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Senior Housing Expansion Strategy: Keys to Intelligent Growth in 2017

Moore Diversified Services, Inc. teams up with Senior Housing News to bring you the most up-to-date industry information you need to succeed.

Senior Housing Expansion Strategy: Keys to Intelligent Growth in 2017

The past few years have been busy for the senior housing industry as existing owners pursued growth opportunities and new players made investments in the sector.  Senior housing transaction volume in the first quarter of 2017 alone hit $4.4 billion, according to the National Investment Center for Seniors Hosing & Care (NIC).

Recent data show some markets are stabilizing while others are overbuilt, and yet in other markets, supply is still well below demand for senior housing.

This landscape means there are still many opportunities for new investors and existing owners and operators to target expansion, whether through organic growth, portfolio acquisition, or through other avenues if necessary.

But today, more than ever, it’s important to have a calculated approach to that expansion – both in understanding the markets and ensuring every deal makes sense from a financial perspective.

With the help of market studies and financial analysis expertise, today’s senior housing players do not have to navigate this market alone.  Instead, they can leverage industry experts to bridge knowledge gaps to make better investment decision.

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SELF-MANAGED COMMUNITIES – CHALLENGES AND OPPORTUNITIES

SELF-MANAGED COMMUNITIES – CHALLENGES AND OPPORTUNITIES

Looking to the future, a growing number of operators of individually owned, self-managed senior living communities have two major concerns; 1) they may not be fully aware of all of the issues that need to be addressed in order to keep up with the current state-of-the-art and the growing complexities of the senior living business model and 2) once they identify all of the issues, can they really afford to pay for them?

Multiple property portfolios and large third-party management companies have significant economies of scale and can spread the cost to develop and  implement the necessary strategies to keep up with changing trends.  The future challenges for individual self-managed operators involve two key time frames; 1) short-run, what must operators consider in the next 18 to 24 months? and 2) longer-range, how can they really address the future; at least over the next 24 to 60-months?

Examples of these current and future needs include: sophisticated systems and procedures, comprehensive and expanded business practices, growth and expansion of Information Technology (IT), enhanced business operations efficiency including financial benchmarking, enhanced sales and marketing, human resources, risk management, and increased purchasing power.  One issue is very clear; financial viability and available cash flow is a must in order to procure additional services, resources and professional advice and counsel.  The trends of increasing minimum wage will also impact entry level workers in senior living.

There are four basic property management decision options for senior living communities; 1) continued individual self-management, 2) purchase as-required, short-term third-party management company services and resources while sustaining full self-management autonomy, 3) procure selective management support on an ongoing basis from either local providers or through a negotiated contract with a full service, third-party management consulting firm and 4) full scope long-term outside third-party management support.

Most self-managed operators desire to remain in complete control.  That’s understandable.  But it will be increasingly difficult to achieve.  Some not-for-profits and for-profit operators may think they are somewhat immune to these future challenges.  That’s not true.

To remain successfully self-managed in the future, sponsors and owner/operators must essentially create the same service mix and resources that they might otherwise get from a qualified third-party management company. 

Here is but a sample of some existing and future self-management issues to address.  There are actually about 25 that will surface over the next few years:

  1. Systems, Procedures and Policies – Having sophisticated, yet practical, and cost-effective systems, software, operating strategies, controls and performance enhancements.
  2. Achieve Economies of Scale – Realizing the potential for creating significant ongoing operations and procurement economies of scale that deliver substantial (and necessary) financial benefits to an individual community.
  3. Staying on the Leading Edge – Sustaining the ability to stay on the leading edge of the state-of-the-art in operations strategies and technology in an ever-changing complex industry.
  4. Providing Innovative Operating Strategies – Executing cost-effective, consistent and focused market positioning, sales and marketing initiatives, along with cost-effective operations that result in high resident satisfaction and clinical excellence.
  5. Implement Risk Management – Having leading edge risk management knowledge, experience and systems. Contractual and resident care litigation will continue to increase along with potential cost exposure.
  6. Succession Planning – Operators must recognize that leadership can change by both planned and unpredictable events. Developing existing “bench strength” with existing staff  and forward looking succession planning will also be a mandatory initiative.
  7. Growth In Community Based Services – Progressive communities are creating an expanded seamless continuum beyond their campus into their Primary Market Areas. This generates additional revenue and sharpens the image and market positioning of the original senior living campus.
  8. Enhanced Organic Growth – That’s a fancy term for expanding service delivery and realizing efficient financial proceeds from an existing asset – the current community.
  9. Increased and Sharpened Board Involvement – Board members should no longer be selected or retained as an honorary position. Boards should be carefully diversified based on their specific experience and the ability to directly benefit the community on a continuing basis.

