Debt and equity capital is readily available for the right borrowers, according to panelists at the 2019 NIC Fall Conference. 

Private equity interest in the sector has not slowed as players compete for the best properties and development opportunities. Debt funds are assuming a bigger role as a capital source while traditional debt providers aim to stay disciplined amid wariness about the broader economic outlook and overbuilding in certain markets.

“It’s an interesting time,” said Sarah Anderson, managing director, Newmark Knight Frank. “The industry is in a good spot.”

Back-to-back educational sessions at the conference, held last month in Chicago, addressed the capital markets. The first panel discussion explored capitalization options. The second session compared new and traditional debt and equity capital sources.

The broader economic outlook provided context for the discussions. Panelists noted that unemployment is very low, 3.5% in September, its lowest point since December 1969, which has pressured wages and staffing in the sector. The Federal Reserve has cut interest rates two times so far this year, and may cut rates again, a plus for borrowers but also a worrisome sign that economic growth is slowing. 

“This is the longest economic expansion we’ve had,” noted panelist Grant Saunders, senior vice president/senior banker, KeyBank Real Estate Capital. He didn’t think any one factor might tip the economy into recession, adding that the correlation between seniors housing performance and the broader economy is somewhat muted in both bad and good times.

Private equity continues to play a big role in the sector. “We don’t see any slowing,” noted Anderson. She added that a lot of opportunistic capital is sitting on the sidelines, waiting to buy up troubled properties in overbuilt markets.

The agencies—Fannie Mae, Freddie Mac, and HUD—are actively lending and offering competitive rates, said panelists.

Debt funds have emerged as an alternative funding source, noted panelist Dan Reilly, managing director, White Oak Healthcare Finance, a debt fund. He’s bullish on skilled nursing properties, especially those owned by local operators that have good relationships with hospitals and other referral sources. “It’s a huge opportunity,” he said. “Great operators with great track records will win in the skilled nursing sector.”

Reilly said his fund has earmarked money to invest in new construction, though other lenders are wary of ground-up development at this point in the economic cycle.

“We like to understand new construction projects,” said Anderson. Developers prefer partners with sufficient liquidity to provide a completion guarantee and an operator with a good track record. Panelists noted that an operator should also be invested in the deal so its interests are aligned with those of the lenders and investors.

Panelists in the first session analyzed three case studies, providing insights into how they viewed each deal.

In the second session, panelist John Mark Ramsey, CEO, Sentio Investments, noted a disconnect between investor expectations and property performance. The operating environment is somewhat tricky while, in his opinion, investors still haven’t lowered return projections.

Ramsey likes repositionings and new development, in certain situations. “Other firms are moving in that direction,” he said.

The mezzanine debt market remains robust, according to Tim Podboy, head of originations, Heitman. Some banks dictate the use of preferred equity as an alternative, however.

Will credit standards tighten?  

“I think we will see some tightening,” said panelist Steve Anderson, managing director, Ally Bank Healthcare Capital.  He predicts that slower lease-ups will also slow lending.

Panelist Ramsey agreed. He thinks banks will tighten their lending standards because of a combination of an oversupply in some markets, labor shortages and rising expenses. In response, banks will focus on the quality of the operator and sponsor, he added.

Ally’s Anderson urged lenders to be patient. “Buildings will fill eventually,” he said.

Panelists in the second session also discussed the NIC study “The Forgotten Middle,” which explores the future housing needs of middle-income seniors. The speakers addressed how capital sources might work together to produce more housing for this growing cohort of elders.

Public-private partnerships were discussed as a financing option. Private capital sources will probably not accept the lower returns expected from middle-market housing. But other types of capital might, noted Ramsey, singling out so-called impact funds or those that invest with a social goal in mind.

Panelists agreed that middle-market communities may require a variety of capital funding sources. The hard part will be how to pay for the care component.

