NIC MAP® Seniors Housing Rate Tiers

Similar to the intent of “class categorizations” seen across other commercial real estate property types, NIC MAP® has recently developed a “rate tiers” approach to our seniors housing property database that is quantitative and objective, with a goal to further segment our data for our clients. Useful to investors, analysts and senior living operators who wish to benchmark their properties to properties with similar rate structures, this approach allows NIC to promote greater transparency within the seniors housing property type and creates greater comparability to other commercial real estate property types.

• The NIC MAP Seniors Housing Rate Tiers Report provides a historical time series of average market rates (AMRs) and AMR annual rate growth, occupancy and inventory for majority independent living (IL) or majority assisted living (AL) property types by rate tier and metropolitan market for the 31 Primary Markets.
• Additionally, the report includes market aggregates for the 31 Primary Markets, Secondary Markets (32-99), and the 99 Primary and Secondary Markets.
• Defined uniquely for each metropolitan market (as opposed to a national average), three rate tiers for each metropolitan area have been estimated based on average market rate (AMR) data that is segmented by quartiles into three groupings: top tier (i.e., top quartile), middle tier (i.e., middle two quartiles), and bottom tier (i.e., bottom quartile). Each quarter, a property is classified into one of these three categories, and the designation of a property can change from one quarter to the next.
• The NIC MAP Seniors Housing Rate Tiers Report has a “same-store” methodology for computing rate growth within each tier. Year-over-year rate growth is computed by using only the properties included within a respective rate tier from one period to the next.

The example below shows the standard four charts found in this report for the New York metropolitan market from 4Q2018.

The following charts display occupancy by NIC’s three rate tiers for majority independent living and majority assisted living across the time series, aggregated for the 31 Primary Markets.

The data tells an interesting story in that independent living and assisting living occupancy results by rate tier have followed different patterns. The occupancy rate for bottom tier majority independent living properties in the 31 Primary Markets has generally outpaced the top and middle tiers since 3Q2006. The occupancy “spread” by rate tier was the greatest during and coming out of the Great Recession, perhaps due to the greater affordability of bottom tier properties, which may have allowed them to maintain higher occupancy rates than the top and middle rate tiers. More recently, majority independent living occupancy rates for the three rate tiers converged and reached a near-term peak close to 91% in the second and third quarters of 2015. Since then, and as the market has softened, the difference in occupancy rates between the bottom and top tiers widened to as much as 3.5 percentage points in 2Q2018, when the average occupancy rate of majority independent living properties in the 31 Primary Markets was at a 4-year low point. Currently, in 4Q2018, bottom tier majority independent living occupancy (91.9%) is 1.8 percentage points higher than in the top tier (90.1%).

However, rate tier occupancy for majority assisted living property types in the 31 Primary Markets followed a different pattern. Bottom tier majority assisted living property occupancy rates were lower than the top and middle tiers leading into and through most of the Great Recession. Coming out of the Great Recession, majority assisted living inventory grew at a faster pace than majority independent living, and occupancy across rate tiers was relatively narrow until it began to diverge around the fourth quarter of 2014, as strong supply growth outpaced demand. Since then, bottom tier occupancy rates have exceeded the top and middle tiers. In 4Q2018, majority assisted living occupancy in the 31 Primary Markets was 85.4%, near its record low rate of 85.3% reached in 2Q2018, when the difference between the bottom and top tiers was the widest at 4.9 percentage points. As of the fourth quarter, the difference between the bottom and top tiers is 4.4 percentage points.

In the coming months, NIC will begin to explore a number of intriguing questions raised by the data:

• Are markets with high top tier AMR annual growth rates dominated by large chain properties?
• Do markets with high variability between the top and bottom tiers suggest the need for greater local focus when analyzing the market fundamentals?
• What are the benefits and drawbacks of investing in metropolitan markets with wide or narrow variations in top and bottom tier pricing?
• Do top tier properties tend to be newer and bottom tier properties older?
• Are top tier properties located in neighborhoods with higher property values than bottom tier properties?
• Does the greater affordability of bottom tier properties help insulate them from occupancy pressures in times of fluctuating local demographic and economic conditions?
• How does AMR annual rate growth relate to changes in inventory and occupancy by rate tier?

The “rate tiers” approach to NIC’s seniors housing property database is, indeed, a “game changer.” This new report provides NIC MAP clients another way to segment the data with increased granularity, allows for greater comparability to other commercial real estate property types, and delivers on NIC’s mission to promote greater transparency within the seniors housing sector.

Seniors housing isn’t quite like other commercial real estate investments. Returns and valuations can be significantly influenced by operational performance which makes acquisition and investment decisions complex. Professionals new to the industry can find underwriting a deal difficult and challenging.     

