Why do investors, lenders and analysts focus so much on occupancy in seniors housing? Operating margin became much less important over the years compared with the absolute level of cash flow earned. This makes sense since a property’s value is derived from the cash flow, not the margin, and increased value from increased cash flow, not a better margin. The one caveat is that as the operating margin increases, the absolute level of cash flow should also increase, but not always.

Getting back to occupancy, we follow it closely because trends in occupancy can tell us so much about a company and the markets where it operates. In today’s environment, everyone seems to be blaming consistently decreasing occupancy on the tail of last winter’s flu season, plus the increased competitive environment with new community openings competing for customers.

But think about it. If customers are going to a new community, they are not going because its reputation for quality care is better than yours. They have no reputation yet. They are going because it looks nicer (usually), and chances are they are offering discounts to get your former customer to move in. Or a higher price may be deemed worthwhile, because it does look and feel so much better than your community. Although a new community can have some design or locational flaws, to the average consumer it will almost always look nicer than that 10- to 15-year old community down the street. Most architects and developers learn from what was built in the past, and apply that to new developments.

Another reason for some lower occupancy numbers reported was an increase in the “death rate” in the second quarter. While this can be blamed on that flu tail, what was missing from the narrative was that perhaps the death rate was higher because the frailty rate was higher on move-in. And if the frailty rate was higher, does that compress operating margins if you are not capturing the increased care levels in your pricing right away? Probably. Then, one has to consider what that higher “death rate” does to a community’s reputation. You can just imagine that 88-year old mother telling her daughter, “I’m not moving in there. My friend was fine when she moved in, but she died three months later.”

Declining occupancy can also be the result of some local disarray at the community level. In Brookdale Senior Living’s earnings call, the CEO said that “people like to hire from Brookdale,” citing this as one of the reasons for employee turnover. The reality is that in many cases, the Brookdale resumes have been sent to the competitors’ unsolicited, not necessarily that they are being sought out. This may be one reason why in the second quarter the number of its communities with occupancy below 85% increased to 43% of the total, up from 39% in the first quarter of 2017. That is just not acceptable, and our guess is that it reflects the sales and marketing staff looking elsewhere.

We are supposedly in the eighth year of the economic recovery, and despite new competition, occupancy should not be hurting as much as it is. Those forecasts of the seniors housing unit shortages in the tens of thousands by 2025 are certainly beginning to look very foolish. Perhaps there is something else going on.