“There has to be a solution around how to provide care,” said Brock Andrus, managing director, structured finance, Bridge Investment Group. Emerging technologies that improve the efficiency of care delivery will play a role, he said. Partnerships with nonprofit organizations to operate the properties are another alternative, he added.

“We have to figure out a way to care for people in the most appropriate setting,” said Ramsey.

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Supply follows demand. Or that’s how the thinking goes.

So it makes sense that aging baby boomers—76 million Americans—represent a huge opportunity for the seniors housing industry. After all, they’ll need an age-appropriate place to live.

But demand for seniors housing is much more nuanced than raw demographics. Consumer preferences, local market dynamics and other factors play a big role in how much, and what kind of seniors housing will be needed in the years to come.

A panel of experts at the 2019 NIC Fall Conference took a deep dive into the factors that impact demand trends and development cycles. They agreed that baby boomers will create more demand for seniors housing in the years ahead, though a large amount of new supply may not be needed for another decade. Panelists also weighed in on demand drivers such as local market differences, the importance of branding, and the aging stock of existing properties.

“The long-awaited crush of baby boomers is already here,” noted panel moderator Susan Barlow, co-founder and managing partner at Blue Moon Capital Partners, an investment fund based in Boston. “They’re helping their parents select seniors housing and their opinion counts.”

NIC Senior Principal Lana Peck provided an overview of demand trends. Here are a few key points:

• The overall occupancy rate for seniors housing (assisted living and independent living) in the second quarter of 2019 in the top 31 primary markets was 87.8 percent, the lowest since 2011. Independent living was five points higher (90.2%) than assisted living (85.1%).
• Second quarter occupancy in local markets varies widely from the highest, San Jose (95.7%), to the lowest, Houston (81.1%). Rent growth also varies, but hovers around 3%.
• Absorption of new inventory is ramping up while new construction, especially of assisted living, appears to be slowing.

(NIC third quarter 2019 data show similar trends.)

What’s Ahead?

Peck previewed new research on demand trends which was detailed in NIC’s October Insider newsletter.

Looking at age 80-plus households, factoring in a penetration rate of 18%, the study projects that an additional 881,000 units of seniors housing inventory will be needed between 2019 and 2030. But, Peck noted, the demand hits at different times. Fewer units will be needed in the near future than were produced in 2018. The most units will be needed between 2030 and 2040 (105,000 units annually).

Panelist Gleb Nechayve provided insights on market selection. He is senior vice president, head of research and chief economist, Berkshire Residential Investments, Boston. He argued that it’s not if market selection matters, but how it matters.

Unlike other commercial real estate asset classes, seniors housing lacks some fundamental research on market selection and property performance. “Understanding differences in risk-adjusted returns across markets is critical to market selection,” said Nechayve.

Based on NCREIF and NIC MAP data, Nechayve made some observations:

• Markets with high occupancy tend to have higher rent growth.
• Higher demand usually accompanies higher supply growth.
• Markets with supply constraints tend to have higher occupancies.
• A concentration of wealthy seniors and adult children, also with a high level of education, contributes to positive property performance.

Blue Moon’s Barlow addressed consumer trends that influence demand today and going forward. She noted that baby boomers, especially adult daughters, are already impacting their parents’ housing decisions. Healthcare integration is important, especially for families who live far apart. Creating a sense of community is a way to differentiate a property.

As an example, she cited a Blue Moon financed project in Denver. The new property will sit at the center of the city’s Jewish community, providing housing options for elders in the area.  “The developer is building something that is an asset to the whole community,” said Barlow.

Where would the panelists buy land for a new senior living development?

In the near term, panelist Nechayve said the best spots are those similar to the ones already succeeding, places with a well-educated population with high incomes. “That’s where to concentrate,” he said. But he cautioned that future demand will likely come from elsewhere.

Peck noted, “We could see something very different in 10 years.” While demand will increase, much of it will likely come from middle-income seniors. NIC recently released the results of a study, “The Forgotten Middle.” It details the growing need of this group for moderately-priced housing options.

