Senior living occupancy and profitability recovery have shown mixed results since the pandemic hit, said a panel of experts during an Argentum webinar Wednesday.
Operators continue to be challenged by wage and supply inflation unseen in the past 20 years — highlighted by costly agency labor. In addition, occupancy remains far below pre-pandemic levels.
Operators in some markets had to raise wages by 10% to 20% just to attract and retain the workers they had due to competition for the same labor pool, said panelist Chris Wettig, Legend Senior Living’s chief financial officer. Higher food, supply and utility costs across the board also are putting pressure on margins.
Individual markets’ specific conditions and older assets are posing challenges for others. American Healthcare REIT’s portfolio has only 70% recovered compared to pre-pandemic occupancy levels, Executive Vice President of Asset Management Ray Oborn said. Meanwhile, agency costs increased by 268% from the first half of 2021 to the first half of 2022.
“It’s very challenging right now,” he noted.
Occupancy recovery
Wettig said he doesn’t expect to see the rapid growth that the industry experienced in the last three quarters of 2021, which was a result of vaccinations and pent-up demand. Although he said he does expect to see single-digit growth in the near term, he predicted that significant increases in demand will be elusive until 2024 or 2025.
With an industry vacancy rate hovering around 20%, Wettig said, most operators are vying for the same leads, and most markets continue to see significant discounting of market rates.
Oborn said operators already are discussing how aggressive to be with annual rate increases for next year. Many operators have settled on hikes of between 8% and 10%, he said, adding that anything higher “might be a little aggressive.”
Wettig said that Legend Senior Living increased rates in February and ultimately lost 120 basis points (1.2%) in occupancy as a result. But he said the majority of residents understood that communities were experiencing significantly higher labor costs, as well as higher prices for food, utilities and insurance.
“When you can explain those things and make the customer understand that, it makes it a little more palatable,” he said.
National Health Investors Senior Vice President of Investments Michelle Kelly said that she is interested to see whether operators can successfully sell higher rate increases two consecutive years.
“It’s appropriate to be trying to get that kind of rate increase because the environment hasn’t changed,” she said. “Last year, it was an attempt to get back to break even. This year, it’s just keeping pace. It will be interesting to see what’s deemed aggressive this year.”
2020 failures don’t dampen demand
Wettig said that 600 new properties were developed in senior housing between 2014 and 2016, primarily by new entrants into the industry. The pandemic contributed to those properties not generating the expected returns, leading many of those investors seeking to exit the field, creating an abundance of acquisition opportunities.
Kelly said she has seen a “huge” influx of deal activity over the past six months. Many who tried to come to market in the spring or summer of 2020 and did not achieve desired valuations are back and having more success, she added.
Private equity funds, Kelly said, are sitting on a lot of capital “burning a hole in their pocket,” and REITs are looking for creative ways to put equity to work.
She characterized the acquisition environment as “bumpy” and “disjointed.” But, overall, Kelly said, people believe there is strength in the product and the industry, and senior housing is here to stay.
