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There is a growing focus on finding alignment between the owners of senior living communities and the operators that manage them – but doing so is not always easy.
Leaders of senior living real estate investment trusts (REITs) such as Ventas (NYSE: VTR) and Welltower (NYSE: WELL) are big proponents of finding more ways to get owners and operators moving in lockstep. The reason why is simple: There is a sizable net operating income upside ahead for companies that can right-size occupancy and margins today.
In the not-too-distant past, the relationship between senior living community owners and operators was a relatively one-way street, according to Ventas Executive Vice President of Senior Living, Justin Hutchens.
But in recent years, companies like Ventas have taken the philosophy that owners have a larger and more active role to play in that relationship, and can help their operating partners achieve the results they want to see.
“An old way of asset management would be to pull information from the operator and ask questions,” Hutchens told Senior Housing News. “The new way is to pull information, but then we give it back to them with our insights.”
Indeed, the old way of owner-operator alignment led to “misalignment in terms of expectations between what the operators knew they could deliver and what the owners, who had just entered the industry and were pouring a lot of money into the space, thought was possible,” said Andrew Agins, founder and partner of Evolve Senior Living.
Evolve is a relatively new operator with a growth strategy based on finding better alignment with owners of senior living communities. The company is going big on sharing information and finding efficiencies, and working closely with ownership groups, in order to improve community performance.
But there are potential risks in finding alignment, including operators giving up too much control over their business practices, according to 12 Oaks President Greg Puklicz. That is why the company seeks alignment not necessarily by sharing the actual workload, but by making sure that all stakeholders are aligned in a community’s business plan and are clear on goals and incentives.
“We work for owners and prefer to work for owners that also ask us what we need to succeed,” Puklicz said. “When we’ve got an ownership group that provides us with incentives, provides us with support of programming … we find that’s when we’re most successful, and that results in the communities ultimately being successful.”
Building a ‘real collaborative relationship’
One of the cornerstones of how Ventas has worked with senior living operators to find alignment is its Ventas operational insights (OI) program. To date, Ventas has used the program with 35 senior living operators and 800 communities, according to its website.
Through the program, Ventas’ operating partners share information on leading indicators such as real-time move-ins and move-outs and lead conversions. Ventas uses the platform to determine how many dollars to allocate to CapEx and other investments. It also provides operating partners with market demand and home value information along with the financial profile of their prospective residents.
As Hutchens has noted before during the company’s earnings calls, Ventas OI helps the company match the “right operators” with the “right assets” in the “right markets.”
“The differentiator is that we’re really trying to be helpful, and that we answer the questions that we would be asking to help to bring focus to certain communities or certain opportunities,” he said. “That’s created a real collaborative relationship between Ventas and our operators.”
Additionally, finding better alignment and driving better results can help Ventas’ operating partners get better management incentives.
“We have a number of agreements like that, and it helps to really drive a better outcome,” Hutchens said. “It’s certainly a popular arrangement.”
Alignment is also a cornerstone of Evolve. The Chicago-based company is currently working with owner Focus Healthcare Partners to underwrite and manage deals from a $370 million fund dedicated to supporting senior housing.
Agins said he has seen more ownership groups, including new entrants to the space, want to take a more hands-on approach in their investments. That is ultimately a good thing for the industry, as it allows operators to seek out and receive the resources they need to generate revenue for both parties, he said.
Evolve Living developed an in-house tool called Evolve Intelligence to compile information and share it with ownership groups, who have access to the data whenever they desire it.
“Yes, it will expose us to our owners if we’re not doing something well, but we’re willing to bet on ourselves that we’re going to do a great job,” Agins said. “And we believe, at the end of the day, if you have a bunch of smart people sitting around a table solving a problem together, we will ultimately get better outcomes.”
That is also the view of Jonathan Schatz, president of Coastwood. Coastwood, along with Lee Equity Partners, were behind the deal joining Discovery Senior Living and Integral Senior Living. Though the company does not own the real estate its operating companies manage, it places a high priority on alignment among all of its different moving parts and its capital partners.
“I actually think it’s a pretty exciting time, because we’re starting to see a heightened recognition of the value of quality operations that has always been known in the industry,” Schatz said. “The years following Covid, the Great Resignation and now the fiscal environment have really highlighted the value of great operators and also capital partners who understand the space as well.”
Like Evolve, Coastwood and its various companies believe that sharing information is among the most fundamental parts of finding alignment among different stakeholders.
“We are continuing to focus on building out a really robust reporting function that meets the needs of our capital partners,” he said.
Many operators opine on alignment, and the topic has been the focus of multiple industry event panels. But at the end of the day, Schatz believes finding alignment is relatively simple, and that everything comes back to performance.
“They want us to perform, and we want to perform, so let’s go perform,” he said.
As Puklicz has noted before, operators must balance finding alignment and moving in lockstep with maintaining their own business practices.
It’s a not-infrequent arrangement for larger capital providers or REITs to aid operators by helping them recruit new workers or by handling their back-office functions. But the strength of companies like 12 Oaks lies in their ability to know the communities and markets in which they operate, and the danger is that too much assistance on a larger corporate level could effectively “de-regionalize” them.
That is why 12 Oaks prefers to build relationships on respect and trust. Puklicz said he takes steps to ensure all parties understand and agree on a business plan, including goals for the community and the ownership group’s exit strategy, to get better alignment.
From there, Puklicz works with his team to determine what is needed from their end and focuses on data sharing and communication. 12 Oaks has distilled the data it shares with ownership groups into a dashboard that covers key performance indicators like occupancy, staffing and financial metrics. Compliance and CapEx issues are also captured and sorted among the data, and reported monthly at the minimum, he said.
Pendulum still swinging toward alignment in 2024 and beyond
In the recent past, Ventas has had success finding new operators with which to transition into aligned management structures. That practice will continue in 2024 and beyond, albeit at potentially a lower volume than in past years, Hutchens said.
As senior living operators and owners continue to work together in the future to achieve their shared goals, Agins believes the industry will continue to move toward relationships that prioritize alignment. And although he still sees a largely broken system of owner-operator relationships in senior living, he is optimistic that is giving way to a more aligned future.
“I do see the pendulum really swinging back toward better alignment and better relationships,” he said.
As he looks ahead, Puklicz believes that regional senior living operators like 12 Oaks will continue to be at the forefront with regard to aligned management structures and good performance.
“I think people are realizing that the best alignment comes from management groups that have a specialization regionally, where they can be familiar with the market,” he said. “They can react quickly, be nimble and be entrepreneurial … and I think a lot of the large equity groups are starting to realize that.”
