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Discovery Senior Living achieved “explosive growth” when it was joined at the hip with Integrated Senior Living (ISL) earlier this year — and that may be just the start of the company’s next chapter, according to CEO Richard Hutchinson.
“We’ve hit the fast-forward button on evolution,” Hutchinson said during the latest installment of SHN+ TALKS.
Heading into this year, Discovery completed a recapitalization with Coastwood and Lee Equity Partners aimed at growth and evolution of the company’s brand management structure. In February, Discovery announced partnership plans to pair Discovery with ISL as sister companies.
“This wasn’t something where we were just trying to get a bag of money and run off into the sunset,” Hutchinson said. “It was evolutionary and purposeful and thoughtful in its timing, and we really just needed some juice to take it to that next level.”
In trusting Lee Equity Partners’ experience in other industries, Hutchinson said the capital raise and experience in other areas helped Discovery create “leverage as we grow.”
Discovery’s next chapter includes an intense focus on defining its regional management structure via its various in-house operating companies. Those companies include the newly launched LakeHouse Senior Living, which operates communities in Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin.
Despite all of the company’s progress so far, Hutchinson said Discovery is not done building out its regional management structure, with other regional platforms with a “couple more announced not in the too-distant future.”
Discovery Senior Living now oversees nearly 300 senior living communities nationwide, making it among the nation’s largest senior living operators.
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
– Discovery’s evolution and rapid growth in 2022 and 2023
– Hutchinson’s thoughts on evolution and change within senior living
– How regional management structures can benefit operations and spur growth
– The ways Discovery is preparing for future growth
– Hutchinson’s outlook for senior living in 2024 and beyond
[00:00:05] Austin Montgomery: Good morning, everyone. I’m Austin Montgomery with Senior Housing News. Welcome to SHN+ TALKS. These are live, interactive and honest discussions with people shaping the senior living industry today. For this edition, I’m joined by Richard Hutchinson, who is the CEO of Discovery Senior Living. The Bonita Bay Florida-based provider is the fifth-largest senior housing operator in the country. Richard, thanks for joining me here today.
[00:00:31] Richard Hutchinson: Thanks for having me.
[00:00:33] Austin: Of course, and I’m really looking forward to our conversation. With that, let’s get into it. Richard, let’s start with a simple question, and it gets to your background. How did you get involved in the senior living industry?
[00:01:11] Richard: It was 1994, I was with a master plan home builder and developer in Florida doing typical real estate things, single-family homes, high rises, those types of things. In Florida during that time, we heard about this really cool assisted living industry. We had many of our communities that we had built that had a lot of aged folks, so we decided to go ahead and participate in self-perform on the construction, with a little dumb tax paid there.
We self-performed the building and a few communities in Florida and then it’s 30-something years later and here we are with a few more than just a handful. It’s important actually, the genesis of Discovery because it does reveal some of the DNA that we have. Those master planned communities were super highly amenitized mid-to-higher end in Florida. We were used to country clubs and golf courses and tennis clubs, those types of things. We actually entered the space more focused on independent living.
Very proud, still have that same first community public courtyards in Sun City Center, Florida, still have that today under operation and it’s doing very well. It’s changed a lot in 30 years, but that was how I got started.
[00:02:55] Austin: Thank you. Now, we’ll fast forward all the way to this year. I would love to get a sense of just how the year has gone for Discover Senior Living? How would you characterize 2023 so far?
[00:03:14] Richard: I think obviously, we’ve been pretty busy this year, and I think it’s pretty public that we had a recap last year, and that added fuel to the fire that was already burning there. We’ve been busy, but the word that I would describe 2023 is busy. We’re a high-tempo company, always have been, and I think we even turned it up a little bit of a notch in 2023.
[00:03:43] Austin: You touched on the recapitalization from last year. Do you want to describe some of the biggest accomplishments so far this year that Discovery has seen?
[00:03:53] Richard: Sure. The biggest accomplishment continues to be the biggest accomplishment every year, which is being successful at providing our customers what they desire, which is a wonderful experience, and the performance we’re able to drive by focusing on that every year, still the biggest accomplishment we have. Transactionally, I think it’s pretty well-known, the acquisition and partnering with Integral Senior Living was a really big piece of our puzzle this year.
Getting that accomplished, bringing over that management team as an operating vertical for Discovery I think is huge for us. We’re still going through integration, and maybe we’ll chat about that later, but at the same time, that was a huge accomplishment. I think recently, probably you have seen, we stood up another regional management company, so whether we’re acquiring and partnering with existing operating platforms or standing up platforms, that’s all part of our thesis.
Discovery at year-end was somewhere around 120-something communities, and today we’re chimneying almost 300 communities, so some pretty explosive growth. While that might scare some folks the way we did it, and hopefully we’ll chat a little bit about that, I think it is really unique. Because of that, our performance in every one of our operating verticals actually have gone up into the right, every one of them without failing, including the branding LakeHouse.
