Unlocking Hidden NOI

Operators find new ways to generate income, cut expenses through innovative methods.

By Jeff Shaw

On its face, net operating income (NOI) is a simple formula: revenue minus operating expenses. Therefore, increasing NOI is only a matter of increasing revenue or reducing expenses.

Of course, all operators know it’s not nearly that simple. Where can you unlock new revenue, or cut expenses without also damaging that revenue? There are thousands of different ways to do so, but the “secret sauce” that keeps revenue high and expenses low is a difficult recipe to uncover.

What’s more, sometimes the most logical source of good NOI — high occupancy — isn’t enough. 

Dana Wollschlager, principal with senior living real estate consulting firm Plante Moran Living Forward, has tales of clients who were 100 percent occupied and completely private pay, yet somehow still losing money.

“They were grossly underpriced for their services,” says Wollschlager. “They were taking a $300 loss per resident per month.” 

Thinking about occupancy on its own is too simplistic, according to John Shafaee, founder and CEO of Chicago-based Medtelligent, whose software product ALIS (Assisted Living Intelligent Solutions) provides operators with the tools needed to maximize workflow. An operator has to consider dozens of factors to find a truly optimized NOI.

“The way most people manage NOI is purely through occupancy — they make sure the beds are full,” says Shafaee. “You can’t just build a beautiful building. Both occupancy and NOI are a lot more complicated than that.”

Data illuminates issues

Plante Moran Living Forward uses a tool called Price Point to help clients compare total expenses to income from service fees and rents, as “most operators have no idea” what the hard costs of services are, according to Wollschlager. It’s important to consider even less obvious factors, such as principal and interest paid on the mortgage compared to the competition.

“The answer isn’t necessarily to increase fees. It’s a math problem. Staff can become more efficient, for example,” says Wollschlager. “Operators need to make sure costs are commensurate with what they’re charging, because 98 percent of the time they’re not even close.”

Data becomes the key component. If an operator has hard numbers to work from, then finding and solving shortcomings becomes easier.

At continuing care retirement community operator LCS, benchmarks are used across the Des Moines, Iowa-based company’s portfolio of 127 communities. Those benchmarks give management a basis of comparison, and are put up against the industry standards from the National Investment Center for Seniors Housing & Care (NIC).

Common benchmarks for the company include expense per occupied unit, operating margins and labor cost per resident.

“Those are the drivers of the bigger ticket items,” says Judi Buxo, director of senior living management for LCS. “We operate from a key principle: that which gets measured gets managed. It gives everyone a common ground to work from.”

Staff training pays off

Many operators fall short on tracking labor costs, according to Travis Palmquist, vice president and general manager of the senior living division for software vendor PointClickCare. 

In many cases, a staff member will perform a service without logging it or accounting for that time because it’s faster and simply easier to complete the service and move on. Known as “service creep” or “leakage,” this creates a gap in information and results in unbilled services that can quickly add up.

“If you go across 50 or 60 communities, just imagine the number of services that don’t get documented,” says Palmquist. “There are a lot of labor costs associated with services being given away.”

In addition to figuring out what’s being given away for free, better logging of services performed can also notify management that a resident’s acuity is increasing. 

Palmquist cited an example of one customer, an 18-location operator, that increased revenue $750,000 per year after tracking and billing services more accurately.

Getting the staff to go along with this change is easier said than done, however. Bad habits are hard to break, and training staff members on new software and procedures is a notoriously slow, painful process.

For the Plante Moran Living Forward client losing money despite 100 percent occupancy, Wollschlager discovered that rather than tracking actual time spent on services, staff were simply checking a box for services performed. Meanwhile, some services weren’t documented at all.

“It’s not just the staff’s fault. We need to hold everyone accountable for letting it go,” says Wollschlager. “Everyone gets caught up in the day-to-day, but if we want to stay in business we have to be more systematic about it. Making sure staff members are documenting unscheduled care is very important and requires management and auditing.”

Then, of course, there’s the constant, nagging staff problem across the seniors housing industry — turnover. 

Losing staff members hurts NOI in lost productivity, training costs and time spent looking for replacement employees.

Medtelligent estimates staff turnover across the industry at 30 to 35 percent per year, and Wollschlager suggests there’s no simple solution.

“Some say pay the least you can, then try to keep them there. Others say pay as much as you can because happy workers means happy residents,” says Wollschlager. “People need to get their arms around that issue, and there’s no quick solution.”

Seniors housing consulting firm Senior Living NOI suggests an approach where management identifies the top 20 percent of performers, then celebrates and listens to those staff members, according to Jill Haselman, the company’s founder and CEO.

