Private Buyers Remain Very Active 

There may have been some challenges in the seniors housing and care markets in 2018 but it is safe to say that liquidity did not seem to be one of those challenges based on the latest sales transactions data. Indeed, not only was there strong dollar volume registered in terms of closed sales transactions, but the sheer number of transactions closed was greater than in 2017. 

In terms of the number of deals closed, a measure different than dollar volume, we saw continued signs of a very strong transaction market.  There were 514 deals closed in 2018 of which 85 were portfolio transactions and 429 single property transactions. That compares to the 502 transactions closed in 2017 of which 101 were portfolio and 401 were single property transactions.  Portfolio transactions have consistently represented about 20% of overall closed transactions when looking at the past few years, including in 2015 when the public buyer type, namely the publicly traded REITs, were more active with larger deals. However, 2018 saw portfolios represent closer to 16%, highlighting the fact that single property transactions are very important to the market in terms of the flow of transactions closing. We have seen 21 consecutive quarters of more than 100 total deals close. 

As far as the size of the deals, small deals of $50 million or less dominated in the fourth quarter, which is typical with every quarter given the large percentage of single property deals, representing about 89% of all deals closed.  Over the past few years we have seen a significant decrease in large deals of $500 million or more.  In 2015 we saw 10 transactions of $500 million or more and only 10 combined in 2016 and 2017, and only 1 in 2018.  However, we did see a significant pick up in deals between $250 million and $500 million as only 2 were closed within that range in 2017, but 7 were closed in 2018. 

To take a deeper look at the activity, let’s dig into the annual trends of who the buyers were for 2018. 

Private Buyers Still Very Active 

As far as the trends in buyer activity in 2018, one notable trend is the institutional buyer decreased significantly from 2017 to 2018 as a share of volume and the public and private buyers increased as a percentage of closed volume.  The public buyer category is just that — any publicly traded company. The private type is any company that is not publicly traded—for example, a private REIT or single owner or partnership. The institutional type is usually the equity funds that manage pension money or other types of institutional money. 

The institutional buyer type represented only 19% of the $13.9 billion in closed transactions in 2018 as its total closed dollar volume decreased by 48% from 2017 when it represented 32% of volume and closed $5.2 billion in transactions.  However, 2017 was represented in a significant way by Blackstone, within the institutional category, when they closed some larger deals over $500 million.  For additional comparison purposes, the institutional buyer closed $3.9 billion in 2016 representing 27% of closed volume that year.  The institutional buyer has averaged $3.9 billion in closed transactions per year over the last three years. 

From the public buyer side, its representation of volume increased from 25% in 2017 to 29% in 2018.  In terms of the dollar volume, it held relatively steady as the public buyer closed $4 billion in both 2017 and 2018.  In 2018 the volume was really carried by the Welltower/QCP deal and in 2017 it was carried by the Sabra/Care Capital Properties deal.   The public buyer has also averaged $3.9 billion in closed transaction per year over the last three years. 

The private buyer (see chart below) continues to be the most consistent and steady source of capital as it registered close to $6 billion in closed transactions in 2018 at $5.9 billion.  It represented 43% of all volume in 2018 which was up from 34% in 2017 when it closed $5.5 billion in transactions.  Over the past three years the private buyer has averaged $5.7 billion and it has closed above $5 billion in transactions for five straight years.  

Lastly, just to touch on cross-border activity as we have seen a steady decrease in that dollar volume ever since the 2015-time period when it registered $2.1 billion.  It has averaged about 5% of volume over the past three years and only closed $500 million in 2018 which was down from 2017’s $900 million.

Focused on the theme, “Investing in Seniors Housing & Healthcare Collaboration, the 2019 NIC Spring Conference kicked off on Wednesday afternoon. The Conference drew more than 1,500 attendees, including investors, seniors housing and care operators, and healthcare providers.

A reception was held for first time attendees. “Our company has six projects coming out of the ground,” said first time attendee Gary Elam of Carefield Living. “We are here to find capital.”

The afternoon included three well-attended educational sessions.

Meet Mary.  She’s 86 years old, with arthritis, osteoporosis, hypertension, and COPD.  Her story gave the NIC Conference opening panel “Underwriting Health Care in Private Pay Seniors Housing” a platform to illustrate how the broader health care system is starting to impact seniors housing net operating income (NOI).

Mary’s care cost Medicare over $60,000 during her time in assisted living.  Seniors housing operators on the panel described how their staff traditionally handled medical episodes, cooperating with medical professionals but receiving no financial consideration for the care they provided (other than standard monthly care charges).

