Discovery Senior Living CEO Richard Hutchinson is preparing the company to grow its regionally-focused operating model in the years ahead.
Hutchinson expects that 2025 will be “the year the shovels come out,” and Discovery has been approached by several lending groups regarding potential new development. But don’t expect Discovery to dive head-first back into building anew just yet.
Even while construction and labor costs have come down, the Bonita Springs, Florida-based operator is taking a more cautious approach before starting new developments. Hutchinson’s advice for other companies is to “be careful.”
“We could end up with a bunch of supply that all of a sudden has a little bit of desperation to it,” he told Senior Housing News. “We need a smart delivery of this new supply.”
Preparing for growth and upcoming economic cycles
Hutchinson’s more cautious approach to development is rooted in the fact that he is already thinking multiple cycles ahead. Specifically, he is concerned with the future supply-demand balance in 2027.
“It’s about how we are positioning ourselves as a company to not only take advantage of this new supply cycle, but holistically defend our positions in new markets while being smart about how we deliver supply into these markets,” Hutchinson told SHN.
On the cusp of a new year, Hutchinson sees a senior housing landscape in which demand will push occupancy higher for Discovery and other operators, with less dramatic spikes in costs around staffing and operations than in recent past years. Discovery also set monthly resident rates higher in 2024 with a varied market-by-market approach.
“Our margin profile has improved significantly and we’re able to pass along rate increases that were planned or better due to the lack of new supply and we’ve been dead on-target with our move-ins heading toward the end of the year,” Hutchinson said. “From a staffing perspective, cost of running our business perspective and the rates we’re getting, it’s all two-thumbs up, trending positively.”
In 2025, Hutchinson said he expects Discovery’s senior housing portfolio, now numbering 340 communities, will see “more normal margin profiles.”
That comes as the bid-ask spread has improved in the last 12 months as cap rates have compressed, he added. Even with the Federal Reserve’s action to cut rates in September, Hutchinson remains cautiously optimistic for what’s ahead, but told SHN that the rate cut and any future cuts must “flus everything back through the system.”
“It feels like everything is progressing logically at this point,” Hutchinson said.
Reorganization effort, corporate support continue to grow
With the reorganization of Discovery Management Group now handling all legacy senior housing brands, an effort that started last spring, Hutchinson said there’s still room for evolution from the way operators use and build data systems to drive business intelligence and growth.
“But it’s not as evolved as other industries so you have to take the good with the bad and make the best choice you can,” Hutchinson said of Discovery’s reorganization effort. In tracking the progress of the reorganization, Hutchinson added that many operating and tech systems have “transformed” in 2024 with a goal of being completed by year’s end.
Hutchinson sees Discovery positioned well for future horizontal growth through developing new regional management companies, building off the creation of LakeHouse Senior Living in 2023 and Arvum, along with Provincial Senior Living in early 2024.
“That balance we’ve been able to play through and get proof of concept,” Hutchinson said. “We will stand up more management companies. We will acquire more management companies to add to this horizontal thesis.”
To highlight Discovery’s success in driving occupancy in margin in 2024, Hutchinson highlighted Provincial, a middle-market brand that is predominantly independent living and “light assisted living.”
Provincial Senior Living now operates 72 former Holiday properties, Hutchinson said. Discovery is for the portfolio reporting margins above 40% by taking on a leaner operating model to drive occupancy and customer satisfaction.
“There’s a reason why Welltower gave us 23 of them and to them from other folks to do that,” Hutchinson said.
During a third quarter earnings call with investors, leaders at real estate investment trust (REIT) Ventas (NYSE: VTR) highlighted Discovery’s contribution to the REIT growing net operating income (NOI) growth as Discovery, Sinceri and Sunrise “continue to deliver excellent operating results in the U.S.,” Executive Vice President Justin Hutchens said.
By building out corporate office support for the new regional management companies, Discovery deploys corporate “subject matter experts” in all aspects of operations, from care delivery to dining, to help remove any friction that could arise at the community level. This has created a “constant feedback loop” which has led to more communication and collaboration between regional teams and corporate leaders.
Rate growth, operating performance continue in 2024
Senior living operators have dealt with a range of operational headwinds in the last four years, but operators have reported gains in occupancy and margin improvement, albeit slightly, in 2024.
Discovery’s march toward continued operating performance has been driven by rate growth, where the company takes a market-by-market approach to resident rental rate annual increases. That means being able to drive “double-digit” rate increases in well-occupied, under-supplied communities with residents seeking value and are “willing to pay for that value and increased services,” Hutchinson said.
On the flip side, Discovery has implemented smaller rate increases where market fundamentals aren’t as strong, Hutchinson added.
“Every market has a different answer and we are data-oriented,” Hutchinson said. “We prove where we should be.”
