Assisted Living Fill – Up: The Real (Not So Pretty) Story
|Interview with Anthony J. Mullen, Managing
Director, KMF Senior Housing Investors, LLC
|“Assisted Living Fill-Up: The Real Story” was the compelling title of a panel discussion presented at the recent National Investment Center for the Seniors Housing and Care Industries (NIC) annual conference. It promised some hard-hitting revelations-and it didn’t disappoint. Based on research by the ProMatura Group, under the auspices of NIC Director of Research Anthony J. Mullen, panelists reviewed the typical practices of assisted living providers trying to open, fill and keep filled their new facilities. Suddenly the reasons for the industry’s current financial doldrums became strikingly clear: It’s not just overbuilding that’s the problem; it is various common mistakes that providers make in the marketing and selling of their wares. Recently, Mullen agreed to review this information and answer questions submitted by Nursing Homes/Long Term Care Management Editor Richard L. Peck.
Peck: There were a number of surprising shortfalls cited at the panel on assisted living fill-up. Just for starters, would you list a few?
Mullen: Confusing the market study with the feasibility study. Not spending enough on marketing in the community, not hiring enough salespeople, not training them adequately or giving them enough time to generate adequate leads. Not following up on the leads that are generated appropriately. Not understanding the concept of net move-in rates and how these impact the project’s fi-nancial feasibility.
Peck: OK, let’s elaborate. In what way are marketing and feasibility studies confused?
Mullen: A market research study is one part of the feasibility process, the other part being financial feasibility. There are three types of market research: (1) quantitative, focusing on such data as existing supply of units, real estate prices, demographics and the like; (2) qualitative, most often using focus groups or surveys to get participants’ views and opinions; and (3) statistical-based consumer research, where you try to develop a large enough sample to measure the actual demand for what your organization is specifically offering-you’re specifically testing your market hypothesis, as it were, by getting a large enough sample to take an actual buying or leasing step. Number three, however, is rarely done, although it is the most important. I would say less than 3% of providers do this, and that’s part of our problem.
In general, market research tries to predict what your most likely absorption rate will be. The absorption rate takes into account your anticipated pre-lease numbers and move-in rate (both net of cancellations, of course). Most people don’t predict their absorption rates with any degree of precision, and often come up with ranges that are too broad to be meaningful.
Peck: Where does one get the data one needs to be more precise?
Mullen: For one, get the historical averages for similar properties both nationally and in your area. The national data can come from NIC research on move-in rates, and the American Seniors Housing Association has excellent data in its “State of Seniors Housing” annual study on unit turnover. Turnover, as we’ll see, is key to determining absorption and the ultimate success of the project.
You have to dig around in your local area for data on your nearest competitors, and you can get it if you work at it.
Given this, you try to predict the financial feasibility of your project. Some projects might be feasible at a net move-in rate of three per month, and some might not. A project for which you’ve paid $17,000 a bed for the land might not work at three net units per month; at $10,000 or $5,000 a bed for the land, it might.
Peck: So what is this all-important net move-in rate?
Mullen: This is the move-ins minus the turnover that occurs. Turnover usually kicks in as a factor after the first eight or nine months. As your units are filling up, some residents are starting to move out for various reasons, which means that these same units have to be filled again. Based on our research, I’d say a conservative estimate for this kind of turnover is about 40% a year. When you factor that in, you find that to achieve a rate of, say, 3.5 move-ins per month, you actually need to fill 5.8 units per month. This is a concept that many people don’t understand, and it costs them.
A second point here is that you should try to be conservative in making these estimates. You should allow for some margin for error. For example, if you use an estimate of five net units per month and it only produces a debt service coverage ratio of 1.15 to 1.0, the project likely will not work financially. You need more wiggle room than that, particularly if you’re a new entrant in the market. If you’re off by two units a month in your net move-in rate, you can come up dramatically short.
Interestingly, the net turnover ratio was never really a problem until the market became overbuilt. Gross move-ins began to drop, and turnover only exacerbated the problem. Net move-ins became the crucial analytical issue without people fully understanding the situation.
Peck: Let’s address the marketing needed to generate those move-ins in the first place. Where do people go wrong?
Mullen: One way is to focus on the facility’s opening and forget that marketing must be an ongoing commitment. Owners depend on the natural course of events to keep their buildings filled. The fact is, however, that there are very few true waiting lists in this field; between the time it is decided that assistance is needed and the actual move is a very short-term phenomenon. Especially with turnover starting to hit eight or nine months after opening, there must be a regular commitment to producing leads, following up appropriately and converting them to sales every month.
There are areas where other mistakes are made. Take, for example, our data indicating that you need 14 leads to produce one net move-in. Let’s say you have an 80-unit facility and you’re aiming at 92% occupancy; you’ll need 1,000 leads. And each of them costs something, depending on the marketing media that you use and the costs of your sales staff. This is a science that is very poorly understood by 90% or more of the companies in the industry.
Peck: Before you go further with this, what is a “lead”?
Mullen: A lead is someone who inquires about the facility and is qualified as a potential customer. Leads must have the need for and the ability to afford what you’re offering. If they don’t qualify in this way, they are not leads.
Peck: What about following up with these leads?
Mullen: A critical mistake often made here is to follow up simply by sending literature about the facility. This is where your sales department comes in, and there is a real “art and a science” to sales in this field. Assisted living sales are based on a thorough understanding of the potential customer’s needs and how the facility might meet them, and then convincing the potential customer that this can be done at a fair price. Unfortunately, most companies do a very poor job of this. In a recent study, 30% of them didn’t even get a name or address from the person inquiring, much less establish a relationship, uncover their needs and invite them in for a visit-all critical steps in converting leads to sales.
Another problem has been that some companies don’t even start marketing until a month or two before opening. Generating leads from professional referrals alone-probably the best source of all-takes more time than that. You should plan to start marketing at least nine months before opening. And then companies don’t hire enough salespeople. One person normally can’t handle an 80-unit project. Each lead takes a certain amount of selling time. If you need 14 leads for each move-in, and each lead takes five hours of selling time, you begin to see how much sales staff you need. And then you have to train them properly-another frequent shortcoming.
Peck: So, what are the basics a company needs to maintain a consistent fill-up in a new facility?
Mullen: In a nutshell, I would recommend these:
‘A product offering obvious value
Peck: If a facility is unable to achieve 100% occupancy, how much occupancy is “enough”?
Mullen: In general, operations will be covered by 50% occupancy; add debt service to that, and you’ll need about 84% occupancy-and guess what the average occupancy is for most assisted living facilities these days. Many owners are struggling to cover their debt service, and are having to pump more equity into their projects just to keep them alive.
Peck: Which explains why the investment community isn’t much interested in assisted living these days?
Mullen: That’s correct. This year and next will be transition years, in that many lenders will finally sell off the problem properties in their assisted living portfolios and, at the appropriate pricing, several large private equity groups will then step in and invest to help recapitalize the industry. NH
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