On the heels of the news that the Federal Reserve would aim to increase its benchmark interest rate for the first time in nearly a decade, senior living providers are celebrating higher margins, but remain worried about operational challenges, a new study finds.
Cleary Gull, an investment banking, wealth management and institutional advisory company, released its findings on the top challenges senior housing executives face in its 7th annual Cleary Gull Senior Living Study.
While the survey revealed positive results for returns and optimism about strategic business planning, the top challenges facing executives remain the same.
“We have seen the senior living industry battle several challenges head on, both economic and regulatory,” Steven J. Backus, vice president of Cleary Gull, client advisor and the study’s author, said in a statement. “Strategic thinking and planning are more important than ever before. Access to timely and relevant information can only help as the industry evolves, which is why we continue to offer our study.”
Industry Challenges
The top three challenges that senior living CEOs, CFOs and COOs reported were maintaining occupancy rates, improving operations and adjusting to declining reimbursement rates. Compared to last year’s survey, executives did not cite health care reforms as one of the top challenges, but were still concerned with reimbursement and occupancy rates.
At the same time, occupancy rate challenges were also the top opportunity executives saw in the industry, followed by expanding service lines and maintaining debt coverage. An improving real estate market has helped boost occupancy rates over the last few years and increased operating margins. For the second year in a row, operational margins increased to an average of 3.65%, compared to 3.24% last year. As the economy continues to improve, more providers may also be able to raise fees to cover expenses.
Interest rates were a big concern among senior living providers, with many anticipating that rates would rise earlier in the year. In fact, rates actually declined throughout the year, allowing low-cost borrowing to continue.
Investment Opportunities and Strategic Planning
This year’s survey bucked a trend from the previous two years, as the average allocation for participants rose for a higher allocation to fixed income and cash, with lower allocation to equities. Fixed income allocation rose to 53.2%, while equity dropped slightly to 40.9%. This result is opposite of what the survey predicted due to positive equity returns in 2014 and concern over what impact rising interest rates would have on fixed income assets.
“We continue to believe that diversification is critical,” Backus said in a statement. “With uncertainty about the pace at which interest rates will rise and senior living organizations’ high commitment to fixed income and cash in their portfolios, it’s important to develop a plan and take steps to mitigate risk.”
The vast majority—74%—of providers in the study said they anticipated portfolio returns would not exceed 6% in 2015. The study projected 4% to 6% returns for the year. Senior living executives said they were worried about market volatility, interest rates and international turmoil regarding their portfolio returns. In fact, fewer providers were optimistic about high returns, with just 33% expecting annual returns to be greater than 6% over the next three to five years. Last year, 39% of participants said the same.
Strategic planning was up, according to the report, as 72% of providers said they had just completed or were in the midst of implementing strategic plans.
“That is a telling sign that industry leaders recognize the importance of business planning in order to continue serving residents given ongoing changes in health care,” the report reads.
Low borrowing rates have encouraged providers to restructure debt, though fewer organizations planned to issue new debt to make an equity contribution to a project being funded in anticipation of rising interest compared to the previous year. The report also urged those providers that have not implemented a strategic plan to reposition their portfolios.
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