How to maximize NOI

by Jeff Shaw

As more buildings open, operators fine-tune their income strategies

By Jane Adler

Amid a wave of new competition, investors and building operators are taking a closer look at how to boost net operating income (NOI). An increase in NOI not only flows directly to building owners, but it also drives property appreciation.

Gone are the days of easy returns, however. The quickly maturing seniors housing industry faces savvy, informed consumers who carefully shop around among a growing number of senior living options. That puts building operators under pressure to improve performance. 

The task isn’t as simple as generating NOI at multifamily properties. Seniors housing operators must consider the same factors as apartment managers — namely occupancies, resident turnover, unit mix, pricing and expenses. But they also must deliver costly food service, personal assistance and often even healthcare. 

The formula for NOI success today is extremely market dependent, according to industry sources. While they prefer not to reveal specific returns, sources note that NOI varies widely by location, building and the number and type of new competitors. 

Ventas Inc. (NYSE: VTR), a big healthcare REIT and seniors housing property owner, reported year-over-year NOI growth of 3.8 percent for the year ended Dec. 31, 2015. Its seniors housing portfolio grew NOI by 2.3 percent. 

At a January healthcare conference sponsored by J. P. Morgan, Ventas CFO and executive vice president Robert Probst noted that while 70 percent of the company’s seniors housing portfolio is located in markets with high barriers to entry, the other 30 percent is situated in markets showing signs of overbuilding — exposing NOI to risk. Partnering with a great operator is the way to win in competitive markets, according to Probst.

While operators face a number of challenges, there are steps than can be taken to boost the bottom line. Some of those steps are outlined below.

 

Calculate max NOI, then adjust

NOI is defined as the annual income generated by a property minus operating expenses. Although most operators calculate NOI using current financials, Stephanie Handelson, president and chief operating officer at Benchmark Senior Living, advises using a property’s maximum NOI instead.

“That’s where most operators go sideways,” she says. “They don’t take the time to figure out maximum NOI if everything aligns. What could a building generate? That’s where the opportunity is.”

By using maximum NOI as a benchmark, different scenarios can be played out. How does unit mix change NOI? Will the addition of memory care units boost NOI? Does increasing the number of shared rooms increase NOI? 

“We re-evaluate NOI all the time,” says Handelson at Benchmark, based in Waltham, Mass. “There’s an art and a science to this business, and not all properties are created equal.”

Vacancy is the biggest factor that determines the overall performance of NOI, says Handelson. She tracks vacant days by unit type to see where to make adjustments. 

Competition plays a big role in decision-making. Benchmark operates 52 buildings and has an ownership interest in 51 of them. The buildings, comprised mostly of assisted living and memory care combinations, are clustered in New England, along with a property in Pennsylvania.

The company has a total of about 5,000 units in the markets it serves. Other operators have added about 3,000 new units in those markets over the last 24 months, and another 2,500 units are in the works. 

In one case, a new competitor offered one-bedroom units priced only slightly above studio units in a nearby Benchmark building. “We had to rethink what we were doing,” notes Handelson. 

Combining studio units to make two-bedroom apartments was considered by Benchmark since the competitor didn’t offer two-bedroom units. 

“Would the higher rate make up for the loss in unit count?” she asked herself. In this case, the starting rents for studios were reduced and the care package was reconfigured to capture more revenue. “Now the building is more competitive,” she says. 

 

Add memory care

Reconfiguring unit mix is boosting NOI at Sagebrook Senior Living at Bellevue, a seniors housing community in Bellevue, Wash. The occupancy rate was approximately 60 percent when Auctus Capital Partners purchased the property in 2014.

The company launched a complete overhaul of the community and hired Seattle-based Leisure Care to manage the operations. Leisure Care manages 36 seniors housing properties, mostly located on the West Coast. 

“It’s challenging to (manage) a building without a strong revenue stream,” says Bre Grubbs, vice president of new business at Leisure Care. 

Eighteen apartments were converted to memory care. “It’s doing fabulously,” says Grubbs, noting that about half of the memory suites are leased. 

The building’s website highlights the new memory care units with prices starting at $3,600, calling it “the best value in town.”

The completion of the renovation has increased occupancy in other sections of the building. The independent living component is 100 percent leased, and the assisted living section is expected to be full soon. 

 

Boost sales

Operators are using a variety of new approaches to attract new residents and keep the existing ones in place.

Gardant Management Solutions utilizes Sherpa, a cloud-based sales software designed for seniors housing. Sherpa guides the salesperson to build a relationship with the prospect in order to close sales. 

The system, which suggests questions for the salesperson to ask, provides a step-by-step approach to follow. “We call it prospect-centered selling,” says Danni Holman, vice president of marketing sales and engagement at Gardant based in Bradley, Ill. “We grow occupancy by building relationships.”

Gardant operates more than 40 assisted living facilities in Illinois. Its occupancy rate portfolio-wide is 96 percent. The high rate is explained, in part, by the fact that the buildings are part of the state’s Supportive Living Program, which accepts Medicaid payments. That puts the buildings in reach of low-income seniors, which creates a lot of demand for the product. 

Holman also attributes high occupancies to the use of Caremerge, a web-based system that informs families about the resident’s status and also acts as an internal interface to coordinate care. “We keep residents and their families happy,” says Holman.

As competition heats up, pricing strategies are crucial. Annual rent growth for seniors housing in the fourth quarter of 2015 was 2.6 percent, according to the National Investment Center for Seniors Housing & Care (NIC).

