• October 19, 2016

    Meet Larry Cohen, CEO of Capital Senior Living (NYSE: CSU). As one of the handful of publicly-held senior living operating companies, Capital Senior Living went public in 1997, serving as Cohen’s first experience working on an IPO. At the time, he was CFO—a position for which he had been approached while working for a large real estate company that had an interest in senior housing. He later took the CEO position in 1999.

    Since then, Capital Senior Living has grown its portfolio to 126 properties (a majority of which are owned, and some of which are leased)—and counting. We sat down with Cohen to learn about the “runway” in senior living, where he sees Capital Senior Living’s growth path ahead, and why he has learned to listen more than talk.

    Tell me about how you got into senior living.

    I was fortunate enough in 1986 to work for a large real estate company that was one of the largest operators of hotels and apartments in the country. They thought it would be great to get involved in seniors housing, combining hospitality with multi-family. They built four buildings, two in northern California, two in Arizona; all were a little early in the curve. In 1989, I joined PaineWebber and eventually ran their real estate company, about a $3 billion portfolio, predominantly apartments and shopping centers.

    When I joined PaineWebber, they were in the process of structuring an investment vehicle to finance the development of senior housing properties for a company in California that was one of the pioneers in this industry, way back when. It was Angeles Housing Concepts; Bill Tuthill led their senior housing division. He started with Bill Colson in 1975, so they were truly some of the pioneers. Angeles was very large in syndication of public partnerships for real estate oil and gas; they had an investment firm. In 1993, I believe, they got into financial difficulty and went bankrupt.

    At PaineWebber we formed two private REITs to fund 13 buildings that were either built or acquired by Angeles. When they went bankrupt, we had to find a new operator, so we did a search. I was very active at that time in the National Multi-housing Council and actually was one of the founders of the American Seniors Housing Association, back in the early 1990s. We did the search, narrowed it down to six operators and selected a company from Dallas called Capital Senior Living. Capital came in and did a phenomenal job, and within two years doubled the value of the portfolio. When 1996 rolled around and the founders of Capital were thinking about taking the company public, they approached me. Long story short, I left PaineWebber, joined in November of 1996 originally as Chief Financial Officer, we went public in October of 1997, and then one of the founders retired in 1999 and I became the CEO (which was his position). The other founder was chairman. He left the company about six or seven years ago.

    What was their pitch for you to come on board? You had a good job, so why take that risk?

    I just saw such runway in this industry. When I saw the quality of the operating team, which still is there today, I felt that in any real estate based operation, I’ve never seen such quality and passion for what they do. I haven’t been disappointed in 20 years.

    I just saw such runway in this industry. When I saw the quality of the operating team, which still is there today, I felt that in any real estate based operation, I’ve never seen such quality and passion for what they do. I haven’t been disappointed in 20 years.

    This is an operationally intensive business, and I think what differentiates Capital Senior Living over its 20-some-odd years is the philosophy that empowers the on-site staff to have accountability and responsibility and autonomy. It fosters the culture of longevity. Probably the greatest metrics that I look at every year are tenure of our staff and resident satisfaction. We have capacity for 16,000 residents, we survey them every year, and we score 95% every year in third-party tabulated satisfaction surveys. Every quarter, we have a town hall meeting and I get to recognize corporate staff and employees of the quarter. Three-quarters of our executive directors have been with the company for 12 years or longer.

    When you joined, did you think you’d still be here 20 years later?

    I probably never thought about it. When you’re 42, you’re not trying to think out 20 years. I saw seniors housing as a real estate asset class that had the greatest growth and greatest longevity because of the demographic. Quite frankly, we’re only now coming into the demographic drivers of this industry. Part of what what happened in the 1990s, when people saw the overbuilding, is a lot of people overshot the demographic. They knew that there was a need for seniors housing, but there wasn’t the data you have today, whether it be NIC or other sources, to really understand supply dynamics, market by market. One of the reasons we formed the American Seniors Housing Association in 1992 as a subsidiary of the National Multi-family Housing Council was because there was no information about the industry. I would look at multifamily, or office, and even today, even going back 20 years, you knew what asking rents were in every building in every market. You knew what occupancies were.

