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Senior living operators have for the last three years felt the sting of higher expenses in their annual budgets as certain line items remain costly. Looking ahead, many operators do not see that changing.
While staffing still makes up the lion’s share of most operators’ expenses, the typical senior living profit and loss statement — also known as the P&L — now looks different than before.
For example, while the cost of staffing is an old and familiar pain point, rising cost of insurance for senior living stands out as a significant new expense pressure, Beth Mace, special advisor for NIC, told Senior Housing News.
“It’s related to all of the catastrophic climate related changes that we’re seeing, and the fact that insurance companies are changing the premiums that you pay, which is affecting the cost of insurance for operators as well,” Mace told Senior Housing News.
Despite the new expense landscape, there are some industry leaders that are optimistic about what 2024 will bring. They are all approaching the new senior living P&L with a belief that operators simply must cope with a new and challenging way of doing business.
Among those is 12 Oaks Senior Living President Greg Puklicz, who believes that stabilized staffing costs, higher occupancy rates and discipline on margins could lead to a strong year ahead.
“We just haven’t been able to rebuild margin this year, but I think that’s going to be something we continue to work on and focus on for 2024,” Puklicz said.
The new senior living P&L
Margins have compressed since the start of the pandemic as operators have grappled with a new slate of expenses that looks different than in previous years.
“Expenses have risen quickly and often not commensurate with revenues, which in turn has squeezed operating margins,” Mace wrote in a September NIC Insider newsletter. “And while some components of expenses are improving, others are not. This is due to several factors.”
Wage growth has outpaced the general rate of inflation. That is good for workers, but it also represents a new challenge for operators.
While setting wages higher can help offset turnover, at least in theory, staffing is already the largest portion of a typical operator’s expenses, with Mace estimating it to be around 60% of operating costs.
According to Puklicz, labor costs have been over budget for 2023 largely across the board, with care staff seeing the largest increase with 8% to 12%, depending on the position. The Dallas-based operator also has seen an increase in dining staff of between around 5% to 8%; and an increase in overtime pay, which has caused salary and benefit costs to grow by around 5% in 2023.
“We’re still mostly on budget, but we haven’t been able to find any relief and I don’t see any relief in the short or even long term there,” Puklicz said.
Food costs at 12 Oaks have risen between 5% and 6% since 2022. To mitigate and offset those costs, the operator changed menus to include more cost effective ingredients.
“One thing we found about a year ago was that if food vendors were out of a particular product, they were making substitutions and oftentimes we found … those substitutions were not cost effective,” Puklicz said.
As a result, 12 Oaks Senior Living now has a policy with vendors to prevent those kinds of changes.
Revel Communities is another operator that has had to be more creative with menus and food to keep expenses from ballooning.
“It takes a lot of collaboration and effort to analyze your food and beverage costs,” Danette Opaczewski, EVP, resident experience and COO of Revel Communities told SHN. “But once you do that, you come up with a healthy model that can keep your business aligned in a particular way with the food cost.”
A new major expense for operators has been the increased costs with insurance for this year.
“Just as labor scarcity has been a thorn in the side for senior housing operators for a very long time, it’s worth a moment to consider if the availability and costs of insurance will become a new thorn,” Mace wrote in September.
For senior living operators such as Tucson, Arizona-based Watermark Retirement Communities, insurance costs were highest in states like Florida. The cost of insurance is now affecting developments that were underwritten over the past few years, according to Bryan Schachter, chief investment officer of Watermark Retirement Communities.
Schachter noted as those developments are coming online, the operational insurance “is quite a bit more expensive” than originally planned.
Puklicz said 12 Oaks is budgeting for an additional roughly 15% increase for property insurance costs.
Operators including Watermark have also grappled with the cost of sourcing new capital, which has been harder to obtain amid the M&A slowdown and banking turmoil of 2023. Schachter said the increases to cost capital have been “really, really tough” on the company’s operations, and that even successful communities are seeing their debt service increasing between twofold and threefold over the span of a year and a half.
Information from NIC states the continued rise of capital comes from the Federal Reserve maintaining a rate between 5% and 5.25%, up from nearly zero in 2020, and rates are anticipated to be held through 2024 to try and further curb inflation. No new information on rate changes was available following a Sept. 19 Federal Open Market Committee meeting, Mace said.
A recent NIC executive insights survey from May showed that between 86% and 95% of operators across all care segments “saw increases either significantly or slightly” to their expenses in 2022. Those conditions are likely to be the case for the foreseeable future, Mace wrote.
“It’s likely that the P&L statement for many operators will remain challenged as 2023 continues to unfold,” she explained. “However, it is heartening to recognize that the top part of the statement is positioned nicely for many operators as demand and rate growth support revenue expansion.”
Reasons for optimism
Though expenses will remain a challenge for senior living operators in 2024, there are plenty of reasons for them to feel hopeful about the year ahead.
One is the fact that both senior living occupancy rates and resident rental fees are on the rise at the tail-end of 2023, with projections that the industry could fully recover to pre-pandemic occupancy by the end of 2024.
While there is much left to do with margins, Puklicz believes that if 12 Oaks can hit its targets for 2024, that will be an improvement over what the company saw in 2023.
Staff turnover is decreasing and the company has been able to trim its use of agency staffers, leading to overall operational savings, he added.
Cultural changes at Watermark have helped attract and retain workers, such as offering daily pay for hourly workers, and it has helped dramatically reduce the need for staffing agency expenses.
For example, one Watermark community in Arizona was paying around $30,000 per month to fill workforce shortages with agency staffers at the end of 2022. . That community has now been agency free for the past six months and has spent just $2,000 on agency expenses for the entirety of 2023, Schachter said.
Additionally, the community in question is up to 95% occupancy, which has brought it up to a 30% operating margin.
“As recently as 12 months ago it was losing money as a result of occupancy being a bit lower than where it is now,” Schachter said.
Hiring trends for 12 Oaks Senior Living have also reversed over the past year, with Puklicz saying the company has been on a 10 month positive run with hiring more staff than those that have left due to centralized recruiting efforts.
Alongside the general positive trends for employment, wage increases have helped slow general turnover, though the exact amount varies depending on the state. Opaczewski with The Wolff Company said that factor is something she is monitoring closely, especially in California, where the minimum wage was recently increased to $20 per hour for food industry workers, which may impact wages for other roles in the state.
Increasing rent rates has been another positive for companies as the year is closing out, which determines a significant chunk of the revenue brought in. 12 Oaks Senior Living has seen an average of a 10.4% increase in revenue per occupied room (RevPOR), particularly through renewals, Puklicz said.
“We’ve adopted a very aggressive strategy to increase in-place rent,” he said. “That’s been very successful in increasing revenue.”
Watermark has also been pushing rent increases for existing residents to offset expenses, varying between 6% to 10% depending on the community over the past several years according to Schachter, with this year averaging around 8%.
According to Mace, the final positive points for P&Ls this year are the general increase in occupancy rates are going up as a whole, demand is remaining strong and inventory growth has been relatively subdued. The inventory growth rate only grew 1.3% in Q3 year over year, a record low since 2012, according to the most recent NIC MAP Vision quarterly report.
Overall, though, overall improvements are anticipated across the board for P&Ls this year.
“We’re definitely seeing improvement because of the improvement in market fundamentals,” Mace said. “So that’s good, and it will probably stay the case to at least the end of this year, but it is much more difficult to finance future expansion.