Developer REDICO and operator American House combine decades of expertise to grow portfolio in Midwest and expand eastward.
By Jeff Shaw
REDICO is both an acronym and a company name that perfectly spells out its focus and function: Real Estate Development and Investment Company. The 50-year-old firm made its name in developing and acquiring office and retail assets across the country.
When the company was looking to break into seniors housing, the executives knew they were reaching outside their comfort zone. So they looked for a company that knew its stuff when it came to the industry.
American House Senior Living Communities was a Midwestern regional operator founded in 1979 — long before the assisted living development explosion of the 1990s — with a moderate portfolio, but a sterling reputation for operational proficiency. REDICO decided it had found its partner, and came together to form a single company in 2008.
REDICO considers American House to be an “affiliate” rather than a direct subsidiary. More than 10 years after the acquisition, the companies are just now combining offices in Southfield, Michigan, a first-ring suburb of Detroit.
“When we found American House, we found a well of knowledge of the seniors housing industry, something our competitors didn’t have,” recalls Dale Watchowski, president and CEO of both REDICO and American House. “We took the institutional character of REDICO and deployed what we do from a financial perspective and applied that to the seniors space.
“We spent the first three years working on policies, procedures and systems. Once we felt comfortable that we had all the right ingredients in place, we went out and started to invest.”
The investment went quickly. American House founder Bob Gillette — who’s “retired but still on board,” according to Watchowski — brought 13 communities to the joint venture. Following the combination with REDICO, the portfolio ballooned to 63 communities totaling nearly 7,000 units.
As of June 1, 2019, American House operated 60 communities totaling 6,615 units, placing it No. 27 on the list of the 50 largest U.S. seniors housing operators, according to the American Seniors Housing Association. The combined company’s focus is largely on independent living, which makes up approximately 75 percent of the portfolio. The rest is assisted living and memory care.
With the exception of two communities that American House operates under a third-party management contract, the entire portfolio is both owned and operated by the companies.
Reading the market
Many seniors housing companies have a specific approach to growth through acquisitions versus development. REDICO and American House instead prefer to be opportunistic, doing what’s most appropriate for the market and economic cycle.
For example, the company “tended to make our name in turnarounds of distressed properties,” says Watchowski. However, the previous five years were mostly marked by ground-up development as “there was not a lot of distress in the market.” The company is now shifting its focus back to acquisitions as occupancy rates drop due to overbuilding, creating new opportunities for value-add, turnaround acquisitions.
“There’s a time to build and a time to buy,” says Watchowski. “I’m becoming worried that the space is becoming overcrowded. There’s a bit too much development going on.
“The concern I have is also related to the lack of discipline among investors. You’ll build a property and then three other developers announce new properties in that market. In my opinion, it’s reckless. Because of that, we’re very cautious about where we go to right now.”
The company insists on managing every property it owns — and in fact credits that approach for its expertise in turnaround projects. “We want to have skin in the game,” says Watchowski.
Pure investment companies might be too focused on profit and cashing out, while pure operations companies might be too focused on care and compassion. A combination allows for best of both worlds to meet, says Paul Stodulski, CFO of both REDICO and American House. Even though the companies were combined in 2008, just before the peak of the Great Recession, the American House occupancy rate only saw a slight decrease from 94 percent to 93 percent, he said.
“With REDICO’s national presence and ability to underwrite and go into different markets, you have the capability to understand what makes the market what it is,” says Stodulski. “You have that investment background, you have that senior-level leadership that can steer the organization through difficult times.”
Regional expertise plays a factor as well. Because REDICO and American House are both based in Michigan, the companies know and understand Midwestern residents. American House properties target a middle-class clientele, charging assisted living rents between $2,500 and $4,000 per month.
Based on this extremely targeted focus, the companies refused to expand beyond a five-hour drive from the Southfield headquarters for many years.
“We decided to focus on the type of resident we were serving, and that’s the Midwestern, middle-market resident,” says Watchowski. “We wanted to test our systems and processes by staying close to home.”
The companies have begun a slow, careful expansion plan throughout the Midwest, and even made the leap down to Bonita Springs, Florida, where American House founder Bob Gillette retired.
“We went to Florida because it translates quite well to a Midwestern market, particularly the Gulf Coast of Florida,” says Watchowski. “There’s a good chance if you’re from Michigan or Ohio, you retire to Florida.”
REDICO already owned a large construction company in Florida and knew the landscape well, while Gillette provided the “eyes and ears.” The company is now expanding throughout Florida and nine communities have opened to date.
