Silverado kicked off August with a party.
The occasion was the grand opening of Silverado’s latest memory care community, in the northern Milwaukee suburb of Glendale. But, viewed in a certain light, the event could be seen as more significant: the start of a new chapter for the 23-year-old company.
At the beginning of July, Silverado had ceased operating its two existing communities in the Milwaukee area — as well as 18 other properties across Texas, Illinois, Utah and Arizona, because real estate investment trust Welltower (NYSE: WELL) made the call to bring in new management. In that one fell swoop, Silverado’s overall operating portfolio was cut roughly in half.
So, the opening of the Glendale community one month later marked Silverado’s quick comeback to the Milwaukee market, with a ground-up development that the company itself will own. This will be the template going forward and returns the Irvine, California-based company to its roots, Shook told Senior Housing News, in an interview at the new Greater Milwaukee at North Shore location before the grand opening party.
“When Steve [Winner] and Jim [Smith] and I started the company, we owned everything and/or had long-term leases, and now going forward we’re back to owning everything or having long-term leases, where we can control our destiny,” he said.
In the wake of the Welltower transitions, Shook is also reflecting on what should not change at Silverado. Taking pride in the company’s reputation as a memory care trailblazer, he is adamant about maintaining and nurturing Silverado’s culture.
He also remains passionate about gathering data to develop and share evidence-based best practices in memory care, to keep providing leadership in a sector that has gone through what he called “a perfect storm” of challenges over the past few years.
Taking stock and moving on
Oversupply has hit the whole U.S. senior living market in the past few years, causing particular pain for standalone memory care. Construction in the sector peaked at the end of 2015, and occupancy began to crater as this inventory came online in subsequent years. The fallout is ongoing, with some freestanding memory care developers and providers in various levels of distress and REITs trying to shore up results by bringing in new operators.
Still, the news that Welltower would transition the 20 Silverado properties to a new operating company was met with some surprise in the industry, given Silverado’s history and reputation.
“We typically think of Silverado as a best-in-class operator in the space,” KeyBanc Capital Markets analyst Jordan Sadler observed when asking about the transitions during Welltower’s Q2 2019 earnings call.
The high regard for Silverado has been built up over the two decades since Shook and his co-founders started the company in California.
When they began, the Silverado vision was to change the memory care paradigm by reducing medication use and restraints in favor of a programmatic approach to enhance quality of life and even slow the progression of memory impairment.
That approach evolved over the years to include a wide variety of elements, including: having dogs, birds and other animals in the communities; facilitating intergenerational interactions, including by having playgrounds at communities and allowing workers to bring their children to their shifts; fostering residents’ sense of purpose through meaningful activities such as volunteer work; designing environments to maximize residents’ independence and sense of being at home; and breaking new ground in early-stage dementia care through its specialized Nexus program.
Throughout the years, Silverado has tracked its results and conducted numerous studies in conjunction with universities. It touts four clinical outcomes in particular: transfer to the emergency room or urgent care; hospital readmission within 30 days; acute hospitalizations; and deaths receiving hospice services.
On the percent of residents transferred to ER/urgent care, Silverado reported a 2.4% company-wide rate in 2018, compared with statistics showing 11.9% for skilled nursing facilities and 34.6% for assisted living. The company similarly outperforms in the other three domains.
However, in explaining the recent operator transition, Welltower highlighted different numbers: occupancy and margin.
The 20-property portfolio had occupancy of 67% and margins around 6.5% to 7%, Welltower Chief Investment Officer Shankh Mitra said during the REITs’ Q2 earnings call.
These numbers do not tell the whole story, Shook told SHN. For example, occupancy was not uniform across the whole portfolio. Still, he makes no bones that there were issues.
“They were communities that weren’t at the occupancy we wanted,” he said, citing oversupply as the main culprit.
Shook was seeing clusters of operations opening at the same time, and not only freestanding memory care buildings but conversions of existing independent living and assisted living units into memory care. To fill up, these competitors tried to undercut each other on their rates. Doing so is a difficult proposition for memory care in general, given the high cost of labor for these communities, and this holds especially true for Silverado — the company’s clinical outcomes are only achieved through a labor-intensive model, and that comes at a cost. For example, every Silverado employs licensed nurses on-site, around the clock; a medical director with dementia expertise; and a master’s-level social worker.
“We don’t get into price wars,” Shook said.
The Silverado properties faced other challenges. As a rule, Silverado offers companion suites, due to the socialization benefits of having a roommate. This could be a hard sell for some people who were swayed by private rooms in a shiny new memory care building down the street.
