It is no surprise that the COVID-19 pandemic had a tremendous impact on skilled nursing occupancy. But what exactly happened? This article provides the insights on supply and demand dynamics and the disparities between property level occupancy rates for freestanding skilled nursing properties.

Demand and Supply Dynamics for Freestanding Skilled Nursing Properties (2017 – 2022)

The COVID-19 pandemic caused an unprecedented global health crisis and human tragedy. Among the most affected groups and property types were older frail adults and skilled nursing properties. Indeed, the health crisis led to a dramatic loss in occupied beds for the skilled nursing sector. From the first quarter of 2020 to the first quarter of 2021, demand, as measured by occupied stock or the change in net absorption, fell by about 62,000 beds on a net basis for freestanding skilled nursing properties for the 31 NIC MAP^® Primary Markets aggregate. This was equivalent to 15% of the pre-pandemic (1Q 2020) occupied bed stock. Net absorption rates averaged about negative 4% on a quarterly basis over this four-quarter period.

Subsequently, beginning in the first quarter of 2021 through first quarter 2022, demand patterns reversed course and the net absorption rate averaged 1.1% on a quarter-to-quarter basis — equivalent to over 15,350 beds absorbed on a net basis over this four-quarter period. Notably, 25% of the occupied beds lost for the Primary Markets aggregate during the first year of the pandemic (1Q 2020 to 1Q 2021) had been recovered during the second year of the pandemic (1Q 2021 to 1Q 2022). While this was a very welcome positive trend and does indicate light on the horizon, the sector continues to face concerning financial challenges unfortunately for a number of reasons. These reasons include very low occupancy rates, Medicare funding cuts and underfunding of Medicaid reimbursement in many states, incrementally higher expenses, and staggering staffing shortages restricting admissions of residents into some skilled nursing properties.

Interestingly, however, as Exhibit 1 below shows, supply and demand for freestanding skilled nursing properties were contracting even prior to the pandemic. Based on historical data since 2017, quarterly net absorption rates and inventory growth averaged negative 0.2% and negative 0.1%, respectively, over the period from 1Q 2017 to 1Q 2020, the three years preceding the pandemic.

Further, the data show that during the height of the pandemic and prior to widespread vaccination among residents (from 1Q 2020 to 1Q 2021), the decline in inventory for skilled nursing properties continued but at a much slower pace compared with historical patterns and averaged negative 0.03% quarter-to-quarter, less than one third the rate at which inventory had been declining prior to the pandemic (negative 0.1%).

Exhibit 1 – Supply & Demand Dynamics – Freestanding Skilled Nursing Properties

The question is, why did this slowdown in the loss of skilled nursing beds occur during the first year of the pandemic? Perhaps fewer beds were taken offline because bed capacity was simply needed during the height of the pandemic to take care of the unprecedented numbers of ill older adults.

In hindsight, skilled nursing properties generally stood their ground and navigated through extremely uncertain and decentralized responses to COVID-19 when they were needed the most to care for individuals at high-risk for severe illness from COVID-19 and went even further by accepting COVID-19 patients from overwhelmed hospitals in many states.

During the second year of the pandemic (1Q 2021 to 1Q 2022), skilled nursing inventory decline accelerated once again, averaging negative 0.2% quarter-to quarter, twice the rate recorded prior to the pandemic (negative 0.1% quarter-to-quarter over the three years leading up to the pandemic, from 1Q 2017 to 1Q 2020), and nearly seven times the rate recorded during the first year of the pandemic (negative 0.03% quarter-to-quarter over the period from 1Q 2020 to 1Q 2021).

While vaccines have proven to be effective at limiting severe illness, hospitalizations, and fatalities from COVID-19, and the level of agility, preparedness and responsiveness among skilled nursing properties has never been higher, these statistics show that inventory nonetheless contracted during the second year of the pandemic. The inventory decline may have been the result of:

• Closures due to inadequate funding leading to financial stress among some operators amid very low occupancy rates and incrementally higher expenses,
• A move to more private rooms thereby removing some bed capacity at properties, and
• The staffing shortages limiting admissions and occupancy recovery.

