As Koelsch Communities breaks ground on new communities at a steady pace, it’s running into some hurdles related to technology, labor and the cost of construction materials. But that’s not slowing the company’s development pace down, according to Dennis Christianson, executive vice president and CFO for the Olympia, Washington-based senior living provider.
The company — which currently has 32 open communities spread across eight states — has a plan to break ground on four new communities and open two others this year as it looks ahead to 2020 and beyond. With a strong foundation in standalone memory care, Koelsch is also expanding its model as the company’s footprint grows.
For this installment of Senior Housing News’ Bottom Line series of CFO interviews, Christianson spoke about some of the budgetary challenges for senior living company and how Koelsch is approaching hot industry topics like Medicare Advantage (MA).
The following interview has been edited for length and clarity:
SHN: When you started with Koelsch in 2010, where was the company at and what were your main priorities?
Christianson: Senior housing finance and accounting is my third career. I started out in human services doing alcohol and drug and mental health counseling. I have a bachelor’s in history and a master’s in clinical psychology.
People have asked me, how do you get from wanting to do marriage and family counseling to accounting and finance for a mid-size senior living company? Well, it’s all analysis and it’s all problem-solving. It’s just a matter of what you’re analyzing and solving. And money problems are a lot simpler than emotional and behavioral problems.
I moved to Washington in 2000 to work as a church administrator and operations guy for a large church and private school in Olympia. I did that for 10 years, and during that time I started talking with [company founder] Aaron [Koelsch]. In 2010, he said, my top financial person who had been with me since we had one building in 1989 or 1990 is retiring. So, they eventually gave me a shot. The day before I started the job, I said, Aaron, I don’t know anything about senior housing. He said, I know you and I know you’ll figure it out.
Koelsch was 10 communities then. I came on and my first title is controller, which was the highest financial position in the company at the time. I was doing bank reconciliations, payroll for the home office of 12 employees, a lot of hands-on detail stuff, bookkeeping processes. Now, fast forward to 2019, we’ve got 30 communities open and our home office crew is 50 people. I no longer do bank reconciliations and I no longer do payroll, but I know what it should look like.
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?
One, for Koelsch specifically, the growth just means more of what was there. But now we have different questions during financing processes, loan applications, covenants that we have to figure out, how to measure lease arrangements. [Real estate investment trust] Ventas is a great partner, we have 19 leases with them. We have two leases with [real estate investment trust] LTC. The thing I’m grateful is, we really try to focus on relationships with the people at our partners who are reviewing our stuff.
But it has gotten more operationally complex. And it’s taking more time. As CFO, at 30 communities and growing, I now have a treasury manager, two accounting managers, I have a controller, and we have two or three staff accountants who are doing all of this that me and two others did in 2010. Some of that is just the volume. Some of it is the complexity.
Can you talk about some moments during your time with Koelsch that were times of particular challenge or change, and how you worked through or are working through those challenges/changes?
I think we’re in the middle of some right now.
Our culture at Koelsch is very relational, but we like to keep things very simple. We were using paper time cards until 2017. So, we rolled out electronic timekeeping. That’s given us some good insights we knew we were going to get about time. This year, we’re rolling out electronic health records and electronic medication management.
One example is, in 2011, it was my job to make sure the computers were working, make sure all the printers work, the copiers, all that. With that, our chief of operations at the time asked me if we could get Wi-Fi into the buildings so that if staff were there, they could more easily print and get their emails.
Aaron called me and said, I hear you’re putting Wi-Fi in. He said, ask me before you do another one. I said, well I’m going to Chandler, Arizona, next month, to do the same thing. Can I put Wi-Fi in there? He was fine once I explained it. That was a little bit of a challenge, having to make sure all that communication happens, who needs to know and how.
But within six months, he said, hey, a family member came up and thanked me for having Wi-Fi in the building because she was able to pull up pictures on her iPad and show her mom what her grandkids were doing. Because that connected to residents and resident satisfaction, Aaron said, I want to make sure we get Wi-Fi in all the buildings.
How are you thinking about costs and expenses for 2019? Are there items on the balance sheet that are of concern, or areas where you expect to make significant investments, or achieve any cost reductions? Are margins under pressure this year? We did see them under pressure in 2018.
