InterFace Panel: Labor Issues Hurting Margins and Investor Confidence in Senior Housing

The State of the Industry Panel at the Ninth Annual InterFace Seniors Housing Southeast Conference: Moderator Steve Gilleland of SLIB; Doug Schiffer of Allegro Senior Living; Sevy Petras of Priority Life Care; Jesse Marinko of Phoenix Senior Living; and Judd Harper of The Arbor Co.

By Taylor Williams

ATLANTA – The labor shortage that continues to plague the senior housing industry is impacting corporate capital markets as owner-operators find themselves underwriting higher costs that ultimately lead to shrinking profit margins and scare off some potential investors.

The origin of the shortage of qualified and committed staff at all levels of residences for the elderly can be attributed in large part to the pandemic. But other macro-level factors — low overall unemployment, fierce competition with hospitality and healthcare users, high demand for flexible work routines — magnify the problem, even as COVID retreats into the world. daily life background.

According to data obtained by the St. Louis Federal Reserve, since January 2020, some 400,000 nursing home and assisted living workers have left the profession. Additionally, a 2021 study by the American Healthcare Association and the National Center for Assisted Living found that of approximately 14,000 properties surveyed, 99% of nursing homes and 96% of assisted living facilities reported shortages of staff to varying degrees.

Rising labor costs are putting pressure on operating costs, which are even more strained amid 40-year inflationary highs and rising capital costs that inflation has subsequently brought about. For many owners and operators, expenses are accelerating faster than income and occupancy in their portfolios – a trend investors understandably don’t like to see.

At the ninth annual InterFace Seniors Housing Southeast conference on Wednesday, August 17, a panel of industry leaders identified labor as the biggest culprit for this dynamic. The quintet of senior housing veterans addressed the crowd at the Westin Buckhead Atlanta Hotel as part of the ‘State of the Industry’ panel. Steve Gilleland, Chief Investment Officer of Senior Living Investment Brokerage (SLIB) moderated the discussion. Seniors Residence Company, a magazine published by France Media, organized the event in conjunction with the Atlanta-based publisher’s InterFace Conference Group.

In their analysis, the leaders shared strategies to address the labor shortage, as well as anecdotal evidence of how their scholarship partners have responded to this cost stressor.

“Capital sources are very aware of the magnitude of labor costs eating into margins, but we cannot respond to them fast enough to meet the return expectations of many capital partners,” said Sevy Petras. , CEO of Priority Life Care. , an Indiana-based third-party operator. “We expect it will take another year or two for the industry to catch up to these costs and return to similar margins.”

Petras added that his company has gone on the offensive in terms of workforce sourcing and retention, with teams increasingly pressured to recruit and incorporate more sophisticated technology processes when selecting. prospects.

“The days of publishing and praying are over,” Petras said. “We now see vacancies like we see open units, and we’ve created a marketing plan to fill them the same way we fill residences.”

Panelist Jesse Marinko, CEO and founder of Phoenix Senior Living, said investor profiles and underwriting haven’t really changed in response to the work. But the financial markets’ overall response to the shortage – which has essentially been to slow down – prompted his company to think differently about the mix of units and services offered at its properties.

“You want to find a narrative that capital sources can buy into,” he said. “In this context, we talk a lot about buying above replacement costs, but replacement costs have gone up as margins have gone down. That prevents you from getting around a lot of the gatekeepers of investment committees. So now we are talking about mix changes.

Specifically, Marinko said current market conditions favor projects with heavier independent living components over assisted living and memory care. Since the residents of these units tend, as the name suggests, to require less help, this solution represents a kind of workaround to the labor problem. Panelist Judd Harper, president of The Arbor Co., which operates about 50 communities nationwide, quickly agreed with Marinko’s arguments.

“Our development partners are moving towards heavier independent living components due to staffing,” he said. “In terms of acquisitions, we had a ton of turnarounds and opportunities that our partners were bringing to us to manage post-acquisition, and we don’t see much of that anymore.”

Panelist Doug Schiffer, president and COO of St. Louis-based Allegro Senior Living, expanded on this notion by saying that some sources of capital are changing their strategy and looking for active adult offerings. The increased interest in working adults over traditional types of senior housing is that these properties tend to be age-limited and cater to a younger segment of the population who don’t doesn’t need 24-hour or semi-regular care. .

“These investment committees are looking at pro formas and performance capabilities, and what they’re seeing are margins that are just a lot tighter,” he said. “Because of this, it often feels like they are looking for a new industry, and working adults have entered the senior housing mix because they are much less dependent on human capital. Instead of a staff of dozens and dozens, with one working adult, you probably only have seven or eight people working on site.

Elsewhere in the discussion, Harper shared some of the innovative approaches his company has taken to address the jobs crisis, including tying executive bonuses and other incentives to workforce retention rates. as opposed to income-based measures. Harper also defined the labor shortage as a function of labor rather than wage rates and budgeting.

“Salary issues have increased and are somewhat resolved, particularly for our frontline staff, which is what the industry needed and which has had a positive impact on other aspects of the business,” Harper said. . “So while we don’t have the pay battle we had a year ago, we do have a problem with people not showing up for interviews or training after hiring them.”

This practice of “ghost” employers following a verbal commitment is a new development in the ongoing labor struggle, but it is not the only variable in the workforce equation, as the pointed out other panelists. For example, in the skilled nursing segment of the continuum of care, there are minimum staff-to-resident ratios that must be legally adhered to. And while legal regulations on the number of residents between staff may be lacking in other care segments, there are still accepted and established industry standards that, if not adhered to, can lead to serious operational inefficiencies.

Moreover, the simple fact that, even with the innovations that have arisen during the pandemic, employees of retirement homes cannot work remotely, and this may be a decisive factor. This is especially true for younger members of the workforce who tend to value this element of a job offer. For these reasons, operators continue to seek employees who are genuinely passionate about the industry, even at the risk of further complicating their work situation.

“It takes a lot of heart to work in this industry,” concluded Shiffer. “Whether you work directly with the residents on site or advise them, these are difficult tasks. And that’s the #1 thing we’re dealing with right now.

As difficult as the current retirement home labor market is, the practices that owners and operators have created and adopted in response should ultimately result in greater operational efficiencies in the future, the panel agreed.

“Moments like these make you wonder how you do business,” Marinko said. “This is a long-term problem that has no quick fix. Our human resources department has become very analytical about the number of calls, applicants and CVs we receive. The process of driving these candidates has become a science that helps us better understand resource allocation. »