In the past six months, many U.S. senior living providers have watched their revenues dry up as their expenses skyrocket.
But that doesn’t mean there aren’t tools available for them, either. On the expenses side, there are avenues for controlling costs in the budget even as testing, personal protective equipment (PPE) and labor costs become new and significant line items. And on the revenue side, discipline on pricing and rent collections can make the difference between an organization that is treading water and one that is sinking.
But if providers think maintaining a budget and staying disciplined in the middle of a pandemic is a “pipe dream,” they ought to think again, according to Healthtrust COO and Partner Colleen Blumenthal.
Healthtrust recently prepared for the American Seniors Housing Association (ASHA) a special interest brief summarizing findings from a study examining data representing more than 180,000 senior living units between March 1 and June 30. Healthtrust found that senior living margins were an average of about 21%, which is closer to those typically found in the skilled nursing sector, according to Blumenthal.
“Just thinking out loud, if debt coverage is usually 1.2 to 1.3, and you miss your budget — the central tendency [was] right around 30% — that tells me a lot of operators are making debt service by just a hair, so there’s not alot of room for error,” Blumenthal said during a panel discussion at Argentum’s Senior Living Executive Conference, which is being held virtually this week. The panel discussion, held Wednesday, was moderated by Legend Senior Living CFO Chris Wettig.
But the industry has also learned much more about operating in a difficult environment during that time, and providers such as New Perspective and LCS have learned that these pressures can be mitigated with some skill and careful attention to detail.
Covid-19’s ‘budget busters’
While senior living providers across the country have felt the sting of Covid-19 in their operating budgets, not every provider was hit the same way.
One common theme — and perhaps an unsurprising one — isthat occupancy decreased across the board earlier this year as outbreaks spiked, driving down topline revenue. That was true even for providers with waitlists, due to the logistics of moving in residents during shelter-in-place orders, Blumenthal said.
But the drops in occupancy weren’t uniform, according to the study. At the low end, providers in the study shed about 200 basis points of net occupancy, or 2%. At the high end, it was closer to an average of 900 basis points, or 9%.
At the same time, providers dealt with significant new expenses related to PPE, sanitization, Covid-19 testing, overtime, agency staffing, childcare stipends and in some cases, telehealth. And, providers that saw the greatest occupancy losses also tended to see higher labor costs, according to the study.
As with with occupancy, expenses varied from community to community, with differences driven in part by the cost of testing residents and staff for Covid-19. Some operators are reporting spending about $500 a week per community, while others are reporting as much as $15,000 a week.
“Those are all things that ultimately converged upon a massive budget buster,” Blumenthal said.
And those are just the costs that providers have incurred so far. In the months ahead, the senior living industry may also get hit by the rapidly increasing cost of liability insurance — as much as a 20% premium increase with Covid-19 carve-outs.
“We may get our arms around what we need on a sustainable basis going forward, [but] I think occupancy and liability are going to create huge challenges for operators,” Blumenthal said.
Mitigating the impact
While providers might not be able to stop their expenses from rising this year, they are not helpless, either. Senior living companies such as Des Moines, Iowa-based LCS and Minnetonka, Minnesota-based New Perspective have learned that, with attention to detail and discipline, these pressures can be managed as the pandemic drags on.
To start with, providers need good visibility of their budgets before they can hope to mitigate the financial impact of Covid-19, according to Diane Bridgewater, executive vice president, chief financial and administrative officer at LCS. In March, the company began grouping its Covid-19 costs into two buckets: labor, and all other expenses.
“Very early on, it became pretty clear that we need to start tracking where we have costs that are specifically being driven by Covid-19,” Bridgewater said.
Some of what senior living companies can do to mitigate the financial impact of Covid-19 is likely common sense for seasoned operators. For instance, where New Perspective had several communities ready to open amid the pandemic, it chose to move forward with soft openings that eschewed the standard pre-pandemic ribbon-cutting ceremonies and moved in independent living residents before others, according to President Chris Hyatt.
That allowed the company to open the communities with lower-than-normal expenses, such as marketing and variable labor cost, Hyatt said.
The company took a scalpel to its operating budget, making adjustments from trimming travel and halting non-essential CapEx to revisiting existing contract service offerings to potentially renegotiate terms and conditions to lower costs. New Perspective also reassessed its technology and hardware, such as its commercial dishwashers. And in some cases, the company chose to pay for them through extended leases with buyout options rather than outright purchases in order to preserve cash on hand.
Another piece of advice Hyatt had for operators: make sure you are collecting all of your rent and care fees owed, and stay disciplined on market rates. Operators should keep track of annual resident rate increases, care levels, meal plans and ancillary income to make sure they’re not leaving any revenue on the table.
While discounting may bring residents through the door, the cost of safety and care are higher now than in any time in recent memory, and some providers literally can’t afford to offer concessions. In fact, Healthtrust has found that the top determinant of net operating income (NOI) increase is discipline on rates.
“Don’t give the store away, because you can’t get it back so quickly,” Blumenthal said. “If your top line gets hit, it’s much harder to recover, and you can do all the expense mitigation you want but you’re still going to be suffering.”
Also crucial to mitigating the financial impact of Covid-19 is taking advantage of federal stimulus, such as the recent paycheck protection program (PPP) or the Provider Relief Fund Phase 2 General Distribution allocation. In vying for federal dollars, operators must think of it as assembling a jigsaw puzzle, according to Bridgewater — but doing so is sometimes easier said than done.
“One of the great challenges of Covid is being able to understand the programs and the guidelines,” Bridgewater said. “Just the moment when you think you’ve got one understood, an additional fact, or an additional interim final rule related to the application of the program, comes out.”
And that is in addition to other layers of complexity, such as how the stimulus applies to various product types, and the complicated and fragmented nature of the senior living industry. That is why senior living operators would do well to follow the lead of the industry’s various trade associations, such as Argentum, ASHA and LeadingAge.
“’I’ve never seen the three organizations come together like they have during these times,” Hyatt said. “So, I want to give a big hats-off to all of them for what they’re doing … in helping us with funding, testing, PPE.”