The complexity of the senior living business has increased substantially in the past 10 years.  This trend is projected to dramatically increase over the next 10 years.  A frequently used cliché is still very appropriate; “evaluate the past with 20/20 hindsight . . . look to the future with an entrepreneurial vision.”

MDS can help you evaluate your current position and the ability to continue to self-manage. You must know where you are in order to know how to get to where you want to go. Call us today for an appointment. 

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Top Five Strategic Challenges and Priorities for 2017

Top Five Strategic Challenges and Priorities for 2017

“You’ve Got Questions . . . We’ve Got Answers”

What are some top priorities I should focus on to become more market-responsive, operationally focused and successful in 2017 and beyond?

I’ve identified five top strategic challenges and priorities for sponsors and owner/operators to successfully address in 2017 and future years.

1) Increasing Resident Age and Higher Acuity – Many independent living communities are turning into “naturally occurring assisted living communities.”  The need for assistance in living for residents is increasing.

2) Aging Physical Plants – Some of today’s older designs are not state-of-the-art or fully market-responsive.  Physical plant retrofit and cosmetic enhancement is a mandatory initiative for many campuses.

3) Increasing Capital Expenditure Requirements – These investments can include functional design modification, cosmetic enhancement and adding market-responsive features like additional dining venues.

4) The Senior Living and Health Care Continuum Is Expanding – Many operators are specifically addressing Alzheimer’s/dementia, memory care and Continuing Care At Home (CCAH).  They also recognize that the psychographics and “birthmarks” of today’s prospect and their adult children/decision influencers have changed considerably.

5) Market Positioning/Sales and Marketing – Key strategies include sharpened marketing positioning, improving the lead management programs, have very targeted and quantified performance objectives and sophisticated social media strategies.

The next steps for you should be to objectively address three critical questions.  1) What will be your strategic position in 2017?  2) What specific action are you implementing?  3) What are your expected outcomes in 2017 and beyond?

Keep in mind I’ve only identified five strategies.  There are at least 25 initiatives that could be considered.

Let MDS help you develop and define your strategic focus. From a quick situation review to a full strategic analysis we can tailor a service just for your needs.  MDS helps clients to accomplish their goals. Contact us today.

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Digital Strategy and Content Planning for 2017

Digital Strategy and Content Planning for 2017

Is a Digital Presence Important for the Senior Living & Housing Industry?

Having a digital presence in this day and age is mandatory and it goes beyond just having a website.  You need an ongoing presence that can include a blog, Facebook page, Twitter account and more.

An image of a manager writing something in the air

Studies have shown that as anywhere from 67% to 94% of people research products and service online before purchasing.  This includes not just consumers, but also B2B (Business to Business).  If there is no website, or it is outdated, lacking in information or unprofessional, that potential customer or client will move on.  Yes, it is that important.  In addition to your website, added value comes from blogs, newsletters and other social media content you provide.

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You’ve got questions?…We’ve got answers.

You’ve got questions?…We’ve got answers.

Q: How should a not-for-profit senior living community objectively segment the financials of charitable mission initiatives from the basic senior living business operations?You've got questions?...We've got answers.

A: This is a three-step process.

1) Create an income statement and sheet that includes only your senior living business operation (revenue, operating expenses, profit, debt service, cash flow, etc.). If necessary, show any cash from the business operation that is needed to fund charitable initiatives as a separate financial burden below the operating profit and net cash flow line entries. The expected outcome is the execution of sound business practices while meeting industry benchmarks for financial performance.

Continue reading “You’ve got questions?…We’ve got answers.”

It’s a New Year, New Plan, New Game – Welcome 2017

It’s a New Year, New Plan, New Game – Welcome 2017

Happy New Year! The beginning of a new year.  Does that spark excitement in you? A clean slate to create and take advantage of new ideas and opportunities.  Or is it just another day? The current competition in the senior living and housing market can be fierce so if January doesn’t make you take inventory and commit to make a change, you need to get in the game!

Innovate Definition Magnifier Showing Creative Development And IngenuityDo Not Rest On Your Current Success

Now, this doesn’t mean you must totally revamp your business strategy (unless it is drastically failing).  But each year should bring new ideas and new goals.  Even if business is booming, resisting innovative additions or changes can see that success falter eventually.  Amazon is a great example of implementing new and innovative ideas into an already successful business.  No one can deny that Amazon’s business has been on the upswing for an extended period.  The secret to their success is that they are a step ahead with new ideas as the previous ideas run their course.  The Apple iPhone is another great example.  Same product, a phone, yet it is continually being updated and improved as to avoid letting the competition pass them up and it keeps their customers excited for what is new.

