Caring for the elderly....

This last weekend I was spending some time with my friend and his son, watching a tennis match that my friend's wife was playing in.  We were in a viewing room for the indoor courts, which was sparsely populated with close friends and families of people playing tennis.  The room was very quiet.  As we sat and watched the match a conversation was struck up between two of the men in the room.  They were talking about senior housing.  Having spent a little time in the industry, I couldn't help but listen intently.  As I evesdropped, I learned that one was an executive level manager in a senior housing company and was explaining some of the finer points of senior housing finance to the other man. 

The main points of the discussion were as follows:
1) senior housing is cheap to buy right now if you can access capital;
2) through partnering with a REIT, this senior housing professional was going to be able to finance 100% of the purchase of an 'underperforming' senior housing property; and
3) should the company purchase the property and make it perform, all those involved in the purchase of the property stand to make considerable money when they refinance the property in a few years.

As my friend and I left, I looked at him and said, "You know, that conversation embodied everything that I believe is wrong with the senior housing industry."

The problem is that the motivation and payoff in senior housing is not based on service, it's based on real estate transactions. The most common structure is to incorporate the operator separate from the property owner.  Operators are paid 'management fees' based on a percentage of revenue, typically 5%.  The payoff in operating compared to the real estate transaction is vast, thus, operating is used as a means of increasing value of the eventual sale or refinance of the property.  Many property owners incorporate as operators too.  While favorable valuations come from strong operations, investors are normally promised quarterly or annual dividends which can place focus on increasing census instead of strategic growth.

I worked as an Executive Director for a senior housing company and have felt the strains between adhering to strategy vs. increasing census.  The push and pull is intense.  During my time in the industry, I did not see the alignment of the expectation of investors with the strategic direction of operations.  Consequently, finding residents that are the 'right fit' for the operating strategy can became less important than increasing census.

There seems to be something fundamentally and structurally wrong with this.  How can we expect real estate experts to deliver a service that is clearly socially focused?  The nature of the real estate industry is incredibly different than the hospitality or healthcare industries.  True that delivering housing and senior care services requires some expertise in real estate, as property management is essential to delivering services.  But why are all the leaders and owners in senior housing from commercial real estate?  I believe it's because that's how the real money is made in the industry - from the transaction of real estate, not from delivering services.