Arrow Senior Living CEO: Right Unit Mix, Occupancy Goals Expand Middle-Market Margins – Senior Housing News

The middle-market is a growing senior living sector, and operators are spending considerable time and resources nailing down a scalable model.

It’s a particular focus for Arrow Senior Living CEO Stephanie Harris. Arrow’s middle-market communities have been able to hit margins even greater than the typical 30% to 40% seen in the senior living industry.

The company achieves that by building efficiencies into its operations such as sharing home-office employees among its 26 open communities, using technology and setting community stabilization upward to 98% or even 100% occupancy. But even more crucial is the fact that the St. Charles, Missouri-based operator relies heavily on independent living in its unit mix.

“I think the biggest trick with the middle market is going to be appropriately sizing the scope of services,” Harris told Senior Housing News during a recent appearance on the Transform podcast. “[Making sure] that it’s not just all standalone AL or standalone AL-memory care, that it includes independent living, so that you can create longer length of stay and better outcomes that create lower cost in operation.”

Looking ahead to 2022, Harris is focused on growing Arrow’s portfolio. The company currently has four projects in pre-sales that are “leasing new reservations at a rate that’s probably even in some cases better than pre-Covid rates,” Harris added.

She also believes that there will be more turnaround opportunities ahead as the industry undergoes more pressure from the Covid-19 pandemic.

Highlights of Harris’ podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts and SoundCloud. The interview took place in early December.

On dealing with Covid-19, particularly where the delta coronavirus variant surged over the summer:

We’ve been very fortunate that, while cases are popping up, [with] our strategy and testing — as well as pushing the vaccine, not mandating it but encouraging it, and getting great voluntary participation — we fared very well, even at the peak of delta.

In a sense, that gave us a front-row seat in the first act of the wave. And I was surprised at how many of our communities were able to work through what were overwhelming the hospital systems. Where we had cases, it was really based upon resident exposure to family visits. You don’t want any exposure, especially employee-to-resident exposure. And it was nice to know that the precautions, the testing strategy, did go a very long way at protecting the resident base.

The endemic elements of what this pandemic has evolved into, I think, unfortunately, will be a part of the future, just like we have flu season. I think we’re ready as an industry, and I think we’re only ready because we’re more aware. A lot of the techniques that we’ve learned in fighting coronavirus are going to serve us well into the future.

I think that our bigger risk is if there is [a variant] that has a bigger impact on seniors. The good news is, with a higher vaccine rate among seniors, we have a better leg to stand on as we battle future rounds. I don’t think we’re ever going to be entirely prepared, but we are far more prepared in that infection control is going to become a part of our permanent conversation that [skilled nursing facilities] and hospital settings have always had.

On the ongoing recovery in occupancy:

The recovery has continued to get better, month over month. We are averaging, at some communities, a 2% recovery in occupancy a week. As a company, [we’re at] 1.6% a month, on average, over the last 12 months.

We had a lot of new developments open right before Covid, or during Covid. All of our communities that were stabilized going into Covid are now not only back to stabilized occupancies, but they have higher occupancies than what they had pre-Covid, which I think is remarkable.

We have a lot of pre-sales or new-development communities that are going to open in the next six to 10 months that are leasing new reservations at a rate that’s probably even in some cases better than pre-Covid rates. We just opened a community about 36 days ago, in Columbia, Missouri, and we have 78 occupied apartments already in just over a month.

I think that speaks to the fact that the seniors that are looking ahead are doing that again, and that the communities that are lagging are more than likely not getting the benefit of being necessarily the newest community in their markets, or they have always been a little occupancy challenged.

We’re noticing that the communities that are lagging in the overall performance were ones that were turnaround projects we had taken on before the pandemic. They basically have recovered from 2020 in 2021, but to a neutral setting, because there’s always been turnover in the process. They’re not getting the same growth levels that our new development or our stabilized assets have had.

