How Senior Living Providers Are Protecting NOI As Occupancy Suffers

Occupancy is one of the most important contributors to net operating income (NOI), but in the face of ongoing struggles nationally with oversupply, operators can continue to boost their NOI through other means.

Because this is the case, those who focus too much on occupancy as a metric for the health of senior living communities — or the industry as a whole — are looking at an incomplete picture. Indeed, even as nationwide occupancy levels plunged to historically low levels, NOI grew in most senior housing segments between 2013 and 2018, as operators adjusted rates and managed expenses.

The industry experienced an extended period of construction resulting in occupancy dropping from 90.2% in Q4 2014 to 87.7% in Q2 2019, according to data from the National Investment Center for Seniors Housing & Care (NIC). Occupancy began to tick up last quarter, to 88%.


Data from the National Investment Center for Seniors Housing & Care’s (NIC) 2019 State of Seniors Housing report reveals 1.4% NOI growth for its same-store sample of 485 buildings across the care continuum between 2013 and 2018. Independent living and assisted living communities with memory care led the way, with 2% NOI growth during that span CCRCs, assisted living with memory care and communities with a mix of independent living and assisted living saw NOI gains ranging between 1.5% and 1.6%. Assisted living communities, which have been particularly hard hit by new supply, were an outlier: They saw a 2% decrease in NOI.

This is not to say that all is well in the senior living industry. In the last year, labor expenses have continued to surge, and same-store NOI dropped across all property types tracked by the State of Seniors Housing, except CCRCs. Margins also have taken a beating, dropping by as much as 17.4% in standalone memory care. The senior living industry as a whole may in fact be facing the toughest operating environment in its history, as American Seniors Housing Association (ASHA) President David Schless recently told Senior Housing News. 

Still, the situation across the industry cannot be captured in any single number, and more than a few providers are maintaining NOI growth.


“We note that while, in aggregate, margins and profits were down, about 40% of the same-store sample did report some improvement in total NOI,” according to the 2019 State of Seniors Housing report.

Focus on economic occupancy

Tucson, Arizona-based Watermark focuses on what it calls “economic occupancy” — the difference between the actual rent collected from tenants and the rent that could be collected if all tenants paid full market rents. This allows Watermark — which has a portfolio of 58 communities — to understand what will result in maximum NOI for a community, even if that means sacrificing occupancy to attain it, Schachter told SHN.

“Getting hung up on just occupancy or just rates can be a little bit misleading,” Bryan Schachter, director of strategic investments for Watermark Retirement Communities, told SHN.

One approach Watermark uses to address economic occupancy is in differential pricing. This gives the company flexibility to push for higher occupancy and rates, while keeping rate concessions to a minimum.

[Communities] with great teams in place and stronger programming can withstand the forces from labor pressures. It allows us to overcome the ‘shiny penny syndrome’ of new supply.

Watermark Retirement Communities Director of Strategic Investments Bryan Schachter

Watermark discounts units that don’t have the best views or access to amenities and common spaces. In turn, it will increase rates on premium units so that it largely offsets the impact from concessions to push occupancy and rates, overall.

“Finding the balance there ultimately leads to the strongest result on the bottom line,” Schachter said.

Economic occupancy is also at the forefront for Generations. The Clackamas, Oregon-based provider operates seven communities in five states, targeting the middle market, President Chip Gabriel told SHN. Generations ties its annual rate increases for existing residents to property tax hikes — typically around 3% in recent years.

Where economic occupancy really impacts Generations is in turnover and empty apartments, and Generations often finds itself competing with other providers for price-sensitive residents, especially if a community’s occupancy rate is not where it should be.

Generations also takes a market-specific approach to concessions, and goes out of its way to communicate to existing tenants why a new move-in may have a lower rate.

“It can be frustrating for existing residents to hear about [a new resident] who moves in who is paying less than someone who has lived there for a couple years. We usually try to do that with move-in incentives and other concessions to get them back to [market] rates over time and to keep the neighbors who have been there longer happy,” Gabriel said.

Watermark is also discrete with rent concessions. They represent a risk to economic occupancy, as they can build the number of residents in a community but erode the revenue generated by new move-ins.

Communities with occupancy rates in the high-80s and low-90s may feel pressure to continue offering concessions to new residents in order to boost occupancy.

Watermark’s policy is on a market-by-market basis, and the provider prefers to price its communities based on where it sits in relation to its intra-market competition, Schachter told SHN.

“Our preference is to do short-term concessions versus permanent. We may offer one month free, or waive part or all of an [entrance] fee,” he added.

Think long-term on wage pressures

Driving occupancy and setting competitive and profitable rates are just part of the NOI equation. Keeping expenses in check is also crucial, and an increasingly difficult challenge for senior housing. Labor typically accounts for about 60% of operating expenses, and providers are facing major workforce pressures at the moment.

The combination of a low unemployment rate and tight labor pools are the main drivers in the wage pressures senior housing operators currently face, and those pressures are not going away anytime soon.

The increase in expenses has outpaced many providers’ ability to raise rates, the State of Seniors Housing report notes, resulting in NOI erosion and margin pressure. Still, providers like Generations are circumspect about these expenses.

Operators should be proactive in setting the wages in its markets to compete for, and retain, talent, Gabriel believes.

Generations decided to set minimum wages at over $15 an hour in its West Coast communities, where the Fight for $15 movement is particularly strong and states are mandating minimum wages between $14 and $15 per hour. This resulted in a 10.4% short-term increase in salary expenses, but has long-term upside in employee retention and strengthening workplace culture, and Gabriel is confident this will translate to future NOI growth.

“It can be frustrating for existing residents to hear about [a new resident] who moves in who is paying less than someone who has lived there for a couple years.

Generations LLC President Chip Gabriel

At Cherrywood Village, a 354-unit campus in Portland with a mix of independent living, assisted living and memory care, the money Generations spent on labor helped increase the campus’ census to 95% over the past two years. As a result, Generations has not spent money on advertising during that time and has been able to push rents for existing residents while capturing higher move-in rents for new tenants.

Maxwell Group/Senior Living Communities addressed the minimum wage issue by setting starting wages for new hires based on a wage banding system, which defines the market and internal value for each role. Starting wages are based on market information, followed by a wage increase after 90 days (typically around 35 cents per hour), and set hikes after one and two years of employment. After that, wages are capped.

As a result, Senior Living Communities wound up paying employees more while saving the provider money over time, President Ben Thompson said during SHN’s Summit in Washington, D.C. earlier this month.

“[Communities] with great teams in place and stronger programming can withstand the forces from labor pressures. It allows us to overcome the ‘shiny penny syndrome’ of new supply,” Schachter said.

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