Heavyweight Health Care Investor Steps Up to Change Senior Living’s Business Model

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In recent years, deep-pocketed companies, mainly REITs, have put considerable capital behind plans to reshape how senior living owners and operators work together.

Yesterday, I caught wind of another such company: SPHERE (Strategic Public Health Equities and Real Estate) Investments. The investor – which has offices in both the U.S. and overseas in Europe – was born out of Flagler Healthcare Investments, which has thus far amassed a portfolio of medical office buildings, outpatient surgery centers and long-term acute care hospitals in 15 states.

The company is making plans to invest $300 million in senior living operators and properties in 2024, and already it has some irons in that fire. But Founder and CEO Didier Choukroun is not making a simple play to capitalize on a decent discount to replacement costs. When I spoke with him Wednesday, he shared with me that he has a grander vision of bringing a new business model to the industry that changes the relationship between capital and operations.

On the operations side, SPHERE is looking to back like-minded operating companies and give them access to resources such as a tech and data suite. On the real estate side, the company is scouring the market for properties that lie in its “sweet spot” of a combination of independent living, assisted living and memory care.

“We believe that, by investing in a management company with our digitization and ideas that we have to improve the outcome of the residents, we should be able to create a very profitable company and thus, at the same time, benefit the ownership on the real estate side,” Choukroun told me.

Behind Choukroun’s way of thinking is a naked view of the senior living industry in which neither owner nor operator are turning an “acceptable profit” despite “solid” supply and demand fundamentals.

“So, something is not right,” he told me. “We believe that what is not right is the senior living business model.”

In his view, owners must give successful operators a bigger prize if they hope to prioritize better outcomes, and at the same time, operators must work in closer alignment with the owners of the properties they manage to improve performance.

SPHERE is not the only company seemingly with that strategy. Looking across the industry, I see REITs such as Ventas (NYSE: VTR) and Welltower (NYSE: WELL) making similar plays to build up operating partners and then give them the tools with which to be successful.

In this week’s exclusive, members-only SHN+ Update, I analyze SPHERE’s plans in relation to the rest of the industry, and share key takeaways, including:

• SPHERE’s vision for reshaping the basic senior living business model
• How management fees play an outsized role in the need to change for the future
• How SPHERE intends to drive the wellness trend in senior living
• Why this is yet another indication that the relationship between owners and operators is evolving

‘Something is not right’

One of the things that stood out to me about SPHERE’s plans were the company’s motivations behind them.

When we spoke, Choukroun did not mince words about the state of the industry as it relates to operators and their frustrations. He described the ubiquitous 5% management fee that operators often receive as insufficient to allow them to focus on good resident outcomes.

The senior living industry is already very fragmented, and operators get the vast majority of their revenue from resident rates. With just a 5% management fee to operate a property, Choukroun believes that operators will spend most of their time and energy warring with each other over price – “a disaster for everyone,” he said.

“Few management companies today have solid margins, which would allow them to really focus on the most important aspect, which are the outcomes,” he said.

The fact that management fees are often too low to incentivize good work is a view I’ve heard from senior living executives including Aegis CEO Dwayne Clark and The Springs Living CEO Fee Stubblefield.

“Guess what’s going to happen? [The operator] is going to give you their C-team and try to collect their fees … with as minimum energy as possible,” Clark told me in 2022.

It’s that trend that has pushed Choukroun and SPHERE to plan for a more holistic approach to senior living operations and ownership. In the long-term, the company is seeking to to build a portfolio of properties managed mostly by the operators that the firm also invests in.

By investing in operators and giving them access to the company’s data and tech platform, SPHERE’s plan is to increase profitability and margins, and in turn also bump up the incentive for good operators.

Choukroun added that operators often look at real estate ownership as the key to greater profitability and ultimately stability. Indeed, that is stated the belief of Clark and the leaders of many other operators. But he doesn’t see that as the only way to achieve stronger bottom-line results.

Instead, Choukroun seeks to work with operators as an investor, helping them unlock greater efficiency and focus on outcomes. In theory, that would also help them better diversify their revenue sources through expansion into ancillary services, as Choukroun has said senior living operators in Europe have done over the years.

Crucially, he does not believe that operators must stay small or regional to serve a bigger partner. There, too, he takes cues from Europe, where other companies have been able to use scale to control quality, boost margins and improve resident outcomes, he said.

Another key element of SPHERE is the firm’s stated commitment to “forging a future where our activity is intrinsically linked to public health advancements, with the ultimate goal of enhancing human health and well-being,” as per the company’s website.

To achieve this goal, SPHERE is focused on addressing social determinants of health, with the goal of enhancing health and wellness of entire communities. This ambition is leading the company to invest in senior living as a key component of the built environment that also can be leveraged to significantly affect social determinants.

This aligns SPHERE with other forward-thinking senior living operators and ownership groups that are increasingly focused on the social determinants of health, driving resident wellness, and participation in payment systems that reward a population health focus. I’ll be curious to see whether the operators that partner with SPHERE help further drive these trends.

I do think it’s notable that some of the significant and interesting companies to enter the senior living space in recent years are doing so with a heavy focus on wellness, from Canyon Ranch to Serenbe to SPHERE. Veteran owners and operators that are laggards in pivoting toward a wellness focus should take note that they could soon be facing increasing pressure from newcomers to the space who are driving the expansion of this model with significant dollars and reputational heft.

A constantly evolving business model

When analyzing SPHERE’s plans, I was reminded most of those of Welltower and Ventas. Execs with these REITs have expressed similar sentiments about the need for better alignment between owners and operators. And both companies are pairing their partners with technology and data platforms to help them improve operations and outcomes.

Welltower has spent the last few years partnering with what it sees as strong operating partners, and then entering into RIDEA contracts with them in which both parties have so-called skin in the game.

Mitra last year at the 2023 NIC Fall Conference said the industry must “think about a complete business process reengineering and think what needs to be done by people and what can be done better by software, technology, systems, infrastructure, so we can have our precious human capital focus on what they signed up to do.”

During the same event, Ventas CEO Debra Cafaro told Senior Housing News that “the historic model is giving way to a more aligned model, where the owner and the operator are really in it together and can rise and fall as one.”

She also weighed in on what she sees as the importance of operators to have market density to succeed in the emerging models.

“In order for the organizations to be sustainable for the long-term, there has to be some amount of critical mass, and then investment in the critical mass then enables you — and the alignment enables you — to have the financial wherewithal to invest in people and invest in technology,” she said during a panel at the event in 2023. “And that’s what it’s going to take, really over time, in order to build a better mousetrap.”

Although I do still see some varying opinions about how senior living owners and operators should work together, I also believe that it is the companies with the deepest pockets – notably the two major REITs – that obviously have an advantage in being able to reshape the industry’s standard business model in the coming years. 

While SPHERE is not as large, its entrance raises the prospect that the evolution also is going to be increasingly driven by new players to the field, who appreciate the rich opportunities in senior living but also perceive what has been broken, inefficient and outdated. No doubt these newer investors will learn some lessons the hard way, but I hope and believe they will also keep raising the bar for professionalism and profitability in the industry.