspects will be held by handheld devices. We’re seeing that through our care planning technology.

That has been very much, again, what makes employees happy working in our communities: providing better resources, better tools, better technology to make their jobs easier. More importantly, I think they know how important they are, and serving the residents, and how important they are to the Trustwell team, and they feel that sense of importance so they can identify. I think that there’s a lot of technology that we don’t need. A lot of ideas out there that may not be cost-effective and easily implemented, so you have to think about that. The other thing is putting guardrails on implementation.

In other words you’ve got this smorgasbord of offerings out there and you have some very enthusiastic leaders that say, “Let’s do this.” They take a step back and say, “All right. How are we going to implement this? How are we going to roll this out, make sure that it’s working, and adopted and training is implemented, and then the on-site associates will be using it before we move on?”

It’s also phasing. Now, we have a very detailed phases scheme on all of our renovations…We are doing complete renovations in these buildings, including memory care conversions. They have been seamless and not at all disruptive to residents. We phased it where work is done at night when residents are asleep, we make sure that we’re not interfering with their living space. We did move residents out in segments, out of the rooms and back in, and that’s worked out very well.

We also are phasing in technology to make sure that as we add new technology, new systems and programs, we’re thoughtful to make sure that they can be implemented properly and that resident, that the staff can be trained and be comfortable before we grow. Also, we don’t distract from the core issue in the day-to-day activities that are ongoing amongst the on-site and corporate leadership that they can execute on our strategy and continue to make great strides that they’re making before we implement new technologies.

[00:46:52] Tim One of the things that I take away from NIC, it seems every NIC conference I attend, the spring and then the fall, value-based care becomes a bigger part of the discussion. I can remember when I first started, it was possible to go to NIC and not really at all talk about value-based care. Now, it seems you can’t get through NIC without talking about it. I want to get your take on that whole trend as big and nebulous as it is. What do you make of the value-based care movement and are you working at Trustwell to integrate some of those new payment sources, maybe special needs plans and things into your operations?

[00:47:33] Larry: We are not working on payment sources at this point. However, one of the strategies we had for years at Capital Senior Living was partnering and creating relationships with other healthcare providers, whether it be hospitals, skilled nursing, therapy, rehab, home health. We are, actually, working very closely and collaboratively with many of these organizations.

All of our revenue’s private pay. Right now we are continuing on private pay service, to the extent that there may be something interesting, we may look at that.

We don’t yet have the scale to really implement that at this point. We’re focusing more on the local markets, what we can do within those markets. We’ve always had a very strong faith in business development through marketing and strategic partnerships with caregivers, and it’s going very well. We’re seeing all the benefits of that at our communities.Yes, [value-based care is] an important part of our business, but we are continuing to focus at this point on the private pay senior housing business.

00:49:25] Tim: I want to tap your experience for something else here. We just saw a fellow public operator from that period, AlerisLife, formerly Five Star Senior Living, get taken private. I won’t ask you to comment on that situation directly. I don’t know that you want to, but I am curious about the larger trend. Do you think there’s something about senior living operations that makes it tough to also be a public company? I’m curious when you were at Capital, is this a discussion that you ever had in the past, this idea of it’s really hard to be public? Maybe it would be better if we were private?

[00:50:11] Larry: Great question and I have some different views. Yes, we always talked a bit at Capital. 22 years as CEO, that’s something you talk about. Capital Senior Living went public in 1997. At that time, we were developing buildings. We went public to access capital for development. There was a use of the capital and there was a very affordable cost of capital.

It also facilitated lending, because the lenders liked doing business with the New York Stock Exchange company that had a solid balance sheet and access to capital and a good capital stack. We were considered a financially stable organization that was able to get the lowest cost of capital. Then, obviously, everyone had overbuilt in the late 1990s. Then, actually, it was interesting from 2001 to 2006, we didn’t have a source of capital using our stock as a public company.

I, actually, created joint ventures with private equity funds like Blackstone, and GE, and Prudential, which ended up being very, very successful and financially successful, versus raising money using our stock. There was a flurry of IPOs from 1996 to 1999. Most of those companies, many went bankrupt and many are no longer around or, actually, none in current form.

It’s a great question. I think there’s a discipline you have in a public company in quarterly reporting and having good corporate governance, good oversight, having good conversations and transparency with investors who are very smart, ask good questions. I think that all of that is very helpful. Where the stocks are and have been for some time, they no longer are a source of capital.

What really does not make sense is, why are public companies triple net leasing buildings, or even managing buildings, when they’re not creating revenue sources or value creation to create shareholder value? It’s a great fool theory that you could just expand by growth because as we’ve seen, non-disciplined growth always does not always work out well because you end up taking on buildings that, “Oh, maybe they’re too small. Maybe the markets are too small. Maybe they weren’t making money. Maybe the rents were too low. Maybe the demographic doesn’t fit.”

