Part I—Equity Investors Weigh in on How to Make the Numbers Work

Facing a shortage of seniors housing and care options for the growing numbers of middle-income seniors based on new research, NIC convened an investor summit May 21 in New York City. The summit brought together industry stakeholders to brainstorm ideas to create innovative housing models that cut costs and streamline operations to improve affordability for middle class elders. Promising approaches included public-private partnerships, shared suites, new technology, and efficient designs and staffing models.

The investor summit included three separate panels of experts. They explored various solutions from the perspective of equity investors, debt providers, and property operators with successful strategies already in use.

The results of a new study, “The Forgotten Middle,” were also presented at the summit. The study was recently published in the journal Health Affairs and discussed at an April 24 policy forum in Washington, D.C.

The study shows that fewer than half (46%) of America’s middle-income seniors will be able to afford the $60,000 average annual costs of seniors housing and out-of-pocket medical costs in 2029, even if they use all of their financial resources, including their home equity. But if the costs were cut, millions of older adults could benefit.

The independent research conducted by NORC at the University of Chicago also shows that an additional 5.9 million older adults would be able to afford seniors housing if annual costs were cut by $15,000. Data show that if average annual costs for seniors housing and care fell by just $10,000 a year, an additional 2.3 million older Americans would be able to afford it.

“In only a decade, the number of middle-income seniors will double, and most will not have the savings needed to meet their housing and personal care needs,” said Caroline Pearson, senior vice president at NORC at the University of Chicago and one of the study’s lead authors. “Policymakers and the seniors housing community have a tremendous opportunity to develop solutions that benefit millions of middle-income people for years to come.”

Funding for the study was provided by the National Investment Center for Seniors Housing & Care (NIC), with additional support from AARP, the AARP Foundation, the John A. Hartford Foundation, and The SCAN Foundation.

What follows is an edited Q&A of the first panel discussion which focused on equity investors. (Here is a link to the other panel discussions.)  The equity panel was moderated by NIC Chief Economist and Director of Outreach Beth Mace.

Participants of the equity panel included Pam Herbst, managing director, AEW Capital Management; and Andrew Brett, principal, director of Real Assets Research, NEPC.

Mace: To put our discussion in context, what changes have you seen in the acceptance of seniors housing by institutional investors over the last 10 years?

Brett:  We’ve been calling seniors housing an emerging asset class for a number of years, but now it’s becoming more of a core investment like the four main commercial real estate asset classes. Not all investors are there yet, but it’s an active conversation. We currently tend to look at seniors housing as a value-add or opportunistic investment.

Herbst: The first time years ago when we went to a client about investing in a stabilized portfolio of seniors housing at a 10.5% cap rate, they were scared to death. But we were able to convince them to invest and we walked out of the room with $100 million in equity for a portfolio and it did amazingly well.  We could show clients that the operating risk was not as much as they thought. A lot of them thought assisted living and memory care was like the nursing home where they visited their grandparents.

Over time, the risk perspective has been reduced for clients. They saw during the financial crisis that assisted living did well because it is need driven. We did learn that independent living had a different risk profile because it was a choice and people could not sell their houses. But that risk has come down and now we can meet cash flow and return requirements, so investors are getting more comfortable with that segment.

A number of institutional clients today view seniors housing as a core-plus or value-added strategy. Fifteen years ago, they looked at it as an opportunistic play. But if clients understand the huge opportunity with growing demand for seniors housing, stabilized properties fit comfortably in the core to core-plus strategy space.

For a middle-market product, we have to work on the cost per unit and required investor margins.  As a company, we’re looking at developing affordable units in Texas for $140,000 per unit. Discounting land costs by $25,000, the cost is still $115,000 a unit—much higher than the cost it would take to meet today’s return requirements.  It’s not just the investment returns that are an issue, but the cost to develop the project.

Mace:  Could you get comfortable with middle-market investing?

Brett:  Institutional investors do believe in the resiliency of the asset class. But we have to have a compelling scenario to meet their actuarial rate of return of 7+ %.

Mace:  Is there a fully private market solution or do we need a public/private partnership?

Herbst:  I think we need some kind of subsidy. We’ve looked at shared units with two bedrooms, shared common space and a bathroom. The costs are 20-25% less than for full market private pay units. Greater demand because of a larger population should produce a quicker lease-up which will impact cash flows. Another thought is to look at shared rooms, like college dorms. It could be a suite with 4 bedrooms, and a bathroom with two sinks, and a shower, and 2 toilets. That arrangement would lower the construction and operating costs.

