Survival, success, profitability face increasing challenges

by Jeff Shaw

How well owners, operators execute on top priorities in 2015 will be crucial

By Jim Moore

In the October-November 2014 edition of Seniors Housing Business, I identified five of the top 10 priorities that both for-profit owner/operators and not-for-profit sponsors must address in 2015 and beyond. Click here to read that article.

These five priorities include:

  1. the need to respond to increasing resident age and higher acuity trends;
  2. modernizing aging physical plants;
  3. structuring optimum financial operations and increasing the value of physical assets;
  4. adapting to the changing senior living life cycle;
  5. recognizing the expanding risk management issues and other significant threats that are rapidly emerging in our industry.

The senior living business model is becoming highly complex, so these priorities involve more than simply setting lofty goals or well-intended and soon-to-be forgotten New Year’s resolutions. For many operators, these are necessary strategies to realize survival, success and profitability in 2015 and beyond. What’s more, addressing the five issues outlined in the previous article certainly does not guarantee success in 2015 and beyond. 

There are at least five more key important priorities to consider. 

1 Expanding the seamless continuum for senior living

The intensifying needs of residents due to their advancing age and the increased complexity of their acuity levels will require more complex assistance with activities of daily living. These needs will increase in traditional areas such as home health, rehabilitation and hospice. For many operators, some comprehensive wellness programs, case management and geriatric assessment will require increased sophistication and structure.

The concept of “catered living” or “independence plus” will require more formalized programs with a sound business foundation. There are two fundamental changes to the continuum that should be carefully evaluated in 2015 and beyond: 1) providing assistance-in-living (AIL) within independent living; 2) possibly offering service delivery off-campus with continuing care at home.

With AIL, there are two fundamental challenges to address: 1) responding to local and state regulations that might limit how AIL can be delivered within your independent living community; 2) creating a sound, profitable business model that delivers reasonable cash flow. These strategies accomplish another important objective, and that is creating organic growth within your existing community with only limited to modest new capital improvement. 

2 Focusing on consumer affordability Issues 

Sponsors and owners/operators face increasing challenges with respect to controlling operating expenses. However, we’ve got to continue to think of the multi-faceted big picture. Operators are pressured to either reduce certain service offerings or pass these costs on to residents through increased monthly service fees. The increase in monthly service fees that operators typically plan is approximately 3 percent in 2015. 

Keep in mind that the financial pressures operators face typically involve the following types of costs: labor, healthcare, energy/utilities and food costs. These are exactly the same costs that cannot easily be shifted to the senior consumer because of the added burden.

In late 2014, the Social Security Administration informed seniors that their benefit increase would be only 1.7 percent. Meanwhile, returns on certificates of deposit, money market funds and Treasury bills continue to be less than 0.5 percent.

Some communities are starting to witness a surprising trend of increased unpaid monthly service fees, which is causing accounts receivable to grow. Simply stated, some seniors are having trouble meeting their monthly obligations. It is true that accounts receivable is a potential asset, but it is not cash flow to pay obligations to suppliers, employees or to service debt. 

In 2015 and beyond, sponsors and owners/operators must focus on at least two mandatory high-priority initiatives: 1) operate their communities in an efficient manner in order to meet benchmarks in financial performance without compromising resident satisfaction or clinical excellence; 2) consider using zero-based budgeting when planning future operating budgets rather than simply assume that last year’s budget can be increased by approximately 3 percent with the cost passed on to the consumer. 

Management should request that each department identify modest cost reductions in the 2015 budget that was likely drafted in late 2014. While this sounds like an idealist or significant initiative, owners/operators may be surprised by the potential results. 

Simply stated, operators must strike a delicate balance between operating profit margins, cash flow and the changing trends of residents’ affordability.

3 Developing a practical response to two waves of the future

Astute sponsors and owners/operators must recognize the growing importance of information technology (IT) and social media. IT is having a growing impact on senior living by creating more efficient operational outcomes and advances in technology.

Social media is a rapidly expanding technology with a growing spectrum of practical and innovative effects. There is no question that emerging innovations and expected outcomes will have a significant impact on our industry. However, prudent operators and industry professionals must continually conduct appropriate due diligence. The cost benefit of tangible and specific performance improvements and the effect on the quality of life of residents and their families must be carefully and continually evaluated. 

4 Putting the priorities all together to create a necessary call to action 

Break the 10 priorities into two “top five” categories. The first top five should start to be executed within the first quarter of 2015. The second top five should be executed within calendar year 2015. Then determine the appropriate sequence of priorities for your firm. Decide what could be best accomplished by outside assistance. The payoff typically far exceeds the initial cost of the action. 

5 Answering six tough questions 

1) What could possibly happen in the next five years to threaten our individual projects or our portfolio? 2) Are we satisfied with our financial returns (cash flow, cash-on-cash, return on total equity, internal rate of return)? 3) How does our specific operation stack up when compared to general industry ratios and benchmarks? 4) Do we have a current five-year strategic plan for capital improvements, competitive repositioning, net operating income enhancement and resident satisfaction? 5) Do we have a consistent plan to translate mountains of data into strategic, useful information? 6) Do we have an acceptable exit strategy? 

2015 is the year to step outside the box in terms of change/innovation. Finally, the most critical priority for 2015 and beyond is to evaluate the past with 20/20 hindsight, but approach the future with an entrepreneurial vision.

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