LOS ANGELES — The seniors housing industry needs to focus more on the health and happiness of residents and less on the real estate aspect of the business if profits are going to be sustained for the long term, said Maragret Wylde, president and CEO of research and advisory firm ProMatura Group and keynote speaker at last Thursday’s InterFace Seniors Housing West conference. Approximately 250 industry professionals attended the event held Feb. 26 at the Omni Hotel in Los Angeles.
“We really don’t need to be selling the real estate,” said Wylde, whose Oxford, Miss.-based research firm specializes in understanding what consumers want and are willing to pay for, specifically persons age 50 and above. “We don’t need to put any more into our communities. We don’t need any more amenities.”
From Wylde’s point of view, the importance of a quality operator can’t be overstated.
Bidding Frenzy Continues
Many of the day’s panelists agreed that real estate aspect of senior care has gotten a bit out of control recently, creating prime conditions for a seller’s market ripe with hungry institutional investors. Some also wondered if this flurry of activity might soon lead to overbuilding in many of the nation’s hottest seniors markets, such as Sarasota, Fla., Houston and parts of Colorado.
“Interest rates are absolutely driving the market,” said Darrin Smith, a speaker on “The Outlook for Seniors Housing in 2015” panel and senior vice president of seniors housing for HCP, a giant publicly traded healthcare REIT based in Irvine, Calif.
Darrin Smith, senior vice president of seniors housing for HCP
“They’re pushing prices of acquisitions to historic levels. It’s pushing the development cycle as well. If you’re a developer and you see a stabilized property at a 6 or sub-6 percent cap rate and you can build at a 9 or 10 percent cap and stabilize your costs, you’re going to continue building. That won’t change until interest rates go up,” added Smith.
Debt and equity have been readily available for seniors housing acquisitions and developments over the past few years, thanks to REITS, pension funds, life insurance companies and mezzanine lenders. However, many participants on the panel focusing on the outlook for 2015 expressed their concern that this wave of capital may place facilities and, therefore, the seniors who occupy them, in the hands of inexperienced operators.
“More important than underwriting is operations,” said panelist Margaret Scott, executive vice president and chief investment officer with Houston-based Belmont Village Senior Living, a seniors housing owner and operator whose portfolio includes several properties in California. “We see lots of people building. Some might be merchant builders that are turning over to an operator that might not have dealt with seniors before. We can’t lose sight that seniors is a labor-intensive business.”
Margaret Scott, executive vice president and chief investment officer with Houston-based Belmont Village Senior Living
Peter Martin, fellow panelist and managing director of equity research for San Francisco-based JMP Securities, said the asking prices for these projects has become so inflated that many smaller investors have had no choice but to jump into the development game if they want a piece of the action.
Some of the recent portfolio transactions have been in excess of $1 billion, said Martin. “These guys shouldn’t get too enamored with the dollar value, but with the underlying metrics. We see people wanting to get into the platform, but the operator platform is what deserves a premium because we all know how difficult it is.”
Though operators face challenges due to ongoing labor, litigation and regulation concerns, Wylde said the biggest issue facing the industry is that it’s failed to develop for, and cater to, seniors and their families. In short, the industry has fallen short on meeting their expectations.
Satisfaction Study Is Revealing
ProMatura recently partnered with the American Seniors Housing Association (ASHA) to survey nearly 7,000 seniors residing in rental independent living communities in 11 major U.S. cities. The study, which aimed to determine which factors influenced how satisfied a resident was with his or her community, showed that when it comes to happiness, home truly is where the heart is.
“The biggest thing impacting a resident’s overall satisfaction with a community is how strongly they feel at home there,” said Wylde. “In independent living, feeling at home is the single dominant attribute that makes people say they’re ‘very satisfied.’”
Peter Martin, managing director of equity research for San Francisco-based JMP Securities
The average customer in an independent living facility generates $106,764 in revenue for an operator based on an average stay of 37.9 months and a monthly bill of $2,817, according to the study’s calculations.
However, an operator cannot satisfy a customer if it can’t attract, then retain, that customer first. This is why Wylde believes many facilities need to change their marketing and sales approaches rather than worry about their real estate, amenities and services.
“We’re very enamored with our services — and we should be,” she said. “They’re good. We probably offer more than we need to. But we don’t really need to be selling that. What happens virtually every time a potential resident comes through the door is the sales team gets together and starts selling real estate. It’s ‘Let’s take a tour because our investors are so enamored with our real estate.’”
Lobby Décor Should Take a Back Seat
Many developers and operators get into the unending cycle of one-upmanship, plunking more and more money into services designed to “wow” the resident in order to beat the competition, noted Wylde.
Dana Wollschlager, vice president of senior living consulting firm Plante Moran Living Forward headquartered in Southfield, Mich., and a speaker on the “Technology and Operations” panel, said she sees this trap all too often.
Dana Wollschlager, vice president of senior living consulting firm Plante Moran Living Forward
“Lots of clients get hung up on the sexy stuff like water features and lobby décor,” she noted. “My response to that is, ‘Will that hard feature bring you more revenue? If it won’t, you might want to rethink that.’ That water feature may get a family in the door, but it’s not going to tell the family their mother has a UTI (urinary tract infection). That water feature won’t be quite as effective on them 24 months from now.”
Another problem with developers and operators trying to outdo their competitors when it comes to amenities is that seniors pay little attention to these elements, said Wylde.
“All this money is being put into lots and lots of amenities, and it doesn’t necessarily create a feeling of being at home,” she said. “Are we pricing ourselves too high by building too much? Could we have a better product that more people could afford if we didn’t feel we had to out-amenitize our competition? Studies show seniors care about two things: they care about the dining options and dining hours.”
ProMatura also sends “mystery shoppers” into many of the facilities it works with to identify the pros and cons of the facility’s sales approach. The consultant notices one specific misstep occur time and again.
“More than 90 percent of the time is spent talking about the real estate,” said Wylde. “They ask nothing about the customer. In most places, you make an appointment. You walk in, they make you sit down. You wait and fill out forms. It’s like a doctor’s office. That’s how we greet a $106,000 customer?
“We need to make them feel at home,” said Wylde. “Studies have shown the communities and companies that have at least some semblance of customer service that does involve friendliness have higher occupancies and higher rental rates.”
While the conventional wisdom is that “at home” and “happy” are subjective terms, Wylde believes that when it comes to seniors housing those are important intangibles. The ASHA study “Unlocking the Mystery Behind Very Satisfied Independent Living Customers: Make Them Feel at Home” did the work itself.
The study showed seniors felt more at home, comfortable, happy and therefore “very satisfied” with their housing if they easily made friends, interacted with a friendly staff, were allowed to keep their own furniture and had plenty of natural light.
This led successful communities to more referrals, fewer defections and happy families, said Wylde. “If the customer is happy, the family is happy,” she said, which leads to increased net operating income.
“You don’t have to go bigger,” pointed out Wylde. “If we can sell them ‘home,’ and a day that would be similar to the day they would have if they were home, you’d be great. Location is important, but if I’m an investor, I don’t care about the real estate so much. The differentiator is how good the people are, how well the community is run, the competency and friendliness of the staff. That’s the game.”
– Nellie Day