Another demand factor to watch is building obsolescence. Seventy percent of the seniors housing stock is 20 years old or older, said Nechayve. “There’s tremendous opportunity for new development to replace those properties in major markets.”

Peck noted that the “sweet spot” for building occupancy is in the 10-17 year age range. That’s when operators have mastered efficiencies and have learned how to maintain resident satisfaction. “The communities are institutions in their neighborhoods,” she said.

Barlow remarked that Blue Moon capitalized three older assets last year and they’re among the best performing properties in the portfolio. “It’s what goes on inside the four walls that counts,” said Barlow. “The properties are known in the community as the best place to live.”

Amid huge structural changes in the healthcare system, population health management is quickly emerging as a way for skilled nursing and assisted living providers to improve the healthcare outcomes of residents and reduce costs.

“Population health management is an exciting trend,” said Mark Parkinson, president and CEO at the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), Washington, D.C., a group that represents long term and post-acute care providers. “Every major provider is developing a strategy around it.”

In order to help providers develop effective strategies, AHCA/NCAL will hold a population health management summit December 9-10 in Washington, D.C. Designed for long term and post-acute care leaders, the Summit will provide a gathering to discuss different population health management models, network with peers, and gain a deeper understanding of the role of the Centers for Medicare & Medicaid Services (CMS).

Population health management is being driven by two major trends that have impacted the assisted living and skilled nursing sector in both negative and positive ways, noted Parkinson. The first trend is the recognition that healthcare outcomes are more important than procedures. Providers should be paid based on value and outcomes rather than the volume of procedures that are performed—a plus for the healthcare system and the patient.

The other trend is the growth of Medicare managed care, or Medicare Advantage insurance plans. About 34% of Medicare eligible adults are now in Medicare Advantage plans, a number expected to continue to grow. This has had a negative impact on skilled nursing providers because payments under Medicare Advantage are less than those under the fee-for-service system. According to the NIC Skilled Nursing Data Initiative, revenue per patient day under Medicare Advantage has fallen from $510 in January 2012 to $432 in June 2019.

Population health management has emerged as a solution, noted Parkinson. Skilled nursing and assisted living providers can become managed care companies and apply to be a Medicare Advantage institutional needs plan, or I-SNP. This is a plan which includes residents who reside, or are expected to reside, in a long term care facility for at least 90 days, or require a nursing facility level of care but reside in assisted living or in their own homes.

But becoming an insurance company is a daunting task, admitted Parkinson. In part, it means taking on the full financial risk of residents’ Part A, Part B, and Part D Medicare benefits and creating a healthcare provider network.

I-SNPs Expand

Sensing an opportunity, a growing number of providers are introducing their own I-SNPs or figuring out ways to partner with other providers. In 2019, there are 62 provider-led special needs plans across the country, a number that Parkinson figures will double in the next five years.

Last January, AHCA/NCAL launched the Population Health Management Council to represent members that own Medicare Advantage plans, mostly I-SNPs. All 24 AHCA/NCAL member-owned plans are represented on the Council which advocates at CMS, develops strategies and shares best practices.

Parkinson attributes the growth of I-SNPs to the fact that the plans create a funding stream for innovation to keep residents healthy. Under the I-SNP arrangement, skilled nursing providers are paid a per member, per month payment (PMPM) to take care of the medical needs of a resident.

Eighty-five percent of the payment must be used for health care services. Fifteen percent is reserved for administrative expenses such as payment of claims, enrollment, sales, marketing, and profit. If the plan keeps members healthy through additional wellness services and/or reducing avoidable hospital admissions it can keep the savings it creates after all administrative and medical expenses are paid.

One example of the innovation that comes with owning a health plan is the application of an enhanced primary care team. Nurse practitioners are employed to see plan members and ensure they are receiving the right care, at the right time, in the right setting.

