When I recently asked Welltower (NYSE: WELL) CEO Shankh Mitra why the company pursued IRS approval to self-manage independent living assets, he replied with a question of his own.
“Do you not know the state of our industry?” he asked.
The sector continues to fall woefully short in attracting customers, has failed to create a sustainable workforce, and too often loses money for investors, he said. Few operators have stepped up to the challenge of addressing these chronic issues by creating scalable, efficient and effective operating platforms — as a result, many communities are still run “as an island.”
In short, he believes Welltower has no choice but to create a large-scale operating platform that can support all the partners in the REIT’s portfolio, while enabling the company to selectively self-manage some assets.
Mitra is not out to antagonize people, he told me, although he is not bothered about being divisive if that means offending people who are complacently “drinking their own Kool-Aid” regarding the performance of the sector, their organizations, and the promise of demographics to be a cure-all.
I think that even people who are offended, skeptical or critical of Mitra or Welltower should note that other leaders, from very different parts of the industry, also are speaking out more sharply about the sluggishness of operators to improve and innovate, even when taking into account ongoing challenges related to pandemic recovery.
In this week’s exclusive, members-only SHN+ Update, I share more highlights of my conversation with Mitra and offer analysis and my takeaways, including:
- The sector needs to act more urgently to get operational basics right, to support innovation
- Getting the “people versus profits” balance right will be important as Welltower seeks to drive margins through more a more data-driven operating platform
- The move toward REIT self-management is one more death knell for the 5% management fee
‘Standards are too low’
Despite his dissatisfaction with the status quo of operations, Mitra emphasized that there are good operating platforms out there, which Welltower has been systematically trying to align with over the last several years. But he also believes that too many people in senior living are oblivious to the dangers posed by a lack of operational rigor.
“Every industry has to have high standards, or someone is going to come in and disrupt it,” he said.
I was struck that Mitra — the CEO of the largest for-profit owner in the industry — sounds very much like one of the sector’s leaders on the nonprofit side, HumanGood CEO John Cochrane. For years, going back to pre-pandemic days, Cochrane has been speaking out sharply about how slow-moving and risk-averse senior living has become, and warning that operators have a stark choice: “self-disrupt” or be disrupted.
Representing another slice of the industry — mid-size, for-profit owner/operators — Juniper Communities CEO Lynne Katzmann has also been hammering away at this point for years, warning of potential disruption from major tech companies and insurance behemoths, particularly if senior living providers do not more boldly pivot to value-based care models.
And for years, versions of the same value-based care panels have occurred at seemingly every industry conference, with Katzmann and a few other leaders answering the same questions again and again, as they have educated, encouraged, cajoled, prodded and pleaded with their peers to develop meaningful strategies that will position the industry as a whole for success, even as the health care system has continued to inexorably transform around them.
“Everyone seems to have a hard time just getting started. Cut the crap. Just get started,” Sachin Jain, president and CEO of SCAN Health Plan, said just a few weeks ago at NIC’s spring conference in San Diego, speaking of value-based care.
When assessing the state of the industry, I’d also consider the share price performance of publicly traded operators over the last five years: Brookdale shares are down 59%, Sonida shares are down nearly 94%, and AlerisLife shares are down 90% (with the company now being taken private). This includes the pandemic period, but the public operators were not investor darlings in the years leading up to Covid-19. Then there are penetration rates, stuck at around 10% year after year, which industry leaders routinely cite as evidence that the senior living product simply is not appealing enough to consumers.
I’ve cited these and other statistics in the past, arguing that they point to the need for faster and bolder innovation. But innovation might be impossible because far too many operators aren’t even getting the basics right.
Mitra said that many operators — even large ones — don’t keep a proper rent roll. And with regard to sales practices, on an industry-wide basis, providers aren’t even responding to 50% to 70% of incoming calls from prospects.
“That’s how bad we are, from an industry standpoint,” he said.
Equity analysts I spoke with, who cover other industries as well as senior housing, said they also see a delta between how sophisticated senior housing operations are compared with multifamily, hotels and other sectors.
Welltower’s move to self-manage
Welltower’s operating platform is intended to address shortcomings in a variety of areas, including sales and pricing.
For one independent living and assisted living operator with a concentration in the western United States, Welltower’s data-driven operating model succeeded in boosting occupancy over a recent five-month period, according to the REIT’s latest business update.
Specific steps included accelerating lead response time, implementing amenity-based pricing using a multifamily approach, and bidding out the contract for unit turns.
The strategy is to further build out this operating platform and then harness it to self-manage some independent living assets while also applying lessons learned and best practices across the REIT’s entire senior housing portfolio.
A big question — and one causing some heartburn among Welltower operators — is which independent living communities the REIT will move to manage internally. One operator executive I spoke with believes that Welltower intends to ultimately self-manage its entire IL portfolio, while other operator execs told me they believe Welltower has no intention of replacing them. Analysts I spoke with also did not have any definitive take on the scope of Welltower’s plans to self-manage, with the consensus being that the process will be gradual — more evolution than revolution.
I wondered if Welltower is preparing to take over operations of the Holiday by Atria portfolio to resolve a situation of potentially awkward bedfellows, given that Atria is owned in part by Ventas (NYSE: VTR). But the take I got from analysts is that the two REITs recognize the mutual benefits in getting along as best they can, while still competing.
Mitra says the answer to the question of which properties Welltower will self-manage lies in operators’ financial results.
“Look at your P&L,” he said, adding, “If you’re really good at what you do, you get to do more of that. If you are bad at what you do, you get to do less of that, if you’re really bad at what you do, you get wiped out. That’s just how capitalism works.”
