• January 26, 2018

    Meet Dale Watchowski, president, CEO of American House Senior Living Communities and REDICO, a national commercial real estate investment and development company. REDICO and American House are affiliated companies headquartered in Michigan. American House was founded in 1979 by Bob Gillette, who retired in 2008 at partnered with Watchowski at that time. Watchowski has grown the company from 27 communities to more than 50 today, in locations in the Midwest and Florida, offering independent living, assisted living and memory care.

    We sat down with Dale to learn about what drew him to senior housing as a growth opportunity from his position at REDICO in the first place, how American House is looking ahead not just for tomorrow but for the next 20 years, and why sometimes, it’s better to be lucky than smart.

    Senior Housing News: Tell me how you got into senior living.

    Dale Watchowski: I’m also the CEO of a company called REDICO, which is a commercial real estate company that is very strategic. Every year we build a business plan around what we want to do going forward, so we look in basically three- and five-year planning cycles. Pre-recession, we were looking at what we felt would be an extended recession in real estate and being in various asset classes, we thought: “Okay, what can we do that might enable us to withstand this downturn—and not only withstand it but do well through it?” So we looked at some asset classes that we might have considered “recession-proof.” We thought that the alignment in senior housing might be appropriate given our experience in medical [real estate]. We considered the high barrier to entry through the operating components that goes into the business and our position was: “Let’s focus on this business. Let’s build a great company. But we want to start with an operating platform.”

    The idea was that we didn’t want to be just an allocator, either through acquisitions and development, without being an operator. So we went out and started looking for a company to buy rather than growing a business organically. We found American House.

    How did you find them?

    It’s an interesting story. Sometimes you’re more lucky than smart. We had some business in Florida, and I was flying back from Florida, and I ran into a gentleman on the airplane who I had known for many years and had a lot of respect for: Bob Gillette. Bob was a founder of American House 40 years ago. We engaged in a conversation.

    Were you sitting next to him on the airplane?

    I wasn’t actually sitting next to him. We were standing on the plane and as I was throwing my bag up into the overhead compartment, I asked Bob how he was doing. And he said, “I’m doing really well but I’m starting to think about where I want to take the business. And I’m at ‘that age.’’ I said, “We should have breakfast,” and it couldn’t have been more opportune. We had our initial conversation and I determined that Bob was interested in taking the business in a bit of a different direction. I determined from that conversation that he was looking to bring in an executive who could take the business to the next level.

    And I also determined, and this was probably the best news of all, that Bob’s son, Rob Gillette, who grew up in the business, was really interested in staying involved, and so was Joe Schwartz, who had historically been the chief investment officer for the company. So that made it even more attractive, because this was an opportunity with good organizational structure.

    And they’re also based outside of Detroit, right?

    That was the best part of all.

    Was American House on your list of companies to reach out to you when you were thinking of getting into senior housing?

    Oddly enough, not really, because much of what REDICO had been doing over the years was outside of Michigan, and this gave us a great opportunity to acquire and expand the business within our own state. It had been our objective to go out and expand geographically. So we looked at several different companies before we looked at American House. It couldn’t have come at a better time and it probably could not have presented itself as a better opportunity because post-merger or acquisition if you will, we ended up maintaining the American House offices in Bloomfield Hills, and the REDICO offices were kept in Southfield, Michigan.

    So now when you’re on an airplane are you always looking to see if there’s a deal on board?

    I wish that were true. But it is a good life lesson because most often people put on their headsets and try to avoid the person next to them as best they can. You should open yourself up to those situations.

    It’s funny to think of where you’d be if you hadn’t run into him on the airplane that day.

    If I hadn’t, things might have been entirely different. We were pursuing another company at the time. And we were close on another opportunity. What concerned me about the other business was, that while they had an infrastructure, I think their outlook was entirely different toward senior care. What I found with American House is that at the end of the day, obviously it’s a business and an operating company, but what was most important to them was the resident experience and resident care. That was very different than what I had found in the space through my research.

    Different how?

    We call it our “secret sauce,” and it’s in the people we hire. Our team members tend to stay with us for a long time. We tend to hire a little different. We hire colleagues with not a lot of institutional [knowledge], but with a caring and nurturing type of spirit. In fact, culture for us is everything and probably the first question we’ll ask is not around where did you go to school, or what your bio looks like, or where have you worked. It’s all about: What’s your outlook on resident care and where’s your passion? So that’s our secret sauce.

    …culture for us is everything and probably the first question we’ll ask is not around where did you go to school, or what your bio looks like, or where have you worked. It’s all about: What’s your outlook on resident care and where’s your passion?

