Senior Living Expenses Still a ‘Puzzle’ as Operators Test Solutions

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Staffing costs. Debt service. Insurance premiums. These are just some of the line items operators are still grappling with in 2024.

In the last four years, senior living expenses have not been stable. While the cost of certain goods and services has moderated, others have increased; and although senior living occupancy has steadily risen across the industry, average margins have not. This has left operators in a somewhat difficult position, as they look to both grow for the future and be as efficient as possible today.

Merrill Gardens COO Jason Childers likened managing expenses to assembling a puzzle where operators must balance long-term fiscal priorities with daily operational expenses.

Indeed, I see operators across the industry working on their own respective expense puzzles, albeit in different ways. This week, I spoke with operational leaders at Merrill Gardens, 12 Oaks Senior Living, Aegis Living, Atlas Senior Living and Cogir USA to learn the current state of senior living expenses, and how they are managing the push-and-pull of expenses in their own way.

In this week’s exclusive, members-only SHN+ Update, I analyze my interviews with these leaders and the current state of senior living expenses and offer the following takeaways:

– Why turnover and retention are still top levers for expense growth

– The rising cost of insurance premiums and how operators are grappling with them

– How debt service payments remain a “black cloud” over the industry

Turnover, retention an important piece of the puzzle

While operators have battled rising staffing costs, increased care costs, and higher food prices, senior living providers aren’t sitting on their laurels or waiting to see whether costs go down. Nor are they banking on more steep resident rate increases to aid stuck margins.

A 2023 CFO hotline survey of non-profit operators by investment bank Ziegler of top industry executives found that staffing, inflation, food costs, insurance issues, and employee benefits were still the primary drivers of predicted senior living fee increases.

In the age of the pandemic, senior living operators have seen big increases in staffing costs, mostly linked to wages, overtime and staffing agencies. As of 2023, labor was thought to be as much as 60% of an operator’s costs overall. In 2024, many of the forces keeping staffing costly are still in play.

Given that turnover is among the top “unnecessary” costs an operator can incur, operators are turning their focus to retention as a primary lever to better margins in 2024 and beyond.

Two operators focused on retention and turnover are 12 Oaks and Cogir USA, which have executed in reducing turnover by bolstering wages, providing leadership training for staff and optimizing operations through data insights to improve staffing efficiency.

Doing so led to a 36% reduction in turnover for 12 Oaks and a 20% reduction in turnover at Cogir, Puklicz and Ernst told me in our conversations this week.

“We’ve been able to calm things down, implement our systems, get buy-in from leadership at the communities and the success is coming quick and early,” Puklicz said.

Seattle-based Merrill Gardens has seen wage growth stabilize in recent months.

“The biggest positive change we’re seeing is with wages because over the last few years, it’s felt a little bit like a roller coaster,” Childers said.

The company also has formally mentored new employees in their first 90 days, reducing turnover during the crucial period for turnover.

Utility expenses also remain a sticking point in an operator’s bottom line, with Merrill Gardens investigating fixed utility rates to minimize spikes in utility service costs in a fiscal year.

Additionally, new to the organization in the last year has been the rollout of a purchasing platform for community leaders to identify cost savings, supported by artificial intelligence, per item—from care equipment to food costs.

Senior living operators are still trying to figure out just what works in succeeding on staffing. From testing flexible scheduling to leadership recruitment and data-driven hiring models. I expect more companies to tackle operating expenses by vying for staffing efficiency.

Insurance premiums still a challenge

While staffing has become more expensive in the age of Covid, so too have insurance premiums. Senior living operators – which by and large house people who are in need of more care and help than the general population – are especially prone to cost overruns in that category.

Aegis Living CEO Dwayne Clark said his company has seen an 18% increase in insurance premium costs, along with food costs spiking double digits compared to last year.

While operators are making improvements to occupancy and staffing, insurance remains harder to solve, given that insurance is simply a must-have.

Cogir Senior Living USA COO Gottfried Ernst recently told me that the Scottsdale, Arizona-based provider has seen “double-digit” increases to insurance premiums in the last 12 to 18 months.

“Operations have to modulate their staffing and modulate their other areas of expenses to compensate for these semi-variable costs [like insurance],” Ernst told me.

For Cogir communities in California, Florida, and Texas—three areas prone to severe weather in the form of wildfires, hurricanes, and flooding—property insurance has also increased, Ernst added.

That said, insurance is not always an uncontrollable expense. For instance, Revel Communities COO and EVP of Resident Experience Danette Opaczewski told SHN in 2023 that “there are a lot of levers to pull in every aspect of insurance.”

“You just really need to have a great risk manager working with your group, a broker that understands who you are and why you want what you want, and then leverage your claims against what you do,” she said. “Don’t settle.”

Dallas, Texas-based 12 Oaks Senior Living opted in the past to structure medical benefit insurance for employees through an employee benefit captive plan, allowing the business to net cost reductions and gain more control over insurance policies. To date, insurance costs have risen for 12 Oaks at a slower rate of 6% compared to double-digit increases seen elsewhere.

I think Revel and 12 Oaks demonstrate that thinking outside the box can go a long way in controlling supposedly uncontrollable expenses such as insurance premiums. While I don’t think every operator will be able to reduce their insurance premiums so easily – especially those that have communities in areas prone to natural disasters – their examples demonstrate a possible way forward for other companies grappling with them in a similar way.

Debt service payments still a ‘black cloud’

Fluctuating interest rates have made repaying loans more difficult than anticipated, and the industry is facing a wall of maturities in 2024 and 2025 totaling around $25 billion.

Indeed, the industry has a “black cloud of debt” looming over it, Clark lamented. Compared to two years ago, debt covenants are now simply higher, complicating hopes of expanding margins in the short term.

“So all your profits are going to your floating debt and your interest rate,” Clark told me. “That’s a problem.”

While some operators are stuck in the mud spinning the tires of debt service payments, prudent operators can and should plan for a future where margins remain truncated, and new growth takes smaller, bite-sized forms.

Prudent fiscal management and foresight in baking in debt service obligations at properties help operators manage long-range expenses alongside short-term operational priorities.

“We’re more value-conscious, and transparency is very important to understand the higher-level economics of the community, because we have to forecast and answer to our investors,” Ernst told me.

In managing debt service obligations, Atlas Senior Living Chief Financial Officer (CFO) Kelse Henderson told me operators must market and evaluate communities within a portfolio on a separate basis while considering its physical plant age to test competitive markets.

“It starts with understanding where your different community is in a life cycle of investment,” Henderson told me.

Trailing lending data analyzed by NIC MAP Vision in the fourth quarter of last year found that lending remained muted as permanent financing has “remained inconsistent” across various lending areas, including tougher lending standards, a wider bid-ask spread, and lowered loan proceeds.

The report highlights the contributions of 17 lenders, with the total loan volume closed for senior living exceeding $560 million. In the fourth quarter of last year, delinquent loan balances decreased by 13% from the third quarter of 2023, while delinquencies as a percentage of total loans dropped by 4.4% in 3Q23.

On the nonprofit life plan community side of the industry, the broader outlook from Fitch Ratings still places a “deteriorating” outlook for the sector.

At the end of the day, I think creativity and transparency will be the solution to debt service challenges. When the dust eventually settles on this period, I believe that the most successful companies will be ones that are willing to experiment and be creative.