[00:05:37] Austin: Yes. We’ll definitely dive into the integration with ISL and LakeHouse here in a bit. I first want to touch on the recapitalization because I think that set a strong foundation for all of this. It’s been a little bit since we talked about this news. Do you have any updates to share on the recapitalization? Anything you want to mention on just how the integration process is going?
[00:06:00] Richard: Yes, the recapitalization with Lee Equity Partners and we brought in Coastwood as a partner as well, really the trifecta of having Discovery, which was majority owned by me previously, bringing in Lee Equity Partners and Coastwood, Dan Decker over at Coastwood, great experience in the industry. We really brought in folks who could help us execute our thesis.
This wasn’t something where we were just trying to get a bag of money and run off into the sunset or anything, this was strategic and it was actually just evolutionary and purposeful and thoughtful on its timing. We at Discovery had brought the platform to a certain sophistication, a certain level, and we really needed some juice to take it to that next level, and so we were very disciplined and we had been searching for the right partner for a long time.
We were very, very fortunate getting Lee Equity Partners and with all of their varied backgrounds because we actually had offers from a lot of different companies to come in, but that right fit was really important for us. That right fit included something that Lee Equity Partners had in spades that most didn’t, which was experience in other correlated industries that we could leverage as we grow. I think that’s a very, very important part of our growth piece, is understanding what ground they’ve already plowed, and trying not to reinvent the wheel in many regards.
I think that our industry is unique in a lot of ways, but we can learn and have to learn for other industries and just be humble and realize we don’t need to know everything, other folks have some pretty good ideas that we can borrow. Lee Equity Partners coming in, bringing that varied background, as well as obviously the recapitalization resources tremendously helpful, and we’re executing. I don’t know if you’ve noticed, but we added some board members and we have some external board members now, including Jacquelyn Kung, who a lot of people know formerly as the owner of Activated Insights.
I think I’ve said this to you before, Austin, the idea of bringing a lot of these operators together is to create a team of operating all-stars inside of Discovery as the parent. We’ll talk about structure, I hope, because that’s really important in our thesis, but also at the board level, right? Whether you are Yoo Jin Kim from Lee Equity Partners, or Christian Chauvet from Lee Equity Partners, or Jacquelyn Kung, we’re trying to also put together an all-star team at the board level to really help guide us and provide us insights as we execute plans of growth.
[00:09:01] Austin: Thank you. Yes, it’s very exciting. When we spoke in February, I know you talked about this in a way that really talked about the next phase of platform evolution for Discovery. Why do you think that evolution is necessary in today’s senior living climate?
[00:09:23] Richard: Evolution is necessary in every climate at all times, including in our industry. It is just the nature of the beast. If you stay in the same place you fall behind the pack. We’ve hit the fast-forward button on evolution. The why of it is that inflection that’s going on. We are a recognized real estate class now. We do have more sophisticated capital, and I know a lot of the operators are feeling that, and when I say feeling that, they can tell because these really smart people are asking really smart questions and demanding a lot more information and everything.
That goes right into the heart of having data at your fingertips and the ability to operate at a tempo that makes sense to sophisticated capital, so you have that inflection. Of course, you have the demographic inflection, which we’ve all known has been coming and the changing of the consumer preferences, but you also have technology inflecting at this point in time, and then, of course, we had the one we hadn’t planned on, which is the macro-economic environment inflection, and whether that’s through the labor inflation that we’ve all experienced, or general inflation we’ve all experienced, or just the macro pressures now of interest rate rising.
All of these coming together says to me, and it has been saying to me for years that, hey, we have to change the way we’re doing business and growing. I guess the last one, and maybe the start of my thesis of needing to change, was the historical context of companies that grew in this industry. It was difficult, and it’s still difficult, to grow in this industry. Looking back in history at a lot of the companies in the space and the challenges they faced when they grew, and then tackling some of the paradigms that we’ve had in this industry, some of them are very stale, and trying to tackle those in a meaningful way, it can be overwhelming.
Lastly, and very contemporarily, dealing with margins and owners –We all like to live in the past. It’s comfortable in the minds of humans to live in the past. The good old days but look, those good old days are gone. There are margin compression pressures everywhere. For us, the way to go ahead and add margin to our buildings for our owners and oftentimes partners in those buildings was being able to scale, but then, balancing the ability to scale.And you’ve heard me say this forever: Scale but not fail. But scale and perform.
You end up in that good spot where you’re actually using the ability of scale to accrete margin, to offset some of that compression that we’ve seen over the last five, seven years. Look, this is the way the industry is going. We’re going to have high labor costs. It’s a labor-intensive business, and obviously, in this environment, labor’s not going backwards. I always thought it was funny when people said, “When labor moderates.” Yes, well, that’s not going to go backwards.
