Even as the senior living industry recovers from the Covid-19 pandemic, headwinds from inflation and the lack of further federal aid could force some operators to make tough decisions in the months ahead.
Inflation of the cost of goods and services, coupled with the dwindling possibility of more federal relief dollars, have put pressure on operators’ bottom line and disrupted margins. For operators already struggling with occupancy recovery, that could prove to be an insurmountable challenge, according to Beth Mace, chief economist for the National Investment Center for Seniors Housing and Care (NIC).
“You can only withstand the pressure of low occupancy while your expenses are rising and squeezing that NOI for so long,” Mace said Wednesday during a NIC webinar.
In some cases, that distress has led to a change in operators at some communities. For example, Arcus Healthcare Partners closed on a 118-unit assisted living and memory care property in receivership, with Omega Senior Living as the operating partner. Looking elsewhere in the industry, Arcus CEO Brian Beckwith said he is “surprised there haven’t been more” receiverships born out of distress.
“We’re at the point now with some of the lenders in the industry, where we are reaching the end of kicking the can down the road,” he said. “So, I think we’re in a position where there will be more opportunities like this … and it’s time to figure out what we are going to do with capital restructures that have to occur in the industry.”
In the near-term, Mace believes interest rates will likely approach 2% by year-end and possibly to 3% or 3.5% by “sometime next year” as the federal government looks to tamp down on inflation. The Consumer Price Index (CPI), which was released on Wednesday, shows year-over-year inflation at 8.3%.
“The [federal reserve] is taking this really seriously in terms of what they’re going to do to interest rates to slow demand and slow the overall economy,” Mace said.
At the same time, the prospect of a recession is now on many senior living companies’ minds, and CEOs of public senior housing companies have said as much on recent earnings calls.
Average occupancy for senior housing providers in the 31 primary markets tracked by NIC MAP Vision hit 80.6% in 1Q22. But a little fewer than half of those properties are reporting occupancy rates below 80%, with some as low as below 60% occupancy.
“There’s got to be a little bit more of a time to face the reality of the situation, especially since occupancy hasn’t rebounded immediately,” Beckwith said.
The headwinds of rising costs, staffing shortages and lower-than-expected occupancy recovery have led to “a lot” of small operators in rural markets “really struggling,” Hanson said.
Staffing in particular is “something that is a real problem.” for senior living operators in smaller markets.
“If those go belly-up, it’s going to have a dramatic impact on some of those little towns out there,” he said.
He added that these operators “really struggled to deal with all the regulatory environments and the changes, because they didn’t have a lot of the back-office backbone to help facilitate the rapidly changing environment.”
On the other hand, companies with robust corporate culture and training are better-equipped to handle such challenges, and Hanson said “those are going to be the companies that are successful long term, and in providing that level of care that we’re all seeking.”
Adding to senior living operators’ woes is the fact more federal relief seems unlikely. And with mid-term elections just months away in many states, the window of opportunity for more legislation aiding the senior living industry could be closing.
“Without that support, I think we’ll have more ‘Come to Jesus’ meetings,” Beckwith said.
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