Continue reading “It’s a New Year, New Plan, New Game – Welcome 2017”

Divide and Conquer Then Bring It Back Together: Sharpened  Financial Focus

Divide and Conquer Then Bring It Back Together: Sharpened Financial Focus

by Jim Moore

How can I develop a more sharpened financial focus on my campus which has multiple living arrangements?

Great question.  The Senior living business is becoming increasingly complex.  The continuum of products and services is growing.  There is a pressing need to optimize the financial viability of each individual product or level of care on your campus.

Optimize Financial ViabilityConsolidated financials provide the big picture/summary approach, but to determine the true financial sensitivity of your organization you must develop individual cost/profit centers within your continuum.  Simply combining three or four businesses within a community into one overall consolidated income statement of revenues and expenses is not the best practice for the future.  Just using consolidated financials can frequently mask unacceptable subpar performance of one cost center, while penalizing the overall operation.  Each individual major product and service offered should meet reasonable industry financial benchmarks of revenues, expenses including an overhead allocation, net operating income, profit margins and cash flow.

Continue reading “Divide and Conquer Then Bring It Back Together: Sharpened Financial Focus”

One Company, Many Departments; One Strategy or Many

One Company, Many Departments; One Strategy or Many

by Kim Jimenez

When talking about your organizational goals, is every department within your company on the same page? Have you shared or even included all departments in goal setting and strategy development? Does your Human Resources department act as part of the strategy team for your community and your company or do they perform as an auxiliary function?

Woman drawing Flow Chart

People can make or break your organization. The front-line employees who interact with the public. The CNAs and nurses who care for your residents. The receptionist who greets everyone who walks into your office or facility. The marketing team who puts out the marketing material and branding that can draw in new business (or not). Your top management and executives who define and plan the company brand and strategy. So, don’t you think the department responsible for recruiting all these people need to be an integral part of the company strategic plan? Absolutely!

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2017…It’s Closer Than You Think!

2017…It’s Closer Than You Think!

iss_12277_07926-1As we approach the end of 2016 (sorry, but yes, it is coming at you like a speeding locomotive whether you admit or not!) we hope you are actively evaluating where you are in terms of your 2016 goals.  Are you on track to accomplish everything you set out to accomplish? If not, why not?  Did you set goals that you have since deemed unnecessary, do you need more time or do you need a different strategy? What new goals have developed?

One of the many areas you need to be evaluating is your aging physical plant and capital investment.  Capital investment/improvements on an ongoing basis are crucial to keeping your senior living community in a competitive condition. If you have a newer facility you may be in the planning/budgeting stages but if your community has some years on it, you should be making these improvements to stay viable.  Either way, capital investment is something you need to be thinking about no matter how old or young your community is.

Three Capital Investment Traps

In planning a capital investment strategy, many owners and sponsors frequently commit three tactical errors.  They:

  1. Spend money on the wrong things
  2. Lose sight of their overall strategic objectives
  3. Pay too much for less-than-optimum value

Consider Two Important Time Frames

In developing a new senior living community or improving an existing one, capital expenditure decisions must consider two distinct time frames:

  • Short-Run – The initial (one time) costs of the capital investment
  • Long-Run – The ongoing (perpetual) operating costs of ownership

Cost of Ownership Considerations

To plan effectively, you must carefully weigh the short run capital cost expenditures (immediate capital costs, such as new heating, ventilation, and air conditioning systems) against the long run costs of ownership (ongoing operating costs such as maintenance, utilities, and insurance). Investing less in capital improvements in the short run can sometimes be very expensive over your total ownership period.  These cost considerations become very important if you plan to hold your property for more than five years.  Even if you plan to be a short term property owner, realize that your ultimate sale value can be adversely affected by your earlier “short run” capital investment mentality.  The buyer’s sophisticated due diligence efforts will likely detect flaws in your original capital investment planning.