Benchmark’s Handelson believes the seniors housing pricing model is evolving to resemble that of the airline and hospitality industries — adjusting prices based on demand. Benchmark determines prices by analyzing vacancies by market and by facility. Pricing is reviewed as often as weekly. 

“Every revenue day counts,” says Handelson. “Once a revenue day is gone, you cannot get it back.” 

However, occupancy can’t be bought at all costs, sources say. A building can be 100 percent occupied and generate zero NOI.  

 

Discount carefully

Discounting is a mixed bag, according to sources. It boosts NOI when a building is at 95 percent occupancy and the goal is to be 100 percent full. The 5 per-cent increase goes right to the bottom line, as long as expenses aren’t added. 

But discounting doesn’t make up for an ineffective sales staff. And discounting can impact the ability to staff a building properly, which can lead to resident turnover and occupancy declines.  

“Beware of discounting care,” advises Melissa Owens, vice president of sales and marketing at Louisville, Ky.-based Elmcroft Senior Living. The company manages 82 senior living communities, with an ownership position in several of the properties.

Elmcroft assumed operations of the Hearthstone portfolio in 2011. Prior to that deal, Elmcroft’s legacy portfolio had an occupancy rate in the mid-90 percent range. Overall portfolio occupancy today is in the mid-80s. “We are focused on getting our overall portfolio occupancy back up to the mid-90 percent range,” says Owens. 

In 2012, the company opened a new building, Elmcroft at Oaklawn, in Louisville.  The community features assisted living and memory care and is 100 percent occupied. “We did not discount there,” says Owens. “You have to be strategic about discounting.”

Like other operators, Elmcroft occasionally uses a discount as a closing tool. A prospect might be offered 50 percent off the first month’s rent, or the resident can opt to divide the discount over the first three months. “The idea is to create a sense of urgency,” says Owens, adding that discount offers should be short-lived. 

 

Beef up customer service

Reducing resident turnover helps boost NOI. About 18 months ago, Chelsea Senior Living rolled out a new customer service program as a way to differentiate itself from competitors. 

“Every building has meals, activities and nursing,” says Michael Levine, vice president of sales and marketing at Chelsea based in Fanwood, N.J. “But few have mastered the art of customer service.”

Chelsea operates 18 buildings in the Northeast, with an ownership position in seven of the properties. One of its recent assignments is the Solana at Marlboro, a property that opened last September in Marlboro, N.J. The 97-unit assisted living and memory care facility is already 45 percent occupied.  The lease-up of an assisted living property is typically expected to take 24 months. 

Although executive directors at Chelsea are given a lot of autonomy, none of the communities are more than 150 miles from the corporate office. Anywhere from one to three regional managers visit each community every week. 

The cornerstone of the customer service program is to build a relationship with the resident. At move-in, a department head is assigned to each resident and that person visits with the resident every day for the first two weeks. 

The effort has minimized calls to the corporate office and decreased complaints online. It has also translated into fewer move-outs. 

In fact, the buildings that focus on the effort have posted a 9 per-cent decrease year-over-year in move-outs. The occupancy rate portfolio-wide averages 93.2 percent.

 

Quantify the cost of care 

Charging residents for the true cost of care can raise NOI, say operators. New technology is helping to capture the actual costs of assisted living. 

Leisure Care prices assistance according to the level of care required by the resident. About a year ago, the company implemented a system to track the amount of care received by residents. 

Caregivers use iPods to log services provided, such as help with a medication, a shower and dressing. Reports show that the service was provided and the length of time taken by the caregiver. 

Now when a resident requires the next level of care, data is available to show the family how much time is being devoted to caregiving. Pushback from the family is less likely. “Now we have a clear way to communicate with the family,” says Leisure Care’s Grubbs. 

Like other operators, Leisure Care is also boosting NOI by providing ancillary services that are charged separately. Leisure Care’s newer, high-end communities feature extras, such as travel services and a concierge. “It’s a substantial part of operations in some markets,” says Grubbs.  

 

Pare expenses

Of course, expenses have a huge impact on NOI. Like other factors that influence NOI, expenses can vary greatly by building and location.  While inflation has remained low, costs are still rising. Certain buildings have high fixed costs, such as large property tax bills in expensive markets. A poorly run or aging physical structure can drain NOI. 

Staffing is among a building’s largest line expense. Training programs can help reduce turnover, which ultimately impacts the bottom line. 

Chelsea Senior Living provides a structured mentor program for new department heads. They undergo three months of training and are paired for two years with a mentor who is an experienced department head at another building. 

The new hire has training sessions at the mentor’s building. And the mentor also visits the new hire’s building. 

Chelsea carefully manages other expenses such as overtime pay. Overtime expense reports are provided twice monthly to each property. The goal is keep overtime pay under 2 percent of the existing salary budget on a monthly basis.

Chelsea’s operational budgets are declining. In other words, if a building has 100 units but 90 residents, the food budget is set for 90 people not 100. “Food costs are big,” says Levine. He adds that budgets for care services, such as nursing, are not cut based on the number of residents in the building.

 Despite efforts to hold the line on expenses, external factors can throw budgets and NOI out of whack. Seattle enacted a $15 minimum wage that is being gradually phased in. Large companies with more than 500 employees must pay employees $13 an hour as of Jan. 1, 2016.  

“We already see pressure on wages,” says Grubbs. The company has raised wages, but hasn’t been able to raise rents at its building in Seattle, she points out. “It does squeeze the margins.”

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