Typically a Medicare beneficiary has to spend three midnights as an inpatient in the hospital to access their Medicare benefit and begin receiving skilled nursing services. Providers that own a plan can choose to waive the three-day prerequisite.

This allows a nurse practitioner to “turn on” the Medicare benefit when a change in condition that requires skilled care is noted without the member/resident ever leaving the facility. In this scenario, an avoidable inpatient stay and corresponding expense is averted and the member/resident receives the treatment they need without the trauma of being transported to the emergency department and being admitted to the hospital.

“It’s a win-win,” said Parkinson. “Residents are healthier and providers take control.”

Early results are encouraging. A recent study showed that I-SNP members had 38% fewer hospitalizations than other Medicare beneficiaries, 51% lower emergency department use, and 45% fewer readmissions. Also, the rate of skilled nursing facility usage was 112% higher.

“The clinical outcomes are astonishing,” said Parkinson.

There are different ways to approach the provider-led I-SNP opportunity, he noted. Big providers have started their own insurance plans, while smaller providers are partnering with each other and with administrative firms that help set up the plans.

Parkinson hopes the upcoming Summit will offer something for everyone, those just getting started and those with an existing plan looking to succeed. “We will cover the spectrum of options,” he said.

The Summit will feature speakers from CMS to provide its perspective, and providers that have created plans to discuss the pitfalls and pluses. “It’s an opportunity to learn and hear about the latest best practices,” said Parkinson.

The Population Health Management Summit for Long Term and Post-Acute Care Leaders will be held December 9-10, 2019, at the InterContinental, Washington, D.C., The Wharf. For details and to register visit PHM.ahcancal.org.

Workforce recruiting and retention efforts in the seniors housing and care sector are particularly challenging today. During a panel discussion at the 2019 NIC Fall Conference, representatives from leading operating companies shared their strategies for attracting and retaining top talent.

Moderating the discussion, Jacquelyn Kung, CEO, Activated Insights, noted that “Better workplaces lead to better performance.” She opened with examples of companies in other industries that have succeeded financially by focusing on workplace culture, including Southwest Airlines and Hilton Hotels. Hilton tops the Forbes 100 best companies list currently—a list compiled by the Great Place to Work® Institute—and has seen tremendous growth in stock price over the past five years.

Great Place to Work began an initiative in the senior care industry two years ago, and this year surveyed almost a quarter million employees at more than 3,000 locations. Kung highlighted survey findings showing lower employee turnover in companies with higher trust index scores. She noted the data showed higher occupancy rates and higher charge rates in those companies as well.

The panelists shared moments of inspiration from their careers and how those experiences impact their work with their own employees. Common among the stories was the timing; all had experienced moments of inspiration very early in their careers. Kung noted that almost half of workers in senior care are very young adults and the importance of creating moments of impact to inspire the young workers to remain in the industry.

Audience members then submitted questions around staffing challenges for insights from the three panelists: Tom Grape, founder, chairman & CEO at Benchmark Senior Living, Manny Ocasio, chief human resources and compliance officer at Asbury Communities, and Ahkira McPherson, RN, staff development manager at Vi Lakeside Village.

When asked whether the industry’s biggest issue is recruiting, retention, or engagement, panelists all agreed that the three are equally important and intertwined. From Ocasio’s perspective, engagement allows you to attract more staff, “If you focus on engaging, you’ll get results on both retention and recruitment.”

Next, the panelists shared ideas on how to show return on investment (ROI) for workforce strategies. Tom Grape from Benchmark noted that culture can be an amorphous concept, and the ongoing pressure on wages and benefits in today’s hiring environment is tricky. But, data like that collected by Great Place to Work offer a compelling place to start. Ocasio added that some initiatives at Asbury have demonstrated measurable reductions in turnover, and that can directly affect the bottom line: “It costs about 1.1 times the salary per year of every nurse that you turn over.”

