DISCOUNTING RENT TO DRIVE ASSISTED LIVING MOVE INS COULD HAVE DIRE CONSEQUENCES FOR SENIORS HOUSING OWNERS, INVESTORS AND OPERATORS
With independent and assisted living sales and marketing efforts failing to produce the move ins needed to net up and gain occupancy traction, operators show signs of desperation with little concern as to the long-term repercussions on the senior living industry.
The Bild & Co research team is seeing a disturbing trend as of late; seniors housing operators deeply discounting rent to close sales and lease up underperforming assisted living communities and new developments . This strategy, driven by fear, has consequences that will haunt our industry for years.
- Financial Turmoil: Owners and investors face unprecedented losses ; creating a crisis of confidence in the seniors housing sector; leading investors to make transactions elsewhere including medical offices, single-family rental properties, warehouses, and fulfillment centers.
- Strained Owner and Operator Relations: Lack of alignment is transforming the dynamic of our industry as frustration over the inability to professionalize sales and marketing and to shore up balance sheets comes to a head.
- Devaluation of Independent and Assisted Living: Operators are training consumers to seek out deals rather than value; negatively impacting the industry and its ability to generate the revenue needed to properly care for seniors.
ARE DISCOUNTS A GOOD WAY TO GROW OCCUPANCY QUICKLY?
Let’s do the math and look objectively at the consequences of discounting rent for Rose Bush, who is 87 years old, widowed, and seeking an assisted living community due to a recent decline in her health.
Market Rental Rate:
For this example, I’m using a 100-unit residential assisted living community that turns over 40% of its resident base annually. Market rate rent for assisted living is $5,250 per month, all inclusive, or $63,000 annually.
Length of Stay:
Using an 18-month length of stay , that’s a $94,500 spend for Rose over her 18-month stay ($5,250 x 18 = $94,500) considering no annual rate increase.
Annual Rental Increase Revenue Impact on Rose’s 18-Month Stay:
If at the end of 12 months the community increases Rose’s rental rate by 5%, the final six months of her stay will be increased by $262.50 per month. That means months 13-18 rental income will now be $33,075 for Rose bringing her 18-month spend to $96,075.
The total rental revenue for Rose’s stay at the community without discounting and with an annual rental increase is $96,075. Considering a 23% net operating margin, $22,097 or $1,228 per month is earned in exchange of taking care of Rose during the most vulnerable time of her life.
ONE BAD DECISION ON CONCESSIONS LEADS TO MANY UNPLANNED OUTCOMES
It’s common for seniors housing operators to discount rent or incentivize prospective residents to move into their communities; particularly as they near the end of the month.
Remember Kmart® and its Blue Light Special ?
The iconic blue light special sales gimmick consisted of surprise announcements when price-cuts were offered for a limited time on specific merchandise. At the beginning of each random sales blitz, the phrase “Attention Kmart® shoppers...” heard over the store’s loudspeaker generally preceded a proclamation of the bargain item.
Concurrently, a flashing blue siren light illuminated the area. Customers then flocked to the designated department to take advantage of the sale. During the height of its popularity, the campaign was often successful in eliciting a shopping frenzy, especially since the discount typically lasted no more than 15-minutes.The light came on and customers were drawn to those products whether they needed them or not and sales would ultimately rise. For Kmart® this made sense; customers had thousands of products to choose from that were not on special and that would produce significant margins offsetting the blue light special losses.
Seniors housing is not Kmart® and we are not selling merchandise off the shelf; we are selling healthcare along with lifestyle and longevity; it’s time we act like it. We have one product, that’s seniors housing which in most cases includes healthcare. When operators approve discounts, we lose margin along with the ability to properly operate for the long-term. It’s that simple. Rental revenue is the lifeblood of an assisted living or memory care community. If an operator makes a rash decision to discount rent, there are many ripple effects that have long-term consequences as described in the beginning of this blog.
