Senior Housing Margins Decline But Some Owners, Operators Remain Bullish

As senior living operators and owners start strategizing for 2019, they’re also looking back at how the industry has fared recently — and the statistics aren’t rosy. Yet, the numbers don’t tell the whole story, and some companies are bucking the trends with healthy profits and plans for growth.

Looking at all major senior housing property types, aggregate operating margin fell between 2016 and 2017, according to the recently released State of Seniors Housing report, issued jointly by a number of industry associations. The 2018 edition of the annual report includes data for the 12 months ending Dec. 31, 2017, with information submitted by nearly 1,700 U.S. senior apartments, independent living communities, assisted living residences and continuing care retirement communities.

Considering just same-store numbers — that is, numbers from providers that submitted data for this report and last year’s — operating margin decreased 3.5%.


Furthermore, operating margin decreased for every individual property type with the exception of continuing care retirement communities (CCRCs). The greatest decrease was for assisted living properties that also offer memory care, which posted a 10.2% drop in operating margin.

This pressure on margin is not surprising, considering challenges facing senior housing. An interrelated mix of oversupply, falling occupancy and rising expenses led to the squeeze, Colleen Blumenthal, managing partner at senior housing and health care real estate advisory firm Healthtrust, told Senior Housing News. Blumenthal compiled the State of Seniors Housing report.

Occupancy was down about 2% industry-wide between 2016 and 2017, the report shows. Meanwhile, although revenues per occupied unit increased almost 6%, overall expenses per occupied unit went up 7%. Labor in particular was a culprit for rising expenses. Total labor costs, in gross dollars, increased 6%.

This situation has not appeared to improve in 2018. Owners and operators continued to report supply pressure causing occupancy erosion and hampering lease-ups of new properties. In Q2 2018, senior housing occupancy hit an eight-year low, and this persisted into Q3, according to data from the National Center for Seniors Housing & Care (NIC).

The national unemployment rate was 4.1% as of November 2017 and had dipped to 3.7% as of early November 2018. Needless to say, wages, benefits and other labor costs in senior housing continue to rise as the workforce crunch goes on.

In the 2016 to 2017 time period, senior housing rental rates did not decline much, but this might be coming, making margins even uglier, Blumenthal told SHN. Discounted rates in particular could be an issue; in a separate analysis, Blumenthal compared providers that reported discounting rates with those that did not. Those that discounted showed material negative impacts to their bottom line.

“Discounting impacted the bottom line the most,” she said.

Discounting may be on the rise as providers seek ways to weather the current headwinds. Healthtrust conducts nearly 2,000 appraisals in senior housing and care each year, and in the course of this work, Blumenthal is seeing an uptick in discounting.

“Even groups that have been very disciplined and haven’t been discounting are now starting to, due to peer pressure,” she said. “… Now the catchphrase is, it’s discounts [for a limited time] that will quickly burn off. But most everyone that a year ago said we would never discount now are sheepishly saying they have to, strategically.”

A mixed picture

Despite the declining margins and ongoing headwinds, the senior housing picture for 2019 is not entirely bleak, once the full context is considered. Independent living (IL) is a case in point.

The statistics seem to suggest that independent living could be in very rough water. Operating margin declined 3.2% between 2016 and 2017 for independent living and assisted living communities, the State of Seniors Housing report shows.

The number is dramatically worse when looking at the report’s whole sample set. This shows that operating margin for independent living fell from 47% in 2016 to 39.1% in 2017. That’s a far larger drop than assisted living or CCRCs, and is the first time since 2012 that the IL operating margin dipped below 40%.

Yet, these numbers may not be telling the whole story. In most years, about 200 independent living respondents submit data for the report, but only about 100 submitted for this year’s edition, Blumenthal said.

This drop-off in participation could itself be a bad sign, suggesting that IL operators are too preoccupied by their troubles to fill out the survey. But Blumenthal said that she’s not too alarmed yet — if participation is down again next year, that would raise more flags for her.

Furthermore, same-store data shows that over the last five years, the operating margin for independent and assisted living increased from 33% to 34%.

Olympia, Washington-based provider Koelsch Communities and Murfreesboro, Tennessee-based real estate investment trust National Health Investors (NYSE: NHI) are not drawing back from independent living in 2019.

“What we’ve seen in our portfolio with independent living is that margins have held up, by and large,” Kevin Pascoe, NHI’s executive vice president of investments, told SHN. “We have a portfolio of Holiday communities, some other IL assets mixed in as well, and for the most part they’ve tended to hold up from a margin perspective.”

Going into 2019, NHI remains interested in acquiring independent living assets, particularly as part of a continuum of care with assisted living or memory care, he said. And he has seen an increase in independent living assets up for sale, but this is not because they’ve become unprofitable.

“I do feel like we’ve seen more IL in the market lately, but I haven’t really seen a lot of distress as much as more re-positioning of assets, trying to take maybe a senior apartment and make it more IL-light, with more amenity space, a full kitchen, things of that nature,” he said. “That’s where we’ve seen more in the market, not distressed but a value-add … trying to take it up, amenitize it more and push revenue a little more.”

Koelsch operates about 40 communities across seven states, with the heaviest emphasis on standalone memory care. But it has one profitable standalone independent living building (pictured above) and has been making moves to build more standalone IL. That effort is going well, Terry Hanson, vice president of business development, told SHN.

The existing independent living community is located in Longview, Washington. With strong demand in that market and a waiting list, Koelsch added about 25 units last year. Fill-up is on track, and the community has posted operating margins of 50%-plus in recent quarters, Hanson said.

The company wants to build on this success.

“In every market we’d go to for memory care, we’d measure demand for independent living, and we’d see huge numbers for unmet demand on the IL side,” Hanson said. “So, we started putting together a new building, based on our existing IL building, and modernized with layout and amenities.”

Currently, Koelsch has three independent living buildings under construction, with two in the Phoenix area and one near Modesto, California. Considering Koelsch’s success, Hanson is surprised at the IL numbers in the State of Seniors Housing report. Like Blumenthal, he hypothesized that discounting due to new competition is primarily to blame when IL operators struggle to maintain margin.

“The strategy for us is to avoid discounting and sell value,” he said. “I wouldn’t say we’re perfect, but we’ve taken our lumps discounting and remind ourselves it’s a short-lived strategy.”

Written by Tim Mullaney

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