To help these newcomers get a leg up, NIC is hosting the 2019 NIC Seniors Housing Boot Camp: The Art of Assessing the Deal, on Wednesday, April 10 from 10 a.m. to 4:30 p.m. at the AC Hotel Charlotte City Center.  

Designed for professionals with 1-3 years of seniors housing experience, Seniors Housing Boot Camp is an interactive workshop for professionals looking to familiarize themselves with the unique aspects of investing in seniors housing. 

Individuals with deal-making experience in other sectors will quickly gain practical knowledge by analyzing a “real” seniors housing acquisition opportunity with the input of talented industry veterans.  

Sponsored by NIC’s Future Leaders Council, the event is structured around a case study which includes all the details from a deal that was negotiated in the “real world”. Participants will learn how to evaluate a seniors housing opportunity from experts and then formulate a bid on a property. The actual outcome of the case study will be revealed at the end of the program.  

Prior to boot camp, participants will receive the case study outlining the key characteristics of a potential acquisition opportunity. Throughout the morning, experts will provide detailed descriptions on how to analyze the deal. Topics include: 

• Supply and demand market dynamics 
• Occupancy 
• Operational performance 
• Net income 
• Rents 
• Cost of care 
• Staffing 

Participants will learn how to use tools such as the NIC MAP^® Data Service, gaining skills which will help them better navigate the opportunities and challenges of the sector. They will then apply what they learn in small teams as they develop a bid for the property. Each group is guided by a table captain, a member of NIC’s Future Leaders Council.   

This year’s boot camp, co-chaired by council members Brandi Healey, Ryan Chase, Fritz Kieckhefer and Richard Wang, features several notable programming changes. It will feature a joint networking reception bringing together boot camp attendees and members of the Future Leaders Council.  The reception is a unique networking opportunity for Boot Camp attendees and Future Leaders Council members alike.   

Industry icon John Moore, the Chairman and Chief Executive Officer of Atria Senior Living, will be the keynote luncheon speaker. Moore will provide his insights into the trends impacting the industry and the major drivers shaping the future of seniors housing real estate.  

At the end of the day, teams will present their property bids along with the rationale for their offers. The results of the actual deal will be discussed so that participants can judge their work against the actual outcome. This aspect of the workshop provides attendees a chance to walk through a deal from start to finish. It’s also a great opportunity to network and get to know the future leaders of the industry.  

The 2019 Seniors Housing Boot Camp is fully booked. Learn more about future workshops here.  

• Occupancy in Narrow Range Since April 2018 
• Managed Medicare Revenue Mix Now at 11% 

NIC released its fourth quarter 2018 Skilled Nursing Data Report last week, which includes key monthly data points from January 2012 through December 2018.  The report also includes the latest urban vs. rural comparative data points as well as revenue mix trends. 

Here are some key takeaways from the report: 

1. Occupancy continued to hold in a narrow range as it has over the past several months.  Overall occupancy ended the fourth quarter of 2018 at 82.4% which was virtually unchanged from the third quarter and down 35 basis points from 82.8% in the fourth quarter of 2017.  It has hovered around 82.5% since April 2018. The fourth quarter occupancy trend varied by geographic area with urban areas experiencing an increase, while occupancy in rural and urban cluster areas declined from the third to fourth quarter of 2018. The occupancy rate ended 2018 at 80.4% in rural areas and 83.7% in urban areas, representing a significant difference of 330 basis points.  

1. Managed Medicare revenue per patient day (RPPD) increased in the fourth quarter of 2018, albeit slightly, ending the year at $430. Any ease in pressure on managed Medicare RPPD would be a positive for skilled nursing operators as the last few years have seen a continued downward trend. The managed Medicare RPPD has decreased from $495 in January of 2012 to $430 as of December 2018. There has not been a quarterly increase in managed Medicare RPPD since the fourth quarter of 2016 when the RPPD was at $449. However, RPPD is down 1.7% compared to a year ago in December of 2017 when managed Medicare RPPD was at $437. Managed Medicare RPPD trends varied by geography as rural areas saw a decrease and urban areas represented a slight increase. Urban cluster areas increased as well. 
2. Private revenue per patient day was relatively flat from the third quarter to the fourth quarter of 2018. It has continued to be range bound over the past few months, but it has declined since February 2018. This is notable because it has steadily increased over the past few years. However, the latest data suggest there has been a slowdown since last year. Whereas the private pay RPPD did grow at 1.7% compared to a year ago in December of 2017, it oscillated around the $262 range for several months.  Private RPPD decreased the most in rural areas representing a quarterly decrease of 1%.  It was relatively steady in both urban and urban cluster areas. Meanwhile, patient day mix continued to hold steady as it has the last several months. 
3. Skilled mix held steady in the fourth quarter 2018 at 24.8% which is somewhat common from a seasonal perspective when comparing the third to fourth quarters.  The data usually shows a flat to slight increase from the third to fourth quarters. The quarterly change was driven by an increase in Medicare patient day mix and a decrease in managed Medicare mix. However, compared to December 2017, skilled mix decreased 56 basis points as the pressure on skilled mix persists. The continued pressure over the years has been mainly due to the decline of Medicare patient day mix which was down 110 basis points from a year ago. Managed Medicare patient day mix was up 28 basis points compared to a year ago. The decline in skilled mix over the past year was most pronounced in urban areas as rural areas saw a slight increase. 
4. Managed Medicare revenue mix was the only main payer type that increased from third quarter 2018 and is now at 11% overall. This highlights the importance of continuing to follow the trends of managed Medicare for operators and investors.  Compared to one year ago, Medicaid and managed Medicare revenue mix increased while Private and Medicare decreased.  