It’s possible now to speed entitlements with a local municipality when 15-20% of units are earmarked for those with 80-120% of the area’s median income. If a developer would agree to target 20% of units for middle market seniors, and the municipality boosts the project’s FAR (floor area ratio) by 25%, you’re essentially eliminating the additional land cost. Also, seniors don’t impact local schools or use many city services which is an argument to reduce property taxes.

Brett:  I had a similar thought about shared spaces, but how would that impact residents?

Herbst:  We have shared units in four projects and the roommate situation is going great. People have connected with old friends and we’ve had very few problems. It’s important that the bedrooms have room for a chair and TV.  At some point, not everyone can afford a ritzy place. As a country, we have to get realistic about what services we can provide to these seniors based on their budgets.

Mace:  Maybe the seniors housing industry will have to become more like the hotel industry with a spectrum of products.  But 60% of the expenses are labor which is a big challenge. Do we need a different type of capital stack for a middle income product?

Herbst: The capital piece could become a less institutional product. Maybe it would be geared more for retail investors. There are a huge number of people turning 65 looking for fixed income in a world where yields are low. If middle- market seniors housing can lease quickly and stay leased, and generate a return even of below 5%, that’s not bad. Perhaps the product would be almost like a tax free municipal bond backed by the states.

Mace: If a pension fund is not going to earn double digit returns, does it matter to them that they are providing a service to constituents and having a social impact?

Brett:  It still comes back to the rate of return. The goal is to invest on the merits of the return and also achieve a social impact. The return potential has to be there.  A capital vehicle with a tax benefit is an interesting strategy, but I think it would be tough to package as a fixed income instrument from an institutional perspective.

Mace: What are some innovative ideas to create more seniors housing for the middle market?  Could a mall, for instance, be converted into a seniors housing project?

Herbst: I think that would be interesting. We’ve looked at Class B & C office buildings in the suburbs that we could buy for $80 a foot and then renovate for seniors housing. We see more and more medical uses for empty mall space. With its enclosed areas, good for walking, a mall could be right for a rehab or assisted living facility. We need to think outside the box.

Audience Q:  Where can we squeeze out extra cost when labor is 60% of the operating expenses?

Herbst:  There are ways to make the operating model more efficient. Property taxes and food are a big part of operating costs. It might be possible to partner with programs such as Meals on Wheels which might also bring down dining room labor costs.

Mace:  What about bringing in more volunteer labor? Church groups could volunteer or, say, volunteers could bank the time and then use it for themselves when they move into the building. More and more retired people want to be engaged with their communities and it might be a way to change the narrative while lowering labor expenses.

Herbst:  Reducing the operating cost is the hardest part. We have to focus on reducing real estate taxes, bringing down development costs, and finding thoughtful ways to deliver services.

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May 27, 2019

janekadler@gmail.com

The NIC MAP^® Data Service recently released national monthly data through March 2019 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 1Q2019 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 generally larger for majority assisted living properties dating back to April 2015.
• As of March 2019, initial rates for majority assisted living properties averaged 6.9% below their average asking rate, which equates to an average initial rate discount of 0.8 months on an annualized basis, down from 1.0 months in December 2018. The average discount for majority independent living properties was larger at the equivalent of 1.0 month which was as high as it has been since early 2018. This was notable because the discount has been smaller for independent living than assisted living for nearly the entire time series that began in April 2015.
• Average asking rates for majority independent living properties have exceeded in-place rates for the past eleven months, a change from the prior 14 months (I.e. March 2017 to April 2018) when asking rates were less than in-place rates. For majority assisted living properties, average asking rates consistently exceed average in-place rates. The average majority independent living asking rate increase in March 2019 was 4.0% above its year-earlier level, a slowdown from 5.8% at year-end 2018. The annual pace of growth for majority independent living initial rates also decelerated and was only up 2.8% from year-earlier levels; this followed four months of 5.0% or better growth.
• For majority assisted living properties, annual growth was strongest for initial rates as of March 2019, at 4.8%. This compares with 2.7% for in-place rates and 2.3% for asking rates.
• The rate of move-ins has exceeded or equaled the rate of move-outs for six of the past twelve months for majority independent living. For assisted living, move-ins exceeded or equaled moveouts for seven of the past twelve months, while they were below move-outs for five months. Move-ins tend to exceed move-outs during the Spring and Summer months.

