Nursing care prices fall

Updated transactions dollar volume for 2017 shows an increase from 2016 as the institutional buyer, comprised of mostly equity funds that manage pension money or other types of institutional money, played a major role in higher volume.

A trend has emerged over the past couple years in which institutional buyers have significantly increased the representation of total buyer volume, while also increasing the dollar volume overall. In 2015 the institutional buyer registered $3.2 billion in closed transactions, representing only 15% of all buyer volume. In 2017, the institutional buyer registered $6.6 billion in closed transactions, a 107% increase from 2015, representing 40% of overall transaction volume.

Some relatively large deals to note from the institutional buyer in 2017 were:

• Kayne Anderson, the institutional alternative investment manager, bought a $633 million portfolio from Sentio Healthcare Properties which consisted of 32 seniors housing and care properties. This deal included some medical office building (MOB) properties which are not reflected in these volume numbers;
• Columbia Pacific purchased 54 seniors housing properties from Hawthorn Retirement Group for $1.8 billion which included over 6,100 units;
• Blackstone closed on 60 Brookdale properties from HCP representing $1.1 billion in volume, with a unit count of over 5,500;
• Blackstone, in another large deal, closed on the Senior Lifestyle’s portfolio from Welltower for $747 billion including 25 properties and over 3,600 units; and
• Lastly, in another large deal, the Chinese life insurance company, Taikang Life Insurance, purchased a partial interest in the Northstar portfolio, which according to a press release totaled about $460 million and included over 200 properties.

While institutional buying activity increased, public buyer activity decreased significantly after 2015 as a share of volume. Public buyer representation also decreased in terms of overall dollar volume. The public buyer type represented 53% of the $21.9 billion in total closed transactions in 2015. But as of 2017, the public buyer now only represents 23% of the $16.6 billion in total volume. Public buyer volume in 2015 was $11.6 billion and in 2017 it had decreased 67% to $3.8 billion.

Last to mention, let’s not forget about the private buyer segment which includes private REITs, private owner operators, and private partnerships. It has been a very steady buyer, averaging $6 billion dollars per year from 2015 through 2017. Indeed, private buyers have accounted for very impressive deal flow. The private buyer registered $6.8 billion in volume in 2015 and represented 31% of all volume. In 2017, the private buyer registered $5.6 billion and represented 34% of all volume. Even with the relatively weak fourth quarter volume in 2017, the private buyer accounted for $1.2 billion in closed transactions to close out the year.

Pricing

The storyline for seniors housing and nursing care pricing has started to diverge over the past year.

Seniors housing price per unit was flat in the fourth quarter of 2017, compared to the third quarter at $180,500. However, on a year-over-year comparison, seniors housing price per unit is up 9.3% from $165,100. And from its cyclical low in 2010 of $58,600, it is up over 208%, which translates into a 16.2% compound annual growth rate over the period.

The trend for nursing care price per bed is another story. The price per bed dropped 1% to $83,800 in the fourth quarter from $84,600 in the third quarter. On a year-over-year comparison, nursing care price per bed is down a significant 16.5% from $100,300 in the fourth quarter of 2016. However, from its cyclical low in 2009 of $48,700, pricing is up 72%, which equals a 6.4% compound annual growth rate.

It looks like the nursing care price per bed drop has stabilized somewhat this past quarter, but we will see how it holds up over the next few quarters.

Stay tuned for the next transactions blog after the first quarter 2018 data is released.

As 2018 continues to unfold, construction pipelines are expected to remain full.  Near-record low occupancy levels in assisted living will remain tested, while occupancy pressures will grow in independent living as well.

In markets today with an unfavorable supply/demand imbalance, growing demand penetration rates could help offset supply pressures.

