What’s Behind Recent Senior Living Margin Expansion – And What Lies Ahead

This content is available as part of your SHN+ membership

Third quarter earnings calls highlighted the pain to be inflicted by “higher for longer” interest rates, but the calls also revealed positive trends related to the improving operating environment for senior living.

In particular, leaders with Welltower (NYSE: WELL), Ventas (NYSE: VTR) and Brookdale (NYSE: BKD) zeroed in on improvements in operating expenses versus revenue.

“We continue to focus on the delta of RevPOR [revenue per occupied room] minus ExPOR [expenses per occupied room] as the single most important operating metric to optimize,” Welltower CEO Shankh Mitra said on the company’s earnings call.


Ventas’ leadership is focused on achieving a RevPOR to ExPOR spread of 2% to 3%, Executive Vice President, Senior Housing and Chief Investment Officer Justin Hutchens said. And Brookdale execs likewise focused on progress in managing expenses while driving revenue.

“I am pleased to say that our continued progress towards full operational recovery is making its way down the income statement and was not only top line,” Brookdale CEO Cindy Baier said on the provider’s earnings call.

In fact, executives with multiple organizations indicated that expenses are becoming more manageable, occupancy is improving, labor pressures are easing, and margin is expanding, although still lagging pre-pandemic levels.


In this week’s exclusive, members-only SHN+ Update, I analyze some of the earnings results and offer key takeaways, including:

  • Inflationary pressure on expenses is easing 
  • With agency use largely contained, labor management efforts are shifting
  • Pricing power remains strong but varies by market segment
  • The occupancy outlook is especially strong

Heartening results

Welltower’s senior housing operating (SHO) portfolio numbers were particularly gaudy in Q3, as the REIT reported the lowest ExPOR growth in the company’s history, at 2.4%. Mitra attributed this largely to labor-related costs taking a “substantial step down” from recent quarters, with compensation per occupied room increasing by 2.7%.

Meanwhile, to close out a quarter of accelerating occupancy growth, September’s occupancy gains were the highest for Welltower in the last two years. Occupancy for stable SHO assets reached 81.8% as of the quarter’s end.

The REIT also benefited from continued “outsized rate increases,” Mitra said. RevPOR in the same-store SHO portfolio increased 6.9% year-over-year.

Same-store margins increased accordingly, expanding by 330 basis points year-over-year, which also was a record for Welltower. The SHO portfolio’s same-store NOI margin of 25.6% was the highest since before the pandemic.

Results for Ventas (NYSE: VTR) likewise trended in the right direction. Senior housing operating portfolio (SHOP) NOI grew by 24% in the United States. Occupancy growth in the portfolio was spurred by move-ins at 120% of 2019 levels. Same-store SHOP average unit occupancy reached 83.6%. RevPOR expanded by 6.4% year-over-year for U.S. SHOP properties.

“The pricing power over the past few years has really been very, very good,” Hutchens said. “We have, at a relatively low occupancy, this broad-based demand [that] is allowing for appropriate pricing really to ensure that we can cover all the costs associated with delivering care and services and to deliver growth for the business.”

Cash NOI margin reached 25.1% for Ventas’ same-store SHOP assets, representing a 230 basis point year-over-year increase.

On the operator side, Brookdale exceeded its guidance for RevPAR, which increased 10.8% year-over-year. RevPOR increased 9% year-over-year. Third quarter move-ins exceeded the company’s pre-pandemic pace by 5%, and same-community occupancy increased by 120 basis points sequentially, to reach 77.6%. This is compared to the industry’s 60 bps of sequential occupancy growth, as reflected in NIC data, Baier pointed out. And resident fee revenue increased by more than 10% year-over-year, reaching $717 million.

And CFO Dawn Kussow highlighted decreases in same-community facility operating expenses.

“Year-over-year labor costs increased approximately 1% and other operating expenses increased just under 6% compared to the nearly 11% revenue increase,” she said. “This impressive revenue to expense spread drove 580 basis points of third quarter adjusted same-community operating margin growth to 25.4%, which excludes the impact of other operating income.”

Challenges certainly remain, but the generally improving operating environment was a consistent theme across earnings calls for other companies as well.

“Metrics continue to improve, showing that both AL and SNF operating environments are improving,” Stifel analysts wrote of the LTC Properties (NYSE: LTC) results. And of NHI (NYSE: NHI), the Stifel team observed that the REIT’s “SHOP improvement is very notable,” and NHI’s executives said “the operating environment is improving as occupancy is rebuilding and labor pressures are more manageable.”  

