Multifaceted owner and operator serves 32,000 seniors today, but sees potential to extend that reach to 50,000 within five years.
By Matt Valley
Ed Kenny believes his entrance into the seniors housing business was a case of divine intervention. In the late 1970s, while a student at Providence College in Rhode Island, he went home to Cape Cod to visit his parents. Sadly, his mom suffered a stroke while he was there and she ended up in a nursing home. Kenny, who was working at a hotel resort on the Cape at the time, enjoyed going to visit his mom at night. “I was struck by the compassion and the care these folks were giving my mom. I marveled at what the physical therapist could do for her.”
One day, he came across a magazine article focusing on a company in Des Moines, Iowa, that was building a senior living product known as a continuing care retirement community (CCRC). He wrote to the company, which at the time was rolling out a training program.
“They said, ‘We’d love to have you join the company.’” He was one of the first 15 employees hired and was genuinely moved by the experience. “I said, ‘My parents could benefit so much from living in this type of community and I want to be a part of it.’”
The pioneering company he joined in 1979 was Life Care Services. He began by serving as executive director of several communities managed by Life Care Services with stops in Kalamazoo and Jackson, Mich., followed by Pensacola and Orlando, Fla., and eventually Des Moines.
In 2006, Kenny became the CEO of LCS, the parent company of Life Care Services and a family of companies dedicated to the senior consumer. The affiliated companies include LCS Development, a full-service developer of senior living communities including CCRCs, assisted living and skilled nursing; CPS, a national purchasing consulting network; and Health at Home, which provides in-home healthcare and companion care service.
The privately held firm is a giant in the industry. As of June 1, 2014, LCS ranked as the fourth largest operator of seniors housing in the United States with 119 properties and 31,792 units under management, according to the American Seniors Housing Association. (Now that the merger between Brookdale Senior Living and Emeritus Corp. is complete, LCS is the third largest operator.) LCS also ranked as the 24th largest owner nationally with an ownership interest in 31 properties and 5,539 units.
Kenny recently spoke with Seniors Housing Business about the evolution of the company over several decades, the opportunities for growth, and the hallmarks of a top-notch operator. What follows is an edited version of that interview.
Seniors Housing Business: What are the biggest advantages of being one of the largest operators of seniors housing in the U.S.?
Ed Kenny: Our mission is all about enriching and enhancing the lives of seniors. So, the biggest advantage is that it puts us in position to have greater influence and impact on the lives of the seniors that we are committed to serving. Likewise, it allows us to influence another very important group — the associates that work for the company in all the communities we represent.
As a company, we really look at how many seniors we serve. Today that number is around 32,000. Is there an opportunity to touch more lives in the next four or eight years, and if so how do we go about doing it? That’s how we talk about our growth as far as expanding our reach to the seniors we serve.
Another advantage of our size is the economies of scale. It gives us the ability to invest in resources that we couldn’t when we were much smaller. Obviously, those resources are in training and education programs, investing in IT (information technology) platforms, market research capabilities, compliance and regulation. It is a big plus to be able to reinvest in resources to make sure that our folks who are serving our residents have the necessary tools and expertise to do their jobs well.
SHB: Do you anticipate those owner and operator figures will continue to grow? If so, will it be through new development or acquisitions?
Kenny: We see the opportunity to grow the company to serve 50,000 seniors in the next four or five years, which would increase our reach by about 20,000 seniors. We would do that in multiple ways. We continue to be fairly confident in the development opportunities moving forward. Today, we have more than $1.2 billion of development activity in our pipeline. We have cash that is available to deploy to acquire retirement communities, either a single site or a portfolio. We also look at opportunities to potentially acquire operating companies.
We also look at the world through organic growth. How can we grow our different businesses through organic methods? Then we look at how we can grow through development and acquisition — acquisition of both real estate and operating companies.
SHB: LCS has a lot of tentacles in terms of affiliated companies. Does the company view itself first and foremost as an operator?
Kenny: Let me run through the three-part history of the company to help answer that question. In the first chapter of LCS, we were primarily a manager of retirement communities. The properties were typically continuing care retirement communities. We provided those services largely in the not-for-profit sector. That was Phase I of the company. During that period, we also began to develop some “ancillary services” around that fee-for-service, third-party management business.
In the second part of the company’s evolution, we continued to be a third-party manager of retirement communities, but dropped the notion of providing ancillary business services. Instead, we turned those ancillary services into individual operating companies to help those businesses grow. So, our development business, LCS Development, is a standalone business. Our national purchasing consulting network, CPS, is a standalone business. Our Health at Home is a standalone business.
The third chapter of the company was to say, “All right, we’re going to evolve from just being a third-party manager to also being an investor and owner in retirement housing.” We have been very active in that space over the past seven years, and it will become the largest profit sector of the company in the next two-and-a-half years.
Today, 60 percent of the company’s earnings stem from the management business, 20 percent from the other operating businesses and 20 percent from being a real estate owner and operator. Two or three years from now, about 50 percent of the company’s earnings will stem from real estate, 30 percent from management and 20 percent from the other operating businesses.
SHB: How many years did that first phase of the company run? When did the second phase
Kenny: The company is a little over 40 years old. The first phase was really the first 15 years of the company. We were a professional service company and we were just providing fee-for-service management services. The evolution of growing each of the other businesses as standalone profit centers has been occurring over the past 15 years and really took off in the past 10 years.
SHB: LCS is a private company. Because of the large size of the company, have you ever considered going public?
