How Senior Living Providers Are Protecting NOI While Occupancy Continues to Suffer
One of the main contributors to net operating income (NOI) is occupancy rates. While occupancy suffers with continuous struggles nationally, mostly due to oversupply, there are other ways that the company operators can continue boosting their NOI.
Because this is the case, those who focus too much on occupancy as a metric for the health of senior living communities — or the industry as a whole — are looking at an incomplete picture. Indeed, even as nationwide occupancy levels plunged to historically low levels, NOI grew in most senior housing segments between 2013 and 2018, as operators adjusted rates and managed expenses
According to the data of the National Investment Center for Seniors Housing & Care (NIC’s) the amount of new construction the industry was experiencing resulted in occupancy going down from Q4 2014 to 87.7% in Q2 2019, and started picking back up during last quarter, going back up to 88%.
The data retrieved from 2019’s State of Seniors Housing’s report had shown that there was a growth of1.4% NOI growth for its same-store sample of 485 buildings across the care continuum between 2013 and 2018. Independent living and assisted living communities with memory care led the way, with 2% NOI growth during that span CCRCs, assisted living with memory care and communities with a mix of independent living and assisted living saw NOI gains ranging between 1.5% and 1.6%. Assisted living communities, which have been particularly hard hit by new supply, were an outlier: They saw a 2% decrease in NOI.
This does not mean that everything is great in the senior living industry. What’s more, over the past year labor expenses began to rise and the NOI on all property types that had been being tracked by the State seniors Housing were decreasing in all similar stores except for CCRC’s. Standalone memory care has dropped as much as 17.4%, while the margins could do nothing but take a beating. “As a whole, the senior living industry could very well be facing an operating environment that will be known in the future as their hardest in history,” according to what David Schless, the President of the American Seniors Housing Association (ASHA) had stated to the Senior Housing News recently.
It is not possible to capture all industry situations are with only a glance, but there are several providers still maintaining their NOI growth. It’s been noted that during the time of aggregate and margins, including decreased profits, that around 40% had the same store samples, and reported a minimal amount of improvement in their overall NOI,” according to the State Seniors Housing report of 2019.
Watermark is based in Tucson, Arizona and they focus on something referred to as the “economic occupancy,” which is the difference in the amount of rent they collect from tenants and the amount of rent they would be collecting should tenants pay all of the market prices of rent. This makes it possible for Watermark to have a better understanding about the 58 communities in their portfolio and how the maximum NOI will affect the community, although it may mean that occupancy may be sacrificed in order to obtain,” according to what Schachter has stated to SHN.
According to Bryan Schachter, the director over strategic investigations on behalf of Watermark Retirement Communities made the statement to SHN that “it is misleading to only dwell on occupancy and/or rates.”
When addressing economic occupancy, one of the methods used by Watermark is differential pricing. This method gives more flexibility to the company for reaching higher occupancy and/or rates and keeping the rate concessions down to a minimum at the same time.
“[Communities] that consist of having good teams
positioned with strong programming will be able to
withstand the challenges of labor pressures. This gives
the ability to get over the excitement of getting in new supply.”
By: Bryan Schachter, Director of Retirement Communities (over Strategic Investments) of Watermark.
Watermark raises the rates on higher premium units to offset the units that are given discounts – the units that do not consist of a good view, are considered to be common spaces, and or does not consist of amenities. This balances the effect of concessions in order to reach higher occupancy and rates.
Schachter stated that, “locating a balance will eventually lead to a stronger end result.”
Economic occupancy has been an primary focus for many Senior Living companies. The Oregon based provider ‘Clackamas’ operates a total of seven different communities throughout five different states; the focus is on the middle market, according to what President Chip Gabriel. They have decided to tie its annual rate increases for existing residents to property tax hikes — typically around 3% in recent years.
Impacts are made on generations during turnovers and having apartments that are empty and compete with the providers of price-sensitive residents. They may even use a market-specific approach with rent concessions by explaining to current tenants the reason new move-ins get different rates. Over a period of time, the market rate for all will balance out.
Watermark are discrete with rent concessions as they risk economic occupancy while building the residents up, however, new move-ins erode revenue. Communities often feel pressured into offering new residents’ concessions in order to increase occupancy when rates are in the 80’s and 90’s.
Watermark has a market to market policy and providers use the intra-market competition to base their prices on. Schachter stated that, “preferences may include short term concessions as opposed to permanent by offering a free month or waiving some or the entire deposit fee.”
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