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12 Oaks President: Bid-Ask Gap Remains Wide in Senior Living, Now is Time to Drive NOI

Owners and investors looking to execute on their strategies would be wise to examine every facet of their operations to help drive net operating income (NOI) sooner rather than later — and that all starts with the operator overseeing a community.

That’s the perspective of Greg Puklicz, president and CFO of 12 Oaks Senior Living.

“Is your operator doing everything they can today to position your property for a recap or that monetization event to execute their exit strategy in ‘23 and ‘24?” Puklicz said during a recent appearance on the Transform podcast. “You should be talking about that right now, because now is the time to fix it.”

The need to stabilize communities in 2022 is great, as 2023 could be a “bigger year for rate increases,” he added.

“I think we need to achieve some stability in ‘22, but in ‘23 and ‘24, and with the silver tsunami a few years out still … that’s when I see the heftier rate increases coming,” Puklicz said.

As a company that has built its reputation as a turnaround specialist, 12 Oaks is naturally aware of the need to fine-tune operations to drive NOI for owners and investors — and has been witnessing the effects of market dislocation in the senior living M&A space.

“People who were wanting to pull the trigger on certain transactions basically decided to pull back, and that buy-sell gap is still huge between buyer and seller; the seller’s expectations versus what the buyer thinks they should pay with the Covid discount,” Puklicz said. “So, what’s the answer? Well, get your house in order, build your census, get your operating expenses under control through efficient operations and management.”

The Dallas-based operator is growing, and by April will have a senior living portfolio of 16 communities. In the future, Puklicz sees the company topping out at about 25 to 30 properties — a “sweet spot” in terms of maintaining culture and controlling community operations.

Highlights of Puklicz’s podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts and SoundCloud. The interview took place in mid-January.

On ascending to the president role at 12 Oaks:

I’m really excited about the opportunity. I’ve been in merchant development and the real estate industry all my career, and having the opportunity to move into the president role is a real achievement for me personally. I’m excited about that, mainly because it encompasses all aspects of the operations.

Previously, as a CFO, my focus was on financial performance and underwriting analysis, those types of things. But as president, there’s a lot more to think about dealing with the strategic plan and vision, and how we are going to structure our company and deal with things moving forward. The senior industry is a very complicated industry compared to other asset classes. So, it is a real estate asset class overlaid with the complication of one of the more challenging operating and financial structures that can possibly be thrown at you.

I really applaud Richard Blaylock — our CEO and owner — and his vision. A lot of smaller family-owned businesses lack succession plans. Most people know 12 Oaks Senior Living as Dick Blaylock and Keith Ashburn, who was COO for over 30 years. Over the course of the last year — and Dick’s been planning this for some time — was a transition in management.

First and foremost, Dick and Keith are still here and still very active. But we brought on Lori Jones — our new COO — last year, and Keith has moved from the COO seat to senior vice president of our 12 Oaks Solutions consulting group. And that group has been very important to us, in terms of dealing with the impact of Covid, the pandemic and all the challenges it has brought. So, it’s another significant tool in our toolbox to be able to manage and operate our communities effectively, and Keith is heading that up. Dick, as our CEO, continues to be the visionary and set the direction and tone for the company, but the day-to-day administration has been handed to me. 

So, in terms of transition and succession planning, we are slowly working through that process so that we can have an effective and seamless transfer of power over the course of a few years and continue to provide the quality services while maintaining culture. It’s been a plan many years in the making, and it’s being slowly implemented so that it’s not disruptive.

On how 12 Oaks has felt the impact of Covid

Covid has had a huge impact.

In the early days, I feel we met the challenge exceptionally well. We formed a pandemic committee. And we met very regularly on the evolution of Covid over the past few years. And for a long time, we were able to be untouched by Covid in terms of infection at the communities. That becomes a numbers game at some point in time, and we did have a few communities where there were outbreaks, but we were able to isolate those. The response plans we put in place as a management company really helped minimize the impact of Covid from an infection control point of view.

Putting my CFO hat back on for a second, the impact financially is huge, it’s been game-changing. And it segues into a lot of the shift and the pivot we’ve made in our approach as a management company to the market, particularly in 2022. The challenges of Covid — reduced occupancy, increased wage rates — all those challenges are kind of the hangover effects of Covid.

In terms of what we’ve done to address our occupancy specifically, what we did in late summer and fall was execute what we call a “marketing sprint” at all our communities. We had a lot of unused marketing budget from the earlier part of the year, and we were looking at our performance. We had favorable variances in our marketing expenses, and we had unfavorable variances in our occupancy due to Covid.

We got with our owners, and we said, let’s take a 90-day period and see if we can move the needle. What that meant was keeping our marketing directors in the selling zone, making sure they were properly staffed, not distracted, and were provided with the lead banks and tools they needed to sell and to reach out. Over the course of 90 to 120 days, we were able to move our overall portfolio occupancy up 5%. We gained a total of 5% occupancy on a portfolio-wide basis.