You have to figure out ways to improve margins, better processes. I know I’m getting in the weeds here, but, our staffing models for a lot of the communities are the same ones I put in place in 1994. We have to evolve the actual physical staffing model of these communities, and we can do it. It takes a lot to do it, but we certainly can do it through the utilization of technology and those types of business process evolutions that have occurred naturally across all industries.
That’s what we’re doing. When we do get into talk about structure, I think it’ll be even more revealed, but the why is all of those things. That’s so compelling and sometimes overwhelming to some folks. It’s the why.
[00:13:53] Austin: Now, let’s shift a little bit and talk about that integration with ISL. How is that process going?
[00:14:17] Richard: The integration will take time to complete, but the entire thesis that we have of partnering with other operators and bringing them into the platform of Discovery has been and will continue to be its addition by addition. We do not have some type of thesis where we’re going to go in and buy companies and bring them into our platform that are terrible, or that are not doing well for their owners, not doing well for their customers. That’s not what we want.
That makes the integration process a lot easier. In this circumstance, with Collette Gray, the CEO over at ISL, being such a strong leader and having such a loyal senior team and a wonderfully strong culture, it just makes it a little bit easier than even typical. The harder part is the mechanics. The systems integrations, how they do selling versus how we do selling, and then trying to integrate that. As we went through diligence and worked– we worked a year on that transaction before we closed it.
We spent a lot of time pre-planning the integration. This is where someone with Lee Equity Partners really is helping. They brought in best-in-class world-class integration consultants. Being able to line those up and have the resources to bring in world-class integration consultants, and they set the tempo and the outline, so everything is more smooth. It’s not just Richard and Collette sitting in the room going, “Well, what do you want to do?”
Because we actually challenged ourselves to say that’s actually not the standard. The standard is not to take the best process that is happening if it’s ISL and DSL or some other company, that’s not the standard. The standard is the best process, period, inside or outside of these operating platforms. That’s why we’ve engaged a couple of the world’s best integration consultants to come in and say, “This one here is a wonderful process, let’s integrate this way. This one here is a best-in-class process, let’s integrate this way.
Oh, by the way, there’s a few of them where, actually, neither one of you has a best-in-class process. This other industry does it this way and you guys should think about adopting this.” This is how both the integration can be accomplished but also hit the gas pedal on continuing the evolution of our platform. That’s ongoing and it’ll continue to go on for months longer, months and months longer. I think the ownership groups that were part of the ISL world are now part of the Discovery world.
I think they’re starting to see some of the performance improvements by taking that thesis of combining very good operators and taking best-in-class processes and just improving the total. The cool thing is ISL, Collette and I have a really great working relationship. She agrees with my thesis, which is something that’s important for anybody that we talk to about collaborating with, which is you have to check your ego at the door.
This is not about, “Oh, DSL has the best-in-class process,” or ISL does, or LakeHouse does, or TerraBella or Morada. It’s ‘we.’ We’re a ‘we’ culture. It’s not about the ego. Everybody subscribes to that, and that’s why things seem to be working out great.
[00:18:11] Austin: Wonderful. Are there any benchmarks or any goals that you have in mind, at least in the short-term, as the integration continues that you’re really looking to hit?
[00:18:25] Richard: Yes, of course. I’ll tell you, I have a wonderful team, Bill Sciortino, my COO, he’s on the forefront of a lot of what we’re doing here on the integration items. There are way points in each of our disciplines that we are trying to hit.
The first thing I wanted to do was tackle the ability for me to see everything. I want all the data. Transparency of information was the very first thing that I needed to have happen on day one. It didn’t happen day one but it’s happened pretty damn quickly. Being able to see the data and influence operations through the utilization of data is something that I know Collette and team really, really are working with our BI group constantly on to try to gain more access.
I like to see the data and our team likes to see the data. Improved performance right out of the gate by having more visibility into data, transparency into data so that we can actually show we get benefit right out of the gate to the ownership groups and partners that we have on ISL side, as well as DSL is something we’ve been working on, and in our culture, of course. Making sure the teams don’t have an us and them because that’s not the thesis from day one. We worked really hard to make sure we never work with folks that have us in them mentality.
That part I can tell you is very far advanced. We’ve actually had some folks more formally joining our home office support center. We’ll talk about that, I’m sure. The home office support center from the ISL team, and then vice versa, we’ve actually had some folks, DSL both in the field and at the home office get down into that vertical. It’s cool. I know we’re talking about ISL and DSL, but I have many operating companies now with Morada and LakeHouse and TerraBella and some more standing up here soon, as well as ISL, and of course, our legacy company, Discovery Management Group.
