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The Bottom Line: Civitas Gets Experimental to Alleviate Margin Pressure

Civitas Senior Living launched a lot of experiments to innovate operational practices in 2019, and several of them failed. But that’s not a bad thing, according to CFO Jason Dupont.

If approached correctly, even a failed experiment holds valuable lessons, he said. And given that senior living margins are under pressure from labor challenges and other market dynamics, providers must be willing to fail in order to find out what actually is effective in driving efficiencies. For Forth Worth, Texas-based Civitas, one of the biggest successes has come from a less top-down approach to financial management.

Meanwhile, the tight availability of construction labor and the rising cost of building materials has turned Civitas’ breakneck growth into steady growth. This has allowed the company to focus more on the 43 senior housing communities it has in its portfolio, according to Dupont.

“I think over the next two years, we’ll focus on same-community sales, and efficiencies will become a bigger part of what we’re doing and less about growth,” Dupont told Senior Housing News. “Unless, of course, that black swan event occurs and we’re looking at an environment where really high-quality communities are cheap to buy, in which case, all bets are off.”

The company’s biggest current challenge is staffing, both in terms of finding workers and grappling with wage increases. To help attract workers in a red-hot job market, Civitas has forged partnerships with tech providers — and company executives have handed out business cards to exceptional customer service professionals they’ve encountered in restaurants and airplanes. Last year, the company earned its Great Place to Work certification.

The following interview was edited for length and clarity:

SHN: Would you say it’s true that senior living has gotten more operationally and financially complex over the last few years? And if so, how has that placed new demands on you as a CFO?

Jason Dupont: The answer is absolutely.

The operational complexity has come from a more sophisticated resident, a more sophisticated employee. And so we’re expected as a company, if we want to be a competitive company, to not only provide additional services to our residents that go above and beyond your typical bingo game. And employees have more sophisticated needs, not just salary, but also the health care benefits, ancillary benefits, that come with a modern environment. So, those are the operational side challenges.

The financial challenges just come from a more dynamic and competitive environment that we’ve seen as this industry has grown. I started just after 2009 in this business, and in the last 11 years, the sheer growth in this industry has been amazing. And what it has brought is a lot of different people from outside industries into senior living with a lot of different expertise. And it has upped the level of competition.

So, you’re seeing different types of financial structures, you’re seeing different types of acquisitions, very sophisticated groups with complicated financial structures that want to be in the industry and need to interface with operationally focused companies like ours, which is where the challenge comes for me. And learning about these new groups, what their priorities are, and then finding ways to incorporate those priorities and not change the value proposition that we’re presenting to our employees and residents.

When you say priorities, give me an example of where some of these priorities lie.

For a private equity firm that has a very large and diverse portfolio, they don’t necessarily see senior living for the complicated and difficult industry that it is, from an operational perspective. What they see is a different risk portfolio that allows them to diversify. And so they may want to push rent, reduce capital expenditures, make the project more efficient, none of which is bad in and of itself. And a lot of those goals are shared by us. But at the same time, we’re also in the trenches fighting for lots of different groups of people that have different goals in mind.

And so, pushing the bottom line might not always be the most effective way to get long-term value out of an asset. Our challenge is, how do we address those very straightforward and sometimes aggressive financial goals, and how do we translate that into long-term operational success where we can make everybody a winner?

When did you start with Civitas?

I started with Civitas in 2013. I was good friends with a banker who had left his bank to start a company with an operator who had just opened up shop. I met with both of them, and it was an interesting meeting because I was looking to grow as an employee. I was a director of finance, and I wanted to be in that CFO role. But when I sat down with [Founder and CEO] Wayne Powell, I learned very quickly that what I really wanted was to work with someone who had an enormous amount of passion for the operation side of the business. And that is what drew me to Civitas and what got me excited. And honestly, it’s what keeps me going to work every single day.

We have an entire side of our business that doesn’t really focus on the real estate side at all. Their job is to make sure that the residents and employees are happy, and we do a great job at this company of making sure that that is our first priority and that drives everything we do. That wasn’t necessarily true at the last company I was at. It was more of a real estate and development company, which is where I learned my craft. So, to move to the side where operations are the No. 1 priority by a long shot was a little bit of a rocky change. But honestly, it was exactly what I was looking for.