We believe in prospect-centered selling, having our sales directors stay in the selling zone, not being distracted by Covid or staff shortages. We also spent more money on some of our digital and traditional marketing sources to increase the lead bank. But, a lot of it was going back to the old leads and ferreting out the inquiries from 90 or 120 days ago. So, for us, the marketing sprint was a big success story.

On being turnaround specialists and taking on new management agreements in the age of Covid:

Being turnaround specialists, being able to come into a community and work the occupancy, control operating the expenses — these are things we’re good at, and that has definitely come in handy. As we come out of Covid, hopefully we are going to move from the pandemic to the endemic stage in the coming months. I don’t know how you know when that happens exactly, but as that happens, we need to execute those turnaround skills to rebuild financial performance. There are a lot of challenges on financial performance right now and that’s something we’re definitely focused on.

Inquiries [from ownership groups] are definitely up, and the conversations are definitely happening more often. A year ago, there was a desire for certain transitions, which got put on hold, because it was the owners’ view that you couldn’t do a transition during Covid. I don’t know that I necessarily agree with that, but yes, I think it is an ideal time for transition.

To put it into context, a lot of the distressed properties have come more distressed and marginal properties have moved into distressed categories. Properties that are performing well are challenged, as well. So, everybody has kind of moved down the scale a little bit. What we want to be able to do is take some of these challenged properties, apply our turnaround skills, and help build them up. Anybody who has a property that they hoped to monetize through a recap or a sale, I would submit now is the time to make a [management] transition.

Occupancy is down probably from your pre-Covid levels, operating expenses are most certainly higher. For owners and investors to realize the exit pricing they’re hoping for, they’ve got to get their NOI under control. We’re in a period of time right now where there’s a real opportunity to do something about it. The transactions that are happening in the market are mostly distressed transactions. So, anybody who has quality properties — newer vintage, underperforming and under pressure in terms of census or operating expenses — I would submit now is the time to make a transition. Ask yourself, is your operator doing everything they can? Are they growing census at an acceptable level? Are operating expenses under control? Do they have a plan to grow census? Do they have a plan to address your staffing issues? 12 Oaks Senior Living has a plan.

So, take 2022 to be your time of growth, to be your time of stabilization to move into an exit in 23. That’s what we’re advocating, and that’s where we pivoted our business development efforts, away more from transactional opportunities. The transactional opportunities, we looked at a lot of them in 2020 and 2021. And I will tell you, most of them fell apart due to the owner’s or the investor’s concern over the ability to achieve NOI targets.

People who were wanting to pull the trigger on certain transactions basically decided to pull back, and that buy-sell gap is still huge between buyer and seller; the seller’s expectations versus what the buyer thinks they should pay with the Covid discount. So what’s the answer? Well, get your house in order, build your census, get your operating expenses under control through efficient operations and management. That’s what 12 Oaks can offer.

On staffing pressures:

We are seeing pressures, most certainly.

The quickest and easiest fix is wage adjustment, but frankly, that’s not enough. It’s not something that you can afford to do — or should do — as your sole easy choice. Less creative operators will just say, well, increase wages $3 or $4 an hour. They’re looking for the easy fix that isn’t in the operator’s best interest. What we’re doing at 12 Oaks Senior Living is, in our HR department, for example, we have dedicated recruiters that work with our communities so we have a [professional employer organization] for all the employees across our portfolio so the EDs and the marketing directors and the care directors aren’t spending time trying to recruit employees. We have corporate recruiters who work with EDs to tell us what the open positions are, and then we will go out and find the candidates for them from corporate, and we will present to the EDs or our CDs two or three candidates for each of their open positions. We do all the legwork so they can focus on their community.

Additionally, we’re expanding our toolbox in recruiting. We’re holding job fairs, we’re doing outreach, we’re actually recruiting candidates directly instead of popping an ad on Indeed and hoping for the best. We are making an active effort to fill in the open positions that we do have, and we’ve made reasonable monetary adjustments.

Yes, money is important. I don’t want to diminish that at all. The wage has to be competitive. But with workers, it’s not always just about the dollar. There is a passion in these people for these positions. Nothing against Amazon, but do they want to work on a line in Amazon filling boxes at 18 bucks an hour for eight hours a day? That is very different work than what a caregiver does. It’s very rewarding work, and it’s emotionally challenging work. And it takes a special kind of person. So, that’s why our focus is on the recruiting effort, getting the right people and appealing to the people about being passionate about the industry.

I think [higher wages] is the new reality. And frankly, I’m not so sure if it’s not going to continue to rise to some degree. The reality of the macroeconomic situation is that everything’s going up. Everybody who has to drive to work and buy food for their family and pay rent or their mortgage, go on vacation, buy Christmas presents for their kids — all those things cost more money now. So unless the total economy and GDP shrinks — which is not likely to happen in the near term — it is my opinion that, no this is not transitory, this is the new cost of our current standard of living.