    You took American House from 27 locations to over 50. What are some of the lessons you learned about scaling senior living along the way?

    Make sure you have an infrastructure in place before initiating a broader plan. What we did with American House was to first of all make sure that we had policies, procedures and systems in place, to grow. We still call ourselves “mom and pop” regardless of our size, but what we wanted to make certain of is that when we began to expand the portfolio through acquisitions and development that we had the right team in place to initiate the investment opportunity. Then once we executed, to manage those properties and manage them well.

    More from the Leadership Series

    What are some of the mistakes you’ve made?

    A mistake we made early on was we went into Florida and we weren’t sure that we had built a culture that was consistent with what we had in Michigan. But once you make a mistake, you have to respond very, very quickly—and we did. And since that time we’ve built a great platform down there, and it’s a platform that is based on the culture that we’ve established for our business, and they’re ready to carry out what it is that we do best and that’s caring for our residents.

    How do you translate that culture from Michigan to a very different area of the country?

    It’s not easy, especially in Florida. It’s hard to find good labor in Florida. And interestingly, the person we put in charge there is a Midwesterner. We found a person who had first and foremost on their mind resident care. And I think that everything comes from that. If you care about your residents and believe in that, I think the business will follow and it has for us. That’s why we maintain great occupancy levels.

    It seems pretty simple.

    It seems very simple but in an industry that’s growing as quickly as the senior housing space, it’s hard to follow in practice.

    Dale Watchowski, CEO of REDICO and American House

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    There are a lot of potential entrants looking into senior housing—maybe some are your colleagues in the multifamily space. Does that worry you?

    It worries me in one regard and that is I think you’ll see some short-term pain.

    But I’m looking more at the opportunities because I’m already seeing some cracks, and that is creating opportunity for a company like ours. With a 40-year-old operating platform we should be able to do this just a little bit better. And what I’m finding is a lot of money allocators coming into the space right now don’t have the same concerns that we do, and will not care for the residents the same way that we will. What we’re targeting as an investment strategy is broken deals. I think having an operating platform is important or being very closely aligned with an operating platform is important. That’s why we don’t do third-party management. I don’t think you can do both.

    Why?

    It’s hard to serve two masters. I wouldn’t want to have to answer that question: Are you putting your properties ahead of mine? At the end of the day it’s not the operating platform that’s going to make money for you in this business, it’s really the transactional business. It’s the operating platform that’s going to enable you to maximize the value of those communities.

    You don’t look at operating the companies as where you’re going to make money?

    No. You can’t make enough money. The margins are really thin, especially right now with labor shortages and employee turnover.

    You said you are starting to see cracks. What kind of cracks are you starting to see?

    What I’m seeing is slow lease-up among some of the other communities being built. Third-party manager are managing some of these acquired communities, and they’re leasing very slowly. I’m seeing the margins shrinking dramatically. And it’s a sign. From my perspective, having been in the real estate business for 30 years, it’s all about the margins. It’s not just controlling operating expenses, but it’s managing revenues and managing revenues well, and looking for revenue opportunities through ancillary sources of income. So, what I’m seeing is the companies coming into this space aren’t as focused as an operator as one with 40 years of experience might be.

    You think there’s more margin there, it’s just they aren’t doing a good job?

    There’s more margin. Everybody’s talking about the boomer generation, but [that generation is] looking for a different model and they’re not going to be as quick to come to our communities as everyone thinks. When you look at this Silver Tsunami , they’re probably not going to be moving into our communities for another 20 years. If health statistics are correct, this generation is healthier, they’re more active, and they want to live differently.

    As CEO, how do you prepare for that? How do you prepare for what’s 20 years away?

    We look at trends and metrics. We design our communities very carefully for the next generation. What I’m focused on right now is the affordable aspects of this business. We’ve always been a company that has focused on even our nicest communities being “affordable” by our definition. We want to tap into that middle market. Everybody’s saying it but not a lot of people are doing it. What I’ve been seeing is many of the companies coming in they’re able to support development deals that we look at. There are many reasons for that. Number one: Everyone’s going into assisted living memory care right now when they should probably be going into an independent model, given this aging population.

    When you look at an AL model or a memory care model, you’re obviously going to get more rent. You can pay more for land right? Land prices are way overpriced right now. It’s a very small component of the development deal but it is a component of the development deal. There are very few companies that can develop at a lower cost than we can. We do so much development—whether it’s at REDICO or American House—that our construction costs are probably as low or lower than anyone in the industry can deliver. On our operating costs, we have efficiencies because we operate 55 communities. So what happens is we’ll go and look at a great piece of land. We’ll underwrite the deal and we might not win it, or we might pass on it and find somebody else picking up the piece of dirt.

