Welcome Back, NOI

by Jeff Shaw

While rising occupancies and improving cash flows buoy owners and operators, questions remain whether net operating income will ever completely recover.

By Jane Adler

After several years of punishing declines, net operating income (NOI) — defined as operating income minus expenses — is slowly climbing back. As a vital metric used to assess the profitability and value of a property, any improvement in NOI is a good sign for the health of the sector.

Seniors housing occupancy has been on the upswing for eight consecutive quarters, boosting revenues. 

The occupancy rate for the NIC MAP Primary Markets increased to 83.7 percent in the second quarter, up 60 basis points from the first quarter and well above the pandemic low of 77.8 percent in the second quarter of 2021, according to the National Investment Center for Seniors Housing & Care (NIC). Still, the occupancy rate is well below the pre-pandemic level of 87.1 percent reached in the first quarter of 2020.

According to the State of Seniors Housing report, the 2021 same-store sample (just under 500 properties) indicated a profit margin of 25 percent compared to 28 percent in 2020. The report is a collaborative research project between the American Seniors Housing Association (ASHA), Argentum, LeadingAge, National Center for Assisted Living (NCAL) and NIC.

Meanwhile, the rise in expenses has cooled a bit and the extra COVID-related costs have declined. The use of staffing agencies to fill worker shortages has decreased. Operators have also raised rents, often by double digits. Revenues and operating margins have improved.

NOI recovery, however, varies by market and property, sources say. High-end buildings in affluent markets with high demand are performing the best. Older properties in secondary or highly competitive markets continue to struggle.

Recognizing that NOI has not returned to pre-pandemic levels, owners and operators are finding new ways to boost revenues and cut expenses. The latest technology is being deployed to increase staff efficiency. Employee retention programs help reduce expenses associated with high turnover. Owners are pushing operators to make sure residents are charged for the care they receive amid rising acuity levels.

Meanwhile, investors remain concerned about NOI. Property valuations are in flux. Capital is tight. Transaction volume has slowed. Buyers and sellers can’t agree on pricing. 

“It’s hard to know what a building is worth,” says Nick Gesue, managing principal at a2i Partners, a capital advisory and transaction management firm based in Columbus, Ohio. He was previously CEO at Lancaster Pollard (now Lument). Gesue adds that banks and equity providers are pulling back because valuations are unclear. 

Are interest rate hikes over? No one knows. Another worrisome question is whether NOI will ever return to its previous highs, impacting the overall appeal of seniors housing to investors (see sidebar on page 26). “The sector is under stress,” says Gesue. 

Industry stakeholders remain hopeful, however. 

“We are continuing to see positive NOI trends,” confirms Matt Turner, managing partner at MorningStar Senior Living. The Denver-based company owns and operates 45 communities, mostly in the western United States. “We expect NOI to recover.”

Add revenues

In general, NOI declined between 10 and 30 percent because of the pandemic, sources say. But NOI has gradually improved. In 2022, seniors housing NOI grew 4 percent, according to Fitch Ratings. However, Fitch predicts slower NOI growth in 2023 for the commercial real estate sector overall. 

Chicago-based Ventas, a publicly traded REIT, reported 14 percent NOI growth year-over-year in the second quarter for its seniors housing operating portfolio of more than 400 properties. 

To grow NOI, operators are laser focused on increasing revenues and trimming expenses.

Pent-up demand and limited new construction have led the recovery, sources say. Occupancies are expected to continue to improve at existing properties because of less competition for residents. Few new properties are being built because construction financing is hard to secure. 

Brookdale Senior Living (NYSE: BKD) reported an occupancy level of 76.5 percent in the second quarter, up from 74.6 percent during the same period a year ago. Brentwood, Tennessee-based Brookdale operates 672 communities.

Operators are trying to boost occupancy further with rental concessions, which add to expenses. But concessions, such as waiving a community fee or offering a month’s free rent, are being trimmed where possible. 

“If we have pricing power and good occupancy, we encourage operators to collect a community fee,” says Chris Kronenberger, managing director at Boston-based Blue Moon Capital, Boston. The company owns 35 senior living properties and partners with nine operators. 

The big revenue boost has come from rental rate increases. Rate hikes vary widely depending on the property and its location. Generally, operators have raised rents in the range of 7 to 10 percent each of the last two years, sources say. 

A CBRE survey conducted this spring and published in July found that 75 percent of investors anticipate rental rate increases of 3 percent or more over the next 12 months for seniors housing assets, with 28 percent of investors projecting rent growth above 7 percent for the next 12 months. 

At MorningStar, rent hikes have ranged from 5 to 12 percent annually over the last three years.

Going forward, the question is whether rents can continue to be raised without pushback from residents and their families. 

“Consumers are still feeling inflation on a daily basis,” says MorningStar’s Turner. “What’s important for senior living operators is to push appropriate rate increases and communicate effectively about why those are important to provide good care.” 