The panel then fast-forwarded five years, playing out the same scenario in a community offering a Medicare Advantage plan.  As a member of this plan, Mary stays healthier longer, so pays less in monthly care charges.  But Mary increases her length of stay, and by providing medical services in a lower-cost setting compared to the emergency room, the company is able to keep an average of $500 per month in “gain sharing” – receiving some of the money Medicare might have had to spend on hospital care, but didn’t. Overall, the community realized a 20% increase in net operating income with Mary participating in the medical services revenue model.

How realistic is this? John Rijos of Chicago Pacific Founders, and Chris Winkle of Sunrise Senior Living, shared their real-world experience with Medicare Advantage plans, and said it is very realistic.  Jerry Taylor, of Solera, had not yet implemented a MA plan, but agreed with the concepts.  And all panelists agreed that communities risk being “disrupted out of the business” if they’re not on board. 86-year-old Mary has a typical profile, but her experience, and that of her eldest daughter, Sue, changes with coordinated care. Using two scenarios, one from today and one from 2025, the panel, moderated by Joel Mendes of JLL, got specific and detailed in order to illustrate key points that investors should be considering as the healthcare system increasingly influences how communities operate – and perform financially. Coordination of care will make a big difference for Mary, but it will also drive new revenue streams and improve NOI.

In “Equity in Senior Care: Understanding the Players” NIC injected some levity with a “Dating Game” format, complete with the famous game show’s theme music and a healthy dose of tongue-in-cheek dating references. Underlying the fun, however, was real insight into how capital seekers and providers find a match in the real world. In two different “games” two very different capital seekers asked tough questions of three potential suitors, eventually choosing a partner, but not before attendees made their wishes known with an instant poll.

The session yielded some fun moments, too, such as when John Stasinos, in the role of an investment management platform, said of a rival suitor (a private equity firm), “she’s gonna want to buy you and change you. I’m different because I’ll understand you. You’ll be comfortable with me. I won’t bring an investor to the table that doesn’t share your time horizon.” The session delved into numerous considerations, and many good questions that capital seekers should ask, before they commit to a new relationship.

The last session of the day, “I-SNPs: Why Providers are Becoming Payors in a Value-Based World” addressed the question: Is setting up a Medicare Advantage plan for residents the right strategy for your company? A panel of experts, already involved in that process, discussed I-SNPs, or Institutional Special Needs Plans. These programs provide Medicare coverage for residents of long-term care facilities.

“The process is complicated,” noted panelist Steve Fogg, CFO at Marquis Companies, a provider based in the Portland, Oregon, area. Marquis already has 500 long-term care residents in its program, not all of whom live in Marquis buildings. Panelist Lynne Katzmann, CEO of Juniper Companies is putting together a plan for assisted living residents that will be rolled out next year. Peter Longo, principal & managing partner, Cantex Continuing Care Network, commented: “Find a good insurance partner. That’s key to success. “

The 2019 NIC Spring Conference is just getting warmed up. Tomorrow will feature remarks from Paul Ryan, the 54th Speaker of the United States House of Representatives (2015-2019), and a full schedule of educational sessions. Follow NIC on Twitter for live-tweets of every session, and more.

Former Speaker of the U.S. House of Representatives Paul Ryan will offer insight on what to expect from the new Congress and the impact on America’s seniors

Paul Ryan, the 54th Speaker of the United States House of Representatives (2015-2019), will address the 2019 Spring Conference of the National Investment Center for Seniors Housing & Care (NIC) on Feb. 21 in San Diego. At the Opening General Session, scheduled from 8:00 AM – 9:30 AM PT, Ryan will deliver keynote remarks and participate in a “fireside chat” with John J. Kelliher, managing director, Berkeley Research Group, and former chief counsel of the Committee on Ways and Means of the U.S. House of Representatives.

Ryan is expected to share his views on entitlement and regulatory reform, the continued shift to private management of Medicare and Medicaid, and labor and immigration issues, including their impact on unemployment and wages. As a veteran Capitol Hill leader who has influenced national policy and legislation impacting seniors, Ryan’s remarks will be of keen interest to conference attendees comprised of decision makers in seniors housing and skilled nursing, as well as healthcare leaders who are exploring new partnership opportunities in the sector.

“As we embark on a new Congress, there are new players and dynamics that will shift the policy landscape. The seniors housing and care sector will be paying close attention to what Mr. Ryan has to say,” said Brian Jurutka, NIC president and CEO. “His timely perspective from the leadership seat on the sector’s most important policy, regulatory, and economic issues will be invaluable as attendees develop strategies to succeed in this time of change.”