Were there any parts about getting into operations that surprised you?

My expertise early on was in financial transactions, learning how to structure deals efficiently, learning how to exit deals efficiently, whether that be through capital markets or through agency lending, all those kinds of different ways that we do that. And then I came into this company and every day was a conversation about on-the-ground key performance indicators, like turnover ratios, receivables, PPD calculations on everything from food to laundry detergent.

And that granular focus, which Wayne brought from the nursing home industry, really helped to adjust my perspective of how you can make a project successful. Not through necessarily financial engineering, although that always helps, but from the bottom up. If the guts of the project are solid, even if financial markets aren’t where you need them to be, you can still run a profitable building.

The industry has changed so much since 2013. What were some moments of particular challenge or change during that time, and what you did to work through those moments?

By far our biggest challenge over the last seven years has been staffing. That has been an avalanche coming down the mountain that everyone knew was coming but didn’t necessarily prepare well for. Some people were surprised by it.

Luckily, we had a conversation — I think it was in 2015 at our annual meeting — where Wayne sat all of us down and said, look, the people that we have now, we’ve been blessed, but we are not going to be able to continue to hire high-quality people at reasonable prices much longer. And he was absolutely right.

The industry not only heated up to where more competition led to more groups of people hiring from the same pool, but also, the economy in general has been extremely strong over the last seven years. And that has really driven labor prices up. It’s made it more difficult to hold on to people as more opportunities to earn a little bit more are available to them. And that goes from your hourly employees all the way up to your top-level salary employees. There is not a part of our labor sector that hasn’t been affected.

What we have focused on as an organization is really two things. One is, how do we learn to hire the best people? And we’ve done an incredible job of bringing in a lot of technological systems that help us not only vet people on the front end, through programs like Greenhouse, but also to understand our employees better, understand our teams and how they work together. We use a program called Predictive Index to help us with that. We’re still neophytes when it comes to learning that stuff, but we make the effort, which I think is incredible. What we pay attention to, most of the time is, what do our turnover ratios look like? What does our employee satisfaction look like? We recently put in a lot of effort to do the surveys necessary to qualify as a Great Place to Work. And it’s obviously nice to see that on your email, it’s nice to brag about it when you’re at a conference. But really, the value of that for us was getting our employees to fill out satisfaction surveys about working for Civitas, what does it mean, how does it feel to be an employee at our company.

We got a lot of really good data about how we’re doing in building culture and instilling the passion that we have at the corporate level down into our line employees. And that has really helped us overcome that challenge of finding good people at the right price by using all of those tools together.

What is your turnover today?

The turnover numbers that we’re seeing today are about half of what we saw last year, and that biggest change has come in our hourly employees. And that is something that we’re extremely proud of, but it is something that is going to continue to challenge us going forward.

So, our goal is not just to keep that number steady, but also to continue to see that number go down over the next 12 months as we implement some pretty unique hiring practices. And we’re really pushing our hiring managers to go into places where they’re not comfortable to find talent outside of our industry, that could possibly be a good fit for us.

What are some of these areas that they might not be comfortable hiring from? Are we talking about hospitality or retail?

Those are perfectly valid, and I think places that a lot of people are looking. But also, a lot of our focus has been on early career recruiting. That is partnering with universities, getting into some of those programs, providing resources to those universities to help with their teaching and their classroom curriculum. And in exchange, we can get some interns and some trainees and really take a longer-term approach to hiring. You may need an ED right now, but if you have been working that process for two to three years, hopefully you have a pool of candidates that are unique, because they may not have a lot of experience in your industry. At the same time, they may be better trained than the candidates that you’re looking at currently, just because you’ve been participating in that process the entire time. So, it’s about taking a longer-term approach.

A challenge that Wayne gave us early on — which I found quite a bit of enjoyment in — is if you’re sitting at a restaurant or you’re on an airplane and you have an exceptional service experience, the expectation of our company is that you hand that person your card and you let them know that there is an entire exciting career awaiting them if they if they ever want to make a change. And believe it or not, we have some pretty good employees that have come from that kind of experience. So, the challenge is for every single person in our company to be a recruiter, and every single one of us to be an ambassador. Not only for our industry, but also for our company.