    When Capital Senior Living went public, was that the first IPO that you’d worked on?

    First IPO.

    What was that like?

    It was interesting. It was exciting. We got to take the Concord to go to London and Scotland for the roadshow, and that was neat.

    Larry Cohen, CEO of Capital Senior Living

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    How could you really sell on the roadshow? Was it based on data?

    We had a track record for seven years. At the time, our average occupancy was 97% and our operating margin was around 43%. We were developing. If you go back to that period of time, the wave of public offerings started in 1994 with Assisted Living Concepts [now Enlivant]. We were the second to last company that went public in 1997, and then the window shut. The growth of all the public companies was through development, and then the industry imploded in 1999.

    What happened?

    We raised about $140 million, then it later came to a point where the market wanted to see how companies would be assimilating and incorporated their growth and metrics. Issues occurred in 1998 and 1999 that revolved around some disappointments in the industry. Sunrise bought a company called Kensington. In 1998 or 1999, Sunrise announced that they were not leasing off as expected, and their share price went from $20 to $8 in a day. It was really hard. Then there was concern about supply. Then in 1999, we started to see  some bankruptcies, as companies couldn’t fill their buildings. That being said, we look at Capital Senior Living’s stabilized portfolio in the fourth quarter of 1999, and we were still 95% occupied. We’ve never been impacted negatively by supply. Part of our strategy even today is to operate in markets which are more affordable. If you look at our price point, our average monthly rent in our portfolio is $3,500 per month. At around $200,000 per unit to build, with an average rent of $3,500, the return on cost is about 5.5%. We’ve always been fairly insulated from the supply issues because we never went to the affluent markets that had some of the more economic drivers for being able to absorb the higher costs of construction.

    Isn’t that the hot market right now? Everyone wants the high-end and flashy.

    I like to be less flashy. Let people fly by on their way to the coasts; we don’t have the same wage pressures. Look at our metrics. We consistently operate where we’re generating rate growth higher than expense growth. Roughly 60% of our cost is labor, 9% is food, 8% utilities. If you look at every quarterly report, our costs are growing at less than 2%. We’re still increasing rates 50-100 basis points higher and are able to generate a very sustainable same-store NOI growth.

    We categorize our buildings in three color categories: Those which are 90% [occupied] or higher are green, those which are 85-90% are yellow, those which are below 85% are red. Through the execution of our strategies of converting units to higher levels of care, to meet the needs [of our residents], refurbishments, renovations, and selling off non-core assets, the number of buildings that are above 90% has increased by 15% this year compared to where they were last year. To me, that demonstrates that we’re making progress, we’re seeing great demand for conversions of higher levels of care in our properties and we’re not seeing [new] supply come into most of our markets.

    Do you worry that in converting units to create more assisted living and memory care that you’re not going to be able to control the rents as much? 

    Well, it’s still middle market. If you look at price points, our independent rents average $2,600, assisted living is $3,800, memory care is $5,000. While I listen to what others are charging for those care levels, we’re still mid-market. We have a number of conversions opening this month. The number of move-ins scheduled is way beyond expectations, so the market’s there. If you look at our performance of the first 400 conversion units we completed through the second quarter of 2016, occupancy has gone up 660 basis points in a year, their revenue improved by 25% and income grew by 27%. We’re able to sustain a 41% operating margin with three levels of care. The numbers demonstrate that this has been very successful.

    Do you think we’re poised to have some more IPOs in senior living?

    The public companies’ performance has to improve in the public markets before we see that. The challenge is, it’s such a fragmented industry that it’s hard to find a private operator that has the scale or the size to get a market cap that would be interesting to the public market. When you think about all of the public transactions that have occurred over the last number of years, the RIDEA transactions, the consolidation… you see how fragmented this business is.

    I do think that the sentiment of the public market would have to improve. I think people have to be comfortable that supply is not an issue. I think Brookdale has demonstrated that they’re starting to improve and stabilize. To the extent that investor sentiment improves, hopefully demographics will help, and I think there are other catalysts that will help, such as the high cost of home health making it more desirable and more affordable to live in senior housing.

