This article is part of your SHN+ membership
Last week, Brookdale Senior Living (NYSE: BKD) reported that the company had reached its highest operating margins since the pandemic began.
The company’s adjusted operating margin was 27.6% as of the first quarter of the year, which is higher than the 25.6% operating margin the company reported for the same quarter in 2023. Higher revenue per available room was a big reason why, according to CEO Cindy Baier.
“This represents an important milestone on our road to pre-pandemic margins,” Baier said this week during the company’s first-quarter earnings call.
Other publicly traded senior living companies also reported margins have grown since the start of the year. REITs Welltower (NYSE: WELL) and Ventas (NYSE: VTR) also reported positive progress in margins during the companies’ respective earnings calls this month.
In Welltower’s case, a “historically wide” delta between revenue per occupied room and expenses helped buoy margins. Ventas also reported higher RevPOR in the first quarter of the year as move-ins surpassed normal seasonal amounts.
As I survey the rest of the industry, I see other signs that margins are moving in the right direction, especially as operators get a handle on expenses and maintain the flow of new resident move-ins. But the industry still is a ways off before it is fully recovered in that department.
In this week’s exclusive, members-only SHN+ update, I analyze the recent earnings reports and offer key takeaways, including:
- Why margins are moving in a positive direction in 2024
- The prize ahead for higher margins
- The forces that could impact margins this year and beyond
Margins on the rise, but long way to go
Across the senior living industry, a pattern is starting to emerge: Senior living operators are making progress on margins in 2024 thanks to better-than-expected seasonal gains and expenses that aren’t as painful as they once were.
In Brookdale’s case, the company’s facility operating expenses for the first quarter of 2024 grew to $542.6 million, up from $530.8 million for the same period in 2023, representing a 2.2% increase against the prior year. Revenue per occupied room grew to $6,228 in the first quarter of the year, representing a 4.4% gain over the same period in 2023.
The company did report a dip in occupancy from the fourth quarter of 2023 to 1Q24, going to 77.9%, from 78.4%. But CFO Dawn Kussow noted that the result was “meaningfully better than normal pre-pandemic seasonality for this period.”
All of that was not enough to stave off a net loss for the quarter of $29.6 million. But that number, too, was an improvement over 1Q2023, when the company posted a more than $44 million net loss.
Meanwhile, margins were up for the industry’s two biggest REITs, Welltower and Ventas. Leaders of both companies touted margin recovery in the first quarter of the year, and noted that they expect to gain even more ground as the year progresses.
Welltower’s margins expanded 320 basis points between the first quarter of 2023 and the same period in 2024, a result of a “delta between RevPOR growth and ExpPOR growth [that] remains at historically wide levels.”
Leading the positive results for the REIT was its senior housing operating portfolio (SHOP) segment, which grew average NOI by 25.5% on a same-store basis compared with the first quarter of 2023.
The portfolio also grew same-store revenue by 10.3% in the first quarter of 2024, added 340 basis points of average occupancy and grew revenue per occupied room by 4.8%.
“Our independent living and wellness housing portfolio delivered another quarter of extraordinary growth, but our assisted living portfolio continued a streak of strong outperformance,” said CEO Shankh Mitra during the company’s most recent earnings call. “And as for our non-same-store portfolio, we’re even more pleased with the performance of these assets.”
It was a similar story at Ventas, which reported a gain of 80 basis points of average cash NOI margins between the first quarter of 2023 and the same time this year, up to 25.6% from 24.8%.
Like at Welltower, the company’s senior housing operating portfolio led the way, with average occupancy registering at just shy of 80% and average revenue per occupied unit (RevPOR) ticking up to $4,924 in the first quarter of 2024. Move-ins in 1Q24 registered at 113% of 1Q23 totals, with independent living move-ins at 127% compared with the same quarter in 2023.
According to Justin Hutchens, Ventas’ chief investment officer and executive vice president of senior living, the company’s margins were aided by the fact that operating expenses were lower than expected thanks to staffing improvements and cost efficiencies in the REIT’s data-enabled “VentasOI” operational platform.
“We’re optimistic about our ongoing occupancy performance,” he said. “Remember that we are just now entering the critical key selling season.”
All three companies see hundreds of millions of dollars ahead if they can return to pre-pandemic occupancy and margin rates. Brookdale has noted that simply returning to its pre-pandemic occupancy of 84.5% would add at least $250 million of incremental revenue, while achieving the company’s historic occupancy high of 89% would add at least $420 million.
Similarly, Welltower executives have identified $490 million in embedded NOI growth, should the company return to its pre-Covid senior housing portfolio occupancy of 88.4% and operating margin of 31.1%. And Ventas management sees a similar opportunity ahead to bring the company back to its 92% peak occupancy, seen a decade ago.
The bottom line is that while senior living margins are on the rise, they still have a long way to go before companies reach their pre-Covid goals. I do think that companies including Brookdale, Ventas and Welltower have a clear shot at getting there, but that the path forward may not be as straightforward as they would like.
Growing rates could be a challenge
Based on their latest earnings calls, it’s clear that the executives of Brookdale, Ventas and Welltower are pleased with their respective performances and see an upward trajectory for senior living operations in the year ahead.
On the occupancy front, I also see smoother sailing ahead in 2024 given the current level of demand and low rate of new construction. That alone should help boost margins, as operators fill units potentially that have not generated revenue in a while, gaining operating leverage in the process.
But I do foresee a potential challenge ahead in the form of increasing resident rates. Senior living operators have spent the last few years taking resident rates higher and higher, often for the simple fact that they must keep up with expenditures.
This year, many operators passed through more moderate rate increases after several years of double-digit growth. That has left them with even fewer tools with which to offset expenses, a fact that I think could complicate their ability to regain pre-pandemic margins.
That said, there are of course a lot of factors that will have an effect on margins, and it’s difficult to predict how all of these puts and takes will play out over the course of the year. For example, Juniper Communities CFO Chuck Hastings recently noted that insurance cost increases are slowing, which is helpful. But just this week, Federal Reserve Chair Jerome Powell expressed a bearish outlook on inflation overall and gave further indications of a “higher for longer” interest rate environment.
“I do think it’s really a question of keeping policy at the current rate for longer than had been thought,” he said at the Foreign Bankers’ Association meeting in Amsterdam.
If senior living companies want to return to pre-pandemic margins, they will not simply be able to resume pre-pandemic practices. Instead, I think it will take a new look at revenue and expenses, along with potentially new pricing models for residents, to bolster margins in the years ahead.
The good news for the industry is that I do see many operators looking to do so, including Holbrook Life, Juniper Communities and Revel Communities. All three companies are taking a fresh approach to revenue by increasing ancillary services in one way or another, as we reported in a story this week. Some key takeaways included:
- Senior living operators are now more limited in their ability to pass on high rate increases to offset growing expenses
- Expenses are moderating, with staffing being a big continuing focus for budgets
- Operators are diversifying their services for the boomers and in some cases charging for them
At the end of the day, I think regaining senior living margins will continue to be a more gradual effort, but creative moves to expand revenue will provide a big assist. Hastings anticipates that Juniper will achieve pre-pandemic margins by the end of this year. And if other providers want to follow suit, I believe that they would be wise to pursue new payment structures for residents or other services to supplement the bottom line.