Rent increases help pay for market-rate wages, resulting in less staff turnover and better care. “If we get people the services they expect, we can continue to raise rents — but not perhaps as aggressively as we have been,” says Turner.

External events, such as a recession, could impact the ability to raise rents much higher, according to Adam Kaplan, founder and CEO at Solera Senior Living. The Denver-based company owns and operates seven buildings and manages one other property. Consumers in upscale markets may accept more rent hikes, but, he adds, “95 percent of senior living properties are going to bump up against caps on affordability.”

Kaplan believes one way to address the affordability issue and boost NOI is to partner with healthcare providers to generate a new revenue stream. One idea gaining acceptance in the industry is that Medicare or Medicare Advantage programs would pay senior living operators for some of the services they provide to help keep residents healthy and out of the hospital. 

“We deserve a reimbursement model that funds some of our services,” says Kaplan. 

Charging appropriately for care, a sometimes-overlooked aspect, is another way to boost revenue. Residents are moving in at higher ages and need more care. 

“We are challenging our operators to be mindful of service creep,” says Matthew Whitlock, chief investment officer and managing director for seniors housing at Berkshire Residential Investments. The Boston-based company owns 10 communities in seven states, partnering with five operators.

Expense control is paramount

Of course, expenses are the other side of the NOI equation. Operators are doing whatever they can to reduce expenses to boost NOI. 

Food costs are starting to stabilize, but insurance premiums are up dramatically by about 17 percent annually, according to sources. Deductibles vary with high deductibles for water damage, especially in coastal areas.

The Florida assets owned by Berkshire Residential, for example, have been hit with a more than 50 percent increase in property insurance expenses year over year.

Labor is still the biggest cost. Hourly wages increased 7 to 9 percent in 2023, according to the HCS Nursing Home Salary & Benefits report. However, the increases were not as bad as a year ago, when hourly wages rose about 9 to 11 percent. 

The national hourly rate for certified nursing assistants (CNAs) in nursing homes in 2023 is $18.68. Seniors housing operators say hourly wages for CNAs have settled around $18 to $21 an hour.

The use of expensive staffing agency labor has dramatically declined, sources say. “In many instances we are not using agency staffing,” says Blue Moon Capital’s Kronenberger. “We encourage our operators to manage it as best as possible.” 

He adds that the lack of new construction has helped to improve the labor market. There’s less competition for workers because there are fewer new buildings. 

Operators are focused on employee retention. Recruiting and onboarding a new CNA can cost from $3,000 to $6,000, according to some estimates. 

“We see savings in operations because of lower turnover,” says Turner at MorningStar. He does not think wages will fall but believes that the labor market is stabilizing. 

Also, less turnover generally results in better care for residents, which improves customer satisfaction.

MorningStar, like other operators, relies on more than high wages to keep employees. Flexible hours and improved technology solutions help boost employee loyalty. 

During COVID, MorningStar created a benevolent fund. Team members contribute to the fund and if they have an emergency, they can request a grant from the fund.

“The fund is administrated blindly,” says Turner. “We don’t know who submits a request or receives help.”

Berkshire Residential encourages its operating partners to provide employee bonuses for retention and outstanding service. Turnover is not only expensive but creates a deteriorating culture at the property, especially in key department head positions, according to Whitlock. “The culture of the operating partner is essential to our margins.” 

Solera is running a pilot program at its new community in Austin, Texas. The company is partnering with Curana Health to open an onsite primary clinic staffed by a nurse practitioner. The change is expected to help reduce the workload of staff members. 

“We’re looking for ways to realize efficiencies and maintain our service standards,” says Kaplan. He also plans to launch the program at Solera’s building in Evanston, Illinois.

How to leverage technology

Operators are embracing technology to trim expenses. Several of Blue Moon Capital’s operators utilize the fall monitoring system SafelyYou to reduce emergency room visits and 911 calls after a resident fall. 

Another useful technology is a labor app provided by AllieHealth. It tracks care plans and makes data input more efficient for workers. 

With so many new technologies being introduced, Kronenberger cautions that operators need to be judicious in their selections. Technology costs money and results may not be what was expected.

Technology is being used to boost care revenue. Residents are moving in at older ages and need more care. Owners and operators want to make sure that residents are being charged for the amount of care they are receiving. 

Solera uses a platform called CarePredict. Residents and team members wear a device that tracks the amount of care provided compared with the amount of care in the resident care plan. The data can be used to go back to the family to ensure the community is being paid properly or to manage the level of care provided. “That’s where our industry needs to go,” says Kaplan. 

Looking ahead, NOI is expected to continue to slowly improve but will depend on the performance of the specific property. The number of operational challenges from building to building varies widely. Though owners and operators expect some short-term pain lasting 12 to 18 months, the long-term outlook is positive. 

Berkshire Residential’s Whitlock is among the optimists. “I’ve never been more bullish on seniors housing than I am right now.”

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