Inflation is one of the big headline-grabbing stories right now. Employees around the country are asking for and getting salary increases. And that's if companies can actually find people to hire.
One area that's been particularly hard-hit on this front is senior housing. Here's why Ventas (VTR +1.56%) and other senior housing real estate investment trusts (REITs) could actually see salary expenses fall even as they raise wages for employees.
You have to have employees
It's been hard for companies to find employees lately. That's fine for, say, a restaurant, which can run a little short-staffed. But it isn't OK for a nursing home, which has to have certain staffing levels to operate because of the type of care it provides. The same is true of even lesser levels of senior housing, given the needs of older residents. So, if you don't have enough staff, you have to make a choice.
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A senior housing operator having difficulty hiring employees can either stop taking new patients, or it can hire an outside firm to bring in labor for it. That keeps the doors open, but it materially raises costs. For example, REIT Ventas, which has a sizable portfolio of assets that it both owns and operates (known as SHOP assets), is having trouble finding employees. And it's operating expenses are rising because of it.
CFO Robert F. Probst put some number on that during Ventas' third-quarter 2021 earnings conference call, saying: "...the operating expense increase we saw sequentially between the second and third quarter [is] roughly $17 million. And within that labor representing, call it half of that increase. And if you further double-click on the labor piece, call it, two-thirds of that would be contract labor."
So, to do a little back-of-the-envelope math here, the healthcare REIT's salary costs rose about $8.5 million in one quarter, with contract labor (which means it used outside staffing agencies) accounting for $5.6 million of that. That's about a third of the total quarterly increase in costs that is tied to contract labor.
That's actually not so bad. During Welltower's (WELL +1.75%) third-quarter earnings conference call, CEO Shankh Mitra noted that he has some tenants that have seen contract labor costs rise 10 times over the past year.
The problem and the solution
Although some are getting hit harder than others, this is a huge, industry-wide issue. While each case is different, contract labor can cost two to three times as much as an employee, according to both Ventas and Welltower. It will take time to resolve this headwind, since it takes time to find, hire, and onboard new staff.
However, there's a silver lining here. Given that employees cost less than contract labor, senior housing landlords, including REITs like Ventas that also operate some of their own assets, will likely see their salary expenses start to fall. That's even as they pay more to get talent in the door because the relative cost of an employee and a contract worker are so disparate.
There's signs that the employee situation is likely to improve, too. According to Ventas CEO Debra Cafaro, while she can't predict the timing, she's expecting labor conditions to improve thanks to schools reopening, the expiration of government unemployment assistance, and vaccinations, among other factors.
In other words, this, too, shall pass. And when it does, senior housing REITs are likely to see their employee costs abate even as they increase their pay and staffing levels. That will be a nice tailwind for an industry that has been particularly hard-hit by the coronavirus pandemic.
One small piece of the picture
To be fair, there are a lot of issues facing the senior housing sector right now, and staffing is just one of them. However, according to the CEOs of many senior housing REITs, it is one of the biggest problems, given that certain base staffing levels have to be met. So, for now, investors need to monitor the contract labor issue but also understand that it will, eventually, turn from a negative to a positive as the labor market balances out and senior housing operators hire new employees.
