Trustwell CEO Cohen: Senior Living Industry Focuses Too Much on Occupancy, Not Enough on Margin – Senior Housing News

In 2018, Larry Cohen announced he was stepping down as CEO of Capital Senior Living (NYSE: CSU) — but he didn’t stay out of the industry for long.

Earlier this year, he and several of his former colleagues from Capital Senior Living launched Trustwell Living, with plans to reach the middle market by acquiring older communities and improving them.

Cohen started Trustwell after he took a couple years to get “under the hood” of the senior living industry, where he saw both good and bad. For example, he saw some providers using tools and technologies that were adapted for use in senior living from other sectors.

“It doesn’t always work well,” Cohen said.

Another insight from Cohen’s 34 years in the industry is that some operators too often focus on occupancy rather than rates to drive margins.

“There’s a strong correlation that’s been documented for decades in this industry that margins are driven more by average monthly rate than by occupancy,” Cohen said.

Margins also play a big role in how Cohen thinks about Trustwell’s growth.

“We are very cognizant of the margins going into the buildings, and looking at ways that we can improve those margins by creating operating efficiencies by increasing the occupancy and rate,” Cohen said. “But we’re also very aware that there are many buildings that may never get there, that their rates are so low that, even if they fill, they still won’t generate a margin that will be able to support the cost of capital.”

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

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On the launch of Trustwell Living, Cohen’s new operating company:

It is great to be back in the game.

I’m particularly excited to be joined by such great leaders that I’ve worked with for 15 years at Capital Senior Living. We have been very busy building out our platform, building our systems, and we’re extremely refreshed and excited to launch Trustwell.

We worked together, growing Capital Senior from a company that had 27 communities, serving a resident capacity of 5,000, to 129 properties with the capacity to serve 16,000 residents. During that time, we developed a very proven track record, and that also spread across multiple economic and senior housing cycles.

So, we’re very excited to build Trustwell on a culture of trust, transparency, integrity and respect. At Capital, we enjoyed a philosophy — which we would term a community empowerment philosophy — to empower local leaders to operate their properties with autonomy, responsibility and accountability. And we’re doing the same at Trustwell.

We feel we have a lot of experience. At some point, you’re able to say you have wisdom, and wisdom really is experience. You learn from successes and from failures and mistakes and challenges, and you take all that knowledge and start from scratch, look at state-of-the-art technologies and systems and people. And it’s exciting.

Ultimately, what we’re most excited about is fulfilling our mission to serve seniors and their families, and do it with compassionate care, and a commitment of exceeding customer expectations.

On what Cohen learned looking “under the hood” of the senior living industry after his departure from Capital Senior Living:

I have about 34 years of experience in senior living, and I truly feel like I was one of the pioneers in the mid-1980s to get involved in the business.

I took that time to go and look at other operators, to look at systems, look at technology. And something that I appreciated 25 years ago that was reinforced is that this industry is very specialized. And a lot of the systems, a lot of the tools, a lot of people, resources, aren’t specifically tailored for senior living. So, you see a lot of systems that were tailored for multifamily or skilled nursing. People are trying to build this hybrid [model] and make a workaround to have technology and systems and people and training that work for senior living — and it doesn’t always work well.

Getting under the hood was great because I also saw some things that were very good. So, I learned about new systems, new technologies, and with our team and our collective experience, we’re taking that knowledge and building state-of-the-art resources to use technology that will be special-tailored for senior living. It’s something that will be easy to use for onsite staff, and we’ll be able to have training, we’ll be able to have benchmarking. We’re going to have technology that really makes us extremely well-informed going in as we start thinking about where we want to operate, what we want to operate, and to whom we want to operate for.

So, I think it’s been a very worthwhile time to get a little smarter on the industry, and the tools that are available, and now tailor all those resources to be able to provide a platform that is very well-positioned for success.

On how it feels leading a privately held senior living operating company:

I joined Capital in 1996, we went public in 1997. I was fortunate to join a team of leaders that created a great culture — and I was smart enough not to mess it up. So, we kind of built on that culture and we’re recreating the same here.

[There are benefits], like the ability not to have earnings calls, not preparing 10-Qs and 10-Ks. But there are disciplines you learn from running a public company that are very helpful, and [we] will continue to really benchmark performance and have business plans where you measure quarter-to-quarter results, but with a longer-term view.

Behind the scenes, we are extremely busy. We have a very robust data analytics [platform] that we’re using, both to analyze opportunities that we’re looking at, and to benchmark our results against industry [key performance indicators (KPIs)].

