You are listening to The Roots Podcast by 12 Oaks with host Greg Puklicz, where we’ll be joined by industry leaders to discuss and highlight the character, competency, and care that is required to successfully manage senior living portfolios.
Well, hello and welcome to another exciting episode of The Roots Podcast, brought to you by 12 Oaks Senior Living. I’m your host, Greg Puklicz, and today we have a very special guest. If you’ve been watching our podcast, you’ve seen that over the past several episodes we featured different members of the 12 Oaks team and today, however, we are going outside the organization, and I’m very pleased to introduce Ann Bargeron. Ann Bargeron is a longtime colleague of ours. We’ve worked with Ann at a number of communities over several years, and always enjoyed the relationship with Ann in 12 Oaks. And so, Ann, welcome to The Roots Podcast.
Thank you so much, Greg. It’s great to be here with you.
Awesome. No, we’re really pleased to have you here. And with everything going on in the industry these days, I’m really interested in some of your insights about the industry, particularly from the viewpoint as an investor, as an asset manager, and how you see kind of the state of the industry and where we’re at and what some of the challenges are. But before we get into that, maybe you could tell our audience a little bit about kind of your background and experiences in senior living.
I’ve worked in the industry for 20 plus years. Started in high school, I’m just kidding. But have had the opportunity to work with a number of investor groups ranging from pension funds to international private equity to non-traded REITs, US-based private equity companies. And most of these ownership groups that I worked with I help them establish what I would call an asset management framework or sort of an asset management function. Because owning and, you know, the senior housing assets was more sort of intense, complicated time consuming than they originally anticipated. I’ve had the opportunity to work with 12 Oaks in three of the four companies that of the last four organizations that I’ve worked with. So have known of 12 Oaks for a while and had a great working relationship with you guys.
That relationship between ownership and the operator is just so critical to achieve success.
The synergies between the owner and the operator having linked visions, understanding the business plan for a community or for a portfolio, right? Working together to achieve those end results is so important. Unlike other asset classes, it takes a lot of time and effort to kind of pivot on a business plan. There are just so many intricacies to it. So, that kind of leads us right into the first kind of question I wanted to talk to you about or get your thoughts on. As a seasoned investor and asset manager, I’m wondering what are some of the lessons you’ve learned that you wish the investment community would pay more attention to in order to be successful in senior housing?
This is really a very capital intensive real estate class, and I think many times investors look at this a little bit like it’s apartments, so maybe there’s some turnover cost or eventually you have to put a roof on the building. It’s probably more akin to hotel in the capital intensity maybe than the apartment spectrum. And I think that investors have to be prepared that they’re going to invest in sort of, I would classify it as three sort of distinct areas in a community. You’ve got unit turnover, which I think people coming from the apartment side of the investment world understand that piece of it. And then you’ve got building systems so things like the roof, the boilers, but things specific to our industry like call systems and pull cords and wander guards and things like that, that obviously you would not have any of that in multifamily.
And then a pretty large investment because if the square footage in many of these buildings, 50% is common space focusing on making sure that those are appropriate for the use of our residents is certainly another place that you’re going to have to invest. And I mean, I think we’ve seen over the last, a lot of our housing stock is over, senior housing stock is over 20 years old, and many of those buildings are probably at this point functionally obsolete. The unit sizes themselves, it’s very difficult and just in the assets that I’ve managed, if you have overall unit size that’s less than call it two seventy five or 300 properties in the market are probably going to be 400 plus square feet at a minimum. So you’re definitely at a disadvantage with very, very small unit sizes. And then some of the older buildings depending on the vintage and develops them, you may have common spaces that are just not functional for the resident population that we have today.
So we’ve got the problem of these vintage communities being largely functional, obsolete. What do you think investor ownership groups that have these types of assets in their portfolio, what are some things they can do or should do to be able to improve those properties?
Sometimes communities can get by that don’t have the greatest drive by visibility or don’t have the greatest frontage or sometimes you can get around some of those things. But I think the small unit size in a smaller building is going to be difficult to get around unless what I would call you have a resident base that maybe is not necessarily the primary payer. So you have residents that are using Medicaid or other third party sources, pace programs, things like that where their options are more limited in a certain market. So they’re not comparing your 200 square foot building to the building down the street that’s their unit is 400 square feet with a nice kitchen and a large closet and a very large bathroom.
