How the Push and Pull of Owner-Operator Relationships Shapes Senior Living

How the Push and Pull of Owner-Operator Relationships Shapes Senior Living

Senior living operators and owners need to work together in better alignment to achieve outcomes in 2024 and beyond

This is not a controversial statement, and the issue of better owner-operator alignment has been a hot topic for several years. But discussions last week at our Capital & Strategy conference showed that the industry is very much still determining how to achieve that alignment.

Some leaders, like 12 Oaks Senior Living President Greg Puklicz, are wary of giving up too much control over certain parts of the business, including back-office functions, with the belief that operators doing so risk becoming disconnected from the business.

Evolve Senior Living co-founder Andrew Agins believes that the status quo in the industry still results in broken alignment, and he is seeking new ways of doing business..

In this week’s exclusive, members-only SHN+ Update, I offer analysis and some key takeaways from the discussions with Puklicz and Agins, including:

  • Why some operators might be wary of giving up too much control over operations
  • The risks of “dangerous” management agreements
  • Three key considerations that are key to achieving better alignment

Defining the role of regionals

In recent years, leaders of large senior living ownership groups such as REITs have extolled the benefits of working with a regional senior living operator.

The idea is that smaller operators with a footprint in just a few states are closer to the residents they house, and thus can provide better care with a more personalized approach. Operators are sometimes also paired with back-office and business intelligence capabilities handled in a corporate office or from a centralized location.

Operators like 12 Oaks Senior Living have had success with the regional approach in recent years. That is reflected in how the company added 16.5 percentage points of occupancy in 2023, with a dozen communities in its 38-property portfolio now exceeding the 90% occupancy threshold as of mid-April. But to President Greg Puklicz, there is not a single “regional” model that all so-called regional operators are pursuing, with a key distinction being how centralized certain business functions are.

In his eyes, executive directors or other community-level leaders should be handling tasks like budgeting and strategic planning.

“We take a holistic approach, get them involved with the home office and the home office involved with them – it’s a real collaboration. That’s what regional means to me,” Puklicz said during a panel at Capital + Strategy. “Setting up a huge accounting office in Dallas or anywhere to just crank out financial statements to communities across the country provides the data, but it doesn’t provide the connection and the effective use of that data to really manage communities.”

He added: “When you have all that kind of back-of-house administration split off from operations, I don’t think that model long term is effective.”

To Puklicz’s point, the 12 Oaks model has resulted in meaningful progress for those communities. The operator has wielded its “high touch” model of management with regional support structures to “tremendous success” in communities the operator took on from Enlivant last year.

Puklicz said he is ultimately skeptical of the approach where ownership groups handle back-office functions for the operators that manage their portfolios – at least in practice. While a good idea in theory, he thinks there is a danger such models could lead to the “de-regionalization” of operators that don’t maintain control over the process.

Senior living operators have long complained about incentives, and to that end, Puklicz said 12 Oaks is focused on getting the right mix of base management fees, incentives and exit fees that motivate good performance. And in 2024, he sees companies entering into “dangerous” management agreements that put too much pressure on them to perform.

“There’s got to be more creative and inventive ways to support all the things that need to be done for the ultimate benefit of the community,” he said.

I can see his point, and I think operators are wise to want to safeguard control over certain parts of their operations. But at the end of the day, I do think there are some functions that ownership groups can and should take off of operators’ plates, or at least provide significant support to accomplish. Investing and piloting technology, for example, likely works better at scale. Another speaker at Capital & Strategy was Vikas Gupta, SVP of Acquisitions and Development for Omega Healthcare Investors (NYSE: OHI). He pointed out that Omega has been investing directly in tech companies and has mechanisms for making that tech available to its stable of about 70 operators across skilled nursing and senior living.

Fixing a ‘broken’ operator-owner relationship

While Puklicz’s comments came during a panel on the senior housing operating and investment outlookI also moderated a session specifically focused on owner-operator relationships in senior living. Panelist Andrew Agins, co-founder of Evolve Senior Living, said he currently sees owner-operator relationships as “fundamentally broken.”

Agins said that he believes owners and operators have a problem of “misalignment of expectations between what the ownership thought was capable at the community and what operators knew they could realistically deliver on.”

Operators often do not have the tools they need to succeed, such as data and electronic health technology, he said. At the same time, he said the industry still does not effectively play into its strengths by adopting Medicaid and Medicare payment structures.

“We’re caring for the highest-acute part of our population, and we don’t even have electronic medical record systems that are all integrated so we can have a more holistic view of our residents. That’s a problem,” he said. “I think the data and technology in the sector is far behind other real estate investment types.”

Operators have historically resisted giving up certain information, effectively “stiff-arming” ownership, Agins said. But as ownership groups become more involved in operations, as Welltower is doing with its Cogir platform in Canada, he said it is imperative that operators play ball.

“We think that more smart people sitting around the table are going to be able to create better investment outcomes for the community, which is what’s most important,” he added.

Like Puklicz, Agins believes that senior living operators can earn – and rightfully deserve – a bigger piece of the pie than the ubiquitous 5% management fee.

“There are structures where you can tie your management fee to NOI and have a sliding scale. Maybe you’re earning less at the front end of the deal, but if you’re outperforming, you’re earning more on the back end,” he said. “There are ways to create incentives at the end through a promote structure or through beating your budget, and I think those are real motivators for an operator.”

He noted that third-party managers must often scale to 15 or 20 communities before they can turn a profit.

“If you have one, two, or three communities, you’re in a race against the clock to grow as fast as you can to start building a margin,” he said. “If you can share in some of those costs – or if, through good performance and dedication to those first few buildings, you can pay off on your fees – you’re not in such a rush to grow. And I think that creates better incentives for everybody.”

Bottom line, I think the challenge for both ownership groups and operators is knowing how much an operator can handle and reasonably accomplish, the right data-sharing practices, and financial structures that are fair and get all parties pulling toward the same goals. Getting all these elements right obviously is not easy, but I think the most successful groups in the years to come will be those that are willing to step out of their comfort zones and adjust expectations and practices in all three areas.

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