Occupancy Overview – Freestanding Skilled Nursing Properties

Since the outbreak in early 2020, the COVID-19 pandemic has challenged every aspect of the skilled nursing sector. In the span of one year, occupancy for freestanding skilled nursing properties for the Primary Markets fell 12.8 percentage points, from 86.3% in 1Q 2020 to a record low of 73.5% in 1Q 2021. Since then, occupancy climbed to 77.3% in 1Q 2022, up 3.8 percentage points from its lowest level but remaining 9.0 full percentage points below 1Q 2020 pre-pandemic levels. Additionally, 21% of freestanding skilled nursing properties reported an occupancy rate in 1Q 2022 at or above pre-pandemic 1Q 2020 levels, according to NIC MAP^® data.

The occupancy loss for skilled nursing in the Primary Markets during the first year of the pandemic was mainly a function of a demand contraction. Whereas the occupancy loss for the private pay senior housing sector over the same period was a function of both an increase in supply and a decrease in demand. As background, occupancy for private pay senior housing properties for the Primary Markets fell by 9.2 percentage points from 1Q 2020 to 1Q 2021, 3.6 percentage points less than skilled nursing.

While the uncertainty bands remain wide in terms of when occupancy rates for skilled nursing properties will return to pre-pandemic levels, a key question is whether obtaining a sustainable level of occupancy and revenue growth will be sufficient to grow NOI and recoup the losses from the severe downturn in occupancy rates, the incrementally higher expenses, and inflationary impact associated with the pandemic.

Exhibit 2 – Occupancy Recovery – Freestanding Skilled Nursing Properties vs. Senior Housing Properties

Occupancy Distribution

Average occupancy rates provide a window into an overall market’s performance. But in a time of severe and prolonged downturn, it is important to assess occupancy distribution to get a better understanding of property level performance. Exhibit 3 below depicts occupancy distribution for freestanding skilled nursing properties for the Primary Markets aggregate.

The pandemic triggered significant disparities between property level occupancy rates. For example, the spread between quartile 3 property level occupancy rates and quartile 1 (known as the interquartile range, which represents the middle 50% of the data), jumped to roughly 20 percentage points in 1Q 2021, the highest it has been since NIC MAP began reporting the data in 2005. In 1Q 2020 before the pandemic began to influence the skilled nursing sector, the interquartile range was relatively smaller at 14.2 percentage points, 5.7 percentage points below 1Q 2021.

Further, 75% of freestanding skilled nursing properties within the Primary Markets had an occupancy rate equal to or above 80.8% (quartile 1) in 1Q 2020, as depicted in the box plot in Exhibit 3 below. At the height of the pandemic in 1Q 2021 and based on the detailed distribution compiled by NIC Analytics, only 35% of skilled nursing properties had an occupancy rate above 80%, 15% had occupancy between 80% and 75%, and 50% had an occupancy rate below 75% (median), including 25% of properties with an occupancy rate below 64.1% (quartile 1).

In 1Q 2022, as demand increased for four consecutive quarters, the share of properties with occupancy rates above 80% grew to about 50% (median 79.4%). While 1Q 2022 stats have improved, 25% of skilled nursing properties continue to experience occupancy below 68.9% (quartile 1). Owners of these properties may find access to capital challenging since many may have been relying on COVID-19 era policies to support operations.

Exhibit 3 – Occupancy Distribution – Freestanding Skilled Nursing Properties

The recent improvements in skilled nursing market fundamentals have demonstrated that vigilance and preparedness among skilled nursing properties are key elements for protecting staff and residents from COVID-19 and restoring occupancy.

Methodology

In this analysis based on NIC MAPdata, powered by NIC MAP Vision, we discuss recent market fundamentals for the skilled nursing sector and how it is faring after two years of the pandemic. We evaluate supply and demand dynamics for freestanding skilled nursing properties within the 31 NIC MAP Primary Markets (Primary Markets) since 2017. Additionally, we examine property-level occupancy distribution to get a better understanding of how widespread the effects of the pandemic have been.