    When you look at the returns that are being delivered in the space…is it an adequate return to compensate you for the risk? My answer is we’re getting to that point where it may not be.

    Are you negative on the outlook right now?

    No, I’m bullish; I’m just looking for a new opportunity. Right now, I’m looking at a more social model with less of an operating platform attached to it. I’m looking at ways I think I can provide housing to those who might not have otherwise moved into senior housing. I’m looking to continue to drive down costs and improve my level of service through strategic relationships with providers of services.

    Do you think there’s a certain size that is no longer manageable? Everyone talks about Brookdale—do you think you can get too big?

    That’s a good question. It’s a question that we ask ourselves as executives in the company when we sit around and plan strategically. I think the answer is: Yes, you can get too big. But I think the more important question is how do you maintain a focus—a resident focus—as you continue to grow the business. Once again, it’s in hiring the right people and making sure, that throughout the organization, when you bring somebody in to manage a new region, that they are on the same page as we are as a company. Rob Gillette is doing a great job as our chief operating officer, but I’d say that we came to the conclusion that more important than the COO role is a role that he recently picked up. And we’re now calling [him] the chief cultural officer. And so what we’re finding is that it’s important to manage people, but our team members really don’t need much in the way of management. What they need is really an experience and being assimilated into the culture of our company. So when we grow, I think that’s what we’re focused on is just: Grow, but maintaining the culture.

    With respect to the “affordable” model, do you think it’s possible?

    Construction costs keep going up and they’re rising at a pace well in excess of inflation. And it’s going to continue to get worse, especially with the natural disasters which have recently occurred, and with a lot of manufacturing, research and development and research and technology companies moving back onshore. All you can do is just manage your margins really well, manage the business really well, and keep an eye and sharp focus on that. Don’t take on marginal projects.

    TRENDS & TECHNOLOGY

    Let’s talk a little bit about trends. We’ve started to see NIC data show signs of occupancy pressure. How do you think operators get through this rough patch?

    The trend certainly points to lower occupancy rates, but I think you have to look at each situation independently and that’s what we’re doing. Our average occupancy is still in the low 90s, which is good. So we occupy a very nice position. But we want to look forward, and we are concerned about the trends. We’ve been keeping an eye on the metrics, and trying to determine any one situation where we might see some concerns or some pressure. Are we getting tours? Are our marketing dollars yielding dividends? Are we closing on those tours? What’s the ratio closed? Is the community well received, and how well received? So we’re talking to our residents. We’re communicating with the industry to validate our designs. The other thing that we’re doing is we think we’re in a great position, because our original portfolio is probably 20 years of age on average. So we’re affordable. When you think about this next generation coming in, they don’t have pensions. They probably don’t have savings to the same degree. They may not have equity in their home. So I think that affordability factor is great as long as you maintain your properties really well. We have a very extensive capital program that we promote within the company, and we’re looking at continuing to maintain those properties and initiate capital projects that enable us to be market competitive.

    Do you see your older stock as being more of your affordable product now?

    Interestingly, we’ve been able to deliver our newer communities at affordable levels. Primarily because of our buying power on the development side. And our favorable operating margins.

    Do you think the industry has done a good job investing in technology at this point?

    Health care as a whole is pretty slow to adopt new technology. Relatively speaking, I’d say, no, [the industry] probably hasn’t to the degree that it otherwise could. You see some great products out there and we’re trying some of them out right now to improve the resident experience and our ability to better know our residents from both a social and health perspective.

    What are some things American House is looking at?

    One of the things that we’ve introduced into our properties is Connected Living. As residents move into our communities, they will either get a tablet or they’ll have use of a tablet that enables them to connect with their loved ones. We are right now testing a telemedicine technology. We’ve launched it in several of our communities and we’re tailoring it to residents who want to interact with their health care providers and manage their meds electronically. It’s working quite well for us. We’ve introduced a resident medical management technology called ALIS. We’ve continued to explore new alternatives in technology, primarily because of the fact that we want to continue to improve margins and maintain our resident care as we grow. It becomes more important that you use technology to manage the business and to understand your metrics and what drives the margins.We’ve seen a big boom in ancillary services. Is American House interested in that space?

    We’re very interested in the space. I think there’s probably some low-hanging fruit out there for a lot of operating companies that have been around as long as we have. But we haven’t focused on it up until recently, primarily because we had other areas of focus. And that was building the best operating company that we could and then hiring the best service providers that we could. If we see an opportunity to improve our margins or improve the level of service we’re delivering to the company, we’ll take it, and I think one example was recently creating an advertising and communications company within our operating platform.