Immediately following the Opening General Session, Kelliher will moderate a discussion featuring Republican and Democratic perspectives on Ryan’s comments.  The panel will feature Chris Jennings, who served at the White House in health policy under both President Obama and President Clinton, and Jennifer B. Young, who served as Assistant Secretary for Legislation at HHS as well as Senior Counselor to Secretary Mike Leavitt in the George H.W. Bush administration.

The discussion will cover what Americans can expect from a divided Congress and from the Trump Administration, in terms of further action on healthcare payment and delivery reform, and initiatives to address the housing and care needs of seniors.

The 2019 NIC Spring Conference will take place February 20-22, at the Hilton San Diego Bayfront in San Diego, California.

Last week’s post on NIC’s data group introduced some of the teams and processes involved in collecting the most accurate and reliable data available on America’s seniors housing and care properties. This second half of the story delves into processing and reporting on the data.

A team of three full-time analysts is responsible for processing the data from the Quality Assurance team and completing quarterly reporting on it. The team also produces specialty reporting throughout each quarter, such as the Seniors Housing Actual Rates Report and the Skilled Nursing Data Report. They also support all of NIC’s presentations and webinars with accurate, current data, analysis, and visualizations.

Working in collaboration, the Quality Assurance and the Data and Analytics teams jointly execute each quarter’s data finalization process. Data and Analytics Manager Leighann Garcia explains, “The two teams bring two different perspectives to the data. In the Quality Assurance department, they tend to have a property-level expertise, while the Data team looks at it from a higher level, looking at broader trends over time and at the aggregate, rather than at individual properties. Combining those perspectives works well when we’re finalizing the data before reporting on it. From there, we produce about 45 different reports each quarter.

Research Manager Brian Connolly added that, “the delineation between the Quality Assurance team’s property-level view and the Data Team’s aggregate view is deliberate. It frees up the Data Team to view the data without any bias that might come from looking at a particular property. On the flip side, the QA team can look at the property level without any bias that comes from the aggregate. We put that in place on purpose. That’s why the partnership between the teams works so well. Both teams find important nuggets, and, as a group, we are better able to direct our data collection efforts as a result, particularly as we identify long-term trends that might need clarification. When the Analytics Team looks at the finalized data for publishing and reporting, they know it’s reviewed and as clean as possible. When they see trends, they can be confident they’re not just seeing something that was missed in the QA or data collection process.”

Connolly’s team conducts regular audits, to further ensure nothing is overlooked. “We review the entire database, auditing each market individually versus state data. We’ll go to a given state’s department of health, for example, and find all their lists and compare them to our database. That’s one way for us to proactively research each of the markets outside our normal process of data collection and make sure our database is as complete as possible.

With clean data in hand, Garcia’s team generates reports throughout every quarter. “Reports fit into one of several categories,” she explained. “The first of these is reports that go to clients who have requested a customized report. We also generate reports that get uploaded to the NIC MAP^® Client Portal. Some reports are for internal use. For example, we provide our marketing department with data for their content and generate a few specialized reports for our senior leadership. We also work very closely with our Outreach Team, providing data for their webinars and presentations. We’re closest to the data, and often call out trends from the very beginning of the process.”

NIC is careful to spread out the collection of data points for each metropolitan market throughout the quarter. The way they structure their agreements with data providers – and execute their own collection processes – ensures that no metropolitan market’s data is collected within a single month, for example. All of NIC’s data collection occurs as evenly as possible throughout time and across markets.

Partnerships with leading software vendors in the space have streamlined processes by which NIC receives data. Customized reports, designed to automatically feed data to Connolly’s team, have significantly boosted efficiency, while helping to reduce human error. Because NIC either talks to or receives data from nearly every property in its database, every single quarter, accurate and efficient data collection processes are essential.

Reports are generally built in three different ways. Some are custom developed in SQL, others use the data tools in Excel, while still others are coded in a programming language called R. Using these tools, the team generates reports, some of which are complex and very time-consuming. Once generated, every report goes through a quality assurance process to be validated.

“One key role we play is subject matter expertise on our data,” added Garcia. “While we don’t advise on strategy or make predications, we can help clients if we know what they’re trying to achieve with our data. A client that’s running 14 reports manually in every one of their subscribed markets might come to client services and ask if we can save them time, for example. We’d be able to help them with a custom report.”

Looking ahead, the data group plans to expand the database to include, among other things, seniors housing financial benchmarking data. NIC’s Seniors Housing Financial Benchmarking Initiative will create a time series database that allows for consistent financial benchmarking of select property-level operational revenue and expense categories. “This will be another way our clients can benchmark their communities,” said Connolly.

Through everything they do, NIC’s data teams share a passion for accuracy. “NIC is really focused on getting the numbers right,” said Dan Raney, Director, Product Solutions & Technology. “It’s personally offensive to us if the numbers are wrong, even for a single property. I really believe that the care we invest on data accuracy at NIC is second to none.”