The labor costs are huge. We’re constantly doing wage surveys and what we call wage compressions. Our goal at Kolesch is to pay in the top part of the market. Our rates are in the top part of the market, and we feel like we have better-than-average staff, so we should be paying better than average.
Our goal is to make sure we’re taking care of people, but also the market has to drive the wages at some point. If somebody is being a caregiver because they’re being paid a lot, that’s probably the wrong motivation. So we’re trying to find a balance. A good wage which works for them and works for us, and one that motivates them to come look at us in the first place, and then hopefully stay.
Turnover is high. We constantly look at that. We look at how many people stay with us to complete their 90-day probationary period. We think we can do better there with some better training and hiring. We have good retention, which is somebody who stays with us a year or more. Even though we don’t like our high turnover, our retention I would stack up against any company in the industry.
Of our 2,000 employees, 11% have been with us over 10 years. Those are the leaders. Those are the people we should be continuing to look to for training the other folks coming in. And that number is actually even better when you think all the building we’ve done in the last 10 years, half of our buildings aren’t even 10 years old.
How’s the availability/cost of capital at the moment, do you expect any tightening of the debt or equity markets in the near term?
For Koelsch, there’s good availability. We have a good reputation for standalone memory care, so we have debt and equity providers willing to look at that. The vast majority of our equity is friends and family, so it’s a close-knit group, anyway. But debt providers, there are a number of banks willing and happy to talk to us.
The rates obviously have been inching up, but they seem to be holding pretty well now. So, where we’re seeing the impact is, a little bit of a lessening of the loan-to-cost or loan-to-value, they’re pulling that back a little bit. But we have a good track record, so we can have a real conversation [with banks] about whether … we can get some more room on that.
There’s enough competition out there right now where banks know they’ve got to be in the same general range. We have a few more opportunities than I think some of the newer providers coming on the market. We’ve got a good track record with filling up our standalone memory care.
What’s your take on M&A and development at the moment?
Koelsch is built for ground-up development. That’s what Aaron learned from his parents. So, having our own development company and then a great relationship with an outside development company, having Koelsch Construction, we’re built for ground-up development. We do that well and we understand what we’re doing. The struggle we’re having right now is materials and labor for construction.
It’s rising so fast that it’s hard to get a budget estimate that you feel confident with, because you’re doing it now but you’re not going to be at some of these points for 12 months, 15 months on the construction cycle. The high increase in lumber prices over the last year, which have since flattened, really caught us on a few jobs. I had to work through that.
Right now, we’re spending more time working the budgets, getting firmer bids earlier. So, it’s slowed down a little bit of our upfront process. But the benefit is, we should be able to finish these projects closer to what we budgeted without eating as much of the contingency.
There’s give and take. If you spend time on one end, you hopefully will spend less money on the back end. And you can flip that around.
Acquisitions, we’ve done some. It’s not our favorite thing to do. But we have a guy on our team who, [as] part of his job, will look for acquisitions. The best thing that we can acquire is a community that’s struggling for occupancy and operations, and it needs some FF&E (furniture, fixtures and equipment) or maybe some remodeling. Because then, we can bring our design and development and construction team to add value and make it look like a Koelsch property when it’s done.
We’ve had a couple of good successes in that. Of the communities we have open, only one was not built by a Koelsch family member. So, even though we’ve acquired some, we’ve acquired most from Koelsch family members.
How is Koelsch thinking about growth in the next three to five years?
We have some plans for 2020 and beyond. By June, we will open four new projects. As those roll off the development-construction table and into operations, we’ve got four more starting this year. They’re relatively large for us. We’re changing the model a little bit.
We have four basic types of things we do. Standalone memory care, standalone independent living, standalone three-story memory care and then we’re putting the final touches on a standalone assisted living building with about 100 units. Our preference is, let’s find something we like, and then let’s do that project again, make some tweaks and improvements, and make it better. But let’s not do a bunch of one-off things.
We may be seeing Medicare Advantage start to cover some senior living services, is that on Koelsch’s mind? Any plans to enter that space?