It’s interesting to start a platform with no properties. And when you look at the talent that we bought back together — a team that has such great experience and track record, and a common mission — and you look at the care and quality component — recognizing how important that is to serve our residents, and truly be resident-centric — I think that tells you a lot about what we think about this industry and how we want to position ourselves as a real restart.

The other thing is that we are refreshed. This has been a very tough year. I have tremendous admiration for my friends, and the many heroes in this industry who are truly behind the scenes that did a phenomenal job of caring for residents and families in the most trying times this industry has ever experienced. But there’s a lot of fatigue, there’s a lot of financial pressure.

We’re coming in fresh, we have a clean balance sheet, we have no debt, we have no leases, we have no guarantees. And we’re fortunate that we’re entering the industry with very well-capitalized financial partners that can help fund the growth that we’re pursuing. It was not planned, but we’re entering the industry at a very interesting time. And we have a very active pipeline, and we’re seeing many opportunities that may have not been there prior to the COVID pandemic.

On how Cohen and Trustwell define middle-market senior living:

The middle market is a very broad term. Obviously, a big initiative of [National Investment Center for Seniors Housing & Care] and others has been serving the middle market. And we all understand, as we see the growth of this age cohort that we serve over into the future — which is very exciting — that affordability becomes much more of an issue. The 75-to-84 age cohort is defined as having income spanning from $25,000 to $75,000 a year. That’s a very big, broad definition. The 85 and elder cohort is actually even wider, it goes $25,000 to $90,000.

So, what we’re looking at is serving the upper-half of that income distribution, and we’re looking at taking over or acquiring properties that probably have rents that average, say, $2,800 for independent living, about $3,800 for assisted living, and more than $5,000 a month for memory care. We’re looking at buildings that can generate positive cash flow, we’re looking at properties that can generate adequate margins. And we believe we have the ability, by increasing occupancy and proactively managing our expenses, to see a growth in our bottom line and expansion of that margin over time.

On senior living margins in 2021, and whether Trustwell will tweak them to hit the middle market:

I think that margins are really a key performance indicator. Too much time is spent talking about occupancy.

For 20 years leading Capital Senior Living, I would have an executive summary every month, showing the key financial performance of every community. And the first metric I looked at was margin, not occupancy. The second metric was rate, and the third metric was occupancy. There’s a strong correlation that’s been documented for decades in this industry that margins are driven more by average monthly rate than by occupancy.

We have looked at a lot of buildings since we launched Trustwell, and I spent over the last year or two looking at a lot of opportunities. If you look at the first quarter NIC [MAP VISION] data, we’ve seen an unprecedented drop in occupancy for this industry, where first-quarter occupancies averaged about 78%, down 8.7 percentage points from a year ago. And assisted living is 75.5 %.

We’re seeing a lot of buildings where there is no margin. We’re seeing a lot of buildings that opened within the last three years, where lease-up was stalled because of Covid. And they’re still not generating positive cash flow. We’re seeing many buildings that are 20-plus years of age that are in tired condition, need CapEx, need some strong leadership at the community level. And they, too, are not generating a positive margin.

I’ve also seen a lot of buildings that actually performed well during Covid; many of these performed extremely well before Covid. They were able to minimize the impact in their communities, and they’ve come out of the pandemic or are coming out of the pandemic with attractive margins, occupancies and a very steep recovery, since residents have been vaccinated and communities have been opened up to visitation and to activities.

So, I look at this market really as being trifurcated: buildings that were recently built that never stabilized; buildings that were challenged and even are further challenged because of Covid; and buildings that were stable and remained stable and perform better. We’re focusing on a combination of those three.

I have the experience of having dealt with the oversupply of the late 1990s, the Great Recession, and what’s unique about this situation is that this downturn is a combination of demand and supply.

As I think about the margins, we’re looking very selectively, very strategically, at where and what we want to operate. We are very cognizant of the margins going into the buildings, and looking at ways that we can improve those margins by creating operating efficiencies by increasing the occupancy and rate. But we’re also very aware that there are many buildings that may never get there, that their rates are so low that even if they fill, they still won’t generate a margin that will be able to support the cost of capital. Many of those will be converted to alternative uses.

