Despite higher occupancy rates and steady returns reported in the industry, senior housing executives are still on the lookout to increase margins in new ways.
From placing more scrutiny on investment policies to branching out into new service lines, CEOs, CFOs and COOs recently reported how they are reacting to some of the top industry challenges in an annual survey conducted by investment banking, wealth management and institutional advisory company Cleary Gull.
Senior Housing News caught up with Steven Backus, vice president and client advisor of Cleary Gull, to dig deeper into some of the changes executives are making in a “continually changing environment.”
Creating Solutions to Improve Margins
An improving economy and real estate market have boosted occupancy rates over the last few years, especially for continuing care retirement communities. However, occupancy rates have remained as one of the top challenges for executives, according to Cleary Gull’s annual survey. Despite occupancy rates reaching above the 90th percentile for the industry, there is still room for improvement, says Backus.
“It really comes down to each individual organization’s business model,” Backus tells SHN. “Some that are really reliant on entrance fees and that model, they really need to be closer to 95% occupancy. Whereas if you have a rental, maybe you’re not as reliant on that large entrance fee payment to come in to help operations.”
In an effort to not only increase margins through higher occupancy rates, some senior living organizations are branching out into new service lines, including home health.
“Home health care—where they are actually going outside of brick and mortar and providing services to those that aren’t yet in the community—may actually replace some of the needs for higher occupancy rates because you’ve got another revenue stream and another service line to help offset that,” says Backus. “I would imagine that a lot of organizations would start reaching outside of their brick and mortar to really use that as a marketing tool and a way to help the community.”
Another important change among executives is a shift in investment strategies and policies, says Backus. A majority of organizations—72%—reported having strategic plans in place, according to the survey, which compiled responses from CEOs, CFOs and COOs of not-for-profit senior living organizations.
“Because there are some uncertainties out there, organizations have had to take the information that they have right now, whether it’s the level of reimbursement of Medicaid or Medicare, and start planning strategically around that but still keep the flexibility should things change down the road,” says Backus.
In a changing environment with some uncertainty regarding new regulations and tougher economic conditions through rising interest rates, senior living organizations are not waiting around to make changes, says Backus. Hence, the high number of organizations that are moving forward with strategic plans to update facilities and make other changes.
“A lot of organizations have come to the conclusion that they need to just move forward on the information that they have on hand right now and either renovate, reposition or change some of their service lines,” Backus tells SHN. “I would anticipate the number will slowly move back down as organizations have fully implemented those plans.”
Investment Headwinds and Diverging Strategies
One of the biggest changes among executives is that more are taking a harder look at investment policies, according to Backus.
“When we first started the survey, we had a good number of organizations that hadn’t even reviewed their investment policy within 10 years,” he says. “Now, at least 60% of the organizations viewed it within the last year. The furthest out that it’s gone is maybe five years.”
With more volatility in the marketplace and rising interest rates, remaining competitive means senior living companies must be vigilant with their strategies.
“It comes down to organizations knowing that they have to be more strategic with their investment portfolio,” says Backus. “In the past, it used to be a separate silo that sat on the back burner…They need to rely on those assets a little bit more now, and therefore there’s a lot more attention being placed on how those assets are allocated and how frequently they are being looked at. It’s more necessity based.”
The scrutiny on strategies has resulted in some minor changes across investment trends, the survey found. For the first time in two years, companies were allocating more to fixed income and cash, with lower allocation to equities.
“This is the first year where we actually saw an increase in the percent that’s allocated to fixed income investments,” says Backus. “Organizations are revisiting how their assets are allocated and being a little bit more strategic. But, it also shows the concerns that investors are sharing—equities are extremely volatile and will continue to be volatile.”
With the direction of interest rates up in the air for most of year and strong equity returns in 2014, the survey originally predicted the opposite trend. Indeed, fewer executives anticipated returns higher than 6% compared to the previous year. Backus says this new allocation trend is likely to remain as interest rates continue to edge higher over the next few years.
“I don’t anticipate a large change either in or out of the fixed income market,” Backus predicts. “Our recommendation is that there’s always a place for fixed income investments in your investment portfolio. It’s just how you allocated and diversify those fixed income assets is what’s really going to help in a rising or a falling interest rate environment. Even though interest rates are slated to increase over the next several years, I don’t see any drastic movement in or out of fixed income from an average allocation standpoint.”
Another critical point of concern that could upset the industry is the upcoming presidential election, as changes made to the health care industry over the last several years are still hotly contested.
“The upcoming election next year still leaves a lot of uncertainty out there,” says Backus. “If the office turns over and you get a Republican in there versus a Democrat, they could try to unwind everything and all the changes that have been implemented up to this point, especially around the Affordable Care Act. That certainly may have an impact.”
Written by Amy Baxter
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