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, partnering with leading software providers like MatrixCare, Yardi, PointClickCare and Eldermark makes it easier for operators to contribute data to the Actual Rates initiative. NIC appreciates our partnerships with software providers and our data contributors and their work in achieving standardized data reporting. Operators contributing data not only receive the national report free of charge but 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.

Capital providers and operators are talking about the challenges and opportunities of serving middle-income Americans who will not be able to afford private-pay seniors housing and care at current price-points, yet also don’t qualify for government assistance. While the discussion has only just begun, it is already generating excitement amongst investors and operators, along with a host of new ideas, and an openness to innovation and new partnerships aimed at meeting a huge demand that will only grow over the next several decades.  

Just a month after hosting an event in DC hosted by Health Affairs to publicly announce findings from “The Forgotten Middle:  Middle Market Seniors Housing Study”, NIC released the full study to the public, and hosted an investor briefing and discussion in a special event at New York City’s Yale Club. Co-sponsored by Institutional Real Estate, Inc. (IREI) and Real Capital Analytics (RCA), the event featured insights from study authors, detailed data, and expert panel discussions aimed at inspiring discussion and interest amongst the capital providers who underwrite much of the seniors housing and care industry in the United States, as well as operators and developers in the industry.  

Following an introduction and welcome given by NIC Chief of Research & Analytics Chuck Harry, NIC Chief Economist and Director of Outreach Beth Mace provided key findings and takeaways for capital providers and operators.  

Mace’s summary of the study’s findings highlighted the challenges and opportunities facing the sector. She said “This investment opportunity is big. Our study indicates that there will be more than  14 million middle income seniors in 2029. That’s 6 million more than today.” She went on to explain that these numbers are conservative, and will actually continue to grow beyond 2029, and to point out that at today’s penetration rate of 11.2% and today’s construction rates, it would take 17 years to open the 700,000 new units it would take to meet this demand in 2029. After reviewing other key data points, Mace said that “the goal of today’s event, really, is to get the conversation started, to see how we, collectively as an industry, can start to address the care and housing needs of this cohort.” 

Study author Caroline Pearson, Seniors Vice President of NORC at the University of Chicago, then provided insights into the potential for further study, down to the local level, which would be potentially very useful for investors. Referring to last month’s Health Affairs event, she said, “I was in awe of the response that we got from the policy community to the research. I’ve released a lot of research; people are always very kind and gracious and say, ‘thank you’ but the excitement in the room this time was palpable.” She closed by saying “I’m eager to hear the discussion today. I’ve received lots of questions from the press, and lots of people have said to me, ‘you’ve convinced us this is a really big problem. Now we’re really scared – what should we do about it?’” 

What followed was a series of panel discussions, organized by industry perspectives, which yielded a host of ideas, plenty of questions from the audience of investors and industry leaders, and some general agreement on key issues that the sector will face, in an environment of cautious optimism.  

The first of three panels, moderated by Mace, featured equity investment executives Pam Herbst, Managing Director, AEW Capital Management, and Andrew Brett, Director of Real Assets Research, NEPC. The discussion yielded numerous ideas that Herbst and Brett have considered – or would consider – for making seniors housing more affordable, while retaining viability as an investment for their firms and the industry.  

The idea of shared space was raised, both as a means to lower construction and operating costs, and as a potentially attractive option for the boomer generation and seniors who might find a social living arrangement attractive. Reducing common areas from today’s average of 35%-40% would lower costs. Herbst also raised the possibility of gaining additional Floor-to-Area (FAR) allowances from municipalities in return for adding units to serve the middle market. This could help eliminate additional land basis costs, something she suggested could be relatively easy for communities to grant. 

Other ideas the panel discussed included state and municipal tax grants and investment incentives, renovating and/or repurposing older buildings, such as malls and big box retail, reducing dining and labor costs through existing programs such as “meals on wheels”, and allowing younger volunteers to “bank” volunteer hours towards their own retirement. 

The following panel, also moderated by Mace, was designed to represent the debt perspective. Panelists included Robert M. White, Jr., Founder and President, Real Capital Analytics, Michael Patterson, Vice President, Underwriting and Credit, Freddie Mac, Christopher Callaghan, Group Vice President, Head of Healthcare Banking, M&T Bank, and Heidi Brunet, Managing Director, Newmark Knight Frank. 

White presented data profiling the recent history of debt financing in the sector, with his insights on who is providing debt financing and who is not, and who may be providing debt in future. Following this, the panel answered questions from Mace on their perspective – and their ideas on dealing with potential middle market investment. 