So, how can operators grow their own and the industry’s collective penetration rates?  Below is a list of some possibilities:

• Create the new “independent living” design and prototype aimed at the boomerang boomer generation—individuals aged 70-plus who want to re-invent themselves with active living, continuing education, second “careers” and volunteerism
• Provide greater service offerings that help adult children manage the day-to-day needs of their aging parent residents with concierge-type services
• Engage in an industry-wide “Got Milk?” campaign to demonstrate the benefits and advantages—the value proposition—of residing in a seniors housing property
• Find solutions to relatively high-cost housing and fee structures to make senior living options more available to lower income-threshold households
• Reduce the use of high-cost acute services by becoming part of the broader health care continuum and population health management practices that embrace the whole person in a value-based medical system versus a fee-for-service system, and by creating design-efficient, attractive housing with enhanced service and care features
• Create up-stream and down-stream relationships with hospitals and skilled nursing properties to create comprehensive and coordinated care
• Provide on-site services such as occupational and physical therapies and regular exercise and wellness programs to prolong residents’ length of stay and improve quality of life
• Focus on specialty care segments for residents with conditions such as COPD, diabetes, memory care and other care-intensive needs
• Offer services to the broader local community to familiarize it with seniors housing, while also offering fee-for-service care to the broader community
• Leverage search engine technology for best-in-class marketing and leasing opportunities
• Employ technology to improve work efficiencies to afford staff more time with residents and to improve the quality and quantity of care
• Improve employee retention by providing a culture and work environment that makes staff want to stay in place to enhance long-lasting relationships with residents
• Provide a stimulating and enhanced environment with opportunity for community-based involvement including intergenerational programs with young adults and children
• Offer choice of services, programs, dining experiences, room configurations, social outings and events
• Create outstanding offerings in customer service and customized experiences

Finally, think outside the box and reinvent seniors housing as we know it today.  The “Silent Generation” currently residing in seniors housing was born between 1928 and 1945. What we offer them now is setting the stage for the upcoming wave of baby boomers who will begin to enter seniors housing starting in 2026 when the first of them born in 1946 turns 80.  This boomer generation has proven over the decades that it doesn’t do things the same way as their parents.  And for this, we all need to be approaching the market in new and different ways.

The Centers for Medicare & Medicaid Services (CMS) recently announced a new, voluntary bundled payment program, designed to curb Medicare costs for 32 different medical episodes by paying providers a single payment per episode. The new program puts hospitals and physicians in the driver’s seat, enabling them to select or convene care delivery partners and distribute financial benefits earned as a result of reducing the costs to Medicare. The new model, Bundled Payments for Care Improvement Advanced (BPCI Advanced), will replace existing voluntary BPCI models, including BCPI 3, which put skilled nursing providers in charge of care episodes. BPCI Advanced includes several incentives for participation among hospitals and physician groups, but not without drawbacks. If BPCI Advanced gains traction, skilled nursing providers may have to adapt to benefit from the model or risk being left out.

Much like prior BCPI iterations, BPCI Advanced aims to lower Medicare spending for 32 specific conditions, three of which are outpatient procedures. Many of these covered episodes were included in the now-defunct mandatory bundled payment models scrapped last year before they were ever initiated. In BPCI Advanced, hospitals and physician groups may apply to CMS to participate for their desired care episodes. Those entities will then be responsible for coordinating all related care delivery, including post-acute care. The entities will take on both upside and downside financial risk in this model. Participants will also be subject to certain quality of care standards.

Post-acute providers take a backseat

With the introduction of BCPI Advanced comes the termination of the previous BPCI models. Post-acute care providers were eligible to participate as partners with hospitals under BCPI 2, and were given the reigns to control costs and reap maximum benefits under BPCI 3. Participating skilled nursing providers in BPCI 3 may be disappointed to be taken out of the driver’s seat, since many providers adapted systems and made investments in staff and capabilities to maximize the benefits under the voluntary model. CMS has not given any indication that a post-acute driven model should be expected in the future. Former BPCI 3 participants may have enjoyed controlling their own destiny as it related to episodic care, but will now only be eligible to participate as a downstream provider, and only if an existing or potential partner opts into the model.