The good news is that supply is at [low] levels we haven’t seen in many years, and we are seeing growing demand of the age cohort that we serve. I think one of the key takeaways of what made Capital successful rebounding from the overbuilding of the late 1990s and the housing downturn of 2008 to 2010 was our discipline to maintain the integrity of that rate structure, and we saw a nice recovery coming out of that. I think this time the industry is different.

On potential acquisitions Cohen and Trustwell see in the market today:

There are still very good deals. And properties that are stable and where there’s still growth opportunity, whether it be to expand the building, create more levels of care or change the utilization of some of the units and drive returns.

There are buildings that, as I said, have been challenged, whether they’re recently opened and haven’t been able to fill or are buildings that need cutbacks. So, we’re taking a very holistic approach to these buildings.

When we look at these opportunities, we’re looking at the physical plant, we’re looking at capital needs, we’re looking at the ability to reconfigure the buildings by utilization, whether it be the levels of care, the mix or size of units. We’re looking at combining units, shrinking capacity in some cases, and blending the mix between independent living, assisted living and memory care. We’re looking in some cases perhaps at just completely repositioning a building.

I think part of the challenge is there’s a lot of money on the sidelines right now looking for opportunities. There’s been a big delta between the ask and the bid, and I think that’s starting to narrow. I think part of what we have seen is that we’ve never seen negative absorption at the extent that we have in the last four quarters. So, it’s a little difficult to underwrite the performance going forward coming out of this pandemic.

The other advantage that we believe we have at Trustwell is that we are well-capitalized with partners. And we’re looking at buying properties and have the ability to buy properties for all cash. We don’t have to be limited by financing, which is very challenging today. So, we have a very disciplined and strategic approach to what we want to do.

We’re looking at opportunities where we can come as a third-party manager with an owner to improve a current situation. We’re looking at opportunities where we can come in with a capital partner to provide working capital to finance a shortfall that has to be met, as operations stabilize and improve. And we feel that we have the arsenal of operational skill, resources and talent, and the financial resources to match up to that, to allow us to be very strategic in how we look at how that capital is invested, and how we deploy our human resources.

How Covid-19 stacks up to past senior living crises:

This is unprecedented.

However, what we learned from the past, and I think what we’ll see today is that … those operators, those communities that had a disciplined approach to how they thought about their average monthly rent will typically recover first. And that’s what we saw previously.

I went back and looked at some information going back 25 years. When Capital Senior went public in 1997, our occupancy averaged 97% with a margin of 45%, predominantly independent living — then the overbuilding occurred in the late 1990s. What was interesting is buildings that were stable remained stable. It was the lease-up of the newly built buildings that were being challenged because of the supply pressures. And it took about four years for the industry to recover from the overbuilding.

Going back to 2008 to 2010, we lost occupancy, but we were able to actually save expenses to a degree that we maintained margin and actually increased cash flow, because we maintained the integrity of that rate structure. The recovery was interesting. If I look today at the NIC data quarter by quarter from 2006 to the first quarter of 2021, between 2011 and 2016, 19 out of 24 quarters had absorption that exceeded supply. As a result, the industry saw a nice recovery of occupancy from 2011 into 2016.

We’re coming out of this 870-basis-point downturn in 12 months, and I think this recovery will take longer to achieve. And I do think coming out of this we may see more failures, more buildings that are just unable to recover because of their rate structure and their occupancy to a level where they actually can generate the returns to operate efficiently and successfully.

On whether public senior living companies are pressured to grow too quickly:

Everyone talks about scale in senior living, and what that sweet spot is to operate efficiently. At Capital, even with our growth, we were still the smallest of the public companies. We had a very disciplined approach, and we focused on acquisitions of properties. From 2011 to 2016, we acquired about 65 buildings. We did it typically at a cadence of maybe five to seven that year. And we did onesie-twosies, so we’re able to assimilate those buildings into operations, and we actually did a nice job. When I left Capital in 2018, they were still generating very attractive returns from those acquisitions.

Thinking about the shrinkage that has occurred [in public senior housing portfolios], I think it has to do with the fact that, for properties that have long-term leases, over time markets change, cash flows change. I do think that the industry fundamentals changed a lot coming out of the recession in 2010, because of very low interest rates. In 2007, we were achieving 4% to 5% increases in average monthly rent per year, and we were generating 8% to 10% same-store NOI growth.

Coming out of the recession, we’ve seen a much more muted rate growth, averaging 1.5% to 2%. And in many cases they’ve been flat through the pandemic. So I do think there’s been pressure about that regular increase in rent that occurs over a 10-, 15-, 20-year period, when rates are more muted and the income doesn’t grow as rapidly. And I think a lot of that had to do with the fact that, whether public or private, [there has been] pressure placed on the leased portfolios.

