As the senior living industry recovers from the worst effects of the Covid-19 pandemic, owners and operators are reassessing capital structures with an eye toward creating greater alignment.
Operator executives Mercedes Kerr, president of Belmont Village, and Fee Stubblefield, CEO of The Springs Living, praised their capital provider partners for being flexible and supportive throughout Covid-19, during a Monday panel at the National Investment Center for Seniors Housing & Care (NIC) conference in Houston.
But Kerr and Stubblefield pressed for continued innovation in capital structures and expressed concerns about the 5% management fee model that is prevalent in senior living. Chris Taylor, managing director of Capital One Services, likewise said that the 5% management model is widely acknowledged to be broken.
Creating joint ventures in which operators have equity in their properties is one alternative to the management fee model, and is the approach taken by Belmont Village and The Springs Living.
But, the separation of real estate and operations within senior living has enabled “efficient capital” for the industry through real estate investment trusts (REITs) and other entities, observed Brian Beckwith, CEO of investment firm Arcus Healthcare Partners.
Going forward, the panelists argued that creating alignment will depend on a variety of factors and could require a widespread industry effort to boost transparency — but also will boil down to fundamental agreement among owners and operators about the most basic goals, of prioritizing the wellbeing of senior living residents and the workers who care for them day in and day out.
The future of management fees
Even before Covid-19, industry leaders such as Aegis Living CEO Dwayne Clark were critiquing the senior living management fee model. The pandemic has created greater urgency around this issue.
Now, operators face a host of challenges that require investments to address, but they do not have the capacity or incentives to make those investments on a 5% fee on revenue, in a time when revenues are depressed, Kerr pointed out.
Stubblefield noted that management fees in the hospitality industry are in the 13% to 14% range, for a business that arguably is less complex than senior living. And Kerr added that the hospitality sector also is debating management fee minimums, so that in situations like Covid-19, companies aren’t “cut to the bone.”
Another notable difference between the hotel industry and senior living, Kerr said, is that performance standards in hospitality typically have not been pegged just to the individual operator or manager, but to benchmarking against other peer companies, which is possible through sector-wide data. She suggested that senior living operators should be open to sharing more information about their performance to create similar transparency and benchmarking.
In Beckwith’s view, the appropriate management fee varies from deal to deal. The “right answer” depends on having upside for the equity investor and “something to be shared with the operator or manager,” so that the situation “works for both.”
“Sometimes, for us, that’s been 4%, sometimes it’s been 7%,” Beckwith said.
A holistic view
With widespread recognition that 5% management fees are not sufficient, “you see a lot of people coming up with a lot of different solutions,” Capital One’s Taylor observed.
Kerr made a similar point, noting that there are various structures in which an operator can get upside consideration and “share the spoils,” regardless of whether that operator has an equity stake in the property.
She also emphasized that “capital” is not a monolith, and various types of capital providers have different specialties and goals — so providers should be cognizant of seeking out appropriate capital to create the specific types of relationships for various stages of company growth.
Furthermore, alignment is not simply a matter of dollars and cents. The senior living industry still is relatively young, with a lot of runway for innovation, in her view. Operators and owners can derive alignment from shared goals and values, in striving to create a particular model — say, based around wellness offerings or an active adult model.
“To the extent that they’re driving toward a goal together, I think that is a great motivator,” she said.
While acknowledging that some of his colleagues have thrived in management-fee arrangements, Stubblefield made a case for the owner-operator model. With alignment “all the way through,” operators can more easily make decisions not simply driven by the management fee but “the long-term result for that community and those relationships,” he said.
Particularly in light of Covid-19 and the subsequent deepening of the labor crisis facing senior living, determining where investments are needed for the long-term — and then allocating capital appropriately — is of utmost importance, in Stubblefield’s view. Investments in technology, for instance, are what will enable staff to spend more time forging connections and a high-touch experience with residents.
And this, above all, is where he believes that operators and owners must align — in recognizing that the interaction between the resident and the direct caregiver is the “end product.”
“If we can do that, and figure out how to align with incentives, and provide for people on the front lines of support, then we can have stable, predictable returns,” he said.