Kenny: We enjoy our privately held status. Right now, even in our five-year forecast, we are
not contemplating a strategy of going public.
SHB: Can you give our readers a breakdown of the size of the LCS portfolio in each industry segment?
Kenny: We have roughly 22,000 independent living units, 4,200 assisted living units, 1,500 dementia care beds and around 5,000 skilled nursing beds.
SHB: What is the average occupancy of the portfolio and how has the portfolio performed over the past year?
Kenny: Our average occupancy is 90.5 percent. It increased by 110 basis points, or 1.1 percent, between December 2013 and December 2014.
SHB: Health at Home has provided in-home healthcare and companion care service since 1984. Was LCS a pioneer on that front?
Kenny: Yes. We started out as a private-duty homecare provider primarily focused on providing services to residents living in our CCRCs in probably half a dozen markets. That company expanded into the Medicare business. (Medicare reimburses certified agencies for home health.) We expanded our footprint to be in 15 different markets. We see that as an invaluable service to our residents and our clientele. They want choice in terms of how their healthcare is provided.
A year ago we stepped back and evaluated that business. We concluded that we were very bullish on Health at Home, but we also recognized that it wasn’t a core business of ours. So, we sought a strategic partner to join us in that business. We selected CareSouth Health System based in Augusta, Georgia, and partnered with them a year ago. They have invested in our homecare business. We are excited about having CareSouth as our partner and growing that business significantly over the next five years.
SHB: We are seeing a number of companies trying to get a foothold in the home health and companion care space. LCS has been in it over 30 years. What lessons have you learned?
Kenny: It is a complicated business. It’s a business that you need scale to be successful. The regulatory environment is very challenging. Obviously, the labor component is a huge element of it. Being able to attract and retain high-quality caregivers is a constant challenge in that business.
SHB: LCS and Westminster Funds are the joint venture partners for Trillium Woods in Plymouth, Minn., a high-end retirement community that is scheduled to open this summer. Is the joint venture model one that LCS uses frequently to complete development projects?
Kenny: Westminster has been a great capital partner for LCS. It’s a partnership that started 15 years ago. We own and operate five CCRCs that we developed together. We’re now doing the Trillium with them, and we also bought two CCRCs with Westminster, so it’s been a great partnership. We’ve replicated the model many times.
SHB: Does LCS primarily work as a fee developer for third parties, or does LCS Development primarily develop for its own portfolio?
Kenny: About 70 percent of the development work is for our own account, and 30 percent is as a fee-for-service developer. We will not have an ownership interest in the community as a fee-for-service developer. I’d like to explain the difference between the two in a little more detail. When we work with our investor groups, we will develop a number of independent living and assisted living prototypes. We’re paid a fee to develop those prototypes, but I don’t view that as fee for service. Our development group also provides services for some not-for-profit clients. We will be paid a fee to be the developer of that community, but then we don’t have an ownership interest in that community.
SHB: Why does LCS focus so much on the not-for-profit sector from a development standpoint?
Kenny: The origin of our company makes us a little different. LCS grew up in the not-for-profit sector, servicing not-for-profit clients. That’s still an important part of our business. There are a number of not-for-profit CCRCs and not-for-profit retirement communities out there. They are communities that are aging. They are communities in need of expansion and/or repositioning. We say to them, “We’re available to help you put a facelift on your campus, or improve the overall development of the campus.” We see that as an underserved market.
SHB: A video on your website talks about the importance of collaborating with clients such as Marquette Manor, a CCRC in Indianapolis. Is being a good listener a prerequisite to being a strong management company? Is quality of service what separates the best seniors housing operators from the also-rans?
Kenny: Being able to have strong and effective interpersonal skills is critically important in this business. The executive director in many ways is not unlike a mayor of a small town. You have to have very good communication skills. You have to be very present in the community. Having compassion and empathy is also critically important.
The next big thing is the ability to manage risk. As an operator, what are you doing to ensure that good practices are in place to avoid frequency of falls? What practices are in place to ensure good quality as it relates to healthcare management? What programs do you have in place so that your workers’ compensation outcomes are small or modest?
The last point that we talk about a lot in our organization is the trust obligation. This is more than just being in the hospitality business. There is a significant trust commitment that takes place when a resident makes the decision to move into one of our communities. We’re going to help folks through that final chapter of their lives and make sure that the dying experience is done with dignity and in a caring and compassionate way.
So, we are in the hospitality business, we’re a strong service company and we have the necessary compliance culture. But what really differentiates companies from one another in the sector is their ability to execute on that trust obligation.
SHB: Compare and contrast the role of an executive director today of a senior living community versus 1979 when you joined LCS as an executive director?
Kenny: The emphasis on communication, listening and visibility hasn’t changed at all. That is key. But the regulatory environment has gotten much more complex. The competitive environment has changed a lot in some markets, which has added some more pressure compared with 30 years ago. The regulations and compliance is probably the biggest change.
SHB: How has data and technology benefitted the executive director operating in the trenches day to day?
Kenny: The use of technology and data is obviously a big change from even 10 years ago. We have dashboard systems that provide our executive director real-time information on labor variances, overtime and operating costs per occupied apartment.
SHB: When you joined the company in 1979, did you ever think in your wildest dreams that you’d end up being CEO?
Kenny: No, I never did. I’ve been very blessed. It’s been a wonderful ride. It’s a great company with great people and a great values system. I think we are really making a difference.