How Ventas, LCS, Leisure Care, Sculptor Are Aiming for the Occupancy Recovery Fast Track

Across U.S. primary markets, senior housing occupancy could return to pre-pandemic levels in less than 2 years if absorption continues at its recent rapid pace — but occupancy recovery could take far longer if absorption slows.

Specifically, if absorption returns to its average pace between 2010 and the first quarter of 2020, occupancy recovery might take 7.7 years.

That’s according to projections from the National Investment Center for Seniors Housing & Care (NIC), shared by Senior Principal Lana Peck at the organization’s 2021 Fall Conference in Houston.

“The point I want to make is that there is a really wide difference in the pace of occupancy recovery possibilities,” Peck said.

The NIC calculation is based on variables that will differ across markets, such as the number of units currently under construction. So, certain communities and portfolios will recover occupancy faster or more slowly depending on where they are located, as well as how they are managed, with labor issues and rental rate increases among the major variables at the moment.

With this in mind, investors and operators such as Ventas (NYSE: VTR), LCS, Leisure Care and Sculptor Real Estate are trying to identify the best strategies to pursue, to regain occupancy in a rapid and sustainable manner.

The NIC model

To model the potential pace of occupancy recovery, NIC identified three “ingredients”:

— Re-occupancy of more than 42,000 vacant units due to the pandemic

— Uptake of nearly 31,000 units that were in lease-up before and during the pandemic

— Occupancy of more than 33,000 new units currently under construction

Considering that 15,682 units were absorbed between Q2 2021 and Q3 2021, that leaves 90,450 units currently left to be absorbed.

The pace of absorption in the third quarter of this year was historically rapid, and so a conservative approach assumes that pent-up demand will wane and absorption will return to more normal levels. Issues such as staffing and labor shortages, and a lack of affordability as rents rise to counter increasing expenses, could slow the hot pace of absorption seen recently.

However, there are reasons to believe that demand could continue to drive absorption at record or near-record levels. The demographic wave of older adults and the relative lack of family caregivers is one major factor, Peck observed, but senior living organizations also can take steps to drive more rapid occupancy recovery, such as enacting rent concessions and adapting operating models to enhance consumer appeal.

The NIC formula “is just one scenario” and is meant as a tool for owners and operators to use, evaluating their particular portfolios by adjusting the assumptions for particular market conditions and in response to further data on absorption rates, construction trends and other factors, Peck said.

Confronting labor challenges

Among all the variables affecting occupancy recovery, workforce challenges and related expenses are hitting senior living organizations especially hard at the moment.

Labor issues are widespread across the economy, and the complexity of the issue creates uncertainty about how to address the challenges and anticipate when the pressure will ease, said Nicole Sermier, executive managing director and head of residential investments at Sculptor Real Estate. Sculptor has raised about $7.9 billion of real estate capital since 2003, and completed more than 170 transactions across a variety of real estate classes, including senior housing and care.

“In our underwriting, we’re not comfortable assuming it’s going to get better very quickly,” she said.

For Des Moines, Iowa-based LCS — one the largest senior living development and operating companies in the United States — the labor challenges have been especially pronounced in the skilled nursing centers of the company’s many continuing care retirement communities (CCRCs), Executive Vice President and COO Chris Bird said.

Some LCS communities have temporarily shut down skilled nursing wings due to staffing shortages, he noted.

LCS has not seen notable variation in labor challenges across different regions; when certain states ended enhanced unemployment benefits, applications did increase, but not significantly. Bird is hopeful that the workforce will start to return this quarter, with the situation “turning around” as 2022 approaches.

In the meantime, LCS has increased the intensity of its recruiting and retention efforts, with executive directors more directly involved. And communities are getting creative — including hosting tailgate parties in the parking lot of a Florida Walmart to attract potential applicants.

Technology holds potential for helping to address both immediate and longer-term workforce issues, said Justin Hutchens, EVP of Senior Housing, North America for real estate investment trust Ventas.

Prior to taking the role with Ventas, Hutchens led large U.K.-based operator HC-One, during a period of tight labor markets related to Brexit.

In response, HC-One centralized staff recruiting using an applicant tracking system; typically, line staff recruiting is handled at the community level, but this “professionalized approach” handled applicants similarly to sales leads, Hutchens said.

“It was a big cultural change and a huge help to the local communities,” he said.

During his time at HC-One, the operator also leveraged technology to essentially create a pool of gig workers who could take shifts as they became available. This “bank staff” totaled about 10% of the workforce; they were trained as employees but worked on a per-diem basis, with HC-One contacting them as shifts became available.