LET’S COMPARE A SINGLE MARKET RATE ASSISTED LIVING APARTMENT MOVE IN TO A DISCOUNTED MOVE IN
An experienced but untrained sales and marketing director, who is used to taking orders and offering discounts to close sales brings little value. Compare the impact of a move in incentive on the bottom line as compared to Rose who paid market rate. In this scenario, the move in will generate the following revenue over an 18-month length of stay:
The sales and marketing director offers Rose a discount on rent of 50% for the first six months at which time it will return to market rate*. The community also agrees it will not increase the annual rental rate for a period of two years with a Rent Lock Promise to Rose and her family.
*Think this offer is too good to be true? It was a REAL discount offered to a family during a recent mystery shop of a community in the Chicago suburbs.
BUT IT’S ACTUALLY MUCH WORSE
This is not reality. The fact is operators who discount, do it consistently. Rose is not the only prospective resident who will get this deal; anyone who doesn’t quickly say yes will be offered the same incentive. This operational decision to approve discounting to drive move ins, occupancy, and revenue will cost an owner of an 100 unit assisted living community, who replace 40% of their residents annually, over $693,000 in top line revenue and $159,390 in net operating income annually.
While move ins look good on paper and sales and marketing celebrate their wins, it’s all smoke and mirrors. In most cases, the entire profit margin for the community owners is lost. There is nothing to celebrate but for the fact the new residents who moved got a great deal. Even worse, those cuts must be made up somewhere, it’s business. Meaning the resident, you promised to care for will be shortchanged in food services, maintenance, housekeeping, or care services to make up for the rampant discounting used to fill your building.
MAKING MATTERS WORSE…
Not to add more salt to an open wound but most seniors housing operators use paid referral agencies to generate leads and move ins. If 20% of the community’s move ins came from these agencies, we need to factor that in and deduct the first month’s rent as a marketing expense. This means, deduct another $105,000 annually, further diminishing the operating margin.
For owners and investors, margins are essentially gone. Considering the impact of increased expenses due to PPE, hero pay, staffing agencies, and food cost increases; the picture gets more bleak.
Investors who experienced poor returns pre-COVID-19 due to development and market saturation are now facing difficult decisions with operators who fail to professionalize sales and marketing; impeding their ability to deliver sales results:
- Do they continue to pour cash into underperforming communities and ride it out?
- Sell underperforming assisted and independent living communities and cut their losses?
- Dig in and butt heads with operators to professionalize sales and marketing to grow top line revenue, eliminate discounting, paid referrals, and grow net operating income with strategies proven to work?
There are no easy answers.
WHY ARE SENIORS HOUSING OPERATORS DISCOUNTING AND IS IT NECESSARY?
We are in a pandemic and have been since March 2020. Consumer concerns- from the inability to visit loved ones to seniors in isolation and at risk of contracting COVID-19 are real. While challenging, it’s still a product people want and need. Yet to sell at market rate rent and maintain fee integrity, operators must equip assisted living sales and marketing directors with the skillset to sell in today’s challenging environment. There is no shortcut; the work must be put in; people need to be trained and held accountable to execution day in and day out.
Before COVID-19, the excuse for poor sales performance was competition. Once we get past this awful pandemic it will be something else. So long as owners, investors, and operators continue to neglect training and coaching of sales and executive directors, nothing will change. Occupancy will remain flat and apartments will sit empty. We can do better.
WANT A FREE SAMPLE OF MYSTERY SHOPS TO GUAGE YOUR COMPANY’S BUYER EXPERIENCE AND UNCOVER QUICK REVENUE WINS?
Effective sales training is proven to impact sales performance and margin per move in. Operators must be willing to invest in their sales and marketing people despite their fear of losing them to a competitor who will then benefit from that training. That is a scarcity mentality, and it must change.
Owners and investors are tired of saying the same thing over and over and of hearing the same excuses for poor occupancy, revenue, and net operating income. There is no other expense to cut, the only way out of this problem is to drive revenue which means more sales at market rate rent. To learn how to do that, you must retrain your sales and marketing teams. Selling today is completely different than selling just one year ago and it doesn’t matter how experienced your salespeople are. As Nike says, “Just do it!” and begin the transformation that will pay dividends for years to come.
Do you have an underperforming community that is unable to gain traction? Email me at email@example.com , call 1-800-640-688 or text me at 813.390.3349 and let’s talk!