Are margins under pressure this year?

Yeah, absolutely. Margins are always under pressure. Labor cost is going to be your biggest driver. It’s by far the largest expense we have on our P&L. But, at the same time, we also see technology and maintenance being large drivers as well. Technology, because we’re constantly needing to innovate and bring new systems into our ecosystem in order to stay competitive and in order to provide the quality that we want to.

I already mentioned the two systems we brought on on the employment side, with Greenhouse and Predictive Index. On our care side, we partner closely with Eldermark. A couple of years ago, we switched to RealPage as our accounting partner and we have a new sales and marketing system. I can go on and on. We have just made a real effort to push technology into our ecosystem, because as we’ve grown to the size we are, we have learned that getting data to the right people at the right time and not overburdening our employees with manual reporting was going to be a key to staying nimble and flexible.

And then on the maintenance side, in these buildings that we built brand-new — even three or four years ago — a lot of the technology and features inside the building are starting to become outdated because our residents are just becoming sophisticated way more quickly than we anticipated. We need to be able to provide the living environment that they expect and that their children expect, and that’s been a challenge to our bottom line.

We’ve done a lot of that in 2019, and a lot of those initiatives have failed, which is great. It’s not ideal, but at the same time you learn something, especially if you do it correctly. A lot of the ones that were super successful we will be rolling out to the entire portfolio this year, and hopefully that will help keep those margins steady or improve them. And we will continue to test the ones that failed to hopefully make them better and improve our system overall.

We have a lot of experimental programs and with a portfolio of our size, we get the opportunity to run pilot initiatives, which is probably the coolest thing we’ve come up with in the last couple of years. We will take three or four assets, and a lot of the time they don’t need to be geographically centered. They can be a single equity partner that agrees to use their facilities or communities as a test, and we will roll out an initiative and see what kind of change we can have. It creates a little bit of a laboratory. At the same time, you know if that an initiative is successful, but not as successful as we want, it allows us to tweak it before we push it out to 40 or 50 assets.

What’s been most successful so far?

One of our biggest successes was restructuring the way we do accounting and the way we build our leadership inside of our financial management team.

In the past, you tried to centralize as much as you can. And you put a lot of pressure on your corporate team to get the numbers right, to do everything correctly, to be the check and balance against what’s going on at the asset level.

What we realized is, that takes away a ton of the buy-in from property-level employees for approvals, understanding of where their expenses are coming from, what vendors they’re using, what those relationships with the vendors mean. What we did was we pushed a lot of our accounting responsibilities down to the asset level. We gave a lot of agency to our executive directors and our VPOs for expense approval, vendor approval, understanding what their bottom line means and what their spend-down reports mean.

They now do budget variance analysis actively throughout the month, instead of just at the close period. We now have the capability of closing every single one of our projects in four days. And we are able to provide financial reporting within seven days of any end-of-month period or any fiscal period.

The real effect of that, other than being able to gloat as a CFO, is that we can now make operational changes very quickly. Our teams aren’t waiting halfway through the next month to find out that they blew the budget for the previous month, or that something that they had done — an initiative that they had rolled out, or a labor change that they were trying to make — had a very negative or a very positive impact. They now have that information within a week of the end of the month, and so they’re able to make decisions faster. And that has given us an edge when it comes to melding the financial structure with the operational structure.

How has the availability and the cost of capital been this year? Do you see tightening of debt or equity markets in the near term?

The cost of capital has generally stayed flat or gone down a little bit in 2019. I don’t anticipate that will change very much in 2020. The entire time I’ve been in this industry, debt markets have been aggressive, other than during the lack of availability right after the Great Recession.

Banking has been the easy part of this job. The Dallas-Fort Worth metroplex is one of the fastest growing in the nation. And it’s the financial hub of the Texas market. So, I think I’ve been a little bit spoiled on that side. We have a lot of really large, successful regional banks here, which has given us a lot of access to the debt markets that maybe some other operators haven’t had.

At the same time, we’ve started to grow our relationships nationally over the last two to three years. We’re starting to get partnerships with much larger international banks like CIBC and Capital One that come with [their] own benefits and challenges, but at the same time, it gives us a view into the larger market nationwide and it still looks wide open.

