The outlook for senior housing has been defined as strong, despite the recession and real estate downturn. And operating margins are reflecting the positive outlook, having risen from 2.13% to 3.24%—an increase of more than half, according to a new report on senior living providers, released last week.
But there are still major challenges identified by senior living executives today, both in terms of their finances and their operations. This includes longtime senior living operators, large and small.
Such are the findings of the study, released by investment advisory and banking firm Cleary Gull. The Milwaukee, Wisconsin-based company counts among its areas of focus senior living communities, both for-profit and not-for-profit. Its survey sought responses from CEOs, CFOs, and COOs this spring.
Challenges and opportunities
Among the largest operational challenges Cleary Gull’s senior living clients face: Changes due to health care reform; maintaining occupancy rates; and adjusting to declining reimbursement rates.
Opportunities identified by the senior living executives were expanding service lines; maintaining and improving care provided; and achieving adequate return on investments.
Yet another major challenge lies in that many companies are not using their investment portfolios to their fullest potential toward these goals, says Stephanie Chedid, president of Cleary Gull Advisors and one of the report’s authors.
“The opportunity for assets [operators] have in their investment portfolio need to be viewed as a strategic business tool,” Chedid tells SHN. “There are such fantastic opportunities that help support the organization at any point in their business cycle. We find investment assets are still often separate from [the operator’s] balance sheet either because they have separated it intentionally or they have not thought about it.”
These missed opportunities can come during any point in the business cycle, whether a company is new, established, developing or reinvesting toward improvement of existing properties.
Making the most of investments
The study looked at the investment portfolios of senior living providers and found that in 2013, fixed income and cash holdings were down by 6.31% to 50.31%. Equity holdings increased by 4.32% to 42.46%; and alternative holdings made up 7.12%.
But many executives reported distress over the current rate environment, market volatility and international concerns. According to the survey findings, 69% of participants anticipate their portfolio returns will not surpass 6% in 2014.
The low interest rate environment, while it has been beneficial from an investment perspective, can also be seen as a potential danger, Chedid says, in that most companies have little—or no—experience in managing through a rising rate environment.
“People haven’t invested in rising rate environment since the 70s,” she says. “They haven’t had a lot of of practice in that. Investors have gotten used to low interest rates, and they tend to procrastinate. What I’m hearing is that there is not a sense of urgency to address fixed income specifically. Which is dangerous.”
Staying ahead of the curve
But the good news, executives report, is that many are embarking on strategic plans.
“Ongoing changes in health care, uncertain economic times and changing market environments have made business planning extremely challenging but vital in order to continue serving residents,” the report finds. “An astonishing 75% of participants indicated that they have just completed or are in the midst of implementing strategic plans. That is a lot of activity for the industry and a great sign!”
And there is still time to plan through the market uncertainty, and for companies to make use of investment portfolios, Chedid says.
“The two most important things are the pace at which interest rates are going to increase and what the Federal Reserve Bank does,” she says. “Those are perhaps even more important in the short term than what the rate is.”
Written by Elizabeth Ecker