“It’s a mosh pit of things going on right now,” SRG Senior Living President and CEO Michael Grust told Senior Housing News. Solana Beach, California-based SRG has a portfolio of about 30 communities across the United States.
In the mosh pit of senior living challenges, labor arguably presents the gnarliest problems.
Workforce-related expenses are soaring due to historically low unemployment rates and rising minimum wages across the country. With rent increases unable to keep pace with expenses, net operating income (NOI) is squeezed and margins are falling — and while the economy is destined to eventually cool, Grust and other top executives warn that current labor challenges are the new normal for the industry, meaning only the most highly skilled and disciplined operators and developers will succeed.
A bleak picture
In Oct. 2019, the U.S. unemployment rate hit a 50-year low of 3.5%. In this environment, workers have “leverage like they’ve never had before,” Grust said. Senior living providers are under enormous financial and operational strain to keep pay rates and benefits competitive and stand out as attractive employers.
Illustrating this, Q3 2019 labor expenses for the nation’s largest senior living provider — Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) — increased 6.8% on a year-over-year, same-community basis.
“The challenges we faced this quarter with higher labor costs and rate pressure in select markets were similar to the industry,” Brookdale CEO Cindy Baier said on the company’s third-quarter earnings call.
Indeed, Q3 wage and benefit expenses for another publicly traded operator — Newton, Massachusetts-based Five Star Senior Living (Nasdaq: FVE) — were up 6.9% year-over-year on a comparable community basis, Executive Vice President, CFO and Treasurer Jeff Leer said on that company’s earnings call.
In 2020, labor costs will continue to strain providers’ balance sheets. Minimum wages increased in 21 states at the beginning of 2020, with four additional states poised to raise minimum wages later this year, according to the National Employment Law Project. The national unemployment rate is likely to remain at or near 4%, and senior living will feel the effects, according to a recently released white paper from industry association Argentum.
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“For 2020, the number of available workers likely will not keep up with both new growth and existing job openings — so senior living communities are likely to see labor costs continue to rise at a healthy pace in 2020,” the white paper stated. “The average hourly wage paid to senior living employees is projected to rise 3% in 2020. This would represent the industry’s fourth consecutive year in which average wages rose by at least 3%.”
The lack of available workers also compels some providers to rely more heavily on contract labor to fill in gaps in the workforce, which also drives up costs.
For Dallas-based Capital Senior Living (NYSE: CSU), contract labor costs were up $900,000 year-over-year in Q3 2019; not counting those costs, the company logged a modest 0.2% year-over-year increase in labor costs due to downsizing that occurred. The contract labor drove an overall 1.9% increase.
Oversupply is also taking a toll in certain markets. When new senior living communities open, they compete with existing product for residents but also for staff, poaching workers by offering higher pay or other perks.
“It’s sort of guerilla warfare, if you will, from a labor pool perspective,” Grust said.
The increased competition may also be driving senior living providers to hire more workers than in the past, in a bid to beef up their hospitality offerings and outshine nearby communities.
This practice might explain one potentially puzzling statistic: Between 2017 and 2018, labor expenses rose more dramatically on an industry-wide basis in standalone independent living (IL) than assisted living (AL).
Specifically, labor expense as a ratio of revenues increased 9.4% in IL compared with 3.8% in AL, according to the State of Seniors Housing report, which is compiled annually by a task force led by HealthTrust COO Colleen Blumenthal.
Theoretically, assisted living should face very similar labor cost pressures as independent living in areas such as housekeeping, physical plant maintenance and dining, while AL also has additional costs related to caregiving, according to Mike Andreasen, senior vice president/director – asset and performance management with LCS Real Estate. Based in Des Moines, Iowa, LCS Real Estate is part of the LCS family of companies, which includes one of the largest senior living operators and developers in the nation.
The greater increase in IL labor costs compared with AL probably does not mean wages are going up faster in independent living, Andreasen proposed. Rather, providers are probably hiring additional workers in greater numbers in IL than in AL.
“I think as folks try to put a competitive offering into the marketplace, there is effort going into, how do we provide greater hospitality, greater services, whatever that might be, to differentiate our offering,” he told SHN. “And so you may be seeing some increased staffing as folks seek to differentiate their product in a crowded marketplace.”
It’s a theory that makes sense to SRG’s Grust, who also noted that mandatory staffing ratios in assisted living make a sudden surge in hiring less likely in that setting.
Andreasen’s theory also holds water for Randy Bloom, president and COO of Kansas City, Missouri-based Tutera Senior Living & Health Care, which offers a mix of IL, AL and skilled nursing across a portfolio of 45 owned U.S. properties. Including third-party management, Tutera operates 75 senior living communities in nine states.
“In independent living, we are looking at different types of amenity packages, wellness programs, more robust activity programming … concierge services that we historically have not been involved with,” Bloom told SHN.
However, neither Tutera nor LCS is experiencing greater labor expense increases in IL than AL.