This local market knowledge is key to the company’s success, according to Stodulski. REDICO knows the local contractors to trust, has the money to hire them, and the consistent development pipeline to get a fair price. Contractors know that REDICO pays on time, and will have another project lined up right behind the next, says Stodulski.
What’s the long-term plan? Expand the Midwestern portfolio to the East Coast (there’s already one American House community in New Hampshire), and grow northward from Florida. American House hopes to slowly spread through the Mid-Atlantic and have one, large geographic concentration throughout the East and Midwest.
“We hope to fill that corridor from north to south,” says Watchowski. “It took us 12 years to get to where we’re at today, so our plan is really a three- to five-year plan for that growth.”
Leading with compassion
Have no doubt: The reason REDICO wanted American House as part of its family was operational success. And the company is proud of that success. (See the previously cited 94 percent occupancy rate).
While there are many factors at play, both Stodulski and Watchowski say the key is in sound hiring practices at the executive director level. The average tenure of executive directors within the company is around 20 years, according to Stodulski. The company seeks out compassion and caring, rather than a specific level of experience, and teaches the rest.
“We often hire former teachers or [professionals] from other walks of life — people who have the compassion and understanding of our mission,” says Stodulski. “We have very low turnover at the executive director level, and it leads to a happier resident and better performance for us. Our top focus is our employees. If we have happy employees, we have happy residents.”
Stodulski calls this “competency-based hiring,” and requires valuing personality over experience. In one case, an employee was plucked out of a local country club after
Gillette noticed her attention and care with senior customers. “She was really compassionate and gave great service,” says Watchowski. She was hired, became one of the company’s best employees and eventually climbed the ranks to become a leader in the community.
“You can teach a person how to manage the bricks and mortar and how to have financial discipline,” adds Watchowski. “What you can’t teach them is compassion and care. Our folks love seniors. They think about our residents day and night and would do anything for them.”
This is the basis of what Stodulski believes sets an American House community apart from others (and, indirectly, leads to their success).
“You’re going to get a hug as opposed to a handshake when you walk through our doors,” he says. “We believe that’s unique to us.”
Watchowski likes to pass along an anecdote of American House’s founder Gillette and his son driving home from a philanthropic event. The two realized that they had attended a dinner and contributed to a cause, but had no idea what the cause was or where the money was going.
The founder and son held a board meeting and discussed starting a charity foundation that gives virtually all of its money to supporting the needs of seniors and none to elaborate dinners. The result was The American House Foundation.
Money raised by the foundation can’t go to residents of an American House community (to prevent the company paying itself through its own charity). Otherwise it’s wide open: Any senior in some sort of financial need is eligible. For example, the foundation has purchased washing machines, installed wheelchair ramps and paid for dental procedures.
“Our objective is to help the seniors who otherwise wouldn’t be served,” says Watchowski.
The foundation partners with several organizations — some that help seniors locally, and others that seek to improve senior care as a whole. Locally, the foundation hosts Holiday Hope for Seniors, which provides household goods like brushes and sponges for underprivileged seniors.
On a global level, American House Foundation partners with Wayne State University, University of Michigan and The Mayo Clinic to help fund geriatric studies.
All three research organizations are located in American House’s backyard — the Midwest. Specifically, Wayne State is in Detroit, U of M is in nearby Ann Arbor, and The Mayo Clinic is based in Minneapolis.
“Our objective is to both support them financially, and then have seniors as a whole benefit from their studies,” says Stodulski. “We saw an opportunity in having world-class universities just miles away from our front door.”
In addition to funding research, American House taps into the universities’ respective nursing schools as sources for the next generation of seniors housing professionals. The company finds new staff through internships and also learns how to care for frail seniors through the universities’ expertise.
“While many other operators are focused on the low-acuity resident, we’re focused on the high-acuity resident,” says Stodulski. “A close relationship with those that teach senior care will better enable us to help those residents.”
This is an important consideration for the future of the industry, says Watchowski. As luxury developments leave middle-class seniors out in the cold, the elderly who do move into seniors housing will be older, frailer and more needs-based, he predicts. They’ll also have fewer resources. “How many companies today are offering pensions? Think of the average savings going down,” says Watchowski.
Seniors housing also is losing market share to home healthcare, family caregivers and other alternative ways to stay at home. As a result the “acuity creep” of residents getting older and frailer doesn’t show any signs of reversing.
Instead, operators should focus on the market that is underserved. That group includes the elderly who can neither afford home healthcare nor luxury seniors housing, and those who have means but not so much money that they have unlimited options.
“We just look at this as an ever-evolving industry,” says Watchowski. “The evolution is toward that middle market.”