On meeting the middle market:

I think the biggest trick with the middle market is going to be appropriately sizing the scope of services; that it’s not just all standalone AL or standalone AL-memory care, that it includes independent living, so that you can create longer tenure, length of stay; and better outcomes that create lower cost in operation, which is really what supplements — or subsidizes, if you want to think about it that way — the rents of residents.

Instead of looking at stabilization as 92%, if the communities can drive upwards of 98% to 100% occupancy, that’s really critical in managing the balance of paying our employees well and maintaining this modest, middle-market rent structure. It’s really looking at everything in terms of efficiency at every level.

We rely heavily upon independent living in our unit mix, which really helps on margin, and helps how we share resources across the campus. We also heavily share employees at a home-office level, providing services to the communities, and services that we would otherwise have to have one FTE. This way, we can have a partial share of cost and pool that resource across multiple locations.

It’s really the combination of each of these efforts that I think go to the heart of maintaining a middle market rent structure.

On a blended rate, we’re doing better than the traditional 30% to 40% margins because of independent living. A healthy balance of independent living residents can drive better margins overall, including assisted living and memory care.

We’re situated in St. Louis County, or just outside of St. Louis County in the St. Louis region. And St. Louis County is an example of an area that has some pockets of wealth, where there’s been a tremendous amount of new development — great product — but the occupancies have really lagged, as the industry is targeting these higher-income markets. We’ve accepted a far lower penetration rate because folks who can afford that $6,000-a-month-plus rents also very well have the option to choose home-based care.

Ultimately, the greatest competition is people choosing to stay at home and choosing home based-services. But in the middle market, choices are available. I think what we’re going to find is that, as the industry researches more middle-market, our penetration rates grow. The demand is far greater. We’re going to see a higher penetration rate overall and better stabilization.

We have a river that separates us, where the core of our product is located in St. Charles County outside of St. Louis County. That river is a major barrier. We’re actually charging or getting better rates overall in our blended approach, pure middle-market, versus the concessions [we have offered] in the battle that has gone on on the other side of the river for communities that were underwritten at rates far higher than what we’re achieving in this suburban market just next door. And I think that that’s often what we’re going to find as we start to find new suburban areas to target in the middle-market, that there actually will be more residents and more interest in senior living.

If anything, you’re convincing people that they’re worth investing that money into, not that they have the option to choose something else. So with limited choice and a little bit more patience, I think operators can enjoy this new untapped market.

On turning leads into move-ins amid the pandemic:

A lot of the foundation of turning leads into move-ins is appreciating each individual lead — even those who say no to us, and turning that ‘n-o’ into ‘k-n-o-w’.

A more deliberate sales process can yield a much higher conversion rate in an industry that needs more conversions. We really do need to slow down and look at building value, building trust. Those core fundamentals of the turning-leads-into-move-ins sales model, we still use the sales training materials today. Some of the tools that were developed to create follow-up strategies, direct mail and other individualized marketing efforts to drive resident prospects to our communities — today, if anything, we’re going back to that model more purely than we have in last couple years as web and SEO approaches and geofencing have dominated a lot of the narrative.

I think we’re going to see a bigger focus on, now that we’ve generated enough leads, how to close these leads. And as a company, we’re building out an entire effort in terms of reducing locator agency dependency and reducing cost of lead to move-in as additional ways to stabilize our communities and further address the margin pressures that we’re feeling with the labor markets and other inflationary impacts of the industry.

The more we can figure out how to motivate those people who have the choice to say yes to the community, versus those who are desperately forced to make a decision, that is where we’re going to see improved length of stay. I believe that is absolutely the most important key to achieving a balance and better margin, and meeting that affordability need to ensure that when a resident moves in, they’re doing it early enough so that they can have a long quality length of stay once they make that decision.

I think Covid is going to have a lasting impact, and one of the next waves outside of the variants is going to be a resident turnover crisis. The kind of residents moving in today, in part of this pent up demand, are residents who require far more care. We call those the overripe bananas. And back to the core message of what drives efficiency, what drives better outcomes, what helps us meet the affordability challenge — we have to have residents move in even sooner, even if it is six months sooner, than waiting until that crisis gets a little bit more unmanageable.