    Do you think there’s a perfect size you’d like to be? Because everyone always asks the question of when you get to a certain size…

    Right now we have 126 buildings. We’re at the size where we can be very selective and cherry pick our acquisitions, and still move the needle. A $20 million acquisition is two cents accretive to cash flow, and we love that. We assimilate the acquired communities, our regionals conduct their own due diligence, so when we take over a building, they know the staff, they know the residents, they know the vendors, it’s assimilated into operations, and you can see how consistently these properties perform at high levels. We grow by 12 or 15 [properties] per year. If we did this for 10 years, we’d still be a good size. I feel very comfortable about the pace of our growth; I feel very comfortable that our size allows us to be very selective and disciplined in how we think about the business, how we look at the business, how we grow the business and not lose focus of our main mission, which is to serve our residents and our staff.


    Let’s talk about leadership. What’s your definition of leadership?

    Surrounding yourself with really good people. In our business it’s really empowerment, whether it be the on-site staff, the regional staff, the corporate staff—we’re very collegial. We meet every Monday as a team to go through acquisitions. There’s a lot of inclusion where everyone who has responsibility is partaking in that. We meet every other week on our conversions and renovations. We have monthly meetings where we review every property every month. We go through operations and review marketing. Two years ago, I called every department head into our meeting and I said, “I’d like you to think about what five metrics are most important for your area of responsibility, and create a dashboard. I’d like to come back next month to those dashboards.”

    What are the data points they came back with?

    Well, everyone’s different. So for marketing it’s tours, deposits, conversion rates, cost of leads, etc. If you look at our cost per lead, about 65% of our leads are generated off of the internet. Even with referral sources, it costs us $100 per lead. One radio ad is costing us $3,000 per lead, because you [might only] get one lead, so why do that? It really makes us think about where we’re allocating our resources, in terms of where we get best traction and what it’s costing us.

    What kind of investments in technology did you have to make in order to do that? The the industry is so far behind about that.

    It’s all done internally from Excel, no new systems, just every person creating their own dashboard with the tools they had. It’s fabulous. We sit down in our monthly meeting, and we have a financial review.

    So do you have 120 dashboards?

    Well, it’s one dashboard with various metrics. We measure the number of units, occupancy, revenue, expenses, and operational variance.

    We look at year-over-year metrics of rate growth, occupancy growth and, most importantly, expense growth. Then we break it down by level of care. We look at what the margin is by level of care, what the cash flow is by level of care. Then we go in to look at variances with pie charts and dashboards. Again, as I said, 77% of our expenses [come from] three categories. So we look directly at all of the labor components, we look at food, we look at utilities, then we look at the minor expenses. I’ve got a dashboard on that. We measure the expense growth year-over-year, and then report our variances with general ledger accounts by property.

    That tool gives our team the information real time, immediately, when the financials are presented of where they’re off budget and why, and they can go back and address that. We talk about this every month. I think my goal as CEO of our company is to make sure that we have the best people, we have great retention and want to provide the best tools to provide the best care, the best services and the best financial results in this industry. It’s worked really well. I think the fact that we empower the staff to operate with autonomy, accountability and responsibility, attracts a certain person that’s driven and passionate about succeeding in this business.

    During your time as CEO, what’s been the biggest challenge that Capital’s faced, and how did you overcome it?

    In 1999, like every other company, we faced a challenge of filling buildings that were built between 1988 and 1999 as the industry imploded and our stock dropped to less than $2 per share.

    What’s your stock at now?

    Now we’re at about $17 or so. That was probably the most treacherous period in our history, surviving when so many companies went bankrupt.

    A lot of sleepless nights during that time?

    It was tough. But again, we had the safety valve of the equity in our owned real estate, and since then business has been very good. I like the market in which we operate, I like the private pay business, I like the ownership of our real estate, and today we have the highest percentage of real estate from any of the larger operators in the country. It really generates a stable cash flow to fund investment in technology, training, systems, people, and capital expenditures; all of the growth we’re driving is self-funding.

    So you control your own destiny?