BPCI offers incentives for participation…

BPCI Advanced offers a number of enticing incentives for hospitals and physician groups to participate. First, these convening entities will be eligible for up to a 20 percent bonus if they keep the cost of care under the target price. That sizeable bonus also comes with downside risk, also capped at 20 percent. Because this model includes both upside and downside risk, participants will be considered to be following the Advanced Alternative Payment Model under MACRA. Those providers will then be exempt from providing quality reporting metrics and eligible for additional bonuses foregone under the traditional Medicare fee-for-service model. Physician groups are newer to the bundled payment space, though they are experienced in Advanced Alternative Payment Models under MACRA.

… But not without drawbacks

The assumption of risk is certainly one potential reason for hesitation for providers. But others exist.  Notably, participants will choose the episodes for which they wish to be included under BPCI Advanced and will be locked into that decision for two years. This rule may steer conveners away from experimenting with episodes, thereby limiting participation. Furthermore, convening hospitals and physician groups are still subject to quality standards, meaning they will have to collect and report data. Readmission rates will count against the convener two-fold, both as a quality measure that could impact bonus payments and by requiring the convener to absorb associated costs. Potential conveners have a short window in which they can chose to participate; applications are due in March 2018.

Skilled nursing under pressure

On the one hand, the introduction of this new bundled payment program will open doors for skilled nursing providers to develop new partnerships. On the other hand, those partnerships may be defined by pressure on providers to keep lengths of stay to a minimum while maintaining quality standards set by the convening partner. Furthermore, as hospitals and physician groups join BPCI Advanced, overall admissions to skilled nursing could decline as these entities may want to limit post-acute care spending to reap the maximum benefit from CMS. Convening entities may look to home health agencies in place of skilled nursing altogether, and when possible, may even opt out of any post-acute care services.

Skilled nursing providers that can offer partners low cost, high quality care that avoids rehospitalization may be in the best position to participate in bundled payment arrangements. Some opportunities may exist for skilled nursing operators to gain upstream traction by partnering with home health and coordinating post-acute care. Those providers with previous BPCI experience may have the greatest advantage in joining BPCI Advanced arrangements, while those providers who are new to the game may require initial investments in equipment, data collection, and staff. Likewise, providers already demonstrating good outcomes and low readmission rates for specific conditions may be valuable to partners aiming to participate in BPCI Advanced for the same conditions.

As with other bundles and alternative payment models, there is a fine line to walk between lowering costs and improving quality. This holds true for BPCI Advanced; the best skilled nursing providers that can achieve good outcomes at low cost will be valuable partners for participating conveners.

The Labor Department reported that there were 200,000 jobs created in the U.S. economy in January.   This was above the consensus expectation of 180,000 jobs.  This marked the 88^th consecutive month of positive job gains for the U.S. economy.  Revisions subtracted 24,000 jobs to the prior two months.  For all of 2017, the economy generated 2.2 million jobs.  This marks the second time on record that the economy has created at least 2 million jobs a year for seven consecutive years (the first time was in the 1990s). The 2.1 million increase was less than the 2.3 million gain in 2016, however.

Health care added 21,000 jobs in January. In the past twelve months, health care added an average of 24,000 jobs.

The unemployment rate remained unchanged for the fourth consecutive month at a 17-year low of 4.1% in January. This is below the rate of what the Federal Reserve believes is the “natural rate of unemployment” and suggests that there will be upward pressure on wage rates.

In fact, average hourly earnings for all employees on private nonfarm payrolls rose in January by nine cents to $26.74. Over the past 12 months, average hourly earnings have increased by 75 cents, or 2.9%. This is the most since June 2009. A separate report from the BLS this week—the Employment Cost Index report—showed that private sector wages and salaries rose by 2.8% in the last three months of 2017, compared with year-earlier rates.  This was the fastest growth since the recession. It is also notable that 18 states began the new year with higher minimum wages.

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.4 million and accounted for 21.5% of the unemployed.  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—rose to 8.2% from 8.1% in December but was down from 9.2% as recently as December 2016.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work remained at 62.7%, near the lowest level since the 1970s. This measure has generally been very low by historic standards, at least partially reflecting the effects of retiring baby boomers.

