Senior Living Margins Near Bottom As Volatility Drives New Transactions

For many operators, senior living occupancy and resident rates have grown in 2022. Margins have not followed suit.

While occupancy and rate increases have driven revenue higher in recent months, increased labor expenses and cost inflation of certain goods and services are hampering margin growth across the industry.

The squeeze on NOI margins puts senior living operators in a tough spot. On the one hand, many in 2022 relied on resident rate increases to help narrow the gap between pre- and post-pandemic margins, sometimes as high as 10%. On the other hand, there are open questions about how long residents and their families will accept such increases.


Exemplifying the issue at hand is Irvine, California-based MBK Senior Living. The operator has returned to its pre-pandemic average stabilized occupancy of 90% — but not its pre-pandemic margins, according to President Jeff Fischer.

“Our margins have dipped to about half of what they were pre-pandemic, even with occupancy being back to generally the same number,” he said during a recent webinar sponsored by Valuation & Information Group. “Knock on wood, I think we’ve hit the bottom point, and we’re focusing on chipping away and getting margins back on the uptick.”

But there are things operators can do in the meantime to elongate margins, such as eliminating agency usage, limiting concessions for new residents and appropriately raising resident rates.


“We’re focused on all of our expenses right now, predominantly labor,” Fischer said.

All the while, market volatility is driving more transaction activity across the industry at the tail end of 2022.

Blueprint Healthcare Real Estate Advisors Executive Managing Director Ryan Chase said that the fog of uncertainty over margins and other pressures has created a flurry of transactions in recent months that is leading to “one of our better years … in terms of the number of sales and dollar volume of sales.”

He added that Blueprint “probably has more active inventory than we have ever had in our history right now.”

“I think we have a little over $4 billion of active listings right now — about 140 deals, that’s probably about 500 properties, give or take,” he said. “Usually on a normal year, we’re probably below $3 billion at any given time.”

Margins and transactions

One big way operators have sought to regain pre-pandemic margins is by raising resident rates. And on that front, MBK has made progress.

“We feel good about where our revenues are going,” Fischer said.

MBK is seeing higher revenue than it did prior to the Covid-19 pandemic, thanks largely to rate increases in the neighborhood of 8% last year. And, as the operator’s leaders plan the company’s budget for 2023, they expect further rate increases ahead, though perhaps not as high as before. 

“This year has been pretty aggressive,” he said. “Next year will likely be still somewhat aggressive, but less so than this year.”

Real estate private equity firm Artemis Real Estate’s operating partners were in a similar boat as MBK. The company’s senior living portfolio hovered around 90% before the pandemic, but tumbled to about 75% during the worst days of Covid-19. Today, occupancy has returned to 90% and revenue is higher — but, like MBK, not necessarily margins.

“We have seen degradation in margin, but it’s really been care type-specific,” said Kelly Sheehy, senior managing director at Artemis Real Estate Partners.

Rich Lerner, who co-leads the NewPoint Real Estate FHA lending platform, said he has seen communities with margins ranging from 20% to as low as a near-breakeven 14%.

It comes as no surprise to anyone in the industry today that labor is in many cases the driving force behind margin compression. In addition to staffing costs being higher in 2022, Fischer said raw food costs are also still elevated.

Looking ahead, Sheehy does see more resident rate increases coming down the pike. But like Fischer, he believes they won’t be as high as they were in 2022.

“We’re not assuming outsized rent growth on the out years,” Sheehy said.

Despite an overall good feeling about revenue trajectory, Fischer said that MBK is “taking a more conservative approach,” when it comes to growth.

MBK in March was still aiming to nearly triple its portfolio to about 10,000 units, Fischer said on the SHN Transform podcast.

The operator added four communities in the early part of 2022 — three of which were through acquisitions and one through a management contract. But with the broader economic picture, MBK is approaching that goal with a more conservative mindset.

“As we’re looking at deals, as we’re looking at new acquisitions, we take a little bit more conservative approach because we can’t predict three-to-five years out, so we can’t estimate that we’re going to have higher increases,” Fischer said.

As a result, MBK is underwriting deals that account for its standard rate increases, rather than the high increases in 2022 and likely coming in 2023.

For senior living brokerage Blueprint, many of its big portfolio deals come in the long-term care asset class. But, in senior housing, the Chicago-based company closed deals involving some mid-sized regional portfolios.

Blueprint has seen a spike in sales for communities that are in the lease-up phase, which Chase noted is “a twist” to the current market. Many of these are communities that have substantially filled up in recent years, and now owners are looking to “test the market.”

Other deals the company has in the hopper include communities that were profitable before the pandemic and are in recovery, or communities that struggled before the pandemic and are struggling now.

” I’d say volatility, in general, creates transaction activity,” Chase said. “You wish that people were selling with 40% margins and everything was good and stabilized, but it’s a mixed bag.”

He added that, for companies looking to sell communities, now is “probably the best time” given looming interest rate increases.

“Right now is probably a good time if you’re considering [selling] versus rolling the dice for a year and maybe you take an unintentional option of a multi-year hold,” he said.

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