On the equity side, I think it’s pretty much the same thing. Private equity is still running hot. We’re starting to see a lot of private REITs come back into the market, which we’re excited to talk to. But for us, we’ve stuck with the same five to six partners throughout our time as an organization, and that loyalty is paid off for us. We have very strong development and private equity partners that trust us, and we trust them. As we move forward, we shouldn’t have any problems with access to capital. But at the same time, I think that the overall market shouldn’t also have a problem with that access either.

What is your take on mergers and acquisitions and development right now?

If you’re in the market to buy, but you’re not a private equity player or you’re just using your own company’s money to try to grow organically, it is not a great market right now. We cannot compete with people like Capitol Seniors Housing or Artemis. Their cost of capital is just significantly different than ours, their scope is so much different than ours. So we have not seen a lot of success in acquisitions.

Over the last couple of years, we’ve had a couple of private deals where we manage the property and then acquire the asset through that management contract. But open-market deals are just not where we have been very successful. At the same time, we have been able to grow through acquisitions through our partners. We’ve sold a few assets over the last couple of years but they’ve been strategic sales where we want to grow a partnership, or where we want to start a partnership with someone.

And the markets that these assets are in are ones that we already have a very strong operational presence. What’s funny is, from the very beginning, our financial team has always planned for that inevitable day where cost of capital is low and the market is flooded with supply. And over the last seven years, that just hasn’t happened. We are still preparing for that day, and would be excited if that day ever came. But in the current market environment, we will leave the acquisitions to the larger players. If we find a development that we like, we will pursue it. Right now, we have one project under construction that we started in 2019. And we’re actively looking for more, but at the same time, we’re only really looking for high-barrier-to-entry markets. And those are becoming harder and harder to find. And so I would say our development is slowing down. But you know, it’s with a purpose.

We really are excited with the size of our portfolio right now, and we want more investment opportunities. But at the same time, we’re really not in a position to reach at this point.

Civitas had set a goal to open 20 new communities in the next few years. How is that coming along? And how are you thinking about growth in the years ahead?

We’re definitely on track to hit that number. Twenty-one communities over three years was basically what we were looking at. And we’re right on target for that.

Construction has been a challenge across the board. We own our own construction company and they’ve had challenges with labor affecting subcontractors and issues in China affecting material prices. At the same time, our third-party general contractors on our other development projects have also seen slowdowns in other markets outside of Texas. Because of construction slowdowns and timing on delivering product to market, we’ve seen a little bit of a stretch to that timeline, I would say maybe three to six months, on average.

That has honestly taken a lot of pressure off of our operations team as it is allowed to allow them to get a little bit more time into each new building as it’s coming online. It’s a little bit of a blessing, little bit of a curse. What we thought would be breakneck growth turned into steady growth.

I think it’s also given us the opportunity to look internally at our existing portfolio and really figure out where we needed to strengthen things. And I think that’s another reason why we decided to purposely slow down on our development side, to really find the right partnerships, find the right markets and make sure that we were making those good decisions.

If you would say that, early on in Civitas, we were 80% growth and 20% internally focused, I would say that that’s probably slipped to more like 60% growth and 40% internally focused. I think over the next two years, we’ll focus on same-community sales, and efficiencies will become a bigger part of what we’re doing. Unless, of course, that black swan event occurs and we’re looking at an environment where really high-quality communities are cheap to buy, in which case, all bets are off.

More and more providers these days are exploring different payment options like Medicare Advantage. Is that on Civitas’ radar at all?

We’re not actively exploring it, but we do have a team at our executive level who has spent a lot of time researching it. Our chief operating officer specifically has been tasked with bringing in third-party groups that are offering partnerships in this area, and we’ve sat and listened to them.

What we’ve come away with is, there’s nothing to do right now except prepare. So, what we have started doing across the board is building relationships within the networks that are going to exist once those payment systems are fully operational.

We’ve spent more time focusing on building out hospital relationships, building our internal key performance indicators, so that we have the ability to provide the reporting necessary to be part of that kind of network. A lot of the focus on those groups is the ability to provide statistics that say we are actually improving the health outcomes of the residents that are being referred to our facility or community. And if you’re not able to produce those statistics and follow and track that, then you can’t really be a good partner inside those payer networks. What we’re doing now is building an infrastructure internally to prepare for that. But we’ve taken no active steps to sort of pursue those relationships. I think it’s still in an incubation phase, but we want to be ready once the market is ready to start providing those different payment sources.