Today’s report will support expected increases in interest rates through 2018 by the Federal Reserve, with the first 25 basis point increase likely happening in March 2018.  The Fed has raised rates by a quarter percentage point five times since late 2015, and most recently to a range between 1.25% and 1.50% in December 2017, after keeping them near zero for seven years.  This past week, Janet Yellen led her last FOMC meeting, paving the way for Jerome Powell to take the helm of the Federal Reserve.

The 2017 preliminary closed transactions data is in and it shows a slight decline in dollar volume compared to 2016. Seniors housing and care closed transaction volume in 2017 registered $14.1 billion, which included relatively weak second and fourth quarter transaction volume. The $14.1 billion includes $7.9 billion in seniors housing and $6.2 billion in nursing care.  The total volume was down 2.8% from the previous year’s $14.5 billion, but down 35.5% from 2015 when volume came in at $21.9 billion.  If these figures hold as we finalize the 2017 numbers then it will be the lowest year in closed transactions volume since 2012.

If we take a deeper look at seniors housing and nursing care separately, we see that seniors housing volume was up but nursing care was down from 2016. Seniors housing saw a 4.5% increase in volume from $7.5 billion and nursing care was down 10.8% from $7.0 billion last year.

Comparing volume on a quarterly basis, seniors housing and nursing care in the fourth quarter of 2017 registered $2.1 billion which is down 37.6% from the $3.4 billion a year ago in the fourth quarter of 2016 and the lowest quarterly volume since the second quarter of 2013 which registered $1.7B. In comparison to the previous quarter, volume was down 59% as the third quarter of 2017 came in at $5.1 billion.  A large portion of that $5.1 billion in the third quarter was the $2.1 billion Sabra acquisition of Care Capital Properties. That $2.1 billion transaction was a main driver of the comparison decrease in nursing care volume in the fourth quarter as nursing care was down 64% from the third quarter. Seniors housing was down 50%.

Of the $2.1B in the fourth quarter of 2017, seniors housing made up $900 million and nursing care made up $1.2 billion.

As noted above, one of the weak quarters for closed transaction in 2017 was the fourth quarter. The fourth quarter is historically a strong quarter compared to the rest of the year.  However, in 2017 it represented the lowest in terms of dollar volume. Not only was the dollar volume the weakest in the fourth quarter, but the number of deals closed was also the smallest of the year, which is highly unusual.  Sometimes we’ve seen a very large deal closed within the year that skews the dollar volume in the first, second, or third quarter, but when looking at the absolute number of closed deals, you mostly see the fourth quarter as highly active.  Of course, one main reason for this could be the wait-and-see approach as the tax overhaul was unfolding as 2017 came to a close. Time will tell if deals were delayed into the first quarter of 2018, or perhaps the second quarter.

Smaller Transactions Dominate

Continuing further analysis when it comes to the number of deals closed, a measure different than dollar volume, we saw the number of transactions closed drop 17%.  According to preliminary data, the number of deals closed in 2017 was 446 of which 90 were portfolio transactions and 356 single property transactions. That compares to 538 transactions closed in 2016 of which 109 were portfolio and 429 were single property transactions.  Over the past couple years portfolio transactions represented 20% of overall closed transactions.  This was even the case back in 2015 when the public buyer type, namely the publicly traded REITs, represented the majority share of buyers. Indeed, single property transactions are very important to the market in terms of the flow of transactions closing, not necessarily the dollar volume each quarter.

As the single property transactions market has been strong, we had seen 16 straight quarters of over 100 total deals close, up until the fourth quarter of 2017.  The fourth quarter of 2017 only shows 84 closing so far.

As far as the size of the deals, small deals of $50 million or less dominated in the fourth quarter, more than usual, representing 95% of all deals closed.

Over the past couple years, as the public buyer type has become less representative of the overall volume, 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 9 transactions combined in 2016 and 2017.

Stay tuned for final 2017 figures coming in a February blog along with the latest on buyer composition.