“That gave us a large part of our workforce that was flexible, and certainly was playing straight into what the market was demanding from an employer standpoint,” Hutchens said.

He also emphasized the advantages that senior housing enjoys, given the mission-oriented nature of the work.

“We have a core group of employees that are attracted to this business for the altruistic nature of the business, and that employment pool stayed in place during the pandemic,” he said. “… Playing into the rewarding experience that people get working within senior housing has always worked for us, and it’s always going to be a key part of being successful employers in the space.”

Bre Grubbs, EVP of Revenue with Seattle-based operator Leisure Care, illustrated that point, sharing an anecdote about the company’s ability to recruit from the beleaguered hospitality industry during the pandemic.

The bartender at Leisure Care’s Murano highrise in Seattle formerly worked at a major steakhouse, but says she will never return to that job; she enjoys her new hours, her ongoing relationships with residents, and the fact that when a customer is having a bad day, it often can be fixed with an “extra scoop of ice cream.”

“Not to diminish the hard part, but we’ve had some real wins, too,” Grubbs said.

Concession calculus

Grubbs also noted that she has been repeatedly asked at the NIC conference about rental rate increases for 2022. LCS’ Bird agreed that he has “never talked more in my entire life” about rates.

That stands to reason, given that labor expenses and other operational costs are rising, making rental concessions a particularly difficult strategy for boosting occupancy.

The good news, Bird pointed out, is that residents will be getting a 5.9% increase in their Social Security payments, which should help support higher rates.

“Generally, I’ll share I’ve not heard anybody say anything below 5%,” he said. “We’ve got buildings that are going to be going up close to 9% based on just the cost of our delivery of services.”

LCS is taking pains to explain the rationale behind the rate increases to residents — and consumers understand the imperative to cover expenses, and can be suspicious that deep concessions will mean compromised quality, he pointed out.

One LCS community achieved 93 move-ins between January 2021 and October 2021, with a sales process that focused on the value of the product rather than on significant price concessions.

“We’re actually charging a rate pretty significantly higher than our main competitor, and we filled up, and they’re still stuck at 65% occupancy — so the customer recognizes when I’m trying to discount too much,” Bird said.

However, the ability to drive rate differs across Class A and Class B product, and for different acuity levels and markets, Sermier said.

Generally, rate increases are easier in Class A product, which serves a more affluent consumer than Class B product. Higher acuity buildings tend to have higher labor costs and more frequent resident turnover, putting pressure on how quickly operators can burn off short-term concessions and start to drive rate; in lower-acuity buildings with longer length of stay, it’s possible to benefit from high-single digit annual rent increases on a more consistent basis. And regionally, factors such as the litigation environment and climate change risk are also driving insurance expenses at different rates.

So, Sculptor typically is “more conservative” in taking a discount to the stabilized margin in Class B properties than in Class A.

The right locations for occupancy growth

New construction starts plunged as Covid-19 took hold last year, and the constraints on new supply should help drive occupancy recovery. However, markets that remain more insulated from new supply will likely recover more quickly than those where building remains active.

Sculptor is “fairly agnostic” in terms of choosing what markets to invest in, but favors those like the West Coast and New England where barriers to entry are higher, Sermier said.

And, perhaps counterintuitively, states that historically have been more business-friendly now could become places to avoid, as they are likely facing steeper wage increases than places with more stringent minimum wage requirements.

“That’s something we’re baking into our underwriting,” Sermier said.

LCS historically has developed in “very high barrier to entry locations,” Bird said, but the company now sees a greater breadth of opportunities, given that supply is coming down and demand is ramping up.

“I think we are at this point actually optimistic about the sector and do feel like it’s the right time to be investing and buying — and I would not have said that for a long period of time,” he said.

Ventas’ “favorite market” of the moment is Canada, Hutchens said. There, the REIT is partnered with developer and operator Le Groupe Maurice, and the Canadian senior housing sector has seen 90%+ occupancy rates over the past decade, with strong go-forward fundamentals.

In the United States, he declined to name a specific favorite market, but said that Ventas’ approach to evaluating locations is “very consistent, very local, very disciplined and very detailed.”

To drive occupancy, owners and operators must not only solve labor challenges, set the right rental rates and choose the right markets, but evolve their communities for a new generation of consumer, with the designs and technologies that aging baby boomers will desire.

This is a tall task, but Hutchens returned to the demographic-driven demand as a potent force behind a strong senior housing recovery.

“It certainly seems like in the near-term — call it the next few years — there’s a window of opportunity for net absorption the likes of which we’ve never seen before in the sector,” he said. “ … I’ve been in the sector for 25-plus years, and the demographics have finally arrived.”

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