Is there a way you can, you think that we can overcome? So I mean, yeah, I mean, we can’t make a 200 square foot unit 300 square feet. Can we, are there other things we can do as an operator and as an owner that we should spend money on in the operations? Be that perhaps activities, programming, staffing? Are there other opportunities there you think?
Most definitely. And I think we’ve had buildings that 12 Oaks has managed over the years that have had smaller unit sizes and you make the common areas functional and updated, but in certain markets you realize that your ceiling on rent is probably going to be lower. So you, I would think you have to take that into account and to the extent that you can fix some of the things in those units that you know are lacking, do you have space to actually build a closet? I know that 12 Oak has managed buildings before that didn’t have closets. So can you add closets? Can you add a kitchenette, some of those kind of things to make you more competitive with newer product on the market? I know that we’ve looked at buildings where sometimes occasionally it makes sense to to combine units if your overall unit count is such that the economics make sense.
So you’re not going to take a 40 unit building down to a 20 unit building, but you might take 120 unit building down to 110 unit building by combining the very smallest studios or converting let’s say semi-private assisted living units, which in most middle to higher income markets are very difficult to lease. Maybe you take out walls or reconfigure some of those units so that you’re creating a large one bedroom, which has a lot of demands in a certain market. And we’ve certainly seen that in some properties that you guys have worked on that I’ve been involved with where we had some very successful conversions from semi-private to private. I think those are the kinds of things that investors should look at is where is your vacancy in the building and what can we do to fix that? What makes it more market appropriate?
To your point, the quality of the physical plant is really of paramount importance. So what do you think investors and owners should think about and how should they prioritize things to ensure communities stay relevant to the senior population?
The community being clean and well maintained is obviously the base there, but having amenities and also units that are attractive to the residents and also to the adult children who are in many cases pushing and this decision to search for senior housing and may ultimately be the decision makers is we talked about before the increased acuity in these buildings causes some additional wear and tear that probably 10 or 15 years ago you could get, you could turn a unit two or three times before you had to change the carpet. Well, I don’t know that that ever happens these days. And you know, whether it be because of walkers or wheelchairs or incontinence issues, having a good unit turnover program so that you can prolong the finishes that are in there.
I think there’s a lot of things that you can do that are cost effective that make the units look more updated and especially more appealing to the adult children. One of the things that I know we worked with you at 12 Oaks a lot is putting in what I call apartment size refrigerators, not those little bitty tiny dorm refrigerators that are difficult for residents to get into. The other thing that I think is important is to develop sort of at the management company level, what are the expectations for, and the standards for a unit turn? So if, and that’s also, obviously working with the investor, whoever originates that, maybe the investor gives you what their unit turn standards are, or the operating company is giving that to the investor and you’re deciding on a property by property basis what’s appropriate.
If you’ve got some geographic concentration, I know that it’s always difficult to get a contractor to come in and do some kind of, one-off turn of a unit, but if you’ve got some geographic concentration and you can find someone that you can tell them we’re going to have at least three units a month for you to turn, or we’re going to have five units a month. I think you get some reliability and quality control and things like that. If you’re not constantly using a different contractor.
I think you’ve got some really good points, ideas on what’s needed from a CapEx point of view. One of the things as an operator we’ve often struggled with is an owner, investor will come in and go, “Okay, we’re going to spend all this money and we’re going to do this and this and this and this,” and suddenly expect that the occupancies going to go from 80% to 95% in the next three months, right? Alignment of expectations seems to be a thing, right? So how do you as an asset manager for an investment group work with an operator to make sure that the program, the CapEx program is appropriate? And then what do you do to make sure that the operating results are achievable and ultimately achieved?
I’ll begin this by saying I’m neither an engineer nor an interior designer, nor an architect, but have worked with all those groups extensively in several positions. But I think as you said, as investors and people will look at an older building and go, “Okay, well, let’s paint it and put some carpet down and it’s fixed,” but to the extent that the carpet is smelly or torn, then adult children are not going to be able to get past that fact to understand that the operations there might be good. So there’s this delicate balance of doing and updating what’s appropriate. But before you start that, you’ve got to figure out do we have good operations?