We do have a lot of rural properties in our portfolio, specifically in East Texas. We utilize the Star Plus program in Texas, which is a state Medicaid program. It’s not a huge part of our portfolio. I would say, at 10% of our assets, it’s 10% of the residents. We are very familiar with how to bill for those services, and we know how to work with those managed care providers.

You know, it’s not a business model that we’re particularly fond of, in the sense that it’s a lot of extra work, it’s a lot of extra labor and training on your staff to implement those systems. But at the same time, in a community like in Athens, Texas, where the population isn’t large and the median income is lower, it’s allowed us to stay 100% full, and it’s allowed us to serve the community by providing subsidized housing. So, again, it’s not a huge part of our portfolio, but it’s something that I think we’ve learned to do well.

As a CFO, what sort of data or metrics are you interested in analyzing? And how is this informing your leadership?

Like I said, our biggest challenge, by far, has been labor. Early on, when I first started, we were focusing on the same things I think most people do. You’re looking at your operating margin, you’re looking at your PPD indicators for food and your other variable costs. But really what’s been driving our profitability is things like turnover. Cost-to-recruit is also a big one. Finding ways to make those numbers more efficient has really been an effective way to keep our costs down.

I learned over the last two years that one of your largest variances to your labor is actually in training hours. So, if you’re turning over your line staff — your caregivers, your med aides, your cooks, your housekeepers — at a significant clip, it’s almost like you’re paying overtime to those employees because you have to bring them back in. You have to dedicate a significant number of training hours before you put them on the floor. By bringing down that turnover number, there’s a knock-on effect throughout the entire system. And that affects profitability.

How do you define what a healthy margin is in this business?

We have a very large and a very diverse portfolio. We have some infill properties in some urban markets. We have some rural properties in towns of 2,000 to 3,000 people. So, the way we define a healthy margin is project by project.

There are some communities that are going to run really hot, like urban markets with high rates and easy access to labor. At the same time, you may have a rural property with very low access to labor and very low pricing. But you still have to provide an environment where, when the employee gets up in the morning, they want to be coming to your community, because they’re going to have pride when they get there. And that means you may be putting more into capital improvements than you would in a hotter market, because the building needs to be a higher quality in a rural market, because the margins aren’t as aggressive.

Do you ever feel like you’re you’re fighting to protect your margin, while maybe others at the company are free to focus on things like mission?

I think the challenge has been, as the margins have compressed over the last seven years, how do we provide top quality care? A lot of times, especially when considering the cost of capital improvements, the cost of keeping a building relevant after multiple years, those two things can really conflict with each other. Because when you’re taking 40% of your profits and putting it back into a building, it can really affect what your investors are seeing and what you’re trying to achieve for them.

What we’ve done at Civitas is take a more holistic approach. We don’t ever talk about margin without mission, and vice versa. We sit down as a leadership team and we make it everybody’s responsibility. On the operation side, all the way down to the EDs of the property, they’re responsible for looking at their own P&Ls, for understanding them and for understanding the impacts that their decisions have.

Everybody on the financials and accounting side of our company is responsible for understanding what our mission is and how we can help to make it effective. So, when someone comes up with a new idea or a new initiative that is driving costs without a revenue offset, it’s everybody’s job to sit down and take a look at that. We decide how to turn this into either a revenue-driving item, or push the cost down to make this initiative so efficient that it’s negligible to the margin and that the value we’ll get out of it long-term will offset any initial cost issues.

It’s a humongous struggle, even for a for-profit company, especially one that is privately held by a passionate owner who cares deeply for seniors.

When you have to do rate increases in order to cover a lot of these initiatives, those rate increases can sometimes seem punitive if you’re already at the top of the market. But at the same time, if you can sit down and realize, okay, but we’re also adding these four or five value components to the asset at the same time, and these rate increases will help cover this higher-quality experience, then there’s a much easier decision to be made there.

The post The Bottom Line: Civitas Gets Experimental to Alleviate Margin Pressure appeared first on Senior Housing News.

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