When asked by Mace whether Freddie Mac would be able to securitize mortgages for lower margin housing and care models, Patterson said “we have obviously been able to so far…and we are wanting to continue doing that. We think this may be a part of those securitizations.” 

Referring to the conversation around cost, Callaghan, whose bank underwrites seniors housing construction, said, “We can underwrite to a lower margin for permanent debt, and get comfortable with sustainable cash flows. The lower to moderate income seniors housing has margins that are half those of high-end seniors housing, but you can still underwrite those cash-flows.” 

Ideas the panel discussed included adding Medicare reimbursements above rent, as the value-based care system begins to expand what the government will pay for, to include services such as providing nutrition, rehabilitation, and assistance with activities of daily living (ADLs). It was suggested that properties that provide multiple levels of care might benefit from numerous advantages. Also, the panel discussed the need for local and regional banks to be educated on the sector, to encourage further engagement. Another suggestion was to consider the growing sources of foreign capital interested in the sector. 

A panel of operators included Thomas Grape, Chairman and Chief Executive Officer, Benchmark Seniors Living, Gaurie Rodman, Director, Development Services, Direct Supply, and Judy Marczewski, Chief Financial Officer, Leisure Care. Moderator Kai Hsiao, Chief Executive Officer, Eclipse Seniors Living, began the discussion by saying, “This is where the rubber meets the road now. The question is can we actually make this middle market operating model work.” Hsiao then pointed out that his panelists had all “dipped their toe” in the water of middle market and would share what they had experienced so far. 

When asked about the decision to get into lower-cost private-pay seniors housing, Grape responded that, “we were drawn to it for the reasons that motivated the study, which is that we’ve seen rents and costs continually increase and knew that there was an unserved middle that we wanted to see if we could tap into.”  Marczewski, who said her company was about to open their third middle market property, said that, “what we have done is build an efficient model for operating and for construction. I really think the last piece of that is coming up with the efficient capital structure. That’s what’s missing.” 

Rodman said that, “for the middle market I believe the solution lies in looking at every layer of the development process and the operating process comprehensively, from the beginning.” She supported finding communities willing to work with developers with payments-in-lieu-of-taxes, increasing FAR, and leveraging infrastructure improvement taxes, as part of the land-selection process, in order to remove land basis costs. 

In addition to the ideas that came from the previous panels, the operators contributed many of their own. Grape’s company found cost-savings by simply reducing the building size, having shared units, and he explained how reducing non-care staff was possible, as well as using wood frame construction instead of steel and concrete as a cost-savings measure.  

Marczewski’s company lowered costs with efficient kitchen and menu design, resulting in high quality foods, but fewer options, and lower staff costs. Rodman described a cost-savings of $1,200 per unit just by replacing a closet that had a sprinkler in it with an armoire. 

Other ideas the panel discussed included achieving more labor efficiency with a “generalist” model, partnering with multi-use partners and developers, incorporating smart technology, partnering with healthcare, and leveraging community resources such as high schools and universities for volunteer groups. Panelists also suggested working with Medicare Advantage plans, adopting “social” models that emphasize the appeal of common areas, and attracting investor interest from the healthcare sector. 

The event concluded with remarks from NIC Founder and Strategic Advisor Bob Kramer, who challenged attendees and viewers to think about the day’s key takeaways, as well as to consider what was not discussed, and to take the discussion back to their own companies. He emphasized that, “As we look at 2029, this is a huge market, which, for the most part we’re not serving now. It’s going to grow exponentially in size.” He went on to point out that for 20 years beyond the study’s projections to 2029 the market will continue to grow. 

He discussed how demographics are changing, driving necessary shifts in how seniors housing must be conceived and marketed in the near future. Referring to aging baby boomers, he said, “they’re not going to want to move in to anything with the name ‘seniors’ on it, because they don’t want to be called a seniors.” Concluding his remarks, and the event, Kramer said, “We want to bring a spotlight to ideas, in terms of models…we’ve mentioned development efficiencies, we’ve talked about operating efficiencies, we’ve talked about capital efficiencies, and the last one…regulatory efficiencies – or I might say inefficiencies – but we need to put a spotlight on these and NIC wants to continue to do that.” 

The invite-only event was live-streamed and is available on video, along with access to the study itself and many related resources, at https://www.nic.org/middlemarket-resources.  

While the industry scratches its collective heads trying to figure out what baby boomers want in a senior living community, millennials are pointing the way.  

The two groups have a lot in common. Baby boomers and millennials currently represent the largest cohorts in the American population, 74 million and 71 million respectively.  