What do we need to do to get there? The investor obviously has to commit an appropriate amount of money to do the scale of work that you decide on, that the group decides on. And second, you’ve got to have an interior design group/architect that understands senior housing, understands what you’re trying to accomplish understands the budget and is listening to not only the investor but the leadership in the building and the management company. Obviously the management company, the operator’s got to be in alignment with what’s going on. And I think lastly, you’ve got to have the right leadership team. Are you engaging with salesperson to say, “What are people asking about? What are people asking for? Who are our competitors? What do they have that we don’t have?” You’re engaging with the ED to make sure that they’re in alignment with what’s going to be done and the kinds of price increases that potentially follow a renovation.
So you’ve got to have buy-in from the ED that they’re in alignment with, first of all, doing a renovation, what the plan is. Our hypothesis is if we upgrade this and do upgrades to the units that we’re going to get a thousand dollars more in rent. If they’re not in alignment with that it’s not gonna be successful. Operators really have to be held accountable to maintaining the finishes and to using the spaces as they were designed. Because if you build a second dining venue that’s not inexpensive, but if you don’t operate a second dining venue, then you’ve just thrown that money, we’ve thrown that money away.
I love your comments about alignment at the community level. It’s so important that the onsite staff, the leadership there, the operator, management company and the investor owner, asset manager, all have the same vision and they understand the business plan. At the next level, one of the things that’s really been a focus for operators and ownership groups over the past years is due to a lot of the disruption in the industry, there’s been a lot of turnover and change outs in and operators and management companies. We’ve seen the failure of some large owner operator groups. We’ve seen small operators get absorbed and gobbled up by larger operators. And the whole kind of landscape between the ownership group investors and the operator seems to be in quite a state of flux right now. It’s a lot of conversation about that. We need alignment, right?
And a couple of years ago people would say alignment means, well, the operator needs to make an investment in the community of 150 grand, 200 grand, 500 grand, whatever. Right? I can tell you from an operator’s point of view, the fact that whether I have a financial investment in a community or not, doesn’t mean I pay any more or less attention to it, right? We love our children all the same, and we have a duty of care and a responsibility to the ownership groups to honor our contracts and to give all the attention necessary and to make sure that we’re properly resourced to properly operate these communities. So in this kind of challenge, landscape, we’re starting to rebuild census, operating expenses are still a significant challenge. The lack of capital investment due to higher interest rates is kind of hamstrung us a little bit. How do you define alignment between operators and ownership groups and investors? How do you see those relationships best developing and being structured to ensure their success at these communities?
Honestly, from an investor standpoint, if I’m an asset manager, I would want the operator to be almost agnostic as to do they own it? Does X, Y, Z own it? Does A, B, C own it? Now truth be told, I would like all the assets that I managed to be the top priority, but that’s not how the world works. And we should ask that people be agnostic as to whether you have an equity investment in building A, but you don’t have an equity investment in building B. So hopefully you’re providing ideally an operators providing the same resources across the portfolio. The other thing I think as investors, just my perspective in looking at this over 20 plus years is that we’ve been pretty cheap in really paying the people that for success, getting their alignment through financial incentives.
And that’s at the community leadership, that’s the regional leadership, that’s the corporate entity that’s the operator. To get alignment, all those people need to be successful. And I think investors have been pretty cheap and more concerned about counting their pennies. And I think many investors don’t realize, let’s talk about a turnaround building that has everything from bad debt to low census and also maybe has challenges in the survey. I mean, you really have to have the entire leadership team pulling in the same direction. Business office manager, ED, the nurse, everybody, there’s lots of problems. And when you get to a successful end there, all of those people should have had a financial incentive for collecting the bad debt. And I think there’s an under appreciation on the investor side as to what a heavy lift that is.
I mean, you guys had taken on buildings that I’m aware of in certain markets where there was a very heavy lift and it had all those problems. Incenting the leadership and incenting the management company and I don’t think you, that necessarily the management company has to have an investment in the actual real estate. Can you, is the management company incentive to beat NOI goals, is there some kind of incentive for creating value at the end? Because if everybody’s pulling in the same direction and you double the value of building, we ought to be paying the people that really did the work for doing that. Now, would that involve some capital investment? You know, yes, it might, and there should be recognition of that, but putting lipstick on the pig doesn’t change bad operations, and that’s not going to change the trajectory of a building.
I appreciate those very candid comments and I agree wholeheartedly. And the key is alignment, understanding each other’s goals and objectives and working together on the challenges, right, and solving the problems. Appreciate you taking the time to join us here on The Roots Podcast hosted by 12 Oak Senior Living, and wish you all the best and we can’t wait till we’ll be working with you on our next portfolio.
Sounds great. Thank you for the opportunity.
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