I would say the simple answer is no, we have no plans. I try to follow it, but we are really designed for private-pay senior housing. My personal bent is that government money always comes with strings, and I don’t like strings.
We do have a state Medicaid waiver in a few of our states, but not all of them. We pick and choose where we want to do that. Where we don’t have Medicaid approved for some communities, we have an internal program called Compassionate Care. That’s Aaron’s way of saying, we’re still going to help people who maybe can’t afford the full private-pay.
It all just goes back to Koelsch’s preference for, let’s keep it simple.
Data collection and analysis has become a powerful tool for driving business decision making and strategy, what types of data/metrics are you most interested in analyzing, and is this informing your leadership as CFO more today than in the past?
One of our favorite quotes around the office is from W. Edwards Deming. To paraphrase him: without data, you’re just another person with an opinion.
The idea is, data should inform decisions. It shouldn’t make your decisions. We’re getting better at pulling in more data and making sure we know what it means. Any time we put something out to our executive directors or regionals, we try to summarize for them, this is what we think the data is showing us. And then they have a gut reaction. We don’t like data for data’s sake. Coming out of my background, I have a large interest in data. But I’ve learned that most people don’t. So, we figure out what we want to measure and see if it answers questions for us.
What kind of metrics do you like to track?
Core for us is expense to revenue. We know what our buildings should operate at. The banks like us to look at debt service coverage, so we do. With our number of leases, rent service coverage. We track those individually and as a group.
One of the things I focus on first every month is budget to actual adjusted for occupancy. We have budgets, but six months into the budget year, what we thought the community was going to operate at might be different than its actual occupancy. If you’re still comparing budget to actual, it’s apples to oranges, so we adjust for occupancy.
We don’t get a lot of variation in revenue but our expenses we track very closely. We ask things like, are we spending what we should spend if the building is 86% occupied? And if not, where is it off? Right now, it tends to get off because of labor stuff. If it’s off because of controllable things, then that creates a quick conversation for the regional team.
How does Koelsch budget for things like technology? And what’s your philosophy on how much to spend there?
As little as possible, is the philosophy. We look at questions like, what’s the cost versus the benefit of whether it’s serving resident satisfaction? Is it getting us better data for risk management? Is it something where this technology helps us offset a new hire somehow?
We’re not opposed, and Aaron in some cases prefers to hire a person, even if tech could do that. A person has capacities beyond what technology can do. Having another person around to go, hey, this just came up, can you grab that? You can’t ask a computer program that you’re paying $50,000 a year for to do anything other than what the program can do. But you can ask a person who’s getting paid $50,000 to do something.
People give you flexibilities that computer programs don’t. So, we don’t jump too fast on technology for technology’s sake. But, we still are improving things in our communities, technology-wise.
Mission vs. margin is a theme in senior living and maybe a challenge. Do you ever feel like you’re fighting to protect margin while others in the organization are freer to focus on mission? How do you define a healthy margin in this business and ensure that you’re striking the right mission/margin balance?
My first question after hearing great ideas is usually, how much is this going to cost? But we would be a really boring company if we were totally controlled by the accounting department.
At Koelsch, we remind people this all the time, accounting and the home office are there to serve the communities and the operations. Accounting will not tell operations what to do. It just helps guide them.
Trying to balance margin and mission, Aaron would be the first one to tell you, as a leader of a for-profit company, his goal is to make money. But he quickly follows that by saying the only way to make money is to provide people with exceptional service. If I do that, I’ll make money. If I don’t, I won’t make any.
So, profits are required and a for-profit company better make a good profit. Our system is set up if you serve somebody well they will happily pay you. But our idea is, what can we do so that us asking for your rent check every month isn’t a pain? We want you to like living here.
In our standalone single-story memory care, we look at the NOI margin as the number that’s most consistent, and so I would say 64% expense-to-revenue. Below the NOI line you’ve got sometimes a construction loan with interest only, sometimes you’ve got rent. Our IL-AL combo buildings will operate at a lower expense-to-revenue, and our pure IL buildings operate at even lower one than that.
So, if we see any expense-to-revenue shooting up into the high 60s or 70s, that’s getting a lot of look by accounting first and then Aaron specifically.