“And also, our transparency in the event that we have an oversight,” added Garcia. “Those things do happen. There have been errors, but we’re very forthcoming and transparent when that happens. I believe our customers appreciate that.”

New initiatives, new sources of data, and new reporting products will all be executed by NIC’s dedicated data group, on top of the considerable effort that goes into daily, weekly, and quarterly data collection, QA, analysis, and reporting output which NIC clients have come to rely on, year after year.

A key topic of conversation among seniors housing investors and operators is the impact of inventory growth on occupancy rates and the ability to grow rents and revenue. Related to inventory growth are rising costs of construction, which may be one factor influencing a slowing of construction activity. This blog highlights some recent data to support those discussions.

Seniors housing construction may be plateauing. NIC MAP^® data from the fourth quarter of 2018 continues to suggest that construction activity may be slowing. There were roughly 37,000 units under construction at Seniors Housing properties (Majority Independent Living (IL) and Majority Assisted Living (AL)) for the NIC MAP 31 Primary Markets. That figure is down from the record high of 43,826 in the fourth quarter of 2017 or by nearly 6,500 units. Moreover, construction as a share of inventory slipped back to 6% of open inventory in 4Q2018, down from the recorded high of 7.3% in 4Q2017.  

Construction starts (units that have newly broken ground) for both Majority IL and Majority AL are also trending lower. In the fourth quarter, AL starts totaled nearly 1,552 units, the fewest starts since the first quarter of 2012. On a four-quarter aggregate basis, starts totaled 9,393 units, the fewest since 2014. As a share of inventory, this amounted to 3.3%. The last time it was below 4% was 2012. IL starts, on a rolling four-quarter basis, totaled 7,287 units in the fourth quarter. As a share of inventory, this equaled 2.2%. The last time it dropped below 2.5% was 2014. 

It is important to note, however, that construction data sometimes is restated—both up and down. Construction starts are some of the most commonly restated data points as they are particularly difficult to capture, so these numbers are likely going to see some changes. We occasionally find out that a project has broken ground after it has done so or that a property indicated ground break pre-maturely. Part way through a project, a property manager may adjust their plans for unit mix based on pre-leasing patterns, unforeseen challenges, or other factors. Changes to unit mix can also mean changes to a property’s majority property type designation. 

Construction costs are increasing. The Weitz Company is a major architectural/engineering/construction firm in the United States. Based on data they collect from seniors housing projects they work on and cost estimates from RSMeans, Weitz produces estimates of construction costs for seniors housing by metropolitan area. Larry Graeve, Senior Vice President at The Weitz Company, and Amy Burk, Estimator, prepare Special Issue Briefs for the American Seniors Housing Association (ASHA) focused on construction costs of Seniors Housing.

Their recently released special brief on Winter 2019 Seniors Housing Construction Costs indicates costs rose by 6 to 8 percent year over year. Weitz cites tariffs and labor challenges as contributing factors to the rising costs. As the Weitz reports highlight, geographic variations in cost are notable. The data in the graphic below present figures on a city index of 100, with an example of Wichita, KS (city index 85.6) in the furthest right two columns, demonstrating local variability by product type. For example, there is a cost range of $134 to $159 per square foot for independent living in Wichita, while Philadelphia, which has an index of 115.2, translates to a cost rate of $180 to $214 per square foot.

Local variation exists in seniors housing construction. Not only do costs differ by region, but construction activity also varies due to local development cycles and broader macroeconomic factors. The heatmap below shows local market variation.  Although many markets are “cooling” (as evidenced by the blue tones), some metro area markets still have heightened activity. One case in point is Atlanta, which of the CBSAs in the Primary Markets, had the highest level of construction as a percent of its inventory for 4Q18 at 14.8% (it was 6% for the Primary Markets). Close behind Atlanta is Sacramento, which remained at its record high level of construction as a percent of inventory (12%) for the second consecutive quarter.

Conclusion: many factors could be at play. Construction activity for seniors housing appears to be slowing—by both measurements of starts and active construction underway. While this would be good news for many operators and investors who have been facing the consequences of new supply and competition, we remain cautious until several more quarters of data validate this trend. The slowdown, should it stick, may reflect rising costs, as showcased by the Weitz data as well as other cost and wage data not discussed in this blog. Other factors impacting construction activity may include a tighter lending environment by many of the larger banks and lenders, a more competitive employment environment for retaining construction workers, more cautious investment attitudes at this stage of the development cycle, and possibly concerns about the broader national economy. Additionally, markets experiencing declining occupancies may be discouraging developers from pursuing new projects in potentially challenging areas.