If the sales process is more about what-ifs — we call it the emotional roller coaster, the ups and downs — we’re more likely to capture them before all the bruises set in and before all of the “yellowing” and the browning that can occur. I spend usually the first six months of my year pretty knee-deep in the sales challenges of the company.

The green banana brigade has relaunched for the next six months within the Arrow organization. And as the teams had to quickly fill as many [units] as we possibly could, we have additional leads we have to cultivate that might not move for the next six to nine to 12 months, and our sales process could stand to be a whole lot more focused on that group. I think our industry does have them on the radar, and I think the real monumental shift to better outcomes and a greater penetration rate, that will be the most revolutionary or most disruptive force, in a positive way, for the future of the industry.

On how Arrow uses technology in its operations:

We test different kinds of technology all the time. We seem to be a magnet for new entrants into the space and love to test various types of technology.

A few years ago, the shift for us was, how do we manage the 10 to 11 systems that we have on average in each community and have some way for communication and analysis across each of these various channels. Our industry lacks one portal. Even if you have an integrated electronic health record, there are still challenges of how information can be uploaded as well as how you can glean information from the electronic health record or then, furthermore, compare it to your emergency call systems.

These are all systems we all are most likely using, but I think a lot of companies haven’t taken that step forward to building the platform to create the conversion, and to create the better outcomes. We are knee-deep in creating better care planning results from integrating and leveraging all technology as our top focus.

We’ve added a couple hardware based systems with fall-detection or predictive analytics included in them. But we see them all part of this complementary effort to create a better care planning system or care planning structure. We started this two years ago. We convert through Power BI, and I think that in the next two years, our greatest innovations are going to come from how all of this information can be utilized in creating better outcomes for our residents and making interventions when needed, versus the way today where we plan by checklist or we plan by physical proximity.

If we can create artificial intelligence and machine learning, because we’ve been collecting data — being able to interpret that data, I think, is what’s going to dictate the next two to three years, at least within our organization. And I’m looking forward to that driving the better outcomes across the industry that are desperately needed.

If we don’t fail, we’re never going to learn. We’re okay with that. And sometimes I can drive my team crazy with a harebrained idea here or there. But I think we have an opportunity to, through trial and error, land on a better way of doing things.

On getting into the senior living industry after working on Capitol Hill in the early 2000s:

It all is the result of having one door close and another one open.

I was in politics and thought I would be not only working on Capitol Hill, but eventually running for office. My ego was so big at the ripe old age of 20 years old. I was on a national, high-profile campaign, going from exploratory committee to national to official committee, but it was the end of my road. I was lucky that, back in undergrad, I had met one of my friend’s fathers who was in the industry. He’s got a fantastic senior housing campus and had a turnaround business. I think he called me within two hours of this happening.

I put it off for two weeks, and then eventually agreed to do something for 21 days. Six months later, I was still at that project, not only wrapping up the goals of a sales SWAT team, but I had taken a community from 50% to nearly 100% occupancy in less than six months. It was a really interesting experience, and I was hooked.

I think I just turned 21. Most people who are 21 are doing different things than I was doing. I remember at night, after putting in a hard day — and this is up in Minnesota in the middle of winter — I probably could have gone to a bar. What I did was, I grabbed VHS tapes and watched how caregivers were trained. And I just was consuming everything I could, any book I could find. And I used that time to really start learning the space. I knew from then on that I was going to go back into this industry, even knowing that I was still going to go to law school.

While some people were rushing to get in or to interview for their permanent legal job, you know, I was showing up to school in flip-flops and T-shirts, writing sales materials sitting in the classroom during lectures because one thought would trigger another.

It’s been a wild ride. But it probably would never have occurred but for one introduction.

On making senior living cool:

I’ll never forget 16 years ago, when I had a creative director working for the company. We were creating fake websites and working on modeling out some templates to use for some consulting clients we were working with. And he threw a tagline on there, ‘making senior living cool.’ It stuck with me. That’s really what we’re trying to do.

