Earlier this week, Welltower announced an additional $1.1 billion in new investments, primarily in senior housing – but it was another piece of news in the company’s 2Q24 earnings that caught my attention.
During the REIT’s call with investors and analysts Tuesday, management revealed that the company has made a strategic decision to focus more on lower-acuity assisted living residents.
At the heart of the company’s decision is a belief that assisted living residents lower on the acuity scale can create better net operating income (NOI). Although higher-acuity residents pay higher rates, the care they receive is also costly and staffing is limited, according to Welltower Executive Vice President and COO John Burkart.
Welltower is still in the early stages of its overall move toward focusing leasing efforts on lower-acuity assisted living residents. But I think the company’s strategic decision reveals an ongoing shift in the senior living industry as companies act to bolster stubborn margins and contend with changing trends in resident acuity.
In this members-only SHN+ Update, I analyze Welltower’s comments on this issue and offer the following takeaways:
- The strategy behind moving toward lower-acuity assisted living residents
- How Welltower’s move reveals assisted living’s margins problem
- Challenges ahead for assisted living operators
Higher RevPOR not equal to higher NOI
Welltower conducted a review of the assisted living care levels across its portfolio over the past few months, and management arrived at the conclusion that lower- and higher-acuity assisted living residents have different impacts on the company’s bottom line.
“While lower-acuity residents pay less than a higher acuity resident for the same room, they also consume far fewer human resources and tend to stay longer,” said Burkart on the earnings call Tuesday. “This creates healthier rent growth over a longer period of time, leading to higher NOI.”
He added that the company is in the early stages of its process to refocus on lower-acuity assisted living.
“We put a lot of work into it,” Burkart said. “But obviously it takes time to work through all the different rent goals at all the different properties, so we have a ways to go.”
Welltower did not spend much time elaborating on its plans to refocus its efforts on lower-acuity assisted living residents, and CEO Shankh Mitra didn’t immediately answer a request for more information. But I believe the company’s plans reveal a wider ongoing question regarding acuity in the senior living business today.
In the last few years, senior living operators have told us that residents are arriving at their doors in need of more help than in the past. The general thinking was that residents who otherwise could have moved into senior living communities waited a little longer during the pandemic, and thus were further along on the care continuum.
Senior living operators catered to this group in part by growing with higher-acuity residents in mind. The product type is thought to have a distinct advantage in raising penetration rates in the future.
“When considering penetration rates … assisted living and memory care have a distinct advantage,” NIC Principal Omar Zahraoui wrote in a May blog post. “They are both considered needs-based, and services are often required.”
Given that baked-in advantage, I can see why senior living operators including Tutera Senior Living and Trilogy Health Services are chasing that end of the care continuum. Companies like Tutera and Trilogy, which have historically provided skilled nursing, also have the expertise to deliver more complex care. And they certainly are not limiting themselves to growing on the high-acuity end of the continuum, with Tutera recently opening an upscale senior living community in St. Louis, and Trilogy is expanding across various levels of care through a series of projects in the Midwest.
But I think the strategies of organizations like Tutera, Trilogy and Welltower get at a tension that senior living owners and operators increasingly are trying to account for in their go-forward plans: how to tap into the coming wave of massive demand in a way that will not only fill up communities but boost profitability.
A few years ago after the senior living industry suffered an occupancy drop in the face of Covid-19, I recall that operators and owners alike were hoping that simply re-adding census would get them back to old margins. Increases to line items such as the cost of staffing have meant that operators must exceed former targets and reach even higher for the margins they seek, however.
“Higher acuity requires higher care, and therefore cost,” Burkart said. “Higher RevPOR doesn’t necessarily mean higher NOI.”
A cursory look at margins in the 2023 State of Seniors Housing report from the American Seniors Housing Association (ASHA) seems to bear out those trends. Freestanding assisted living communities without memory care services – often thought to be among the most cost-intensive product types for operators – carried a median operating margin of 26.7%. At the same time, communities offering both assisted living and memory care had a median operating margin of 20.1%.
Welltower is not the only publicly traded senior housing company with the mindset that serving a lower-acuity assisted living resident base is a smart play. Although it may appear as though it’s geared toward attracting a higher-acuity resident, Brookdale Senior Living’s (NYSE: BKD) HealthPlus program is actually geared toward keeping residents in place on the acuity spectrum for longer.
Through the program, Brookdale provides help that residents need to keep them healthy and active for longer, including wellness visits, immunizations and health screenings.
According to Brookdale, communities using HealthPlus have reported 78% fewer urgent care visits, 36% fewer hospitalizations for residents and 63% more completed annual resident wellness visits. CEO Cindy Baier has also noted in the past that communities using it are faster to grow “profitability” than those not offering it.
“We’re prioritizing the markets and the communities where we feel like it can make the most impact,” Senior Vice President and Chief Nursing Officer Kim Elliott told me. “We’re going to continue to lean into how we completely embrace and change the way that our residents receive care.”
The challenge ahead for assisted living
I can understand the strategy behind targeting lower-acuity residents, but I do have some concerns about what all this could mean for accessibility and availability of care for older adults with higher needs.
My concern is heightened by the trends seen in the skilled nursing industry, in which operators are closing facilities and reducing skilled bed counts due to ongoing challenges related to lower revenue from reimbursements and higher staffing costs.
That said, I also think that better public policy can play a role in maintaining access to assisted living on the higher end of the acuity scale. One proponent of that approach is Solera Senior Living CEO Adam Kaplan, who has embraced the idea of Medicare reimbursements for assisted living in recent years.
“Given the degree of margin contraction that we see, we need to be thinking about whether we’re going to be a private-pay industry long-term,” Kaplan said last year during a panel discussion at the 2023 Argentum Senior Living Executive Conference in New Orleans.
Medicaid waivers can also help fill a gap for assisted living in states with such programs – like in Illinois, where operators such as Gardant Management have devised operational models that keep assisted living resident rates lower.
To be clear, I don’t think these trends will mean the end of higher-acuity assisted living at all. There is obviously a need for these services, and there will be companies to serve this end of the acuity spectrum at the end of the day. But on some level, I think it all comes back to the age-old margin versus mission question in senior living, which operators are still grappling with in 2024.
In the end, failing more robust support from the government, I think assisted living companies will have to decide for themselves about whether to trade a few points off margin to not only tap into demand for higher acuity assisted living, but to serve the needs of that particular population.