Strategic Forecast

While key elements of today's external economicright to the bottom line.o For a single community
environment are certainly challenging, the assistedassisted living operator with a typical baseline monthly
living business and its market fundamentals remainservice fee of $3,300 per month, the 70 percent
strong. For most senior living companies, 2010 is theincremental profit margin results in a new cash
year to sharpen strategic focus-laying a solidbenefit of $2,310 per month, or a $27,720 annual
foundation for a potentially strong future for assistedincrease in cash flow for each additional occupied
living- despite being amid the most significantroom.o If a four-community operator increased
economic recession since the Great Depression. Anoccupancy by just two rooms per community, the
unemployment rate that hovered around 10 percentpotential financial enhancement is $55,440 (27,720
toward the end of 2009, a credit crisis, depressed∞ 2) per community per year-times four
home sales, significant consumer savings/ investmentcommunities equals $221,760 per year. With a 9.5
portfolio losses, and low consumer confidence allpercent cap rate, this could increase the value of the
contributed to a slow-down in business.four-property portfolio by up to $2.3 million.
Early indicators of a modest recovery are graduallyFocus on Improvements
surfacing, but the overall economic recessionIf assisted living operators begin to feel a financial
recovery time will be extensive and largelypinch, they are forced to focus on existing
unpredictable. During this recovery period, consumeroperations. Why not focus on existing operations
spending and the availability of consumer andmore consistently? Here is a typical real world
business credit will likely involve more cautious andoperations enhancement scenario.
conservative consumer and lender decisions.TYPICAL SCENARIO FOR OPERATIONS
Supply-Demand BalanceENHANCEMENT
The current economic environment has directlyA typical 80-room assisted living community operates
impacted typical senior consumers' saving andwith 26,280 resident days per year (80 units at 90
investment portfolios and their ability to sell theirpercent stabilized occupancy equals 72 units ∞
homes. Thus, the industry is experiencing delayed365 days per year). Typical assisted living operating
demand and absorption for senior living units.expenses are currently benchmarked at
However, this delayed demand will ultimately result inapproximately $80 - $108 per resident-day (PRD).
a relatively strong upside once the housing marketThis wide range is influenced by resident acuity and
stabilizes and senior consumer investment portfoliosresulting direct care costs.o An operating expense
partially recover from current losses. That's becausereduction of just $1 per resident-day (PRD) is a
of a growing assisted living supply-demand imbalance.reasonable goal. It represents approximately 1
Construction of new communities is currently at anpercent of current total operating expenses PRD.
all-time low, and there are significant barriers to entryWith 26,280 annual resident-days, the $1 cash savings
for new projects in terms of production cost andgoing right to the bottom line would be $26,280 per
approvals. In terms of pent-up demand, age- andyear.o With a 9.5 percent valuation cap rate, the cash
income-qualified demographics continue to grow at asavings in this scenario could have a favorable
predictable and moderate pace. Plus, the need forincreased value impact of at least $275,000 for a
assisted living as an affordable alternative to bothsingle, 80-room, free-standing assisted living
independent living and skilled nursing continues tocommunity.
increase. Stabilized occupancy for assisted living asFor some, this operations enhancement scenario may
reported by the National Investment Center for theappear to be a hypothetical exercise in arithmetic.
Seniors Housing & Care Industry (NIC) was atBut, if you are a single community assisted living
89 percent in late 2009-down approximately 0.4operator, you're probably constantly fighting
percent from 2008. However, assisted livingeconomies of scale and every dollar really counts.
occupancy declines may have bottomed out as theyLook for that $1 PRD savings within two of your
actually increased in the last half of 2009. Averagecost centers: sharpened, hands-on direct care costs
monthly service fees have increased by 2 percentand total dietary costs (raw food, labor, etc.), which
from late 2008. This favorable supply-demandshould not exceed $20 PRD.
situation will eventually lead to a relatively strongA multi-community operator can benefit significantly
assisted living recovery.from operations enhancement. If an operator had a
In 2010, however, the margin for senior livingportfolio of four 80-room assisted living communities,
performance error has narrowed considerably. Astutethat $1 PRD reduction would translate into an
operators realize that while they cannot completelyincreased annual cash flow of approximately $105,120
control the external market, they can control and(four properties Σ 26,280 resident-days per
optimize their internal operations. In fact, a number ofproperty at a $1 per resident-day expense reduction).
owner/operators have sustained their operating profitCapitalized at 9.5 percent, that would result in an
margins by reducing expenses to compensate forincreased portfolio value impact of $1.1 million.
declining occupancy. The opportunity for realizingProfit Margin Benchmarks
significant growth and upside potential within existingThe ultimate financial performance metric, profit
assisted living properties-also known as organicmargins are defined as net operating income or
growth-is significant this year. There are two areasEBITDAR (Earnings Before Interest, Taxes,
offering significant opportunities: optimizing occupancyDepreciation, Amortization, and Rent/ Lease
in difficult markets and operations enhancementpayments). Today, assisted living profit margins are
through expense reduction.typically ranging between 27 and 30 percent. Some
Optimizing Occupancyassisted living communities have higher profit margins,
Astute owner/operators know the opportunity costbut many experience much lower returns while
of a vacant apartment or room. Simply stated, theyhaving unrealized upside potential. Savvy owner
are investing more in sales and marketing duringoperators know they must strike that delicate
these difficult times because the potential returns onbalance between profit margins, high standards of
that investment are very significant. Here is a basiccare, clinical excellence, and optimum resident
scenario that outlines typical opportunity cost.satisfaction.
OPPORTUNITY COST OF A TYPICAL VACANCYOverall, 2010 will likely be another challenging year,
For every additional occupied room (occupancies inbut there will also be some real operational
excess of 80 percent), one could assumeopportunities for assisted living operators. While not all
approximately 30 percent of the additional monthlyof the positive financial enhancements outlined here
service fee would go for new, incremental expenses.can be realized simultaneously, just a small portion of
That is because at relatively high occupancies mosteach of them can easily have a significant positive
operating costs are already "sunk"-they are incurredand largely permanent financial impact on senior living
and covered. As an example, you may not have tooperations. This year is the year that assisted living
buy more raw food or hire another employee forowner/ operators must look back with 20/20
one additional resident.o Approximately 70 percent ofhindsight and, most importantly, look forward with an
the additional monthly service fee represents a veryentrepreneurial vision.
high incremental profit margin-new cash that drops