It’s about building culture, making the community the place to be. A lot of the core principles on the turnaround side are about breathing new life into the community, and that would often come by way of energy. I remember touring with somebody in one of my early projects who said, ‘Well, last time I went to that community, nothing was going on, it was boring, it was dead.’ So the day I got them to agree to come in for a new tour — because we were in the process of acquiring the community — and I set up a live band to play during a happy hour event that I planned and timed out just for this couple’s visit. They weren’t necessarily invited to the happy hour, but this is the background. I was going to change the mise en scene that she was entering.

We’ve carried a lot of that thought into how we introduce prospects to sales. I think where I am most excited at Arrow is that we have introduced it with our employees. If our employees think that what we’re doing is cool, it transfers into how they are meeting and providing care for our residents. Our residents feel it when they see our staff having fun.

One of our chief operating officers is also our chief culture guru. Probably 14 or 15 years ago, she hosted a Nurses Day celebration. It could have been just food and honoring employees here and there. But she turned it into a rock star party, and they actually set up a fake tattoo parlor. The employees and the residents were lined up to get inked.

We’ve got to figure out how to create engagement at both levels. I think we are in a period of time where, more than ever, we have to be employee-minded, and that is how we will drive any of the outcomes we want to see in making senior living cool and more attractive to seniors and adult children. Basic fundamentals are where we’re going to be finding all the fun in senior living.

On confronting staffing challenges:

We have to use this as a period of time to evaluate our workforce dependency, and how we can make the processes we carry out at the community level fundamentally respect the role of each employee.

A lot of what we’ve done is what feels right and feels convenient, but isn’t always easy and flexible for the employees. If we can create more efficiency with that group, and open our ears or eyes to the feedback that they have to provide, I think that we’re going to learn a lot. And we’re going to be able to, out of desperation or aspiration, get better at how we staff and deliver services.

This problem is everything we need to get uncomfortable and start to look at the use of technology in ways that we haven’t up to this point. Our employees who may have been slow to adopt technology are more willing because they know that it might just be them on the shift, or it might just be them and somebody else, and they need to leverage something to get through the day. I think that’s going to be how we see our way through, but also how we come out on the other side with more time for direct resident interaction and engagement, and less in terms of inefficiency. [That includes] predicting what somebody might need, how we simplify documentation, or potentially how we use robots in the care of our residents and surveillance of some sort.

On 2022 and beyond:

We’re continuing with new development. I think that’s going to be an opportunity because we have a track record — and, we have especially had some very positive outcomes in our current pre-sales projects. We’re going to be able to weather through any lender resistance or reluctance in the space.

I also think that the turnaround side of our business is going to become a bigger part [of what we do], where we may have shelved it over the last four or five years because of how much we’ve had in new development. I think we’re going to see a lot of ironing out of lots of wrinkles in this industry, and a lot of operational challenges that will need to be overcome, which will create a reshuffling of some properties to new operators to breathe new life [into them].

There is something extremely predictable about coronavirus that I have to share: It’s that it’s always unpredictable.

I always viewed our company as agile and able to respond quickly to change. I think that [the pandemic] really put that to a test. I think it caused us to recenter and refocus on that. I think we are probably going to see more waves. That’s a reality. We might see new challenges that aren’t even in our purview today. The staffing challenge was there pre-Covid, but boy, it sure got very bad very quickly.

And there could be another challenge. We have no clue what’s going to happen with this inflationary impact or what’s going to happen on the debt side in this space. And we’re in the global economy, so it’s very difficult to predict. But I can say the one thing we can do to prepare is to make sure we are agile, that we are truly listening, to respond. And additionally, that we are finding that better path forward, because struggling through the need to adapt and the need to change — with all of the different things that we’re facing in the industry — is going to surely help each company find their true differentiation [for] somebody staying at home or in another community.

That’s where we have to find that silver lining. And I think it will be unique for each company. But I hope that across the entire industry, we are far more outcome-minded and that we are able to figure out a way to tout the success rates like other industries can, in a tangible way that is objective and easy for the consumer to navigate and compare one product to another to know they’re getting what they’re paying for.