Maybe I should say this, and now the whole world will actually hear it for the first time. Discovery Senior Living has never been an operator — never, not once, ever. It has never been an operator. It has been a holding company from day one of verticals. If you’re in the private equity world, you might call them portfolio companies. Discovery Management Group actually operates our communities.I’m still CEO of that, as well, but that was really the team.
When Discovery Senior Living brings on an ISL or something like that, it really operates as just another vertical. It’s another operating platform, and it adds to, of course ISL, but Discovery Management Group, Morada Senior Living, LakeHouse Senior Living, TerraBella Senior Living, these are all management companies with wonderfully talented managerial teams. They’re presidents and COOs and all the verticals that you have in management companies.
By the way, we also have other companies, we have Discovery Development Group, Discovery Design Concepts, we have Discovery Marketing Group, Discovery at Home or on health care services platform and on and on. We do have a lot of portfolio companies all with wonderfully talented division presidents, and that’s been the case for a very long time. Most people just roll it all up into Discovery Senior Living, which is the reality because it is the parent that’s executing all of that, but most people didn’t know that.
[00:22:29] Austin: The umbrella of Discovery Senior Living grows and grows. It’s always interesting to watch.
[00:22:35] Richard: We are not trying to grow vertically. I think that is an unsustainable path to growth and leads to disconnection because of distance. When you have a localized business like we do, you cannot get distance and so if you try to grow a vertical thesis, I think everyone has seen that’s a really difficult challenge in a space.
Growing horizontally, it’s more expensive, I can tell you that, but it’s far more sustainable and the performance improvements are far greater, and I don’t mind sharing with you. Perhaps I could share a screen. I could share a screen and show you every one of our operating verticals, and sometimes I share it with our capital partners so they understand I haven’t lost my mind on this growth thesis.
Every one of them, everyone, including LakeHouse, which just was stood up, every one of them are up inoccupancy, NOI, margin, RevPAR, all of them. Why? It’s not Richard. Believe it or not, I’d like to take credit, but [I am about] checking the ego at the door. It’s because we have wonderfully talented people running operating platforms. What I’ve done and what I will take credit for, is take the friction away from all the administrative stuff that presidents and CEOs and just management teams in these operating verticals have to deal with, give them scale, give them BI, analytics, give them some of the AI, and we’ll give them that.
Give them all these tools to be successful. Take away the friction in their day-to-day operation so they can focus on value of creative activities every day. When we say reimagine the staffing patterns at the community level, really, honestly I think everyone needs to reimagine it and then picture how much time are the customer facing activities going on versus administrative activities, and then be simple. Don’t try to make it complicated, simply change the percentage.
Figure out constructs that allow them to be more customer-facing, value-add, and that value add can come in a lot of different ways. It could be they have enough time because they’re not dealing with so much administration, so many reporting requirements, so much friction that they find a localized revenue stream that otherwise just wouldn’t have time to cultivate. It can be value-add that way, it can be on the paying more attention to their team members or associates where they are developing better career paths, more direct managerial mentorship, which we desperately need in this industry.
Of course, it can be communicating with families and the customer themselves and creating a higher perceived value of the experience, which allows you not only the competitive advantage in the marketplace, but allows the economic advantage that comes with having a high perceived value in the marketplace. It’s simple and it’s concept, and sometimes I think we overcomplicate things.
I hear about how unique we are all the time, and I agree we are a unique industry, but at the same time, sometimes it’s better to back up and just let’s do something simple. I digress a little bit and as usual, I’m off on the tangent, but that’s important and that’s part of the thesis. My job is to get rid of the friction on site and find ways to add margin to the building and let them do what they want to do.
I have a strong bias about just trying to put the right person in the right role, someplace where they are using their talents to the highest and best use possible. I can promise you a lot of the administrative stuff that we make these guys do on site and any regions and et cetera, that’s not their highest and best use.
[00:26:48] Austin: Could you talk about the effort that went into the launch of LakeHouse, and then give an update as to where that process is right now?
[00:27:12] Richard: Well, the cool thing about the effort going into standing up LakeHouse is it’s the third one, the third regional management company we have stood up from scratch, so there’s a playbook. There’s some dumb tax lessons paid along the way, and so this one was actually a little bit easier. In the construct of how we stand up these regional management companies, we try to infuse the regional management company with legacy Discovery folks, new folks that are in the industry, and then new folks that are outside the industry.
In this case, we had a bunch of communities in the Midwest operating as a more traditional region because they were not big enough to be able to support an entire regional management company from a revenue standpoint, but with the Enlivant transactions, and we took over a fair amount for Fannie and Freddy, during that we decided, “Hey, look, we should stand up a regional management company that should focus solely on the Great Lakes region.”
