3 reasons why LTC profits may soon be harder to come by
There's a saying among basketball coaches: The best way to cover up problems is to score a lot of points.
And while nobody in the field is shouting it from the mountain tops, the sector has been enjoying more than its share of easy layups lately. A remarkable confluence of events has benefitted operators, and in many cases made it appear they are better business people than they probably are.
Remarkably low interest rates are one of the luckiest breaks operators received. Facilities have been able to acquire capital at terms that would have been unthinkably low in the not-too-distant past. The beauty of this unplanned windfall is that borrowers have been able to pay back loans at a fraction of the cost than might have otherwise been the case. And every dollar not paid to bankers has been one more operators have been able to keep.
But as they say, nothing good lasts forever. Just how soon interest rates will rise is anybody's guess. But the conventional wisdom among many economists is that the Federal Reserve will begin raising rates by the middle of next year. So if you're in the market for money, this might be a good time to call your banker.
The second lucky break, at least for operators, is that wage inflation has been largely non-existent in recent years. Yes, the recession may have technically ended a while back, but many workers continue to feel like it's still in full swing. And who could blame them? At many facilities, raises have been harder to come by than domesticated zebras.
Given that labor costs typically account for half to two-thirds of a facility's operating expense, I probably don't need to point out why an almost complete lack of wage inflation has been good for business.
But this too may change. One reason is that as the economy continues to get better, more job opportunities are likely to come along. Moreover, many states and cities are now considering a hike to the federal minimum wage (which now stands at $7.25 an hour). If/when those increases take place, they will likely drive up wages in one of two ways. The first instances will be at facilities that now pay the $7.25 hourly rate. Obviously, they will have to match the newly mandated increase. Then there's the trickle up effect: Many operators who have paid a certain amount above the minimum rate will feel pressure to maintain that gap.
Finally, there's this: We may be closer to the end of the current economic boom than many realize. Although it does not feel like it, we have technically been out of a recession for more than five years. Actually, it has been about 75 months since real gross domestic product started growing, according to the U.S. National Bureau of Economic Research.
Why is that significant? Because recessions tend to be cyclical, and the longest we have ever gone between one is 120 months, or 10 years. So unless we are about to enjoy the longest-ever recession-free stretch in our nation's history, the United States may be in for another economic downturn.
So what's going to happen when the stuff hits the fan? I'm no gambler, but even I would bet the results won't be good.
So enjoy the relatively easy victories while you can. For it may not be long before winning at this game gets a lot more difficult.
John O'Connor is McKnight's Editorial Director.