Full occupancy, wider margins, improved operations — these are three top goals of Sunshine Retirement Living CEO Luis Serrano in 2023.
Sunshine operates 41 communities across 18 states.
“We expect the communities that we opened during the pandemic to be at 100% [occupancy] by the end of this year, and I think we are on track for that,” Serrano told Senior Housing News. “We obviously have to get very creative.”
For Serrano, part of getting creative is landing on resident rates that prospects and their families don’t find burdensome, but that also help elongate the company’s margins in light of high expenses. What is certain, though, is that resident rates must rise with expenses accordingly.
“It’s no secret that the industry is leaning on restructuring part of the cost that we’ve had over the last two years on the residents,,” Serrano said. “We have to do that if we want to stay in business and the vast majority of our residents understand that.”
With investors shortening the runway for distressed properties, Serrano said the industry is simply going to have to recover lost margins one way or another, despite the fact that the process could “take us one or two years.” And while some have questioned whether the industry truly can return to pre-pandemic margins, Serrano believes that they can — and must.
“If the industry is going to stay healthy, we need to go back to the margins that the industry was making prior to the pandemic,” Serrano said.
He added: “I’m optimistic about the future and I think we’re rowing in the same direction and we will be able to get back to the golden age of senior living over the next three years.”
Rebound continues, margins a priority
Labor is one of, if not the biggest cost drivers in the senior living industry in 2023. To that end, Serrano said Sunshine was able to eliminate all agency labor costs across its portfolio in the last 12 months. But he is preparing for a long staffing slog ahead.
He added that he felt “the only way” to get back to pre-pandemic margins would be if Congress eased immigration restrictions and allowed more people into the country to live and work. But without federal action — seemingly unlikely in the near future with the new Republican-controlled House — Serrano estimated that labor issues, including staffing shortages and low associate retention rates, could persist for up to the next five years.
While Serrano wouldn’t disclose exactly what he called “secret traits”’ in the company’s success in solving labor issues across its portfolio, he noted that Sunshine focuses on creating “the right environment” for employees, including through distinct career paths. That’s led to a reduction in employee turnover by offering increased incentives for staff.
“We need to improve employee satisfaction and employee loyalty,” Serrano said. “I think that’s very-much needed in the industry and it’s not rocket science.”
Despite staffing challenges, revenue for the operator is up thanks to a resurgence in the company’s memory care communities, a sector hit hardest during the pandemic. While expenses are still elevated beyond where Serrano would like them to be, costs aren’t ballooning like they were earlier in the pandemic and certain trends are heading in the right direction.
“Revenue increased month-over-month for the last nine months, which is very encouraging,” Serrano said. “Margins are definitely increasing, but we’re not there yet although the path is positive.”
As far as occupancy goes, Sunshine’s portfolio and occupancy narrative is largely in-line with the wider industry’s build-back. The company ended 2022 at 87.5% occupancy in IL and AL, and 79% occupancy in memory care.
That’s up from pandemic lows for memory care “in the high 60s” while IL/AL remained in “the low 80s,” Serrano said.
Sunshine has increased rates between 8% and 10%, in-line with the industry trend that’s passed high costs onto residents, ranging between 7% and 13%, with increases varying depending on local market conditions.
Optimization over new development, M&A opportunities arise
Though Sunshine founded its own development company in the pre-pandemic days, the operator is going to remain on the development sidelines in the short-term given market conditions today. The pandemic slowed the company’s development pipeline and the development company was mothballed, Serrano said.
“The only thing that makes sense would be to buy communities in distress because the acquisition price is cheaper than development prices,” Serrano said. “You have to be a little crazy to do new development right now in my view.”
Instead, Serrano sees opportunities to buy rather than build. The industry is tilting towards a buyers’ market, and that ultimately could lead to a “once in a lifetime opportunity” to get into the senior living industry or expand in it, he said.
“Nobody wants to catch a falling knife, and I think operators and brokers are realizing the worst is behind us,” Serrano said. “There’s opportunities out there to acquire properties at 60% of replacement cost which is historically a phenomenal deal.”
With no new development on the horizon, Sunshine will look to improve operations and push for optimization in 2023, from improving care offerings to expanding services and increasing value for residents as they pay higher rates on their units.
“If you can improve the offering and make them happier, I think that’s a fair deal,” Serrano said. “Our focus right now is back to basics and focusing on the core of our business.”
In 2021, Sunshine launched a new wellness programming model within its memory care communities, something Serrano said has been a success. That’s come through educating and increasing training for on-site staff, from nurses to activities directors. The new wellness offerings have been a “key differentiator” for Sunshine, Serrano added.
Each community has spaces known as “sensory spas,” or areas designated with natural light, auditory and aromatherapy to help induce those living with varying forms of dementia into a state of calm, which can help lower the use of medical interventions.
“It’s been very successful and because we specialize in memory care, we compete very well with other operators that don’t have a therapeutic, educational program for residents living with Alzheimer’s,” Serrano said.
Looking ahead, Serrano said he is watching the ways lenders react to maturing loans within the next 12 months and taking note of whether they refinance at a higher rate or face foreclosure and potential sale.
“I don’t know if a lot of communities can support an 8% loan,” Serrano said. “Lenders are either going to work with operators in a very substantial and thoughtful manner or the banking industry is going to end up being the largest owner of senior living real estate in the country.”
But even with those tough realities facing senior living operators, Serrano sees a light at the end of the tunnel for the industry.
“We’re very close and everyone is looking forward to that after the nightmare that we went through with Covid,” he said.