A hopeful series on troubled waters in the senior living industry.
Recently we have published articles that dissected Bloombergs assertion that we are facing a senior living glut and an article about the Sears Methodist bankruptcy filing. Then . . . over the last few weeks I have become aware of a number of other senior living communities that are failing or struggling. It looks like we are already in the middle of a series on troubled waters in the senior living industry. Lessons But Not Doom and Gloom I am convinced that, overall, the senior living marketplace is very healthy and will continue to be healthy. It will continue to present many great development opportunities. Yet, at the same time, I am convinced we will continue to see a steady stream, or more accurately a steady trickle, of failures and seriously distressed communities. The problems will not be industry or nationwide but will fall into 3 bins:
- A very small number will be the result of too many developers landing in a hot market area at the same time. There will be some short-term winners and losers, but over time these markets will stabilize.
- There will be/are developers who are new to the industry and don’t understand the market, seniors, what sells and what doesn’t and ultimately, are too arrogant to learn from those more experienced.
- Bad Management and Marketing. If we are honest over the last few years there have been a number of markets with huge pent-up demand. Because of that demand operators didn’t have to be that good to be reasonably successful. Those days are over or almost over.
So ultimately this series should be seen as hopeful.
The Series
Here are some of the areas the series will cover:
- When I first wrote about the Bloomberg article I reached out to National Investment Center for the Seniors Housing and Care Industry (NIC) to see if they had a response to the Bloomberg article. While they understandably did not want to get into a discussion about the Bloomberg article, they did provide me a detailed overview of the market and market demand.
- A deeper dive into the Sears Methodist Bankruptcy with a look at why it happened, what it might mean to residents and what it will take for the owners to extricate themselves or at least the senior communities with the least amount of pain.
- Why having current market demand does not automatically mean future demand.
- How taking your eye off the ball or straying away from core competencies can have disastrous results.
- How, when money gets tight, taking shortcuts can turn into disaster.
- Sales and marketing does matter.
You readers represent a lot of eyes, ears and brain power I would appreciate your feedback as the series develops. Even better, if you would like to contribute an article to the series that would help the industry. Steve Moran
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I look forward to this series. Being in marketing, I am on the front line hearing from prospects about their expectations, reviewing their financials, and aware of the current and future challenges we face in meeting occupancy goals. One of the issues I am seeing is that the “younger” people who get on our wait list, the famed “boomers,” have quite a bit of debt compared to the older generation whose mortgages are paid off. Studies I have read in the past touted boomers as being flush with cash and expendable income, but I’m not seeing the strength of their portfolios, at least at this early stage (I don’t think we’ll see boomers rushing to our doors for another 5 years “en masse.”) The other issue is that some communities are accepting prospects with higher acuity of potential health problems to solve their occupancy goals. I predict this will rear its ugly head down the road and create a “churn” in occupancy as they need higher levels of care sooner. And finally, while the consumer loves the idea of refundability, we have already seen several lawsuits regarding them because residents do not seem to understand that the payment comes from the new entry fee for the apartment vacated. Too many of these contracts could create a real cash flow issue if, due to timing, they present too close together for satisfaction of payment.
Hi Candiece: You make some great points. I would add that several but not all of the the challenged properties I have been hearing about over the last few weeks are CCRC’s. And yet I can point you to some phenomenally successful CCRC’s with big waiting lists. It depends so much on the management, smart building design and good sales and marketing programs.
Steve
Minimizing utility costs is always a great place to start. We all know a dollar saved is earned and for the most part, utility costs are not in retreat, quite the opposite. As coal and nuclear issues persist rates are going up all over the US. We would love to help evaluate the savings you can achieve and the improvements you might consider. Our approach is always conservative and our suggestions must meet your financial bench marks before they are proposed.
Hi John: I do agree that controlling costs is very important and that all avenues that do not compromise quality of life for residents and staff should be explored. Yet I would also add that sometimes providers cut what they perceive as fat in programs and services and those cuts end up being the little extras that draw and hold residents.
I have seen to many cases where those cost saving measures have resulted in a nice short-term bottom line bump and a long downhill occupancy slide.
Steve
Steve, I agree, changes that create short term bottom line “bumps” are not a path to financial or operational success. On the other hand, those that create value, savings, and advertising value (like sustainability) are the kinds of change that allow business to succeed – even in droughts.
I find more and more Assisted Living providers displaying their #Green efforts prominently on their web site. When #Green becomes part of the culture, it is a perpetual savings mechanism for the organizations short and long term bottom line results.
Steve thanks for exploring this important topic. I am aware and supportive of the overview you presented. From a broader perspective, I believe that it is ironic that an industry with only 10% market share among qualified prospects hovers at only 90% occupancy as well as very low capture rates. Especially since due to high fixed costs, the last 10% occupancy, usually only 10 to 20 more sales, is the difference between success and failure. Marketing is easy. Converting Prospects, especially higher functioning Prospects is possible but more difficult. As an operator or as an industry, we can try to excuse our sales results on “the economy” or we can take charge of our own future by changing the way we approach Selling.
David you are so right about the 10% market share and poor capture rate. On one hand it is discouraging yet on the other it suggests there is so much upside potential for providers who are committed to doing it differently. Something you know well.
Steve
Steve–some very good insights in your post and in the responses. One issue we have confronted is over-leverage. Many institutions borrowed heavily for construction and/or expansion, and now find themselves struggling to meet financial covenants and, in some cases, make debt service payments. For those institutions with refund obligations to residents, the interplay of residents’ rights and senior lenders’ rights creates confusion that can hurt negotiations with the lenders and can create concerns for residents and prospective residents. We have found these issues, if not anticipated and adressed, can overwhelm most other issues.
Shawn, totally understand and agree. When things get to a tipping point, nothing else really matters.
Regards,
Hi Shawn:
Great point. Many many years ago I worked for a company that was involved in some large communities that were financed using tax exempt junk bonds. They were great projects with amazing fill-up rates, but there was just too much debt and the original owners lost control.
Steve