Operational issues may have come into play in some of the affected communities, but overall this was a supply and demand issue requiring patience, Shook said.
“We’ve been through these cycles before, and we’ve done well as a company,” he said.
This experience is driving his determination to maintain control of Silverado communities, so that there is no danger of a similar situation transpiring in another down cycle.
“We don’t open a community with the idea of turning them over or leaving,” he said. “We have a picture of the company being in the market forever, and if somebody moves in at a Silverado, that they’re going to see Silverado services and care and culture and operations … [Welltower owns] the communities, it’s their choice, so they made the choice. We respect that and we’re moving on.”
A glimpse of the future
Welltower has been a capital partner for Silverado since the early days of the company, and the REIT is maintaining an 11-property portfolio in triple-net leases. All those communities are in Silverado’s home state of California.
On Welltower’s recent earnings call, CEO Tom DeRosa framed the transitions as allowing Silverado to focus on that core Golden State market.
But Silverado’s future will not be limited to California. Shook anticipates doing one or two new developments annually, in markets across the country.
In addition to the new Milwaukee building, Silverado opened a 90-unit building near Chicago about 10 months ago, which Shook anticipates will be fully occupied within three months. And the company made its first foray on the East Coast with a community in Alexandria, Virginia, that opened last year. Lease-up is ahead of schedule there, and that building also should be full within three to four months, Shook said.
All these cities — as well as areas in the Northwest — are ripe for future development, as Silverado seeks to build its footprint in its existing markets. Even Texas, a locus of the recent oversupply, is a target, particularly Dallas, Houston and Austin. Not only are there submarkets within these areas that still have significant demand, but new construction is tapering off generally, Shook noted.
“I think there has been an awakening,” he said, referring to the hard lessons that some investors and developers have learned about the difficulty and commitment required to successfully open and operate a memory care community.
While Silverado builds up its presence in other parts of the country, California will not be overlooked. A new Orange County community is soon to open in the city of Brea, to be followed next year by a new opening north of Los Angeles in Thousand Oaks.
Development costs vary considerably from market to market, Shook said. All-in costs for the Brea project are around $22 million, while the Milwaukee building ran to $13.5 million without taking the land costs into account. The development pipeline is capitalized in part by an investment that Artemis Real Estate Partners made last year. And Shook points out that the company’s initial backers — private equity firm Riordan, Lewis & Haden — are still invested today.
Growth through acquisition is not off the table, either, although Shook is bringing an extra measure of caution to this option.
“We’ll be strategically looking for different locations and acquisitions where we’re going to be pretty picky on the nature of the building and the location … pickier than we were in the past,” he said.
His commitment to ground-up development shone through at the grand opening in Glendale, as he pointed out to the assembled crowd how the building design was informed by the latest in memory care research. In particular, the building features an abundance of windows — including a solarium — so that residents can enjoy the benefits of natural sunlight, even in the Midwestern winter.
“Our communities are designed as a prosthetic device for the memory impaired as a crutch is for a person with a broken leg,” he said.
And if there is an upside to having a smaller portfolio, it’s an ability to focus on Silverado’s fundamental strengths, including the creation of these cutting-edge buildings and the culture within them.
“I think it really gives us a time to sit back and reflect on what’s important, and it’s just been a resounding message how important culture is in the company,” Shook said.
That culture is multifaceted, but one example is that every worker in a Silverado community — including housekeepers and dishwashers — has been certified to work with people who have dementia.
“When a housekeeper is cleaning bathrooms, we don’t do metrics on them that says you have x-number of minutes to clean the bathroom, like you would in a hotel,” Shook said. “We don’t do that because if your mother is having a bad day, then we want them to go intercede in that and give some comfort and get help. And we don’t want them worried that they’re not going to meet their metric on cleaning bathrooms.”
Silverado’s culture helps in staff recruitment and retention, as well as in building census, according to Shook. He highlighted instances of people moving great distances — such as from Pittsburgh to Chicago — to place a loved one in a Silverado community.
While it’s not possible to build a Silverado on every street corner, the company is committed to spreading its model. A top dementia expert from Denmark worked with Silverado last summer and has introduced its approach at large nursing homes in her home country, to great initial success, Shook said.
Overall, he paints a future vision of Silverado regaining scale and increasing its already substantial influence in the memory care field, while continuing to serve those locations where it has a presence today.
There has been nervous speculation from some families and staff about whether Silverado will be leaving more buildings or markets, Shook said. He is unequivocal in his response.
“The answer is a resounding no,” he said. “We’re not gone.”
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