LCS is feeling more expense pressure related to caregiver positions, Andreasen said. Tutera generally is seeing IL and AL expenses rising at about the same rate, and wage rates are going up more quickly in its skilled nursing facilities — but location rather than property type dictates where labor cost challenges are most acute, Bloom told SHN.
“For us, the primary driver of whether or not labor costs are going to increase is not so much product type, but it is urban versus rural facility or community,” he said. “In other words, we’re seeing that in the urban markets, regardless of product, the rates are increasing at a more substantial rate … I believe obviously due to more competitors and more business in general.”
A more competitive senior housing market hits provider balance sheets with a double-whammy, driving up labor costs while at the same time making it harder to raise rental rates. Some providers are forced to offer price incentives or raise rents conservatively to maintain occupancy in markets where new buildings are offering steep discounts to drive lease-up.
For senior housing generally, encompassing both IL and AL, annual rent growth was 2.8% as of Q4 2019, according to data released last week by the National Investment Center for Seniors Housing & Care (NIC).
This level of rent growth lags behind labor expense increases, taking the Brookdale and Five Star numbers as relevant data points. As a result, net operating income and operating margins are shrinking.
For majority IL communities, NOI was down 12.4% between 2017 and 2018, and margin shrank 12.1%, according to the State of Seniors Housing report. For majority AL communities, NOI was down 6.2% and operating margin decreased 7.7%.
For companies like Tutera that also have significant business in the government-reimbursed skilled nursing space — where margins are always razor-thin — the numbers are even uglier.
“Our NOIs are getting smaller, and our margins — where they were very, very tight before — are non-existent,” Bloom said.
No clear answers
Senior housing and care providers cannot survive on “non-existent” margins, but Bloom and Grust do not believe that companies in the sector can count on workforce pressures abating.
“I don’t see an end to this in the near-term,” Bloom said. “So, we are proceeding as if this is the new normal.”
Accepting this reality is difficult because there is no playbook for how to offset labor cost increases.
“I have probably read, like everybody, all of the variety of articles, books, gone and listened to various people talk about the labor crisis and shortage in post-acute health care. And, quite frankly, we try to implement all of the variety of things that are suggested,” Bloom said. “In our estimation, there really are no other efficiencies out there that can be generated to offset the cost of the labor increase.”
For Tutera, growing ancillary services revenue through partnerships with pharmacies, home health, hospice and other types of providers is one opportunity being explored. Outside the portfolio that it both owns and operates, Tutera also generates revenue through third-party management fees, and is seeing increased interest from owners seeking experienced operators in this current difficult environment.
Tutera is also diversified across geographies, care levels, and building mix. This is a crucial advantage, Bloom said, because labor cost challenges are extreme in some locations but less so in others.
“We have enough diversification to stay afloat,” he said.
On the labor front specifically, Tutera is making a concerted effort to be “very creative” in how to attract, hire and develop staff. The company is in the process of launching Tutera University. Starting in the Kansas City area, this program will provide centralized orientation and ongoing education and training — but Bloom sees it as more than a typical corporate university, in that it will also offer courses that are simply of interest to Tutera employees as a life enrichment value-add.
These classes could be on topics ranging from cooking to Excel, he explained. Furthermore, he envisions Tutera University being a way to incentivize and reward workers in other markets by bringing them to Kansas City for special events and training.
“We see this as a multifaceted way to give back to our employees,” he said.
If there is a silver lining to the labor crisis, it is in forcing Tutera and other providers to step up their game and be better employers, Bloom believes.
Like Bloom, Grust has no easy answers for how to succeed in this new environment, but he’s clear that senior living is becoming a dog-eat-dog industry. In the early days, when he and other pioneers were creating the first private-pay senior living communities, competition was sparse and 18 months was a reasonable expectation for lease-up on a new building.
Now, competition is fierce, and savvy operators and ownership groups will thrive in the long run in part by seizing opportunities as others fail.
In the most recent supply cycle, Grust believes that developers went into some projects with unrealistic pro formas that have been obliterated not only by rising labor costs but skyrocketing construction costs, coupled with the constraint on rents.
“Their underwriting has just been destroyed,” Grust said. “My sense is that there may be some distressed opportunities in the next couple of years.”
He remains fundamentally optimistic about senior housing, but believes the risks are also greater than ever before, and success is contingent on being “measured” and “thoughtful” in upgrading operations and pursuing growth opportunities.
SRG has made a push to innovate its offerings to amplify wellness and attract the new generation of consumer. The company recently opened a building in Austin, Texas that Grust believes is an example of how to succeed in today’s environment.
The community is attracting younger residents drawn to the wellness offerings, he said, and he anticipates that the building will appeal to the rising demographic of aging boomers and have a “great shelf life,” similar to the 20-year-old buildings still in SRG’s portfolio.
“Obviously, we’re not shutting our door, we’re positive about the business, but it’s definitely a rough patch right now, where I don’t see wage issues receding — I just don’t see it,” he said.