The NIC Skilled Nursing Data Report is available here. There is no charge for this report.  

The report provides aggregate data at the national level from a sampling of skilled nursing operators with multiple properties in the United States. NIC continues to grow its database of participating operators in order to provide data at localized levels in the future. Operators who are interested in participating can complete a participation form here. NIC maintains strict confidentiality of all data it receives. 

The NIC MAP^® Data Service recently released national monthly data through December 2018 for actual rates and leasing velocity. The NIC Actual Rates initiative is driven by the need to continually increase transparency in the seniors housing sector and achieve greater parity to data that is available in other real estate asset classes. Having access to accurate data on the monthly rates a seniors housing resident pays as compared to asking rates helps us achieve this goal.  

Key takeaways from the 4Q2018 Seniors Housing Actual Rates Report include: 

• Average initial rates for residents moving in were below average asking rates for both majority independent living and majority assisted living properties, with monthly spreads larger for majority assisted living properties throughout the entire reported period dating back to April 2015. 

• As of December 2018, initial rates for majority assisted living properties averaged 8.8% below their average asking rate, which equates to an average initial rate discount of 1.1 months on an annualized basis, up from 1.0 months in December 2017, but down from 1.2 months in December 2016. The average discount for majority independent living properties was smaller at the equivalent of 0.7 months and was down from 0.8 months in December 2017, but up from 0.4 months in December 2016. 

• Average asking rates for majority independent living properties have exceeded in-place rates for the past 8 months, a change from the prior 14 months (March 2017– April 2018) when asking rates were less than in-place rates. For majority assisted living properties, average asking rates have consistently exceeded average in-place rates. 

• The average majority independent living initial rate in December 2018 was 6.7% above its year-earlier level, registering the strongest pace in the 33 months that NIC has reported annual growth rates and significantly more than the average in-place rate growth of 2.2%. Annual growth for independent living move-in rates has been positive for the past eight consecutive months, a sharp contrast with the prior 16 months when year-over-year growth had been generally negative (January 2017 through April 2018). This pattern is not evident, however, in assisted living properties. 

• Annual growth in the average in-place rate for majority independent living properties has averaged 2.1% for the past five months, an acceleration from earlier in the year when growth averaged 1.3%. For majority assisted living properties, the annual growth in the average in-place rate has hovered around 1.9% since April 2018, up from 0.5% in the first three months of the year. 

• The rate of move-ins has exceeded or equaled the rate of move-outs since April for majority independent living, a contrast to the first three months of the year when move-outs exceeded move-ins. This pattern may reflect the influence of the cold winter months and the flu season.   This same pattern is evident in the 2017 data, with move-outs exceeding move-ins only during the winter months. 

• Assisted living also saw move-outs exceed move-ins during the winter months, but the trend in the rest of the year is more sporadic, with move-outs having exceeded move-ins in September and December as well. 2017 data also show stronger move-out patterns in the January to April period. 

This Seniors Housing Actual Rates Report provides aggregate national data from approximately 300,000 units within more than 2,500 properties across the U.S. operated by 25 to 30 seniors housing providers. Note that this monthly time series is comprised of end-of-month data for each respective month. The operators included in the current sample tend to be larger, professionally managed, and investment-grade operators as we currently require participating operators to manage 5 or more properties.  

While these trends are certainly interesting aggregated across the states, actual rate data will be even more useful when it is available at the CBSA level. As NIC continues to work towards growing the sample size to be large enough to release data at the CBSA level, working with leading software providers like MatrixCare, Yardi, and Eldermark makes it easier for operators to contribute data to the Actual Rates initiative. NIC appreciates our relationships with software providers and our data contributors and their work in achieving standardized data reporting. Operators contributing data receive the national report free of charge and will soon receive complimentary reports benchmarking their data against the national figures. They are also helping to increase transparency for the benefit of the sector.  