These four simple steps should help you make important cost of ownership trade-off decisions:

  1. When considering two alternative capital investments evaluate the payback period and calculate the impact on total community value. How many years of operation are required for the operational savings/benefits to result in financial break-even or recovery of each of your alternative initial cash investment options? This can be a simple arithmetic calculation (dividing the initial cost of the capital investment by the estimated annual financial benefit or savings) or a more sophisticated discounted cash flow analysis that takes into consideration the time-value of money invested.  Ideally, your payback period should be between three and five years.  From that point forward, there should be an ongoing positive incremental financial impact.
  2. Estimate the total impact on community value. To determine the increased intrinsic value of your community, you should capitalize the incremental increase in your net operating income resulting from the capital investment1.  The capitalization rate is the cash return (percentage) that reasonable buyers or investors would expect to realize on their cash investment. This would obviously be influenced by their perception of relative risk.  Appendix C briefly describes the capitalization rate concept.
  3. Value engineer your capital investments. This means lowering or controlling capital costs without significantly detracting from the look, operational efficiency, or marketplace acceptance of your community.  The results of this effort should be largely invisible to the consumer marketplace.
  4. Let the “flash value” concept influence capital investment. Flash value is a fairly obscure, but surprisingly simple, way of quantifying, and thereby maximizing, perceived value in the eyes of the consumer.  This concept is defined as follows:

Flash Value Index  =    What Consumer Thinks an Item Costs

                                                      Your Actual Cost

Through consumer testing (focus groups, etc.), you can identify a menu of design features and amenities that exhibit a positive “flash value index” of greater than two to one.  This means that the consumer thinks the item is worth at least twice as much as your actual cost.  You should incorporate a number of highly favorable flash value items into your community.  Typical high flash value items in senior housing include high-quality wood molding or millwork, walk-in closets, unusual (but attractive) public spaces, recessed solid-core living unit entry doors, incandescent or new LED lighting vs. traditional, older fluorescent lighting, wall coverings and artwork, interesting roof lines, and “breaks” in exterior elevations.  The list could go on, but the ideal outcome is for a senior prospect and their family to comment, “This place sure seems to offer a lot for the money!”

Call to Action

      Before you move on, remember you can get very creative with your capital investments by taking four basic steps:

  1. Evaluate the investment payback period.
  2. Estimate the total impact on existing operation and long-run community value.
  3. Value engineer for cost investment savings.
  4. Invest in flash value to enhance perceived value.

Finally, address the key question, “Is now the appropriate time to take action?”

To Understand What Works, Drill Down

To Understand What Works, Drill Down

 

[This article by Jim Moore previously appeared in the industry publication McKnight’s Senior Living]

It is generally recognized that the senior living business is becoming more complex with increasing need for operational sophistication and innovative best practices. The senior living continuum of products and services is growing. There is a pressing need to optimize the financial viability of existing communities through revenue enhancement and expense reduction.

financialYet in spite of these generally recognized complexities and challenges, many sponsors and owner/operators still focus exclusively on tracking and evaluating their financial position on a broad consolidated basis. This is a great big-picture summary approach, but the true financial dynamics and sensitivity of the organization must address the development of individual cost and profit centers within the continuum. Simply combining three or four businesses within a community into one simple consolidated income statement of revenues and expenses is not the best practice for the future. In reality, each of these major product and service businesses should meet reasonable industry financial benchmarks of:

  1. Revenue
  2. Expenses
  3. Net operating income
  4. Profit margins
  5. Cash flow

Each cost center must initially stand alone before being merged into the consolidated financial statement. Just using consolidated financials can frequently mask unacceptable subpar performance of one cost center, while penalizing another one.

Clearly owner/operators must provide a seamless consolidated continuum of products and services for their aging residents. But this consolidated continuum is really composed of a number of individual business models with unique challenges and opportunities. Each key element of this continuum must first be segmented as standalone cost and profit centers and then (and only then) combined to track the results on a consolidated basis. Each business element must be successful individually.

Let’s take a look at a typical example. One of my clients operates a comprehensive CCRC that has independent living, assisted living/dementia/memory care, nursing/rehabilitation and assistance-in-living/wellness as major components in their seamless continuum for their residents. These components have each been segmented as these standalone profit centers. Individual income statements exist for each one. These individual income statements include earned operating revenues, operating expenses including direct costs and an appropriate overhead allocation that applies to that cost center, individual net operating income, profit margin and cash flow. These financial statements also include monthly and year-to-date budget versus actual results and, where appropriate, a discussion of why variances occur.

This approach also quantifies and enhances the objective assessment of key staff member performance. Coupled with resident satisfaction scores, this provides an objective criteria for addressing important initiatives.

The senior living continuum is becoming more complex, with services like comprehensive assistance-in-living within independent living, geriatric assessment, memory care and external continuing care at home. Financial performance sensitivity is also increasingly putting more pressure on profits, debt service coverage and capital investment needs impacting overall cash flow for aging physical plants.

The standalone cost and profit center is a concept whose time has arrived. It is already being implemented by progressive sponsors and owner/operators. The benefits include sharpened pricing, focused cost controls and potential overhead cost reduction. Finally, the concept is fast becoming a key element of a state-of-the-art business practice.

Need help drilling down your financials? Contact MDS at 817-731-4266