Executive directors on average spend 65 percent of their time babysitting staff members with poor performance, says Haselman. Highlighting and empowering the top performers elevates the staff while management gains invaluable information about the residents.

“That 20 percent teaches the management team more about their customers than they ever thought to ask,” says Haselman.

Additionally, the “toxic” employees that drag down the rest of the staff and take up the executive director’s time often leave naturally amid the increased pressure to perform well, adds Haselman.

To help illustrate the problems caused by turnover, Senior Living NOI encourages operators to figure out the actual cost of losing an employee.

“No one measures the expense of turnover,” says Haselman. “They’ll say ‘it’s killing us,’ but there’s no line on the P&L statement for it.”

Beat problems to the punch

NOI can often be unlocked on the development end before a community even opens. For owners, this can result from securing the best interest rates available on acquisition, construction or mortgage loans. For an operator, favorable lease terms are the key.

“Once you’ve entered into a lease, it’s really hard to change those numbers and escalators. You have to live with that for 10 to 15 years,” says Wollschlager. “Those sorts of things have a direct impact on your bottom line.”

The current low-interest-rate environment also means operators of independent living and continuing care retirement communities need to make strong pushes for new move-ins, according to Katie Davis, chief strategy officer for Sherpa, a customer relationship management software firm. Those two sectors are particularly dependent on prospects being able to sell their homes, which low interest rates and a strong seller’s market supports.

“From an NOI standpoint, low interest rates drive independent living occupancy,” says Davis. “We’ve enjoyed low interest rates. As long as that continues, CCRCs and independent living are going to flourish.”

For operators with multiple levels of care, improving independent living census will have long-term impact on NOI, Davis adds. Residents move in at the front end of the continuum of care and move through as needed, rather than only coming to seniors housing out of necessity.

Low interest rates also lead to a double-edged sword. Newcomers are entering the seniors housing space, looking to either try their hand at a new, growing industry, or build and sell quickly while cost of capital is still low, according to Davis. These developers are either too inexperienced to operate effectively, or are just looking to make a quick buck on the construction.

“From that perspective, cheap money is not always a great thing,” says Davis.

On the other side of that, though, Wollschlager sees lots of opportunity for more experienced owners and operators to swoop in, take over struggling facilities and unlock NOI.

“The new opportunities are going to be mergers and acquisitions,” says Wollschlager. “People will be able to procure properties for pennies on the dollar. Organizations that know what they’re doing can get them on the cheap and have a big impact on the bottom line.”

Impact of resident interaction

Another way to stop NOI problems before they begin is to closely examine the backgrounds of incoming residents, suggests Tom McDermott, vice president of senior living sales for software system Yardi. Operators have even begun to screen prospective residents the same way they might screen a prospective employee.

“Some operators are checking for creditworthiness of both the resident and the guarantors, and also looking for any criminal background to make sure the residents and their property are safe,” says McDermott. “The byproduct of successfully screening, preventing that bad apple getting in, keeps the operator from losing a unit that would have to be rehabilitated and remarketed.”

Also on the sales front, McDermott sees variable pricing as a way to unlock hidden NOI. The method is currently used extensively by hotels and airlines to increase pricing at high-demand times and decrease during low demand. While this tool would be extremely valuable for seniors housing, nobody’s been able to figure out how to make it work given the industry’s long sales cycle, which many experts say is approximately 18 months.

“In the apartment and hotel industries, there are a lot of predictors for sales,” says McDermott. “There are more wildcards in senior living that may prevent the successful implementation of variable pricing. There’s a lot of exploratory stuff going on right now, but no model that’s been perfected yet.”

LCS is one of the operators trying to implement dynamic pricing, and the company reports some success on that front. Its approach is based more on knowing where the competition is priced rather than trying to predict demand based on time of year.

“We’re pricing to a market, and our pricing changes often depending on the competition,” says Buxo of LCS, adding that this is a good plan for standard rental communities but not entrance-fee CCRCs.

Regarding resident turnover, one cause that is often left unexplored is dissatisfied family members, notes Medtelligent’s Shafaee. 

“You have to manage the relationship with people outside the community, the family members paying the bills,” says Shafaee. “If you want to increase the length of stay, you have to keep the family happy. You can’t just hit them up for money.”

As far as services for the residents, Plante Moran’s Wollschlager recommends operators try to stick to what they do best  — resident care — and seek third-party help for areas of weakness.

“We don’t have to be all things to all people. There are a lot of good strategic partners that are probably better at certain things,” says Wollschlager. “Why do we also have to be the rehab company, and the foodservice company, and the cable company? I would argue others provide better customer service, better satisfaction outcomes, and better purchasing power that leads to better pricing.”