by Jim Moore – President, Moore Diversified Services, Inc.
The Senior living industry involves a myriad of questions. Some have easy answers – some do not. Here are two very important questions:
1. Do you really know the true cost of a vacant unit?
and . . .
2. If there was a cost-effective approach to answering this question, would you consider pursing it?
The National Investment Center (NIC) reports independent living occupancy of approximately 89% in 2012. While these figures may appear generally acceptable in these difficult times, the bottom line impact of filling just one more vacant unit is very significant. At 89% occupancy, many communities serving the needs of just one more resident would not likely have to buy more raw food or hire an additional full-time equivalent employee. For every additional occupied unit, one could assume only about 30% of the additional monthly service fee would go for new, incremental operating expenses. This is because the fixed and most variable costs are probably already covered. So approximately 70% of the additional monthly service fee represents a very high incremental profit margin; new cash that drops right to the bottom line.
For an independent living operator with a typical baseline monthly service fee of $2,400 per month, the 70% incremental profit margin results in new cash flow benefit of $1,680 per month ($2,400 x .70) or a $20,160 annual increase in cash flow for each additional occupied unit. Filling five more independent living units would create an annual increase of over $100,000. A community also charging entry fees would obviously have an even greater positive impact. Different Senior living products like CCRCs or assisted living would experience similar types of favorable impacts and would be significantly influenced by a different number of revenue producing units-beds.
But that’s not the whole story. Owner/operators considering refinancing or divestiture in 2012 and beyond brings into focus the concept of capitalized value. The annualized additional cash flow of $20,160 capitalized at 8.5% reflects a value increase for a single property of approximately $237,000 . . . for just one more occupied unit-bed. Occupancy enhancement would likely be realized at less than the annual (first year only) cost of filling just one more vacant unit.
There is a third question. Since the potential cost-benefit is significant, is it prudent to not pursue this substantial opportunity?
If you want more information – initially at no obligation – contact Jim Moore at jimmoore@m-d-s.com (www.m-d-s.com).