    Yeah! We really control our destiny.

    Does it get frustrating when you have active investors coming in trying to tell you what to do with your real estate? Or is that just part of the job?

    We respect and appreciate all of our shareholders’ views and we listen to all of our shareholders. We all have the same interest; I’m as aligned as any shareholder. There are different ways of getting there. We have much better information than shareholders do, even with transparency. They’re looking at public data, they don’t see all that we see at the property level. We hope to be good stewards of our investors’ capital, as well as our own personal capital, and make [good] decisions.

    What’s really helpful also to our company is that we have refreshed our board over the past six or seven years. This past May, we brought in a gentleman who spent 27 years at Disney as the president of Disney Resorts. He ran Disneyland, was involved in Disney World, [and Disney’s properties in] Paris and Tokyo. Think about [that] customer experience, think about running a $2 billion business with 20,000 employees. I mentioned Ron Malone, former chairman of Gentiva; we don’t refer our properties’ health care needs to his former company but we have the expertise of someone who has run that business and a staffing agency before dealing with labor. We also have a former head of the REIT practice at Lehman Brothers, and a former COO of one of the largest office REITS, SL Green Realty, as our non-executive chair. He brings in a whole different view on leverage and real estate, so I thrive on learning something every day.

    We had an activist investor who actually came on our board eight or nine years ago who ended up having a great success and we’re still good friends. As I said, we have a lot of engagement with our shareholders, we listen to all of our shareholders. Not all of our shareholders share the same views, but we encourage everyone to express their views. Once or twice a year, the board invites  investment bankers and other consultants into the boardroom to inform them on the industry, how we trade compared to our peers, how the REITs trade. We look at different ways of valuing the company, and always talk about increasing shareholder value. We have a board that’s very engaged, very well informed, that I think makes very informed decisions that help us focus on what we should focus on, to not only serve our residents well but also our shareholders.

    So what’s the biggest risk you’ve taken in your career?

    I’m fortunate. I was a tax lawyer, I’m a CPA and have an LLM in taxation. I worked for two major law firms, and in 1984 I was offered a job to go work for a real estate [firm]. They guaranteed me a partnership at five years out, which is very young. It was a great firm with great culture and great people.

    What was the name of it?

    The firm was called Battle Fowler; now it’s called Paul Hastings, [it’s] one of the larger firms. I was 31 years old with no children and I felt that I could take this risk, and I could always go back and practice law. I’ve never looked back. I very much appreciate the foundation I had of being trained and having worked in a large law firm, but that was the biggest risk I’ve taken.

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

    The best advice I have ever heard was: when having conversations, listen more than talk. I’ve learned to listen, and I think that’s more important in discussion and conversation.

    The best advice I have ever heard was: when having conversations, listen more than talk. I’ve learned to listen, and I think that’s more important in discussion and conversation.

    You’ve gotten better at it over the years?

    I’ve definitely gotten better at listening. I’ve become much more patient. I try and let people finish their thoughts, not interrupt. Sometimes I’ll hold myself back and write a note down so I don’t forget.

    Who would you consider to be your mentor and why?

    We have a very close family, and I would say that my mentor has been probably my father-in-law. He is a very young senior—I won’t say his age—who’s still a senior partner of the largest law firm in the world, and is still incredibly active. He’s an incredible person who has really taught me to live well, both from a family perspective and [work] perspective, to have balance in life. I’m blessed to have three very successful children who I think have really benefited from their mentor being their grandfather.

    If you were to recommend one book on leadership, what would it be and why? Some people are readers, some people aren’t.

    I read a lot of novels, and honestly, I am so absorbed in reading information to help my business, that’s what I focus on.

    So you’re an info junkie?


    How important do you think technology is for senior living providers today?

    Very, and will become even more so.

    Why is that?

    Well, we introduced care plan technology a few years ago. In this industry, you have caregivers administering medications, providing assisted living care, and it used to be just like my timesheets when I practiced law: You get busy within the course of the day, and you finish your day and say, “Oh my God, what did I just do? I think I spent a quarter of an hour on this thing, and half an hour here…” and you kind of recreate what you did.