I do think that in some of the cases, companies may have grown very large through acquisitions, and I realized that this still is a very local business, and every market is different. And the most important resource in this industry is people: having talent, and having the ability to attract and retain talent. One of the benefits we did have of having a disciplined growth strategy was we had career paths that we could develop for talent at the community level, and we were able to promote people either internally at the community, or a good sales director or executive director could become a regional manager, then become a corporate officer.

So, I think the reasons for shrinkage vary by company. And I think it could be by perhaps care levels, whether it be changes of philosophy of care levels, operational size — and size does matter. But as I said, I think that the approach to this business is recognizing that it is very much dependent upon the ability to attract talent.

I am really uplifted by the outreach that we continue to hear from former colleagues at Capital Senior Living at all levels of the organization, many of whom are no longer at Capital. From activities directors to sales directors, executive directors, regional corporate staff — they all have a very similar message, how much they enjoyed working with our team and that they are honored to rejoin us. So, we feel very fortunate that we have great bench strength.

On where Cohen thinks other senior living companies go wrong:

I put the question to operators and developers.

Sometimes operators are doing all the right things, but the building just may be in the wrong location or the wrong configuration. One thing I think is really important for developers is to develop with an operator that has experience and understands that you need to build properties in a way that they can operate efficiently and successfully. And, that will be based on the mix of units — making sure they’re not too big, not too small — understanding the needs for staffing those properties, understanding the local market dynamics. This is not a field of dreams, it’s not an industry where if you build it, they will come.

Regarding the middle market: will people be able to afford it? Are there enough seniors or adult children that are income-qualified to be able to be able to afford the rents that you have to operate? My observation for a number of years, based on that middle market, was that it would be difficult for supply to come into those markets because they can’t achieve a rate level to justify the higher cost of development. Nevertheless, buildings were built, and performers were structured with those higher rents, but they never were achieved. And as a result, you’re seeing buildings that are underperforming, because they can’t achieve the rent structure that they projected going in that supported a construction loan or the investment to build that building.

I think that what is very important — and I put both the operator and the developer owner in the same basket — is to really look at history, look at past performance, look at the market, understand the market, make sure that you have robust data that gives you very good truthful insight of what’s going, and make sure that you are measuring up against realistic expectations. If you do that, you can be very successful there. If not, then a lot of investors will be disappointed, lenders will be challenged, and operators will be burdened by some ill-conceived communities.

On what the future holds for the senior living industry and Trustwell:

Nobody has a crystal ball. It’s very unprecedented.

There were a lot of encouraging comments from the public companies that reported … I think everyone saw a nice boost in lead generation and move-ins in March. Some moderated in April, some continued.

What we don’t know is what transpired in the last 12 months for seniors that did move into communities in a very need-driven era because of the fact that there was a pandemic. A lot of the discretionary move-ins didn’t occur because people didn’t want to move into communities where they had to be quarantined, or there were no visitation or activities.

So, we’ll see what happens with the attrition levels over the next 6 to 12 months, based on the health and acuity of the residents that moved in over the last 12 months. As I said, if you look at the data showing this negative absorption of 42,000 units and 18,000 units of new supply, that’s a lot of units with an inherent occupancy that’s close to 10 percentage points below average. And so, I think there’s a lot that has to be recovered. I think it’s a very wide delta.

Another interesting statistic that came out from NIC recently, going into the pandemic, 33% of properties that reported had occupancies of 95% or higher. In the first quarter, that slipped to 9.6%. Twenty-two percent of properties that reported in the first quarter of 2020 had occupancies below 80%, and 46% of reporting companies had occupancies below 80% in the first quarter of 2021. So, I think that it will take longer [to recover].

I’m very bullish about the future of this industry, but I do think that there will be a number of buildings that will have challenges for a period of time, they may ultimately be converted to other uses. The other statistic that is encouraging is supply is down to 1.5% percent of existing inventory. So, we probably will see less supply pressures over the next few years.

We know the demographic is growing — I really can’t guess what that [Covid] recovery will be, but I just believe that the fundamentals are such that it will take longer this time than what we saw in 2010.

… Obviously, licensure will take some time, but we believe that in the near-term, you’ll be hearing more about our taking over operations. We’re excited about getting back to work, and really caring for residents and staff, and really becoming active again with a live portfolio.