Building on the trends

The third quarter provided reasons for optimism, but owners and operators can hardly rest on these achievements.

“While we are pleased that margins are moving in the right direction, we are also mindful that our profitability remains significantly below pre-Covid levels and below where we believe the industry can attract external capital investment on a long-term basis,” Mitra said.

And continuing to build momentum will not be a simple matter. Market dynamics and economic conditions should provide some tailwinds, but providers will have to keep grinding to make further progress.

Labor provides a case in point. Operators have been able to bring costs down in part through efforts at reducing contract labor. For Brookdale, contract labor expense was 35% lower in Q3 than in Q2 of this year. Going forward, “most material labor improvements” will be achieved through retention and reduction in overtime, Kussow noted.

Brookdale is far from the only provider that has been able to drastically reduce agency labor, and these organizations all are facing this same pivot that Brookdale is doing, to other aspects of labor management. Given the industry’s poor track record on retention, I would not say that they have a reliable playbook for this endeavor. The winners likely will be those willing to invest and adapt, perhaps by leveraging more sophisticated technology to utilize labor more efficiently and boost retention through better working conditions. Certainly, this is Welltower’s assertion.

“At one site one of my team members worked at, the executive director spends over three hours per move-in inputting the documents into the antiquated systems,” Welltower COO John Burkart noted. “Our platform has all the documents in e-form and the modules are fully integrated, reducing the potential for errors and saving time, which enables the site leader to focus on the customers and employees, not paperwork.”

Brookdale has implemented “initiatives and programs” to drive retention, and has seen full-time hourly employee turnover improve more than 10 percentage points year-over-year – although the company is “not yet where we want to be,” Baier said.

Then there’s the issue of pricing power. At the high end of the market, pricing power appears to be holding steady and strong. Welltower is focused on this demographic and “hasn’t seen any pushback” on rate increases, Mitra said. He noted that senior housing has historically raised rates more conservatively than multifamily, and that increases are “much more sustainable than you think.”

But Mitra also acknowledged that a ceiling likely does exist for raising rates paid by “a long-term tenant in the middle of the market.” So, improving the ratio of revenue to expenses could become tougher for providers serving this less affluent demographic. Brookdale – while not operating as squarely in this middle-market space as some operators – is not increasing its new selling rates this year as much as last year.

“From this we expect the fourth quarter sequential change in RevPOR to more closely reflect pre-pandemic performance instead of the sequential step-up in RevPOR we reported in the prior year,” Kussow said.

Expense optimization becomes all the more critical for these operators that can’t keep pushing rates aggressively. Like reducing turnover, this expense management will be a challenge, but providers should be aided by improvements in the economy.

“Expenses are expected to continue decelerating following further normalization of labor market conditions and continued slowing inflationary pressure,” Raymond James Analyst Jonathan Hughes wrote.

And perhaps the biggest and most certain boost to providers will come from continued occupancy improvements. The population of people aged 80 or older is set to grow 24% in the next five years, as CEO Debra Cafaro pointed out on Ventas’ earnings call. Meanwhile, 40% of NIC’s primary markets are experiencing negative inventory growth, according to data shared this week at the Senior Housing News BUILD conference in Orlando.

“We’re facing the most favorable supply-demand fundamentals the industry has ever experienced. Senior housing starts are at cyclical lows and likely to go lower due to tightening credit conditions,” Cafaro said.

Of course, lack of supply will not magically fill beds, and operators also have to be improving their sales processes and procedures. But as they manage to pass the 80% occupancy threshold, the marginal increase in expenses is “relatively low,” as Burkart noted on Welltower’s call.

“Many of the expenses are fixed,” he said. “Each property has an executive director, head chef, maintenance director, regardless of the occupancy level. The bulk of maintenance, utility and many other costs are largely factored in at 80% occupancy.”

The mantra “survive to ‘25” has been invoked several times at the BUILD conference this week, in light of the financial challenges imposed by higher interest rates, tightening credit, looming debt maturities, and other issues.

Those financial pressures will weigh heavily on some operators and lead to some painful portfolio contractions or exits from the sector. But if current conditions continue, many other operators should be able to not only survive the next year but make meaningful progress in the quest to regain pre-pandemic profitability.

Companies featured in this article:

, , , , ,