Two years after launching real estate investment and management firm Mozart Healthcare in 2016, co-founder Archie Shkop decided to start a skilled nursing operating company.
“I started realizing that as much as I knew operations, I needed to be in the thick of it with my tenants to understand the challenges they were facing,” Shkop told Skilled Nursing News at the eCap Summit in Miami last month.
Now, that decision is helping drive improved employee satisfaction, turnover that is below industry average, and a dramatic decrease in agency labor over the last four months, Shkop said. And having a more consistent and engaged workforce enables facilities to take on more clinically complex patients and drive care-related reimbursements.
Shkop also is pleased to have restructured much of Mozart’s debt in 2022, getting ahead of interest rate hikes. This positions Mozart for growth this year, if pricing continues to normalize.
“I am hopeful and optimistic that prices will start to come down,” he said.
Staffing successes
In co-founding Mozart with his brother Ben, Shkop set out to create a model of nursing home ownership with strong operator alignment.
A common problem in the sector, as Shkop sees it, is that most deals involve some degree of turnaround to drive value, and in a typical lease structure, the landlord benefits far more than the management company. With Mozart, he resolved to create more shared upside.
“I won’t do a deal, pretty much, without a purchase option,” he said. “If my tenant won’t have the ability of earning back all the hard work that they did, in the form of owning their building, then they’re going to be resentful.”
After two years of growing Mozart, Shkop’s desire to have an even closer read on operations — and to test innovations and improvements — motivated the launch of Paradigm Healthcare. The operating company began with three Houston buildings and has now grown to more than a dozen facilities.
Some of those facilities are in Mozart’s portfolio, which totals about 35 properties across Texas, Ohio, Montana and Michigan. Shkop has an ownership stake in Mozart and Paradigm, as well as an even newer operating company that he started during Covid-19 with another partner.
While all the companies are at an arm’s-length from each other, with separate teams, lessons learned at Paradigm facilities are shared across the Mozart portfolio, as Shkop hoped when he got into operations.
“We wanted to start small; we wanted to see if some of our operational theses would work,” he said. “We wanted to try and do things differently, to try a change from what was going on in the market.”
Operating differently demands an R&D or startup mindset, and being willing and eager to solicit and act on employee feedback, Shkop said. One simple example relates to supplies.
“Employees were always saying they don’t have supplies, but we knew we had supplies, because we saw the ordering forms,” Shkop said. “What we found was that when buildings were further spread apart, while there were satellite central supply rooms there, they weren’t properly stocked with what the employees needed in real time.”
Recognizing this, the company has gotten better at getting team members what they need, faster.
Monthly town hall meetings also have been an important step in gathering feedback that shapes operations.
“We do surveys, we post the results of those surveys in the employee break rooms … so we’re letting them know where our failures are, where our successes are,” Shkop said.
Implementing loyalty bonuses and giving team members a say in matters such as the names of their buildings have been among the successful initiatives, and have helped drive improved workforce metrics even in the midst of the current, serious staffing crunch.
Going into Q4 of 2022, a “huge part” of the operating portfolio was relying on agency labor, but that has been reduced by 70% in the last four months, according to Shkop. Turnover across the organization is hovering around 50%, which he acknowledges “sounds embarrassing” but is actually significantly below industry averages. And the turnover rate is a reflection of employee satisfaction.
“We do a company rating of how do the employees see us,” Shkop said. “In most situations, when we started off, we were getting a 5 out of 10, which is really not great. Today, we’re averaging 7 out of 10.”
While proud of this improvement, Shkop said the goal is to be a 9 or 10 out of 10. To that requires knowing what areas need improvement and then making the necessary adjustments to achieve improvement, even if it’s a difficult and gradual process.
One example lies in modifications to the admissions process that needed to be made as the company gained scale. A company leader changed the approach three times in three months, and was concerned that Shkop would be upset by that.
“I said, ‘I’m actually really impressed … because you did not dig your feet in and say, well, I started with this approach, let me stick with it — you were willing to allow your team to give you feedback,’” Shkop said.
By admitting to failures, the leader was creating an environment where people could talk openly about what’s going well and not going well.
“That really just fosters an environment of learning, and that’s what we want to do,” Shkop said.
And greater workforce stability also is a prerequisite for providing care to more higher-acuity, short-stay residents, he said. The current mix across the portfolio is about 80% long-term care to 20% short-stay patients.
“We do take significantly higher acuity patients than we were taking even two years ago,” Shkop said. “That only happens though, when … I have people who are staying and learning and fine tuning those skills, my nursing staff, my CNAs, that’s when I feel confident and say, let’s take on more.”
Growth in 2023
In terms of expanding the Mozart portfolio, the company is positioned for growth after focusing on restructuring its debt last year, locking in interest rates around 4% to 5%.
“We didn’t know it was going to be as bad as it is today, with where rates are, but I’m very grateful that we spent our time doing that,” Shkop said.
As 2022 came to a close, a buyer-seller disconnect made transactions difficult, he noted, and many of those potential deals are still in the market today. The disconnect may be narrowing, though.
“We are seeing pricing come down in some deals we’re working on,” he said.
He is hopeful this trend will continue, as interest rates force sellers to adjust their expectations. This would normalize the market after a period of very high prices. Shkop cited several reasons for these prices, including a perception of nursing homes as recession-proof, investor and lender recognition of the government support that the industry received in Covid-19, and the sheer volume of capital ready to be deployed.
But now, market conditions have changed.
“I see a lot of deals going bust, and they already have been going bust, when people who bought them expected interest rates to be where they were, and now they’re three, four points higher,” Shkop said.
While busted deals are obviously not good for the parties involved, the pricing trends have Shkop “hopeful and optimistic” about an improved investment outlook in the months ahead.
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