“We need to talk.”
Those ominous words are tough to hear in any scenario, but are set to be heard by management, boards of directors, banks and investors when it comes to the bottom-line impact of labor costs creeping higher in senior living.
Senior living operators, along with industry groups such as Argentum, NIC, the American Seniors Housing Association and LeadingAge, are sounding the alarm on the continuing staffing crisis, and have launched initiatives to bring new ideas and discussion to the forefront. Operators are finding it difficult to identify and retain talent, and in some cases they keep bad employees longer than they wish. It has become the “new normal” for the foreseeable future.
No matter what camp you’re in, you’ve probably spent countless hours in conversations with managers, executives, consultants and others discussing the creative strategies around attracting and retaining staff. Creativity can only go so far until reality hits and operators cannot ignore the elephant in the room any longer: it is time to raise wages.
An operator simply cannot succeed without paying the right wages and developing and maintaining competitive human resource programs, all while potentially dropping their rents to compete in their markets.
“We have two big problems. Finding residents and finding employees,” explained Jerry Finis, CEO of senior housing operator Pathway to Living, at the Senior Housing News Summit in Chicago this past May. “And I can tell you that finding employees magnifies the problem of finding residents.”
Regardless of occupancy, rising labor rates are starting to pinch profit and loss (P&L) statements quickly. These wage pressures are abundant within all parts of the health care space: new senior living properties, hospitals, skilled nursing/post-acute facilities and home health agencies. Adding to the complexity, operators are competing with fast-food franchises and retailers that are paying competitive wages in the market.
That’s the case for Olympia, Washington-based provider Koelsch Senior Living Communities, which raised the wages of its caregivers in Bozeman, Montana, to compete with a car wash that’s paying new employees $15 an hour.
“We pay highest wages in our company for nurses and caregivers [in Bozeman]. More so than Chicago, more so than Dallas, more so than California,” said Dan Williams, COO of Koelsch Senior Living Communities, at the SHN Summit. “We’re competing with a car wash. We’re competing with fast food in that town. We’re competing with retail in that town. Those kind of pressures will force your hand into doing things that 10 years ago we didn’t have to. Ten years ago, it could be my way or the highway.”
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The economics of wage increases have a trickle-down effect when a new provider enters a competitive market and pays an additional 50 cents to $1.00 to take talent from an existing provider. This bidding war escalates and starts to cascade quickly through an operator’s profit and loss for that location and spreads throughout the region. Next, other positions and parts of the organization are affected when it comes to recruitment, marketing and day-to-day operations.
“Buried within everybody’s P&L statement on your property is something that you can’t really see and it’s not really made apparent. It’s the cost of all this turnover that we deal with,” Todd Spittal, CEO at St. Louis-based Provision Senior Living, said at the SHN Summit. “Just doing math in my head, if you’ve got 100 employees and turnover half of them a year, it’s probably costing $250,000 to $300,000 a year in expense that’s buried in a thousand different little line items that you can’t get your arms around. … That has a real value impact.”
The economics start to add up quickly, and raising the direct wage expense between 2% to 6% in an operator’s budget can have dramatic impact. That direct expense does not account for the other costs associated with recruitment and retention in a competitive market, such as job marketing, interview time and other overhead associated with on-boarding and retention.
Just look at the 2018 first-quarter earnings release from Brookdale Senior Living (NYSE: BKD):
Same-community facility operating expenses for the first quarter of 2018 increased by 5.8% over the first quarter of 2017, driven primarily by an increase in community labor expenses arising from wage rate increases. As a result, same community operating income for the consolidated senior housing portfolio for the first quarter of 2018 decreased by 11.2% from the first quarter of 2017, to $257.8 million.
Brookdale, which is not without its own unique challenges, highlights how these wage increases have immediate impact.
Thinly capitalized operators with little room in the margin are the most at risk for this wage creep. Lenders, REITs, private equity investors and investors will need to take a hard look with their operators at the budgets and projections for the next 24 to 36 months to address the wage creep. Those discussions will be tough and should happen sooner rather than later, lest those capital providers start shopping the community right out from under their operating partner.
Whether lease agreements and covenants are modified or restructured as a result of those conversations, it’s better to address problems head-on than risk nervous or unhappy capital partners. Human capital may be just as important—if not more important—than financial and economic capital when it comes to turning around these distressed opportunities.
Written by George Yedinak