We have to grow the company, so we have to take on more and most of those have not worked out well. I would say today there are some companies that are very successful, very good capital structure. The other thing, the senior housing industry was overleveraged. I’ve been involved in real estate my whole career, was very involved with the formation of the real estate investment trusts that started around the early 1990s when there was a real downturn in the real estate industry.

At that time, REITs would only have about 40% leverage because they understood that they needed to have this access to capital and a conservative balance sheet. If you look at senior housing, even going back to the first IPO, which was Assisted Living Conceptsin 1994, they were over-leveraged companies, whether it be triple net leases or debt. There was never that discipline in the capital stack. The REITs had [the discipline], but not the operators, which looking back was a mistake.

Again, there are some companies today that have very high stock prices and perform very well, and have a great growth strategy, and they’re owning their assets and have a conservative capital stack. I think that works well and would work well in the future, but most of the companies today who are the operators don’t have that today, and that’s a challenge. I think they have to really think hard about, “Is there any value to being public?”

[00:54:59] Tim: Well, that’s great. I’m glad that you answered that question so thoroughly. I want to end our discussion here, talking about the future of Trustwell specifically. I know that you are growing through acquisitions. What are you seeing out there on the acquisition market right now? I know we talked a little bit about the mindset shift among brokers, what do you see out there on the market these days?

[00:55:29] Larry: “It’s a tale of two markets.” I’ll quote [NIC Chief Economist] Beth Mace for that. She said that in one of her writings. Like I said, buying a newly built, class A, stable, independent living, or even just living memory care, you can finance that today. Now, again, the strategy we have with the institutional buyer, they put on 50% financing; it’sa very conservative capital structure. Again, different view, but leverage is lower.

I think that even for cash-flowing buildings, it’s probably down to maybe 60%, 65%, probably not 75%. I think it’s very difficult to finance non-cash-flowing buildings. That’s where cash is king. I saw a lot of my friends in the brokerage industry last week that came up to me to say that certainty of execution is paramount right now. We continue to see numerous transactions that we made offers on that weren’t accepted that never went to closing.

I think that one of the fallacies that happened in this industry over the last few years has been that sellers’ expectations, very often, were unrealistic. They received opinions of value that may have been too high and they went to market expecting to be able to retire by selling their buildings at a very high value. No one saw it the way that their BOVs came in so they never sold. It’s a tough business. There’s a lot of fatigue out there. There’s lots of stress and a lot of fatigue.

I think we’re seeing that there are some opportunities where some owners are trying to just shrink their portfolios and sell what they can almost at any price, and we’ll see what happens with them. They may not cover the debt, so they may have to make the lenders wholeto accomplish that. I think there’s a different climate amongst the capital markets and lenders today..

Cash is king. If you’re well capitalized and can buy for all cash with low leverage, it gives you, definitely, a benefit. I do think that the competitive advantage today is certainty of execution because I think a lot of the sellers and brokers have been disappointed in transactions. We’re not able to close equity back down numbers in pencil. Obviously, interest rates are rising, have had an impact as well.

[00:58:18] Tim: I want to end our discussion with just a what’s next for Trustwell? What can we expect to see out of you guys this year over the next, let’s say 12 months? What are you working on?

[00:58:32] Larry: Well, our focus still [is going] to be on operations, and sales and marketing, to create the value and continue the improvement of the buildings that we own and operate. We will take on some more management, both with the institutional investor. We hope to do more transactions this year with them. We’re having some very interesting conversations with existing owners where we would come in and invest capital alongside them to renovate, use our playbook.

People have taken notice of what we’ve accomplished in the last six-eight months with the buildings that we’ve acquired and operating, and we think that’s a good deployment to capital for our partners, as well as our ability to create better environments for residents, and staff, and families, and economic returns to owners. We’re seeing some owners in this market saying, “You know, I don’t really want to sell because there’s more value to be created,” but something has to be done and we can help solve that.

We are looking at those solutions. We can come in and really provide the full suite of capital infusion, CapEx, renovations, conversions, operational excellence, sales, and marketing, all the systems, data analytics, all that we can bring to the table that we can share with partners and do that joint ventures with institutions. We see that and then we’ll continue to be acquisitive with discipline. We bought 5 properties, we underwrote over 1,000, and many of those are still available.

I think the pricing is getting to the point where I, actually, think we’ll be more acquisitive this year because I think there is just a more reasonable landscape where sellers’ expectations have changed. Trustwell can provide certainty of execution. Fortunately, we have the financial partners that we can accomplish that. I think it will be a very interesting year, both 2023 and 2024. I think this is going to be a very interesting year for the industry. A lot of changes are going to occur. We hope to be able to take advantage of the opportunity over the next 24 months.

[01:00:47] Tim: Great. Well, Larry, I have many more questions I’m sure I could have asked you, but unfortunately, we are out of time. We have taken up this hour and we can talk for another hour. Larry Cohen, thank you so much for a great discussion and for coming on SHN+ Talks.

[01:01:16] Larry: Thank you team so much. Great seeing you. Appreciate it.[01:01:19] Tim: Bye, everyone.

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