Baby boomers are the parents of millennials and share many of the same values that shape their housing preferences. They’re both more interested in having experiences rather than accumulating things. They want to make a difference too.  

“Compare the values of someone 62 and someone 26, and they’re very much the same,” said Lilian Myers, an expert on aging and co-founder of EconomyFour, a social impact company based in Washington, D.C. “Both groups are interested in exploring what’s next.” 

Myers has built a career around looking at the trends that shape our views of technology and of aging. As a serial entrepreneur she helped launch several health technology start-ups. She eventually moved on to work for IBM, initially consulting with global clients on the digital transformation of healthcare.  

A project in Japan that linked isolated seniors by iPad to services from the postal service led her to become IBM’s global leader for aging and the longevity economy, conducting seminars on several continents to find industry solutions for age and longevity. “What it taught me was how universal and institutionalized age bias has become,” said Myers.   

The age of 65 began to be attached to decline and need of help only a century and a half ago as industrial era social safety nets were established, said Myers. Today older adults are better defined by their vitality than their age. “Boomers aren’t using traditional definitions of who is considered old,” she said. “It’s more about how we feel, and we don’t feel old. We’re working, starting new businesses, and giving back in ever-greater numbers.” 

Likewise, millennials are defying expectations. Many millennials, for example, are digital nomads, working remotely from anywhere without a formal office. They can travel and work, settling for months at a time in one place they like.  

The idea can be applied to baby boomers who might like a living arrangement where they can continue to work remotely and live where they want. Myers herself is a bit of a digital nomad, working remotely from her condo in Florida when she’s not on the road. 

The idea of digital nomads fits neatly with concept of portable living arrangements which are growing in popularity. At the NIC Spring Conference, attendees conducted a hackathon to brainstorm ideas for senior living communities that would appeal to baby boomers. A common feature of the communities was a portability component. One proposed project gave residents the ability to travel and live in different communities around the world.  

New alternatives 

Millennials like the idea of coliving, an idea that might also appeal to baby boomers, said Myers. For example, Roam is the global coliving and coworking community that combines work, travel and adventure. The website promises, “Strong, battle-tested wifi, a coworking space, chef’s kitchen and a diverse community.”  

Another emerging housing alternative is the modern micro apartment. These tiny, fully-equipped urban units are well suited to those who want to switch cities easily without being tied down by a lot of things they have to move.    

Millennials prefer urban spaces to the suburbs and so do a growing number of baby boomers. The city offers the advantage of walkable neighborhoods near services, parks and entertainment. No one needs a car.  

Senior living providers have been trying to cram everything into one building adding a hip bistro or coffee shop, said Myers. “It makes more sense to simplify operations and build partnerships that surround the resident in the way universities have for students.” Urban locations already have everything built in.   

Other trends are shaping housing choices. Like millennials, many boomers prefer living in a community with a multi-generational population. Both groups also want to stay connected without being walled off or being dependent. 

As a self–described optimist, Myers believes the coming generation of 45, 50, and 60 year-olds will alter stereotypes about aging with the help of their younger counterparts.  Myers stopped coloring her own gray hair when she noticed that young people in Asia and Europe were dyeing their hair white or grey. “It’s about stage, not age,” said Myers. “We’re looking for what’s exciting and what makes us feel connected, growing, and contributing in work, play, and relationships.” 

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May 10, 2019 

janekadler@gmail.com 

During the upcoming 2019 NIC Fall Conference, the “Innovations that Work” session will share ideas on innovative technologies and tools that are changing the way operators and investors care for residents. Rapid-fire, seven-minute presentations on five key topics will address real-world examples of innovative solutions to some of the most pressing challenges in the industry today.  

The session will include six speakers – each covering a solution to a key problem facing seniors housing and skilled nursing today.  Have you faced a challenging issue and used some type of innovation to solve it? If so, we would like to hear from you.  We are looking for solutions to problems that: 

• Are deployed (i.e. not hypothetical) 
• Have data showing the benefit associated with the soluti8on that can be shared 
• Have an operator willing to speak about their experience with the solution 
• Are innovative – approaches, systems, or solutions not familiar to >~ 80% of operators 

We are looking for your best solutions to help shape the thoughts and strategies that will influence industry peers. Ideally, those impacted by the problem will introduce a solution to fix the problem that shines a light on innovative thinking. This forum is not the place for canned sales pitches! NIC is specifically interested in your real-life experiences building on what’s worked in your partnerships to bring solutions to problems. 

Ready to start your proposal submission? CLICK HERE for more information