On raising rates to meet growing expenses:

Rate growth is real, it’s happening and it’s coming. However, in our industry, it’s going to happen slower than it is in other industries. If industry-wide we are at 94% effective occupancy, then prices could go up. There’s still competition, and there still is — to a certain degree in certain markets — an oversupply of units. That being the case, rates can’t go up.

Rates for existing residents may be able to go up a bit more, because those residents tend to be stickier. But when you’re competing for a move in, you’ve got to be market competitive. So, rates will go up, they have to go up because operating margins are going down. But I think ‘23 is a bigger year for rate increases. I think we need to achieve some stability in ‘22, but in ‘23 and ‘24, and with the silver tsunami a few years out still … that’s when I see the heftier rate increases coming. It all goes back to the point of, as an investor or owner, how do you want to position your property today? Is your operator doing everything they can today to position your property for a recap or that monetization event to execute their exit strategy in ‘23 and ‘24 — you should be talking about that right now, because now is the time to fix it. If you don’t fix it today, you’re going to be behind the curve a year from now.

On margins in the current environment:

Margins are under pressure, but I don’t think margins need to be rethought or recalibrated. The impact of margins has to do with cap rates and interest rates. So, what’s the cost of capital? And what are exit cap rates? Those things right now are compressed. Interest rates remain at historical lows. I know a lot of people are worried about interest rates in ‘23 and ‘24, given the inflationary pressures. Do we get back to the days of monetary policy influences where the Fed starts increasing interest rates to try to tamp down inflation? If that’s the case, the operating margin discussion becomes a little more relevant. And if cap rates go up, then that becomes an issue, as well. So I think you have to look at all three of those things together.

As an operator, we’ve also developed and invested in communities, though we are predominantly a third party developer. And I have a background in merchant building and development. So, when we have the operating margin discussion, it’s also about the business plan for the community. We have to understand with the ownership group what the plan is, and we have to be aligned with what their exit strategy is. Is this a turnaround-and-sale? Is this a turnaround-and-recap? Is this a long term hold for cash flow? There are different considerations in that, but as an operator, our primary function is to drive margin at the end of the day.

On business intelligence and data collection:

We’re doing collection of data in different points. So for example, wages. We have a PEO, and we had access to wage data by job classification. And we’re able to sort that by zip code. So, when we did our budgets for ‘22, we would present to our owners our proposed wage rates for various positions, and we would also have the market data to say okay, equivalent positions in the zip code are paying this minimum, this maximum, this average. We can have data points as to what the market was paying. We aren’t relying on hearsay of the [regional care directors] saying, ‘Oh, everybody’s making $16 an hour, you have to raise rates $3.’ Not that we don’t want their input, but we also want some hard data points for all positions.

The data is out there, you just have to be creative and think about what you need to know to make a decision as to these finer data points within a budget or pro forma.

We’ve developed our own dashboard report. First off, we use Yardi Senior IQ, which is new, and it has really good dashboard capability. We’re deep into looking at how we’re going to deploy that tool, designing custom dashboards at the ED level, the [regional vice president] level, the CEO level, and then for our ownership groups. They all need different things on a dashboard. We’re actually in the process of working on that right now.

As CFO, I developed a custom dashboard, which is just a one-page sheet, and it has all your key metrics. It has your occupancy actuals versus budgets, it has our trends, T3s, T12s. So we can see comparatively where we’re doing. It has the same for labor data, for actual financial performance, current-month-to-budget, T3s, T12s, and then KPIs for rental rates, net effective rental rates, FTEs per occupied unit, food costs, marketing-cost-per-lead, marketing-cost-per-move-in for all those same time periods.

On how 12 Oaks is growing in 2022 and beyond:

Our plan is to still hit that sweet spot of 25, probably peaking out at 30 properties.

Right now, even through the pandemic, we have that kind of infrastructure in place at our corporate office, in terms of our leadership and key positions. As we grow, we can fill those positions. We’re onboarding our properties in the beginning of April that will put us at 16 properties under management through 2022 or 2023.

That 25-community mark, we see that as the sweet spot in terms of still being able to maintain our culture, still being able to maintain that personal knowledge of community issues and activities. And to really be able to serve our clients and investors appropriately, we won’t need to add that middle layer of management. As companies grow beyond that level, I think when you add that middle layer management or you start to silo responsibilities, that’s where the disconnects occur.

For us, [this year] is going to be about performance improvement. We see ‘22 as a year to return to stabilization and focus on performance improvement. And I think in many ways, it’s setting the table then for ‘23 and ‘24.That’s what I would say to all the investors and owners that listen to you in this podcast — Is your operator doing everything they can to put you in a position to successfully execute your exit strategy?

The post 12 Oaks President: Bid-Ask Gap Remains Wide in Senior Living, Now is Time to Drive NOI appeared first on Senior Housing News.

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