That focus on the Great Lakes region is by design because as we have spoken about before, but maybe the audience doesn’t know, we customer profile and then we product select and we refine the metrics that need to be made or used and managed to by geography and customer profile. In this case, it was secondary market and tertiary markets around the Great Lakes region.
We were able to bring over like I said, a fair amount of Enlivant communities, but we also had one of the senior folks from Enlivant available to us. Brad Poterack’s his name. We thought Brad would be a great leader for the LakeHouse communities, and so we brought him over. He was able to bring a few team members from Enlivant that we felt very, very good about.
I’m absolutely going to minimize the effort by having to narrate it. Of course, the home office support center dropped in our business assimilation team, which is specifically developed to assimilate communities into our culture from a training standpoint, a systems standpoint, a support standpoint, and drop them in and they were able to get that accomplished all within about 90-days from the decision to go ahead and stand them up until the two weeks prior to when we thought we were going to take over all those communities.
We were able to stand up that entire regional management company soup to nuts, leadership, regional sales, operations, everything from culinary to care all the way through the facilities, et cetera.
Again, a true regional management company. What a wonderful team. He brought them down to Bonita Springs in Florida, and spent a week or two just immersed together in everything.
The business assimilation team both does home office stuff, but they also travel out to the communities and into that region. It was a wonderful effort. I’m super proud of the team, being able to stand up a complete management company and make them effective day one. When I say make them effective day one, I mean day one they were effective. We have increased occupancy. We’ve now had two months if you include the weeks of September. We’ve increased occupancy a fair amount in those communities, about 200 basis points in the first two months. That’s while creating, as you might guess, a fair amount of lead generation activities. That’s always the hiccup in transitions.
It’s super helpful to have those resources. Once again, this is where scale matters. If you’re a smaller company, having a business assimilation team that can do that, that’s hard to do. Been there. Trust me, that’s financially difficult.
[00:31:55] Austin: I think you’ll want to protect that standup playbook that you have quite tightly.
[00:32:01] Richard: It’s funny you say that, Austin. I don’t react to that. Don’t care. There’s so much space here. There’s so much blue sky. Everybody can get a piece of the universe here. I hope other companies stand up companies, I hope they can grow massively, all those things and we can all be successful. There’s plenty of room.
[00:32:25] Austin: Most definitely. Do you want to talk about the philosophy behind having these regional management companies oversee parts of the portfolio?
[00:32:43] Richard: If I was a public company, I would say no comment, but I’m not, so I get to tell you exactly what the playbook is and why. All regional management companies for Discovery Senior Living, and we’ll have a couple more announced not in the too-distant future, they were based on this. They’re focused only on secondary and tertiary market where the operating tempo is different than in primary markets. We set them up because those markets, the customers in secondary and tertiary markets are exceptionally localized. We’ve done so much research on the customer.
I didn’t color in the lines very well when I was in kindergarten and first grade with crayons, and I don’t do that well now. I didn’t care about state lines or anything like that. What I care about is a concentration of like-customers in a certain geography. When you customer-profile them, how do they consume services? How do they want to consume services? How do they want to be presented with those services? What are their pay ranges that they can actually afford? Then how do you run those buildings?
Because, look, in secondary and tertiary markets across the country, they’re smaller buildings. You need to have a small community operations playbook, which we do. You have to have different metrics, you have to have different ways of lead generating. You just have a different staffing pattern, a different resource base. What we tried to do is create specific companies that served a very focused customer, and then we focus them on communities that are 100 units or less AL and memory care, licensed, typically. There’s some independent living smudged in there once in a while, but they’re predominantly regulated.
Now I have experts that have small community operations playbooks that have metrics that they’re not aggregated metrics, they’re just for small community operations. They operate less than 100 units, they’re specialists in that. Staffing patterns, lead generations, conversions, paid referrals even, those types of things, and then the big thing for me is I limit them. You can’t get bigger than 35 to 40 communities. That’s your regional management company.
Why? Which was your original question. Why do that? Because now I have a special ops group. I have a targeted team that’s wonderfully talented, that is restricted in its scale, so it can’t be diluted in its focus, and they’re attacking a very finite customer profile, and they’re attacking a very finite type of building. It’s like anything else, you get real good at it after a while. When we stood up Morada Senior Living over three years ago now, Hilary Bullard, the President of Morada Senior Living, Tommy Wood, the COO — I have to tell you, Hilary had the toughest job because we had to create this small community playbook.
We had to figure out the metrics differences between operating [in different regions]. Her area is Texas, parts of Oklahoma, parts of Arkansas. I call it my “Cowboy Hat Region,” and secondary and tertiary markets throughout Temple, Texas, and Victoria, Texas, and some of these markets that are not Dallas, Houston, San Antonio, or Austin. She had it tough because she had to figure out how to operate these differently.
