by Jim Moore – President, Moore Diversified Services, Inc.
In an earlier blog, I asked whether Senior living professionals really know the bottom line cash flow (the opportunity cost) of a vacant unit. (See blog dated June 23rd) The results surprised many readers. Now here is another critical question.
Can your operating expenses be reduced by just 1% or 2%? A typical 150 unit independent living community at 89% stabilized occupancy operates with approximately 48,910 resident-days per year (150 units @ 89% stabilized occupancy = 134 units x 365 days per year). Typical independent living operating expenses are currently benchmarked at approximately $50 to $70 per resident-day (PRD) – exclusive of health care. This range is obviously influenced by resident acuity, services offered and local operating expenses. An operating expense reduction of just $1.50 per resident-day (PRD) or about 2% is frequently reasonable to achieve. With 48,910 annual resident-days, the $1.50 PRD results in a cash savings of over $73,000 per year that will go right to the bottom line.
Owner/operators considering refinancing or divestiture in 2012 and beyond brings into focus the concept of capitalized value. The additional cash flow of $73,000 capitalized at 8.5% reflects a value increase for a single property of approximately $860,000.
Operations optimization would likely be realized at just a fraction of the annual (first year only) potential operating expense cost savings. Different Senior living products like CCRCs or assisted living would experience similar types of impacts, but would be significantly influenced by a different number of operating units-beds.
The key question is, Is it prudent to not pursue this substantial operations optimization opportunity?