The discussion then turned to staff training. McPherson shared that Vi places a priority on management and staff development programs, and support from the top down. “From our corporate office, we have ongoing support down to our managers. And then we filter that down to the other stakeholders within the company and to the other employees.” The three panelists shared that training in their companies is primarily handled internally, with managers coaching staff directly. “Every manager has been trained in both being receptive to feedback and in being able to provide feedback that’s meaningful,” noted Ocasio.

When asked about hiring practices, Grape shared Benchmark’s success in reducing staff turnover through use of a predictive analytics tool, Arena, during the application process. He also noted the enthusiasm generated by the 3-day onboarding orientation program in Benchmark headquarters for new department heads and above. Ocasio talked about the use of behavioral interviewing in Asbury’s hiring process and the in-house culture program that helps tie behaviors to the organization’s values. McPherson noted that Vi recruits students and veterans, and offers apprenticeship and mentorship programs, “We are adamant about developing our own employees and promoting from within through leadership programs.”

Having advanced through the leadership programs at Vi herself, McPherson understands the importance of communication and connecting with staff at all levels, “Every day I’m encouraging someone.” Ocasio noted Asbury’s results in developing an app to improve communications with staff, and the nearly doubled message open rates versus email, “It’s really changed the way we communicate.”

Kung then asked the panelists about what she called “the elephant in the room:” workforce pay. Ocasio described Asbury’s living wage strategy, “Nobody makes less than what in their particular jurisdiction would be a living wage.” Grape noted Benchmark’s competitive market studies, recognizing that they are competing for workers with not just other senior living providers but with other local employers. Kung highlighted the importance of drilling down market studies to the local level, “The metro area is really important.”

“I would say you can pay better wages and have lower costs of labor,” said Ocasio, noting that higher wages reduce turnover.

An audio recording of the entire panel discussion is available to conference attendees on the conference recap page on NIC.org.

The Labor Department reported that there were 136,000 jobs added in September, below the consensus estimate of 145,000. For the nine months through September, the average monthly increase in total employment has been 161,000, below the average monthly gain of 223,000 in 2018 (note that this will likely be revised down based on the recent preliminary benchmark revision estimate). Health care added 39,000 jobs, in line with its average monthly gain over the past 12 months.

Revisions added 45,000 to the prior two months. The change in total nonfarm payroll employment for July was revised up by 7,000 from 159,000 to 166,000 and the change for August was revised up by 38,000 from 130,000 to 168,000. Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.

The September jobs report is important to the Federal Reserve and analysts because it is the first major piece of data for the fourth quarter. While not entirely consistent, data through the third quarter suggest that both the global and national economies are slowing. Indeed, the U.S. manufacturing sector is weakening as evidenced by a contraction for the second consecutive month in September in U.S. factory activity to its lowest level since June 2009. Expectations for GDP growth in the fourth quarter have also slipped to less than 2%. Global trade is slowing, and business investment is weakening due to mounting concerns about trade-related weakness associated with rising tariffs and geopolitical strife around the world. In fact, the Fed lowered interest rates on July 31st for the first time since 2008 and then again at its September 18th FOMC meeting as it reacted preemptively to concerns of a potential economic slowdown. The fed funds rate is now targeted at a range of 1.75% to 2.00%, down 25 basis points from its prior target range. Until July and since late 2015, the Federal Reserve had been gradually raising rates following six years of virtually 0% interest rates (2009 through 2015).

The August unemployment rate fell 0.2 percentage points to 3.5%. The last time the rate was this low was 50 years ago in December 1969. A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—fell to 6.9% from 7.2%.

Average hourly earnings for all employees on private nonfarm payrolls fell in September by one cent to $28.09. Over the past 12 months, average hourly earnings have increased by 2.9%, but this marked a 14-month low. For 2018, the year over year pace was 3.0% and in 2017 it was 2.6%.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work was unchanged at 63.2% in September, very low but up from its cyclical low of 62.3% in 2015. The low rate at least partially reflecting the effects of an aging population.