Is It Time to Break Up with Your Operator?

Investors should seek out managers with low turnover, local knowledge and solid standardized practices.

By Jess Stonefield

Market demographics are just one set of factors that impact a seniors housing investment. Another factor, and arguably a more important one, is the operator managing the senior housing community in which you invest.

Operators are charged with managing the day-to-day business within the care community and play a significant role in determining the success of any given investment. As such, they need to be chosen carefully — more carefully than many investors realize.

Seniors housing is an incredibly specific sector of commercial real estate. Finding experienced operators who understand the nuances of the industry can be difficult. As such, many will select an investment based on factors such as the quality of a building, the slickness of marketing materials, the experience of the chosen executive director or market demographics, rather than the operator named in the deal. They see “demand statistics” for senior housing and assume, “If we build it, they will come.” Unfortunately, that isn’t always the case.

The Senior Living Fund principals have been investing in the senior housing space since 2008. In that time, we’ve learned a lot about choosing an operator partner. We’ve also learned — sometimes the hard way — that there are times when severing ties with the current operator is necessary for the success of the investment.

The compatibility challenge

When choosing an operator partner, it’s important to remember that the lifecycle of a ground-up seniors housing investment is typically five years or longer. For your relationship to last and thrive you’ll need to think about how compatible you will be for the long haul.

Are your values compatible? Are your business goals in alignment? These questions deserve as much consideration as any market survey. Consider answering the following operator questions as part of your underwriting process.

  • How do they perform beyond the spreadsheet?
    When entering an investment, it’s natural to ask for the “same old” numbers about how this operator performed in the past in terms of occupancy and growth. However, being a quality operator is about more than revenue. It’s about being able to provide the standard of care outlined in the management contract whilealsomanaging the costs of running a multi-million-dollar business, keeping employees fulfilled and satisfying residents in the process.

    As an example, the departure rate for full-time frontline senior housing employees is 29 percent compared to 13 percent for grocery stores and 10 percent for hospitals. Departure rates in the teens or less may indicate an environment where employees feel empowered, prepared and loyal to the company. That limits the high cost of turnover, and leads to a healthier bottom line.

    Also look at the operator’s marketing style. Does your partner proactively form connections and build its pipeline within the local community? Or does the company sit back and wait for potential residents to show up? The operator’s marketing approach — including the power of its customer relationship management (CRM) software — will have a tremendous impact on how quickly the business becomes stabilized.

    “The marketing director and executive director must work in lock-step to build a robust pipeline,” says Michael Mohatt, Senior Living Fund’s director of business development. “That means ongoing relationship-building with local doctors, hospitals and independent living communities via their CRM, not just onsite tours and resident support.” This isn’t something that would show up in a spreadsheet, but it’s a key indicator of how well your operator understands the seniors housing marketplace.

  • Do they have local knowledge?
    In line with the point above, your operator partner needs to be established not just in seniors housing circles, but in the local market, including hospitals, churches and other organizations serving seniors and their families.

    Before choosing an operator, carefully consider how well entrenched they are in the local market in which they will function. A market study provides knowledge, but it doesn’t provide understanding,and the latter is just as important to your project’s success.

  • Do they have standardized and winning processes?
    Even more than a fancy building, you need an operator who can build sound business practices, including clear and consistent processes that funnel from the corporate side to resident care.

    How are team members trained? How often are they assessed? How well is their CRM maintained? How often is their website updated? How do they answer the phone when someone calls interested in their services?

    These details may seem small, but research shows they’re incredibly important. For instance, in her book Zero Lost Revenue Days: A Revolutionary Approach to Selling Seniors Housing & Healthcare, industry consultant Traci Bild found that of the “mystery calls” her company has performed — making simple calls to senior communities to see how their inquiry is handled — a minimum of 40 percent are mishandled. Oftentimes that number is even higher (particularly at night and on weekends).

    On average, she wrote, the receptionists asked for the caller’s name only 19 percent of the time; offered to help just 19 percent of the time; asked the caller to call back on 11 percent of the calls; and offered to take a message 1.4 percent of the time. Imagine how many potential residents these communities lose simply by failing to standardize their processes.

    “Many executive directors have the clinical background to run a community but don’t know how to run a multi-million-dollar business,” says Brian Colgan, Senior Living Fund’s field operations director. “Sales management and training, marketing and website SEO, as well as proper CRM usage, are just as important as quality of care and clinical experience if you plan to effectively communicate your message and fill your buildings. Making sure your chosen operator has these simple processes in place can make a significant difference in your investment returns.”


Building couples therapy into your relationship

Even the best relationships hit bumps along their journey. That doesn’t necessarily mean they can’t be saved.

Once you’ve selected an operator partner, be sure to build opportunities for improvement into your working relationship.

  • Establish clear performance criteria
    Most management agreements in seniors housing are fairly standard. They mandate that the operator manage things like marketing, recruiting, accounting, and licensure, and will also likely establish a base fee for keeping the community running.

    What most agreements are missing, however, is specific performance criteria the operators are expected to meet in order to maintain their position, or to avoid corrective measures. These performance standards should go beyond occupancy and profit, and include metrics regarding retention, resident satisfaction, marketing efforts and website updates. Having these additional performance metrics and processes in place will allow you to recognize issues early on, protecting your investment.

“It’s possible you may experience pushback from operators on this point,” says Mark Shader, Senior Living Fund’s chief operating officer. “Your job is to communicate the importance of these metrics in achieving mutual success — aligning operational performance with expected investment results.”

One way to do so successfully is to incentivize the metrics that most align with your investment success. We’ll be speaking more on this issue in the weeks to come.

  • Assess early and often
    Don’t wait until your investment is tanking to find out what your operator partner is doing wrong. We utilize a consultant, Bild and Co.,to assess our investment communities early on in our relationship. Their report provides valuable feedback to our operator partners before potential issues spiral out of control. It also provides us with knowledge we can carry forward into future investments.
  • Underwriting is an ongoing process
    Your underwriting standards will likely change the more you learn about the industry — and the more the industry changes. For instance, you may increase your focus on hiring operators using artificial intelligence and technology in the care environment, or on those who are able to successfully link home health offerings with in-community care. That’s OK. In fact, it’s critical that you’re open to elevating your standards as the industry changes. Take time to revisit your underwriting criteria regularly to ensure you’re on trend with industry offerings.

When breaking up is still the best option

You owe it to your investor to take an active part in ensuring the success of your senior housing investment. That means being willing to make hard decisions, including determining when it’s time for you and your operator to part ways.

Depending on your ownership stake in any given investment, and the terms of your specific management agreement, you may not have the ability to break up with your operator as easily as you’d like. If you can, however, don’t be afraid to do so because of the potential for delays and short-term losses in your portfolio.

The long-term benefit of working with a solid operator partner cannot be overstated. At Senior Living Fund, we saw one of our struggling communities achieve 100 percent occupancy within six months just by making a switch to a more experienced operator partner.

Yes, it’s a humbling choice to make. Yes, you may lose money in the near-term. But the long-term health of your investment must always take priority.

 

Jess Stonefield is a contributing writer on aging, technology, mental health and the greater longevity economy for publications such as Changing Aging, The Mighty and Next Avenue. She was formerly a communications expert for Senior Living Fund.