SHB Blog: Investors Penalize Operators Showing Lackluster Performance

Independent living, assisted living and memory care operators are at risk of losing up to half their management fees.

By Traci Bild, CEO, Bild & Co

(Click here to view a video introduction from the author.)

What one sees as success, another may not; that’s the operator-investor dilemma.

Our COO Jennifer Saxman recently met with a REIT client at NIC to discuss the progress of a recent project. Just four weeks in to a 24-week turnaround on five seniors housing assets, she felt a sense of confidence as she walked into her meeting. Four out of the five communities were showing growth.

That confidence was quickly squelched as the chief investment officer made it clear that the entire project would be a failure unless all five locations saw substantial growth. Four out of five simply was not good enough, even if four of the five achieved full occupancy at market-rate rent. That was an eye opener.

This is the current reality of the operator-investor dynamic. The pressure to get results is incredible. While our REIT client who we work with day to day and the third-party management company’s leadership team were both very happy with progress, the CIO was not.

Intense Pressure to Perform

A new trend I’m beginning to see within seniors housing is investors reducing the typical third-party manager fee from 5 percent down to as low as 2.5 percent due to subpar financial performance.

Operators are appalled and investors are incredulous.

This is a perfect example of the emerging investor-operator disconnect. We need to unify investors and operators toward common objectives and improved working relationships. The best way to make that happen is through education.

The Operator Dilemma

Operators are mission driven and investors are margin driven, it’s that simple.

At one time an operator could easily manage the operation alongside the demands of sales and marketing. That was before an influx of new development, a workforce crisis, high acuity residents, continual attrition and the most skeletal staff in the history of our business.

Operators are prioritizing. When it comes down to it, they will and should put residents first; that is their job. There simply isn’t enough staff, and therefore not enough time to get everything done.

Expense cuts have taken a toll and operators have far too little staff to support the number of communities they’ve grown into. Just because an operator can manage five communities with a lean staff doesn’t mean they can manage 20 that same way.

Regional directors are managing 10 to 13 communities with complex challenges, if there is a regional director at all. Most home offices consist of just three to four people that are responsible for managing 20 or more communities, in various geographical regions and in different phases of development. These leadership teams don’t have the time to invest in building sales infrastructure or effective training programs, let alone the energy to hold people accountable. They are lucky to get new hires on-boarded within 90 days, and by that time many are turning over.

Digital is In, but Few Understand It

Traditional marketing is gone, digital marketing is in. This job itself has become so complex that most operators are unable to properly manage it, let alone come up with a comprehensive strategy driven by data.

The reality is that operators are spending their time sourcing, interviewing, hiring and on-boarding new employees due to a workforce crisis. They’re putting out fires, completing endless reports, coping with resident turnover (with little time to grieve), handling complex care issues, poring over budgets to further cut cost, and explaining to investors why they ended the month or quarter net negative. Senior living operators are burnt out, exhausted and have more pressure than ever before.

The Investor Dilemma

In both 2017 and 2018 we saw a tremendous supply of new inventory come on the seniors housing market. It’s no wonder: Seniors housing real estate was found to be the best bet for development, edging out workforce single family properties and multifamily condominiums for 2018 for the No. 1 spot, according to the Emerging Trends in Real Estate 2018 Survey.

The good news is we have seen a slowdown in 2019, giving operators a much-needed reprieve.

While it’s been great news for the investment community, it’s been challenging for operators, who have scaled up in size dramatically and oftentimes without the proper infrastructure to succeed. Due to mediocre performance, further cuts have been made to drive margins, making it more difficult than ever to meet financial benchmarks.

Operators have a duty to look at the business from the perspective of their investor partners. REIT investors receive income from the revenue that the senior living communities in the REIT produce, through rent or lease payments.

Many REITS today own both the operations and the real estate (RIDEA structures) meaning they participate in the actual net operating income, so long as there is an involved third-party manager. Instead of just underwriting a steady rent payment and annual escalation, REITs can analyze and underwrite larger shifts in operations and income. This is critical for value-add projects where there is material upside from enhanced operations and occupancy.

The investor’s job is to provide returns — without excuses — to their investors. Many independent living, assisted living and memory care communities are not performing to expectation.

Operators Need a Sense of Urgency

Seniors housing occupancy sat at 87.8 percent as of second-quarter 2019, down from 88 percent in the previous quarter. Operators are leveraging discounts and paid referral agencies to drive occupancy up while margins continue to diminish, creating even more frustration for investors. While I imagine operators feel their pain, it’s not often verbalized and comes across as a lack of urgency.

Making matters worse is that most operators have little to no investment experience and most investors have little to no operational experience. While each may try, they simply don’t understand what it’s like to walk in one another’s shoes.

This was never a problem until the business got tough. We no longer have a choice: Operators and investors must unite and find common ground, working together toward common goals and performance objectives.

Can We Increase Management Fees?

Several investors we work with are entering unchartered territory, starting their own management companies, doing away with third-party managers entirely or only hiring those that have skin in the game.

Is this the right thing to do and will it lead to better results?

Clearly the verdict is still out, but one of our forward-thinking investor clients is designing a new management contract that rewards operators up to 10 percent (versus the standard 5 percent) upon hitting key financial benchmarks.

I imagine some operators will find this incredibly enticing and, as a result, strive to hit those targets. What I like is the collaborative approach that focuses on incentivizing performance. To succeed, third-party managers are going to have to staff up, implement turnkey systems designed for scale, hold employees accountable and better educate staff on the business side of seniors housing.

It’s Time for Transparency

As an advisory and consulting firm, what we typically see are over-extended, exhausted leadership teams who have done everything they know to do to get results. They are so busy working in the business that they can never work on the business.

That means rather than taking time to figure out why there is so much costly turnover, they instead find themselves in an endless cycle of vetting, interviewing, hiring and training people only to lose them and do it all over again.

Rather than share these very real challenges with investors, many operators internalize barriers to growth and make excuses for poor financial performance. They figure things will ultimately work themselves out, with performance results just around the corner.

In most cases that doesn’t happen; it only gets worse. The operator doesn’t want to concede they can’t get the job done with the resources they have, while most investors are tired of excuses; they just want results.

Yet, just like any good marriage, communication can do a world of good. It isn’t easy, and egos get bruised. But once constraints are out in the open, both sides can begin to work on lasting solutions, coming together in a collaborative way.

I have found that most investors, upon digesting true barriers, will step in and provide the tools and resources needed and more to get traction; it’s a win-win. The cost of the losses, compared to the nominal investments made to drive financial performance, are pennies on the dollar.

It’s time for walls to come down, ego to be left at the door and a candid conversation.

If you’re an investor, here are some great questions to ask:

  1. What constraints or barriers are preventing you from hitting the financial benchmarks we set forth at the beginning of our partnership?
  2. If money were not an issue, what additional resources would help you gain traction in the next 90 days?
  3. What can we as your investor partner do to help?

These questions will help your asset managers better navigate operator constraints and hold them accountable to outcomes as resources are provided.

Seniors housing is complex, but it’s also an incredible business that does immense good.

When our team first began working to align operators and investors, it was toxic and oftentimes shocking to hear how each perceived the other. Today, I look back and see those same groups thriving, aligned and working together in a much more productive way. There is transparency and understanding fostered by solid communication that leads to improved business performance.

It’s not easy to create operator-investor alignment, but it’s worth trying. All you must do is take the first step.


Traci Bild is the founder and CEO of  Bild & Co, a seniors housing advisory and consulting firm that implements sales and marketing infrastructure to grow occupancy, revenue and net operating income.