‘No Margin’ Problem Worsens Senior Living Owner, Operator Friction

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If I had any hope that tensions are easing between senior living operators and their capital partners, that was dispelled at Senior Housing News’ recent BRAIN conference. 

There, one operator executive told me that he was glad capital providers were not at the event — so that he could complain about them to other attendees.

This was said half-jokingly, but the issues underlying the comment are serious, and they came up several times over the course of the day.


A different operator executive divulged that even at 80% occupancy, their company still is not profitable, the inflexibility of capital partners is contributing to the problem, and they fear a coming wave of operator failures.

Such fears seem understandable, as recent weeks have brought further evidence of the deepening distress facing the senior living sector. Bankruptcies in health care are about three times higher than they were in 2021, according to a new report from Gibbins Advisors. Senior care and pharmaceuticals account for about half of total 2023 bankruptcy filings.

Last week, we reported that senior living marketing firm Attane is shutting down, just two years after the firm was created through the combination of GlynnDevins, Linkmedia 360 and Bluespire.


In this week’s exclusive, members-only SHN+ Update, I delve more deeply into the issue of financial distress in the sector and the friction between owners and operators, and share some key comments and takeaways, including:

  • Optimism over rate hikes is being quashed, or at least tempered, by expense increases and slower occupancy gains
  • Ownership group efforts to improve operational performance are sometimes aggravating the problems
  • Some capital providers are“utilizing hope as a strategy” rather than restructuring deals

Dimming optimism on margins

The year began with many senior living operators making further substantial rate hikes after aggressive increases in 2022. Now, it appears that these higher rates have helped buoy margins and driven profitability — but only for some operators, with certain types of buildings, in particular markets.

Consider the case of Watermark Retirement, which increased rates around 8% this year, according to Chairman David Freshwater. As of May, the company’s luxury, Elon-branded communities were achieving “pretty decent margins” at 70% to 75% occupancy, Freshwater told me. But some of the company’s communities serving a less affluent clientele were at full occupancy and had zero margin.

Operators that have less diversified portfolios than Watermark, with few or no luxury communities, now are facing particularly daunting prospects. They have less ability to push rate, for a few reasons. For one, their customer base simply might not be able to afford any more price increases. And providers are also beginning to compete more on price than they have been in the recent past. In Q1 2023, nearly 64% of communities polled by Bild & Co. were offering no pricing specials, but in Q2, that fell to just 54% of communities polled by the firm.

And, occupancy gains are becoming harder to achieve, as described in a note put out by Stifel analysts this week:

“To get back to pre-pandemic levels, occupancy needed to increase by what we call ‘seasonality-plus,’ or typical seasonality (weakest in 1Q, improving in 2Q and strongest in 3Q, decelerating in 4Q) plus an additional amount to recapture the COVID decline. The plus part now seems to be slowing.”

Expense pressures are the final ingredient in this perfect storm. The Stifel team is concerned that margin improvement could be dampened by “higher costs, including labor, taxes and insurance.” Such fears are justified, based on the conversations I had at BRAIN with several operational leaders. One exec who was at the event painted a bleak picture on the expense front, saying:

  • Labor costs have “superseded any reasonable increases to rents.”
  • Insurance costs are “rising faster than they ever have,” and “no matter if you have zero claims, you are going to see increases that are often 10% to 20% more than the year prior.”
  • Litigation has been on the rise since the onset of the Covid-19 pandemic; the operator is “pursued by ambulance chasers at every corner” and bearing high costs to deal with “frivolous claims.”

This executive also believes that compressed margins will persist for several years, or might even be “the new reality” on a permanent basis.

‘That’s broken’: Tensions worsen between owners, operators

During the height of Covid-19, many ownership groups extended flexibilities or additional financial support to operators. However, not long after vaccines brought the pandemic under control, tensions between owners and operators began to flare. This led to renewed concern over misaligned interests and the perceived inadequacy of typical management fees, prompting sessions focused on the issue at industry events, including at the 2021 NIC fall conference.