I understand Mitra’s laser-focus on results, given Welltower’s imperative to drive shareholder value. But a relentlessly capitalist mindset comes with its own potential pitfalls, with valuing profits over people one of them. Mitra does acknowledge that senior housing is a “people business” that cannot be run solely with “modules,” and he emphasized that the operating platform is not premised on cutting costs to the potential detriment of the resident experience, but on adding revenue and enhancing service.
Maintaining positive relationships with third-party operators while driving margins is another element of the people and profits equation. As one analyst told me, Welltower has the scale to be a bull in the china shop, but will be more successful by calibrating rewards and accountability in ways that operators deem fair. The rewards would be incentives for performance, and the potential for Welltower to take over management of assets is now becoming a notable accountability mechanism, at least for IL operators. I hope that Welltower takes steps to ensure that the data-driven operational approach being developed does not quash or compromise the entrepreneurial spirit of some third-party operating partners, which would be unfortuante from an innovation standpoint.
I believe another challenge could lie in the application of multifamily principles within a senior housing context. The creation of the operating platform is being led by COO John Burkart, and the company also recently named Jerry Davis a strategic advisor; both are seasoned multifamily leaders.
I’ve routinely heard calls from leaders across the industry that senior living needs an infusion of more talent from other sectors, so I don’t think Welltower should be criticized for doing just that — but I hope that the multifamily principles translate effectively to independent living, that IL executives bring an open mind to what Burkart offers via the operating platform, and that Burkart appropriately respects their sector-specific knowledge and experience.
Mitra says this is the case, given that the platform Burkart and his team are creating is designed to address issues that senior housing and multifamily have in common, including customer acquisition and the employee experience. Welltower neither has IRS permission nor a desire to directly manage assisted living, and Mitra expresses confidence in the ability of operators to deliver the care component involved in higher-acuity settings.
Welltower rival Ventas (NYSE: VTR) also is looking more effectively influence operations through the application of data and technology, having created an Operational Insights (OI) platform. Unlike Welltower, Ventas is not pursuing self-management of independent living at this time. But CEO Debra Cafaro recently said that any efforts in this area would be led by industry veteran Justin Hutchens.
“We have thoroughly vetted the idea of having an in-house operating platform in senior housing and frankly, if anyone should do it, it should be Justin because he’s actually done it globally, multiple times,” she said.
The Ventas leaders believe that the risks of self-management currently outweigh the potential rewards. Given that the company’s OI framework is improving results, Ventas intends to build on that with its “experienced managers,” Hutchens said.
Despite their differing strategies, Welltower and Ventas leaders agree on one thing: If a REIT is going to self-manage its properties, the results need to be dramatic.
In any case, self-management of IL needs to be a significant “needle mover” to justify the investments required, as Hutchens put it.
And Mitra used life-or-death imagery to describe the stakes for Welltower, not just in self-managing IL, but in raising operational standards generally:
“Either we’ll get this thing done right, we’ll really fix the business … we’ll create systems and processes that actually work as one company, not as separate islands, or we’ll die trying. But what we’re not going to do is sit on our hands and do nothing.”
Clock ticking on 5% management fees
As for why he thinks the standards for senior living operations have stayed too low over time, Mitra points to a preoccupation with dealmaking and misaligned incentives related to management contracts.
After earning a promote on a new development, a management company has little incentive to drive quality and performance over time, he said. If the operator can manage the community well enough to maintain the fee stream, that’s a win, but if not, the company will get replaced by a different operator and simply move on to the next opportunity.
And when I’ve asked other industry leaders why shortcomings in sales practices have been so persistent, and why operators have been slow on value-based care initiatives and other innovations, they often point to the inadequacy of standard 5% to 6% management fees.
Indeed, many of the providers with a reputation for innovation — Aegis Living, Juniper and The Springs Living come to mind — are owner-operators rather than pure-play third-party managers. And Aegis CEO Dwayne Clark has been among the most outspoken critics of the 5% management fee model in recent years.
“If a company takes on a fee-for-service contract, they are typically going to make 6% of gross revenue. Most companies with rising costs can barely make profit at 6%,” Clark wrote in an op-ed for SHN in 2020.
Welltower has tried to create better alignment through the “RIDEA 3.0” contract, with more substantial financial rewards tied to performance. With about 1,500 senior living communities in its portfolio, if the combination of Welltower’s operating platform and incentive structure succeeds in raising the level of operations, that could make a significant market impact and force other owners and operators to adapt or lose market share.
Given their own capital limitations, some of Welltower’s “best operators” recognize that embracing the REIT’s operating platform is “their only chance of taking their business to a different level” and capturing more of the market, Mitra said.
“The strong are going to get stronger,” he said.
Time will tell whether the Welltower approach succeeds, but the company’s efforts are at least an attempt at addressing the owner-operator misalignment that is widely recognized in the sector. Other new models are also being created, with one example being the structure that Discovery Senior Living and its capital partners are pursuing.
And I believe that we might see a shakeout occurring in the next 12 to 18 months as tensions come to a head in current relationships — the dissolution of the long-time partnership of Brookdale and LTC Properties (NYSE: LTC) appears to be one example of an owner and operator unable to find common ground. As old leases and contracts get torn up or lapse, I hope and believe that owners and operators alike will be more creative in how they structure their next deals.
In 2020, Aegis’ Clark asked if the management contract was dead. It was not dead then and it is not dead now, but I’m increasingly convinced that its days are numbered, and the industry should not be sad to see it go.