I use that term all the time, “paying the dumb tax” — it was a smart tax. We invested in some wonderful talent and we had a thesis. We had the courage of our conviction and we executed. Now we can hand Brad and his team that playbook on small community operations with that focus in that era. Otherwise what you have is aggregation and dilution of performance. I think that’s been one of the growth problems by growing vertically in our industry. You lose the specialists because a lot of people are geography-based.
They handle things in Texas. At one point in time in their day, they could be trying to evaluate the metrics of running a large continuum campus in the middle of Dallas, and then the next day running out to Temple, Texas and operating in a little small building, 80 units because they’re in Texas. But you’re asking for people to be unicorns. If they’re so talented that they can run a 36 unit standalone memory care and secondary tertiary market somewhere, and then run over and understand all of the differentiated metrics and driving of leads and the sales process, multi-co-located buildings, managing staffing patterns– if they can do all of that, they should have my job.
They often do, and those types of talented people, you can’t keep them for very long because they just move on and they move up very quickly. I would rather have people that are focused on one particular product type and one particular demographic type of consumer and make that customer experience wonderful. Now, the last piece of the puzzle is what I had talked about before.
Now, have all that advantage of that focus, the talent and the focus into those areas, now strip away all the friction that I just talked about and give them all of the supportive services that a small company of 35 to 40 communities could never afford. Simple things like the office of the general counsel. We have 15 people in the office of the general counsel, compliance and licensing. All of the things, obviously, risk management, insurance, all of these things that we can bring to bear for these guys. You never have that in 35 or 40 communities.
The leaders of a small regional management company have to take a lot of their day dealing with third-party attorneys and firms. They have to deal with trying to scale their business, they have to deal with trying to purchase at a level that is very localized and hard to do. Our teams don’t have to do any of that. I’m going to give an example that’s outside of operations, from my development company, which has a complete renovation vertical.
There’s a big mistake, in my opinion, in this industry, in believing that facilities maintenance and project management are the same thing. Absolutely not. They’re totally different skillsets, yet what do we do? We take a facility’s maintenance director and we asked them to do project management and things like that. You have this regional management company and they’re asked to unit turn, because I don’t know if you’ve heard, but we have a little bit of turnover in this space of our customers.
Unit terms are part of the day-to-day tempo, but managing unit term specs, everyone’s like, ‘Oh, that’s easy. Oh, you got a useful life this, useful life that.’ The problem is managing it where not only can you buy it at scale so you have the best cost, but you have an analytics team, an operations group and a renovations team that can tell you the best useful life, balance so you get our highest ROI on it, but then the other part is managing the spec. What happens, and this happens every day, what happens when something goes out of stock or something’s discontinued?
I’ll tell you what happens in most companies. The maintenance guy, as they say, will run down to a Lowe’s or Home Depot and try to match as close as they can. You get a dilution of the design in the feel and the flavor of a unit relative to what you’re trying to accomplish in a specific marketplace for the overall feel of the community. They don’t have to worry about that in Discover.
Our design team manages unit turn specs. They are always looking for what is being discontinued? What is the appropriate replacement? They deliver packaged unit turn specs to the communities so they don’t have to do all of that stuff. Again, it’s about friction. Take that friction away from it, so that’s why scale I think matters here and why we’re trying to combine paper-focused, refined local management that’s connected to these communities. Because everybody in this call believes it. Everybody in this industry believes it. I also believe it. It’s a paradigm that’s true, which is that the best results are from local management, absolutely.
We’ve had a construct where it was binary, either you’re a local regional management group or you’re a national player and everybody had thoughts on both. My favorite conjunction in the world is and, it’s not or, it’s not but, it’s and, and so we wanted to build something where you could have the best of both worlds. Having hyperlocal refined management, optimizing results at the community level and gaining the benefit of scale from the home office support system, that we’ve developed at this scale.
[00:42:53] Austin: How are you tackling the older assets in the portfolio in terms of thinking about renovation or thinking about design?
[00:43:22] Richard: Look, now it’s a great question. Most of the time it starts at the outset with the thesis of working with the owners. Oftentimes I had mentioned owners are also partners with us, but for the ownership groups, understanding what their thesis is.
If they’re coming to me and saying, ‘Hey, Richard, I have a 25 year old building in the secondary market, pick a state, and man, I really need it to be 95% occupied and rocking along and 35% margin, but I really don’t want to put any money in.’ That’s a pretty easy conversation, but okay, no. How we like to think about it and remember, our standards are going to be very precise. That’s why I wanted to pick apart your question a little bit.
