Q3 Senior Living Outlook: Providers Confront ‘Long Covid’ of Lower Margins, NOI

The senior living industry is undoubtedly in a better place in 2022 as operators continue to grow occupancy. But at the start of the third quarter of this year, many are still grappling with the pandemic’s lingering effects.

Occupancy is on the rise across the industry, and many senior living operators have reported seeing sales leads at or above pre-pandemic totals. Meanwhile, there is a sense of optimism and hope that the industry is moving into a new era; one in which Covid cases can be mitigated and therefore not pose a significant challenge to operations.

But that growth in occupancy has come with a tradeoff of higher labor expenses. And while many operators have had success raising resident rates this year — and many plan to do so next year — that alone wasn’t enough to forestall a widespread hit to margins and NOI across the industry.

As the third quarter of 2022 officially begins Friday, operators including Avanti Senior Living, Commonwealth Senior Living and Aegis Living are focused on continuing the momentum they have felt in previous quarters, and have targeted expense reduction, margin expansion and NOI growth as part of those efforts.

At the same time, they are still not completely back to full financial health — a trend that The Springs Living CEO Fee Stubblefield has likened to an industry dealing with “long Covid.”

“We are feeling better, but still feel a little groggy financially,” Stubblefield told Senior Housing News. “Our financial teams are constantly working to adjust for the high costs of labor and supplies while working to raise revenues in ways that are manageable by our customers.”

‘We’re the tortoise, not the hare’

As they enter the third quarter, some operators are doing so with a renewed sense of optimism. Much of that has to do with the fact that occupancy rates seem to be trending back toward the pre-pandemic baseline, albeit at a slow and steady pace.

Average senior living occupancy rose to 80.6% in the second quarter of 2022 as the industry held its own against Covid-related headwinds, according to NIC MAP Vision data. And in May, Riverside, California became the first of the 31 NIC MAP primary markets to reach its pre-pandemic conditions, with average occupancy at 86.3%.

In the Pacific Northwest — often seen as a market that is favorable for senior living demand and penetration rates — operators are optimistic about what the coming three months will bring.

For instance, leaders at the McMinnville, Oregon-based The Springs Living expect 3Q22 “to be the best one in three years,” Stubblefield said.

Still, he cautioned that “while we are seeing positive trends and good indications for future growth, the numbers don’t yet reflect the optimism our teams are feeling.”

“Occupancy seems to be bouncing along at 90% on average, but growth of net operating income seems anemic as we battle to prevent margin compression,” he added.

The view that slow occupancy growth is ahead is shared by Seattle, Washington-based Aegis Living, which is seeing a steady number of leads, “great tour activity and strong conversion,” according to Senior Vice President of Sales Jennifer Alexy.

“It is also wonderful to get back to a more normal cycle of seeing prospective residents who are starting their journey of considering assisted living a year or so prior to a potential move-in, versus only really seeing prospective residents with immediate needs,” she told SHN. “Having that balance is really a welcome change.”

Like Stubblefield, Avanti Senior Living COO Lori Alford is optimistic about census growth in the third quarter of 2022. But she is also taking the viewpoint that it won’t happen overnight.

“My philosophy is that we’re the tortoise, not the hare,” Alford told SHN. “And slow and steady is going to win the race.”

For the Woodlands, Texas-based operator and its seven communities, “slow and steady” means focusing on basic sales fundamentals and staying disciplined on resident rates. The company also is taking a focus on expense reduction.

Based a few states to the east in Virginia, Commonwealth Senior Living also feels the wind at its back with regard to occupancy growth in Q3, according to CEO Earl Parker. While he said January was “a little bit rough,” the operator saw steady occupancy growth in the months that followed.

Today, several of the operator’s 33 communities are above the 90% occupancy threshold, which the Charlottesville, Virginia-based operator considers stabilized. One of the operator’s buildings just had its best-ever month, hitting 92% occupancy in June.

And looking ahead, Parker expects those tailwinds will continue into the coming months.

“We’re expecting to see continued slow and steady growth,” he said.

And similar trends have played out elsewhere in the industry during the second quarter of this year. For example, Brookdale Senior Living reported occupancy of 76.2% as of the end of May. Brookdale leaders also said the Brentwood, Tennessee-based operator achieved a “milestone” in that it saw about 2,000 move-ins for the month.

Margins remain compressed

The flip side to all of the percolating optimism regarding Q3 is that, while occupancy is on the rise, margins and NOI are not always moving in tandem.

Much of that has to do with the fact that expenses for several senior living community line items — particularly food and labor — are sky-high.

More than one-half of over of respondents (58%) to a recent NIC executive survey said they anticipate their organization’s operating margins to increase in the near future.

Still, a little more than one-quarter of those respondents said they expect margins to drop between 1% and 5% in the near-term, with another 13% anticipating operating margins to contract between 6% and 10%.

Although many operators are focused on NOI and margin growth in the third quarter of 2022, they also believe that it will not happen overnight. As they grow rates, they are also careful not to give residents or their families price shock.

“Our financial teams are constantly working to adjust for the high costs of labor and supplies while working to raise revenues in ways that are manageable by our customers,” Stubblefield said. “All of this has led to headwinds for NOI growth, adjusting to the increased costs will take time.”

Commonwealth is taking a similar approach to margins in the third quarter. Like Stubblefield, Parker believes that rate and occupancy growth will ultimately help the industry return to more normal margins.

“As we see the buildings get back to that 90-plus percent occupancy, I’m confident we’ll achieve the margins that we intended to achieve and were achieving pre-Covid,” Parker said.

Meanwhile, Avanti is “getting creative” with expenses. Because cost inflation is something the industry often can’t affect, she is taking the approach that flexibility is key to operations in the third quarter of 2022.

“We can’t look at it like, ‘Here’s our food-cost per resident day,’” she said. “We have to look at this in a bigger way and really strategize and pay attention.”

Avanti is also confronting staffing challenges head-on. By offering perks like free meals and flexible scheduling, the operator has been able retain workers and therefore avoid using costly agency staff.

“We can hopefully offset some of these expenses and other areas where we have a lot of external forces at play,” she said.

At the end of the day, there is a sense that, if senior living operators can play offense with occupancy now, they will reap the benefits down the road.

“For us, the third quarter gives us an opportunity to play the long game and work to reinvent ourselves for the new reality of the market,” Stubblefield said.