If the talk at BRAIN is any indication, the situation has gotten worse. The heart of the problem appears to be a disconnect between operators who believe that lower margins are currently inevitable and might be permanent, and owners who believe that pre-pandemic margins are still attainable.

As one operator exec told me, “What I am seeing now is investors, REITs and PE are doing anything they can to push operators to get the margins they promised on projects years ago when they raised the capital.”

One strategy that owners are employing, according to this exec, is to bring on someone with operational experience to manage the operators in their portfolio. The exec I was speaking with quoted one of their peers in the industry, who said this play feels like, “They hire an operator to beat up the operator.”

In communities, a “too many cooks in the kitchen” scenario is playing out, the exec explained. Executive directors are taking direction from the ops person brought in by the owner as well as the leadership of the actual management company, which creates confusion.

Furthermore, owners in some cases are cutting management fees, the exec told me:

“I have a building now where the owner wants our attention constantly, but they pay us less than an ED wage to manage the property. That’s broken.”

Two of the operational leaders I connected with at BRAIN agreed that the typical senior living management fee — 5% of revenue — is no longer viable.

“It’s not reasonable to expect a top-performing community when you are not willing to pay the operator enough so he can afford the talent and resources you expect from them,” one of them said.

This is hardly a revolutionary idea. Leaders on both the operators and ownership sides — including The Springs Living CEO Fee Stubblefield, Aegis Living CEO Dwayne Clark and Welltower CEO Shankh Mitra — have made this point in recent years.

But there is a disconnect occurring, one of the execs at BRAIN told me. They said that some owners — REITs in particular — recognize the reality of compressed margins, yet are not willing to “change terms or structure to accommodate.”

The exec believes that capital structures need to be altered to provide “greater certainty and chances for upside” to operators; but instead of restructuring, too many ownership groups are “utilizing hope as a strategy.”

“I think there is some detachment from the realities in the field, that they feel 30+% margins will return, but when pressed for the ‘how,’ they struggle — like we do — to achieve that,” the exec stated.

This operator fears that change will come only through a series of operator downfalls that will reorder the landscape.

The comment called to my mind a conversation I had earlier this year with the CEO of a large owner of senior living properties. This CEO said that “creative destruction” is a feature of capitalism and might be needed in the senior living sector at the moment.

This CEO might have a point — I think the creative destruction argument is basically a version of the claim I often hear from operators and owners alike during challenging times like these, that such periods are a crucible in which strong organizations get stronger and weak ones fail, and the industry will emerge better after the pain.

There’s no question that we’re already seeing destruction occurring across the sector, as shown by the latest distress statistics, and the many LinkedIn posts I scroll past every day from industry pros who are out of a job because their former employer is no longer in business.

And there is already some “creative destruction” underway in the anatomy of agreements between operators and owners. This week, Welltower announced it is dissolving its joint-venture agreement with Revera, the owner of Sunrise Senior Living, and launching a new operating platform with Cogir in Canada.

While details on the operating platform are still thin, the new platform and structure is the culmination of a years-long process and will “truly transform our company in the next chapter of this evolution,” according to CEO Shankh Mitra. Thanks to those efforts, “top-line focused contracts” in the company’s portfolio have largely been converted to “bottom-line focused contracts.” And Mitra added that almost all of the company’s operating contacts are now in RIDEA 3.0 and RIDEA 4.0 structures.

Welltower also is taking swings at new ways of harnessing data to drive more sophisticated, and hopefully profitable, operations. And the Toledo, Ohio-based REIT is not the only ownership group seeking to innovate; models built around managed care, such as the effort from SLTC, are another example of experimentation.

But outside of these examples, I wouldn’t say that exciting ideas about how to create better owner-operator alignment, and replace the standard management fee structure, are flourishing across the industry. This leads me to fear that many owners really are just crossing their fingers and throwing extra people at the problems, while operators are starved for capital and lack the resources to raise their games.

In other words, we are already witnessing destruction in senior living. In the area of owner-operator alignment and capital structures, I hope we also start to see even more creativity.

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