My standard for the middle of downtown Atlanta, mid-rise, high-rise, where a customer is willing to pay $8,000, $10,000 a month is going to be far, far different than the standard and the secondary market aged building with more modest demographics. We do use all of those vertically integrated companies to design something. This is the key and another mistake I think that’s made in the industry all the time. Stop thinking about it in terms of what we want, and think about it in terms of where the opportunity is in the marketplace to serve seniors.
The very first thing we do is we get into a community, we evaluate, and the physical plant is a big piece of this, we evaluate its position in the marketplace relative to its competition, and then with our BI Group, we evaluate the opportunity space in the marketplace. Here’s what you’re going to find a lot of times, Austin, is a lot of people all want to move and occupy the upper 25 percentile. You just instinctively want to give them a better environment to live in and more and more and more.
That may not be where the seniors really need your help. I say the seniors, it also aligns with it may not be where the owner’s best economic outcome for that building could be in the marketplace. Don’t get me wrong, there’s no– we don’t operate slums. These are good buildings in nice markets, but the positioning is the most important thing. Where should we be in a marketplace? We evaluate that first. Then we go back and we say, “What do we need to do, with the ownership group, what do we need to spend to move to that position in the marketplace where the opportunity is? What is the consumer willing to spend in that piece of the marketplace?”
You can put those three things together pretty quickly and then create a thesis. You can also deconstruct what’s already happened and move your building in the marketplace. For example, if you do want to have higher RevPAR and you think that’s going to accrete margin at the bottom, okay, but just having a better process maybe you can get higher RevPAR because of perception and reputation in the things where you’re operating better.
Oftentimes, especially in these aged smaller buildings, you do have to have an investment thesis so that you are combining the movement in the marketplace with the attendant RevPAR to try to get to where you go. The other thing we do every time when we start out is called a GAAP analysis. I’ll listen to owners, partners, we’ll talk about it and we’ll say, “Ultimately my thesis for my investment is that–” let’s take a PE. “I have a three-year-old, here’s what I’d like to get out of it. Here’s what I underwrote. Can you help me get there because things aren’t going well as it is.”
Then we do a gap analysis and we simply say, “Here’s where you want to be, here’s where you are.” We’ll evaluate it on a bridge basis. Incremental occupancy should provide this over time. Inflationary increases to RevPAR will provide this bridge all the way through, better staffing patterns, remodeling, how you’re doing business on-site, but add, add, add. We come and then sometimes it’s a bridge to nowhere. You realize at optimal, we’re just not going to get there. Those are hard conversations with capital partners and capital sources.
Everybody has to put on their big boy pants at some point and recognize reality. I think one of the problems operators have is we are such servants, and we’re so accommodating. We want to tell them that we can get there, and sometimes it’s okay to just be honest and say, “Can’t get there from here.” Now they may go and move on and try to find a different operator that will give them the talk that they want and tell them, “Yes, no problem. We’ll get there.” I think reality is the basis to start with.
When we do that, then the anticipated performance levels are an appropriate incremental amount so you don’t get stretched over your skis because how often have we found in this industry where capital partners are upset with an operator and the operator’s doing everything they can? What it always ends up being is unrealistic expectations, not necessarily only on the capital partner side, but set from the operator by not understanding exactly where it should be positioned.
That was a long and rambling answer to a pretty simple question about how we think about deploying CapEx into secondary market buildings. Really, it’s a lot more work than people think. By the time we put a hammer to a nail, there needs to be a lot of work done and full alignment on what we’re trying to accomplish with the improvements.
[00:49:50] Austin: I think your point on alignment is important as well because it gets back to something that you’ve been alluding to, is the corporate support that you’re able to provide from the home office to help drive census and margin growth. Would love to know just how creating that local management structure mixed with the support center really helps drive those two metrics.
[00:50:12] Richard: Yes, that’s going to be an easy question. The profile of our division presidents, our management company presidents and our COOs are heavy business. Necessarily, we have a very heavy business experienced person, typically MBAs, that type of thing. Many of them have asset management backgrounds or ownership group backgrounds, and so they can speak and understand what’s going on with the owners. Not that other folks can’t, but they are definitely in tune.
The other thing I find is the sophisticated business folks that run these companies understand the supportive services and the resources we’re providing, and this was something we had learned early on with Morada. While Hillary, she’s wonderfully smart and talented and can understand all of those services, we were having trouble translating it into actual operational tempo at the community level.
By partnering with a COO who has a lot of experiences, business-minded for sure, but has a lot more day-to-day boots on the ground experience, we’re able to take that and he or she is the translator of a lot of that sophisticated process and frankly, sometimes the governor of how quickly we implement things and then customize it to how it can be translated and operationalized. That has worked out well.
Prior to that, we were putting the square peg in a round hole and asking people to do things that they just didn’t understand the value of. That’s a big piece of the puzzle, on how to actually translate that into operational improvement. It’s always something you have to show, we don’t believe in enforcing or being prescriptive to our leaders. Our community leaders are really smart people and most of them want to know how to be better. They want to be coached up, as I say, they want to be coached up, but you have to give them something that is manageable. That’s important.
