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Assisted Living Fill - Up: The Real (Not So Pretty) Story

March 1, 2002
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Interview with Anthony J. Mullen, KMF Senior Housing Investors, LLC
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?

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