Addressing the changing face of independent living is high on the agenda
By Jim Moore
Success in senior living in 2015 will require a very sharp focus. Existing sponsors and owner/operators will find it increasingly difficult to successfully optimize and operate their communities in 2015 and beyond. That’s the sobering news. The good news is that most of us have significant untapped potential within our existing businesses. What follows are the five high-priority issues for 2015.
1 Addressing increasing resident age and higher acuity
Traditional independent living has evolved into a form of quasi-independent living. The entry age of new senior living prospects now ranges from 83 to 85. Many operators now realize that their independent living operation is really a naturally occurring assisted living community.
Assisted living is no longer simply providing traditional assistance with activities of daily living in a secure environment. Sharpened dementia and special memory care units are either being developed as part of new construction initiatives, or through extensive modification of an existing physical plant. Senior consumers and their family members have heightened their awareness and perceptions of memory care — sometimes with serious misconceptions.
Typical senior living no longer consists of residents living within two sharply defined and separated living arrangements — independent and assisted living. In 2015 and beyond, the industry must address at least four critical issues: 1) creating a flexible catered-living program; 2) developing a formal memory care capability; 3) modifying the physical plant by increasing high-acuity assisted living and possibly decreasing independent living; and 4) where regulations permit, creating a formal Assistance In Living (AIL) program within independent living. Properly structured AIL programs can deliver substantial net cash flow and enhance the capitalized value of your community.
2 Modernizing aging physical plants
Sponsors and owner/operators developed a significant number of new communities in the 1980s and 1990s, which has resulted in a significant inventory of older, sometimes marginally obsolete communities.
Many of these communities exhibit at least one or two of the following problems: 1) less than optimized cosmetics; styling that is now inconsistent with today’s market; 2) decreased operational efficiency; 3) declining perceived value and relative competitiveness; 4) costly and significant deferred maintenance; 5) decreased ability to address increasing resident acuity.
Older physical plants do not necessarily allow operators to have a wide range of pricing flexibility versus their newer competitors in order to remain responsive to the market. Many types of operating expenses being incurred are relatively insensitive to the age of a physical plant.
That’s because labor, supplies (such as raw food), utilities and other operating expenses do not vary dramatically as a function of property age. Most operators must respond with state-of-the-art design improvements and today’s definition of favorable cosmetics.
3 Structuring optimum operations and increasing value
Enhancing performance within existing senior living communities represents a huge financial opportunity frequently overlooked by many owner/operators. The strategy is called “exploiting organic growth potential.” In 2015 and beyond, strategic focus must be placed on two major areas: 1) revenue/occupancy enhancement; 2) expense reduction.
In terms of occupancy enhancement, operators should recognize that at 80 to 85 percent occupancy, most of their fixed costs are already covered. Do you really have to buy more raw food or hire an additional employee when filling several additional units?
Therefore, units that are occupied above 85 percent typically enjoy a substantial incremental operating profit margin for each additional unit occupied of approximately 70 percent for independent living and 50 to 60 percent for assisted living.
For example, a property with vacant independent living units having an average monthly service fee of $3,000 will likely generate additional cash flow of $2,100 per unit per month, or $25,200 per year ($3,000 x 0.70 x 12).
For 10 additional occupied independent living units and using a conservative 50 percent operating profit margin, that could generate an additional $180,000 in cash flow that goes right to the bottom line as net operating income and cash flow. This would increase the capitalized value of the community by approximately $2.2 million using an 8 per-cent cap rate ($180,000 ÷ 0.08).
Modest expense reduction also produces a very favorable impact. A senior living community with
80 to 120 independent living units at 90 percent occupancy results in 26,280 to 39,420 annual occupied resident days. That figure is derived by multiplying the occupied units (residents) x 365 days.
A modest $2 per resident-day expense reduction (typically 1.5 to 2 percent of total expenses) produces additional bottom-line cash flow of $52,560 to $78,840 per year, depending upon the size of the community. The increased value using an 8 percent cap rate is $650,000 to $985,000.
Keep in mind that these two strategies represent a significant financial enhancement of an existing asset without having to design, construct, finance or operate another new physical plant. But these enhancements have to focus on more than just monetary value.
The ultimate expected outcomes for a community is increased value in four important areas: 1) resident satisfaction; 2) clinical care excellence; 3) increased cash flow; 4) enhanced value of the asset. The first two elements of value are relatively easy to comprehend. Increases in financial value have been addressed in Point No.3.
4 Adapting to the changing senior living life cycle
The life cycle of our industry is changing in at least six major areas: 1) state-of-the-art designs; 2) service flexibility; 3) sharpened resident-focused activities; 4) the continuum of living options;
5) expanded off-campus services; 6) the demographics, psychographics and value perceptions of today’s potential senior living project.
5 Recognizing the expanding risk management issues
Litigation threats, complex licensing issues and changing insurance coverage will continue to increase. There is the distinct likelihood of increased legal exposure involving resident events in operations, which could include damage claims, punitive damages and possibly industry-related class action litigation.
Keep in mind that most residents in independent living, assisted living or nursing spend the rest of their lives in our communities. Quality of care issues in their remaining years and the threat of litigation is already receiving increased focus. In addition, financially strapped counties and municipalities are suing both for-profit and not-for-profit operators in a desperate attempt to generate increased real estate tax revenues through higher and frequently inappropriate valuations.
Will senior living operators see success by exclusive focus on these five items? Certainly not, but in 2015 and beyond addressing these top five priorities also establishes a solid foundation for the development of a “second five” action item list, which will be the subject of another column.