    We now have PDA phones, Androids and iPhones where, when care is delivered, caregivers are able to put in exactly what they did, at what time, and we now have a printout that goes to the family with their monthly bill, showing why they’re being charged for these care levels. Every 60 days or 90 days, that caregiver is prompted to reassess that resident and look at the care and their condition, making sure that it matches up. That has been great.

    We look at different technologies to roll out every year. We try to limit it to maybe one or two. We’ll test it, and implement it. Next year we’re going to look at electronic medical records; we do that [already] at some properties. I think one of the opportunities for this industry is the ability to partake in this continuum, if we have the data. How do we communicate with the hospice, with the discharge planners, with the medical doctors, with other caregivers, and be able to share information?

    One of the things I can see with our relationship with Genesis is they provide us with what’s called a Modified Barthel Index, which measures resident independence on a 100-point scale. We can actually see the outcomes that our residents are receiving, which are very positive for our communities, particularly when they take advantage of some of the therapy and rehab they’re getting from Genesis. As an industry, we’ll assume more of a data provider role. There’s a lot being done, such as Walmart now having powered shopping carts, Uber’s driverless cars. I think that we will see, in hospitality, robots as housekeepers. There’s going to be a lot of technology that will help us improve our delivery of care.

    Do you think the data collecting has helped you provide better care?

    Definitely. I’m into data. Numbers don’t lie. At the end of the day, I can identify triggers early-on. One of the things we look at are metrics. What metrics do you look at that give you an early warning sign that maybe there’s an issue with care or staff? It’s not just occupancy; it’s turnover, it’s resident satisfaction, it’s all of these other data points.

    As the CEO, what are the most important data points to you?

    Every month I get a financial package. The first thing I look at is change in occupancy. The second thing I look at is the margin. The third is changes in NOI by property. Those three metrics allow me to identify by property where things aren’t moving in the right trajectory. Then I can start looking deeper and talk with every building to get much more granular.

    Why do you think the industry has been so slow to adopt technology?

    Because it’s so fragmented. Roughly 70% is still mom and pops. They do a fabulous job of serving residents, and we buy those buildings, but they need those systems. So it’s a question of having the capital to allocate, having the interest and having the abilities. A lot of what we do doesn’t cost us anything; it’s all internally generated by very high performing analysts, accountants, and marketing [professionals] that actually understand the need to know the numbers and being able to provide the information.

    In five years, where do you see Capital Senior Living?

    I think this business will explode in five years, when you look at the demographic that’s coming. You look at the 85-and-older population, and you see births 85 years ago start to increase, and in five years it’s going up 4% a year. All this concern about supply will probably be very quiet, because even though it sounds like construction starts are starting to fall, demand will continue to grow. This will be a very exciting business in five years. I think we will be thinking about different products and services. Residents will want more choices and we’ll deliver that. It will be a different consumer that we serve. I think we’ll have a much higher penetration rate with a much larger demographic, which I think will result in a very successful operation.

    What are some of the things you’re looking at for different models? Is there anything that kind of gets you excited about what could be?

    We focus very much on the now, because that’s who we serve, but we plan ahead. We do plan out five years, that’s why we’re spending $45 million of capex this year, over a normal spend of $15 million. There’s a lot we’re doing now, we’re anticipating by going in and repositioning buildings, going in and building bistros and theaters and chapels and venues for the residents, redoing lobbies, refurbishing. So we’re thinking forward. We’re thinking about the need for our residents that have mobility issues to have larger doorways, larger turning radiuses in bathrooms and kitchens, things like that, to serve those residents. We think about how we can become better providers of care by having better information technology. We are thinking about it and making the investments, but doing it in a manner where we can test it, make sure we have the right product, the right resources, make sure we gain the right return on the investment with the allocation of capital, and integrate it over time to make sure it’s successful.

    During your career, what are you most proud of?

    Our people. I have such confidence in our ability to be successful at what we do because of how incredibly talented, committed and passionate [our people are]. That goes from the property level to the corporate office. I feel very fortunate every day to have such a fabulous team working with our residents.

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