If you are an operator or a software provider interested in how you can contribute to the Actual Rates initiative, please contact Brian Connolly at bconnolly@nic.org. 

One of the most talked-about sessions at the recent 2019 NIC Spring Conference was the “Boomer Hackathon,” in which three teams – and those in attendance – brainstormed innovations in seniors housing appropriate for incoming Baby Boomers. A standing-room-only crowd participated in the event, forming small groups to attack the same problem as three teams of experts, who were formed ahead of time. 

Popularized by Silicon Valley, the hackathon format hammers out rough, but functional, solutions, usually in 24-72 hours. NIC’s inaugural hackathon did so in 75 minutes, but not without a little advance preparation from each of three official teams. Lead by industry veterans, each team of three was selected from a pool of applicants. NIC’s approach to selection was based primarily on diversity of experience and perspective, as that has been shown to improve effectiveness in studies of hackathons. 

The session wasted no time. Hosts Jacquelyn Kung and Bob Kramer quickly introduced the concept at hand, introduced the teams, then ordered them to get to work. Kung then encouraged attendees to form small groups of their own to dig into the issue, which was to create a retirement living model that works for Boomers, a business model that works for the investor (both debt and equity), and a business model that works for the operator. 

The teams were: 

Lynn Katzmann, CEO, Juniper Communities, with Gracyn Robinson and Mike Mattingly  

Kurt Read, Principal, RSF Partners, with Rachel Smith and Hsuan-Yao Huang 

Sean Kelly, CEO, the Kendal Corporation, with Ashley Wilkens and Astrid Kramarz 

A panel of three independent judges, all boomers themselves, was on hand to ask questions and provide feedback. These were Steve Moran, Publisher, Senior Housing Forum, Jenny Brimhall, a San Diego realtor, and Todd Reis, an actor and magician. 

While the teams got to work, Kung split attendees into half, instructing those on one side of the room to form small groups to brainstorm one innovative feature of a living complex attractive to Boomers age 64-73. Groups on the other side of the room were asked to think of an innovative financing approach for a non-traditional living model – and to specify if it was for the operations side or real estate side. 

The room buzzed with discussion, as attendees and teams alike attacked the issues, huddled around whiteboards, or circulated the room to listen in. After ten or so minutes, it was time to hear each team’s 2-minute “pitch” to the judges.  

First to pitch was Kurt Read, whose team presented the “live to learn” concept, a Cornell University alumni community on New York’s Roosevelt Island. The community would mix senior alumni with college students, offer continuing education, in luxury all-inclusive living spaces within easy reach of the city. The project’s investment case for operators features marketing to a large alumni community and outsourcing a-la-carte services. Net margins of 40% might be shared with the university. Assumptions were for 200 apartments; 60% double occupancy; 100 day passes at $5,000 per person and a 90% steady state of occupancy. 

Judges and the audience asked questions of Read, who highlighted the attractiveness of “going back to school” and that the model could scale to other locations, making it a “portable” IL concept. 

Katzmann’s pitch was for an international destination offering, featuring efficient 3-D printed buildings and interiors, solar and energy-efficiency, and even gardens to supplement food supplies. Seniors would be pitched on the ability to travel and live in communities around the world. Financials for operators would net an EBITDA of 40%, with retail covering 15% of debt service requirements. Investors would save 20-25% on lower-cost 3-D printing and gain significant savings from solar and energy efficiencies. A seven-year horizon and 12–month lease up would yield a 5% cap rate upon sale, for a 6% unlevered IRR. 

Questions yielded enthusiastic answers from the quick-thinking Katzmann, who addressed numerous potential flaws with as many potential upsides and creative solutions. 

The final pitch was delivered by Sean Kelly, who revealed that his team’s pitch was, in fact, a real project, currently in development. He walked through artist’s renderings and floorplans as he described how “Kendal at Sonoma”, marketed as a “Zen-lifestyle community,” will offer Boomers portability with sister campuses in other locations, access to community, walkability, and numerous amenities designed around life-balance and well-being. 

As session co-facilitator Bob Kramer later pointed out, no matter who might be considered a winner, perhaps the most interesting outcome of NIC’s first Hackathon was the revelation that all three teams made portability a feature of their appeal to Boomers. Other attendees noted that, while perhaps not yet the new normal, the new concepts – and the idea that operators and investors should think outside the box when preparing for Boomers – should be taken seriously as the generation that changes everything approaches senior living and care.  

Editor’s note: All calculations presented in this article are rough estimates and do not represent actual underwriting models.