Senior Living 100 Intelligence Group Insights - January 29, 2021
When COVID Lifts, the Real Challenge Begins

The senior living business is shrouded in a thick fog of COVID right now, from infection control to vaccine rollouts. It’s truly an all-consuming preoccupation. But when that fog ultimately lifts over the next few months, we’ll be entering a moment of reckoning for this industry, with all aspects of the business dominated by a single driving priority: building back census. Just how far occupancy has fallen in the last 10 months speaks volumes to the challenges ahead.

While COVID case rates were steadily rising throughout 2020, occupancy levels were steadily falling. For the fourth quarter of 2020, average AL occupancy was at an all-time low of 77.7% (down 1.3 percentage points from 3Q) and IL was 83.5% (down 1.4). It was the culmination of a year in which the new-business pipeline wasn’t just down, it’s was altogether broken. States restricted move-ins; families pulled out their parents; and move-ins were like unicorns – no matter how hard you wanted to believe, the reality never materialized.
Off the Ledge: Quarterly Occupancy (AL & IL)
When the dust settles, a new reality is going to materialize, and senior living may never be the same. For one, not everyone is going to make it to the other side. You can’t drop 15 to 20 basis points in occupancy as an industry and not expect carnage. Already we’re seeing signs of the downward pressure. In a market brief published earlier this month, investment bank BMO Capital Markets downgraded senior living REITs Welltower, Ventas and NHI, and offered this forecast: “After studying historical market level net absorption, factoring in a clawback of lost COVID-19 demand and lower new construction, we expect occupancy and cash flow will not recover to pre-pandemic levels until about 2025.” Of course, not everyone will suffer for four straight years. Rather, I think we’re on a collision course for accelerated consolidation. Operators with limited reserves (mostly made up of smaller operators) will likely fail. Operators that elected not to embrace a healthcare-oriented business model will likely fail. And operators that place too much faith in the industry’s “demographic tailwinds” will likely fail.

Their demise will be your opportunity – the opportunity to turn your operational prowess into an even greater market differentiator. To that end, here is a shortlist of some of the key attributes I think will separate the survivors from the pack over the next 18 months:

Marketing sophistication: Whether they’re conscious of it or not, consumers have very rapidly evolved over the last year into uber-digital consumers. We buy our dogfood online. We visit our primary care docs online. And our kids go to school online. The most successful senior living operators will be those who master digital connectivity, including virtual tours, virtual visits (connecting mom and her grandkids), and virtual doctors (i.e., telehealth). Analog served this industry very well for decades, but the 4-color brochure is a dinosaur en route to extinction.

Opportunistic acquisition: This crisis has given rise to opportunity, and it’s literally everywhere. Savvy operators will see expansion potential in defunct hospitality assets (i.e., converting hotels/motels to senior housing); competitors shedding outliers where market penetration is weak; small operators that simply can’t make it through the occupancy drought; and finally the larger players whose portfolios were tired going into 2020 and will not withstand the lease obligations of their REIT landlords (no matter how creative they are in trying to restructure their arrangements).

Diversification: As COVID has exposed the vulnerabilities of single-focus portfolios (i.e., AL only), strategic-minded operators are already planting the seeds of a more diversified future. If you’ve held IL only, but no one can operate independently in a pandemic, you’re naturally rethinking the breadth of your portfolio. If you’re a CCRC and move-ins are rebounding much slower than you modeled, you may be thinking about a CCRC at Home extension. And if you’re anticipating an uptick in resident acuity over the next few years, now may be the time to consider owning (or partnering with) a primary care group.

Creativity: The same old senior living model from the 80s was a dying breed at the end of 2019, and it has even less vitality a year later. Twelve months of COVID has proven to many seniors that aging at place – with the right technology – IS indeed an option. This means the burden of proof to convince people to uproot and leave home is now even greater. Some will be compelled by a Green House model; a co-housing concept; an urban high rise; a village environment; or something completely different altogether.

Building back occupancy over the next few years is going to take a lot more than just getting yesterday’s engine up and running. The demographics of senior living prospects are still the same, but everything around them has changed – and it will influence how they choose to age. They’re no longer technology luddites (they speak to their grandkids on Zoom); they’ve watched endless hours of news reports about COVID deaths in “nursing homes”; they’ve had tele-consultations with their primary care docs; they’ve grown savvy about the need for infection control protocols; and they’ve had time to reflect on the importance of connecting with family. Organizations that can adapt quickest to these changes will be the ones who define the new face of senior living along this slow but steady “clawback” to pre-pandemic occupancy levels.
If you have any comments on this week's content, or ideas for next week, let me know at tcraig@lincolnhc.com -Tim Craig, Senior Living Analyst
To be connected with other members of the Senior Living 100 Intelligence Group community, please email Jen Cross, Senior Living Analyst, at jcross@lincolnhc.com.
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