    Another opportunity right now is this pharmacy services, and all of our residents are contracting with pharmacies. We probably have in our system maybe 12 different pharmaceutical providers. I don’t know if that’s a good way to manage a business.

    What about home care? Are you looking into it?

    We have and we’ve explored that. But for the time being, we believe that the home health care providers that we brought into our independent living communities are able to provide that service better than we could. And so if we can’t do it really well, we don’t want to do it at all.

    LEADERSHIP

    What’s your definition of leadership?

    Building the right team. And letting them do their jobs. I believe in, first of all, hiring the best people that I can hire. But I believe in the team approach. And that is also not asking anyone to do what I wouldn’t do myself.

    I believe in, first of all, hiring the best people that I can hire. But I believe in the team approach. And that is also not asking anyone to do what I wouldn’t do myself.

    What’s the biggest risk you take in your career?

    It was probably taking on a leadership role in a business that I had little in the way of knowing, and I discussed that at depth with Bob Gillette when I accepted this awesome responsibility. As it turned out, it paid off to be one of the number-one greatest experiences of my working career. We knew that we had an opportunity to build on a great platform, but to the degree that it has gone so well, I never expected that. At the time it felt like a tremendous risk, and now I look back at it and I think it was a pretty smooth transition and it all went well. But it went well largely because of Rob Gillette’s and Joe Schwartz’s positions in the company. We were totally aligned and we kept in our lanes.

    What’s the best piece of advice you’ve received in your career?

    Probably to look through the windshield and not the rearview mirror. It’s hard to do that and it’s often hard not to point a finger. But I try to look through the windshield, and when we do look back at those mistakes we’ve made, we evaluate how we could have done something differently.

    Who would you consider to be your mentor and how has that person influenced your career?

    I’ve had many mentors in my life. Probably the most impactful was a gentleman by the name of Ira Jaffe Ira runs a large law firm in Michigan, of which he’s the founder. I think what he did really well as a mentor, is he listened.

    I’m curious. Of all the different business lines that REDICO has, what are you most excited about?

    I’m excited about the opportunities in the senior space to create a product that is differentiated from the rest. REDICO is in various asset classes—office, mixed-use, build-to-suit, entertainment venues and retail. We’re involved in research and development, research and technology. What we did at REDICO that differentiated us from others is that during the recession, we took the opportunity to create a business around acquiring land to be developed. Nobody in their right mind was buying land in the heat of the recession and we were looking at land opportunities primarily because we were in various asset classes. And we felt like we could capitalize on the opportunity to go vertical in each of those components rather than just buying land, developing it and then flipping it. Our thought is that we have the opportunity to bring senior housing to those mixed-use developments that REDICO is working on.

    One community, for instance, is in Bloomfield Hills, Michigan. This was a broken retail development project that suffered in the last recession and REDICO bought it. We’re currently under development within a two-year time horizon. In this community, we have retail, a hotel, a theater, medical offices. We have a grocer and we have 430 apartment units. We will also have a senior living community.

    With our senior communities, we’ve been locating our new developments near health care systems, our newest being in Fort Myers, Florida.

    When we plan our communities, I always keep in mind ways I can engage these folks intellectually. And it’s not just activities. It’s life enrichment. How can I bring other components into a development that that would help the lives of the seniors? I’m really excited about our future senior developments.

    When you talk about hospitals and healthcare, do you see a real potential for partnerships?

    Absolutely. They have to be considering this as a good alternative. I think every health care system should be looking at affiliating with a company like ours.

    Are you having those conversations right now?

    Absolutely.

    Are you making any progress?

    We are working with Henry Ford Health Care System in Detroit. But at the same time, I mean, it has to be something that other people are thinking about.

    People are talking about it but no one seems to know how it all works.

    With the advent of the Affordable Care Act, what you want to do is limit those readmissions. We have an opportunity to care for those residents and we’re doing that. My mother and my mother-in-law each lives in one of our communities. And I will tell you that, in my opinion, they get better care in our community than they do going to the hospital in the health care system. I’m always worried when my mother goes and checks in. She’s 91 years old. What is her experience going to be like? I’m very critical of the way in which others care for other people, specifically my mom.

    By the way, I will tell you the other thing I find really great about our business is that we gain insight into our communities by having family members who live there. Our chief financial officer, his mother is in one of our communities. As I mentioned, my mom’s in one of our communities, and so was my dad until he passed. One of our principals, Joe Schwartz, his in-laws are in one of our communities.