The other big thing, and if we talk about the future a little bit here, the training center. We’re standing up a pretty substantial learning and training center with Discovery and you’ll hear more about that as 2024 rolls in, a really, really big thing, but I think we don’t do a great job training, educating, and career developing.
I think we can do better. This is once again where we can look to other industries and the partnership that we have with Lee Equity Partners has helped us do that, look into other industries and just be better at that.
I think showing people, coaching them up on the why behind all of this sophisticated stuff we’re trying to do and the changes, no one likes change. I hate change too, but– maybe I don’t hate change, but a lot of people hate change and certainly folks on site do not like change because they’re busy and they have a routine and a tempo, and they’re trying at their best to give a great customer experience, and then all of a sudden you shift on them and that’s difficult for them to get. It’s incumbent upon us to be really good coaches and explain the why, and it’s worked out pretty well.
[00:53:34] Austin: Thank you. That’s very interesting. Now just if you can believe it, we have six minutes left, so let’s shift a little bit and we can talk about what’s to come. Would love to get your perspective on your outlook for 2024 when you think about operations and we can talk about opportunities and challenges.
[00:53:57] Richard: I’ll actually separate it exactly as you did. I think from an opportunity standpoint, we’ll continue to execute our thesis, we’ll continue to stand up management companies, continue to grow, continue to evolve the platform at the parent level that allows true margin creation down at the community level by all those things we already talked about. I think we’ll certainly do that.
We’ll stand up more regional management companies. We’ll certainly end up partnering with other management companies coming under the Discovery umbrella. For sure I think all of that’s going to occur. I also think it’s going to be, from an operation standpoint, I think there’s going to be a lot of opportunity in the occupancy. I think people will be less happy with the opportunity for rent increases, and that’s going to be very bifurcated. It’s going to be a very secondary, primary market dynamic that’s going to be very different.
I think that’s going to be a challenge as we go forward. I don’t think the full effect of interest rates, the increases on a market level, I don’t think the full effect is here yet. I think there’s a lot of people that are worried about what 2024 is going to look like. One thing I would tell people is when you think about the forward yield curve and you’re looking at the forward yield curve, it looks like there’s some relief just around the corner.
I would just remind people for the last 15 years, a forward yield curve has been incorrect all 15 years. It will take longer for things to normalize, and that’s going to create a lot of pressures, lending environment, liquidity issues, things like that. It’s going to be tough. That’s a big, big challenge going into next year. You didn’t hear me talk about staffing and labor at all.
I think we have a really good construct. Agency is just not a big deal for us right now. I think a lot of operators are starting to feel that way. We do need to re-imagine how we recruit and retain and we’re going to tackle that in 2024. I’m all done with giving awards to communities that have 20% to 30% turnover of staff. That’s just silly. We can do better as an industry. We’re certainly going to tackle it.
The last thing I would say is from an opportunity standpoint, I think we’re going to find a movement of the consumer to accept our product class even further. I think a big one that you’re going to see and that we’re not going to have time to talk about it, is the digital side of consumption. I think you’re going to see services being consumed digitally. I think you’re going to have leasing, I think you’re going to see some buildings in some markets actually lease sites unseen, which is really interesting, and then I think you’re going to see a lot of companies engaged in various AI solutions.
The word I’ll leave the audience with or as you’re thinking about marketing or lead generation, we’re pretty well known of being cutting edge there, but search engine optimization, SEO, SEM, all those things, those are going to go the way of the dodo, and it’s going to be answer engine optimization because a lot of people are going to put question marks at the end of their searches and when they have what is the best senior living in Naples, Florida, of course it’s going to come back to Discovery, but other than that.
If search engine optimization used to be please tell me what the senior living options are in Naples, it’s going to be a question mark going forward. AI is going to play that monstrous role in that. I think you’re going to start seeing answer engine optimization mechanics in the marketing and things like that. A lot of cool things are coming, a lot of challenges still going into 2024.
I only speak for Discovery and I can only hope for everybody else because I don’t run their businesses, but for discovery, we definitely see 2024 far more opportunistically than challenged. We’ll continue to grow and I think we’ll play out a lot of our thesis and start providing material evidence to the marketplace of how it’s going.
[00:58:37] Austin: Richard, I just want to say thanks for taking the time and for a great conversation. We are out of time for this TALKS episode. Just want to also thank our viewers for tuning in and participating. Don’t forget to catch us next month for our SHN+ TALKS. Take care everyone. Thank you, Richard.
[00:58:54] Richard: Thanks, guys. We’ll see you.
[00:58:55] Austin: Bye.