The analysis examined approximately 4,000 freestanding skilled nursing properties within the Primary Markets. Note that combined properties offering at least two types of service and life plan communities (LPCs)/continuing care retirement communities (CCRCs) were excluded from this analysis.

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The recently released 4Q2021 NIC Lending Trends Report report shows issuance of new mini-perm/bridge loans for senior housing hit a recorded high in the time series in fourth quarter 2021, while the issuance of permanent senior housing loans moderated. This may suggest that some lenders are more comfortable with the lower-risk shorter-term nature of mini-perm/bridge loans as some senior housing operators build occupancy and demonstrate a longer performance track record.

Other trends from this new NIC Analytics report are highlighted below. The quarterly NIC Lending Trends Report, available complimentary to NIC constituents, currently tracks $86.7 billion in senior housing and nursing care loans. The report includes trends for five years of sector construction loans, mini-perm/bridge loans, and permanent loans from 3Q2016 through 4Q2021.

Takeaways From 4Q21 Report

• Mini-perm/bridge loans have amortization periods generally between 3 and 5 years and tend to function as an intermediary loan following a construction loan and prior to a borrower securing a longer-term mortgage loan. New mini-perm/bridge loan issuance was extremely strong for senior housing in 4Q21. On a same-store basis, mini-perm/bridge loan volume was up nearly five-fold for senior housing from the prior quarter. This marked the largest recorded quarter-over-quarter increase in the time series (since 3Q16) for senior housing mini-perm/bridge loan issuance. A large amount of new mini-perm/bridge nursing care loans also closed in 4Q21. The quarter-over-quarter increase was 7.8% for nursing care.
• Delinquencies edged slightly higher in fourth quarter 2021 from the third quarter for both senior housing and nursing care, although delinquencies remain down notably from the pandemic-related highs in 3Q2020 and are still below 1.5% of total loans. Note that delinquency data includes loans in forbearance for some lenders.
• Total loan balances for senior housing slipped modestly for the second consecutive quarter, while total loans for nursing care edged higher for the third quarter in a row. On a same store basis, total loans for nursing care increased by 2.1% from the prior quarter. Total loans for senior housing declined by 1.4% in 4Q21. The decline for senior housing includes maturing loans coming off the books for some lenders.

These data are not to be interpreted as a census of all senior housing and skilled nursing lending activity in the U.S., but rather reflect lending activity from participants included in the survey sample only.

The 1Q2022 NIC Lending Trends Report is scheduled be released in mid-August 2022.

Interested in participating? The NIC Lending Trends Report helps NIC Analytics to deliver on NIC’s mission to enable access and choice by further enhancing transparency of capital market trends in the senior housing and care sectors. We very much appreciate our data contributors. This report would not be possible without them.

If you would like to participate and contribute your data, please contact us at analytics@nic.org. As a courtesy for providing data, data contributors receive this report early before publication on the website. The information provided as part of the survey will be kept strictly confidential. Individual answers will be combined with the answers of all other respondents. Data acquired from this survey will only be reported in the aggregate, and therefore, the resulting aggregated data will not be attributed to you or your company upon distribution.

2022 NIC Spring Conference Session: “Debt & Equity Trends in Senior Living.”

With the Federal Reserve taking aggressive steps to curb inflation by raising interest rates through several hikes, senior living stakeholders are sizing up the possibilities of a slowing economy and higher debt costs. The labor shortage is another big concern.

Despite the headwinds, investors, lenders, and borrowers remain bullish on the senior living sector. Market fundamentals are continuing to improve as, hopefully, the pandemic recedes while a big surge of aging baby boomers is finally on the horizon.

“The industry has a lot of tailwinds,” said Elliot Pessis, managing director at Harrison Street, a Chicago-based investment fund. “That’s why we are long-term investors.”

Pessis joined a panel of lenders and investors during a session on debt and equity trends at the recent 2022 NIC Spring Conference in Dallas. Session moderator Morgin Morris, senior vice president, KeyBank Real Estate Capital, kicked off the discussion with a lightning round on key economic indicators.

The panel agreed interest rates will move higher, but cap rates could hold steady due to the high amount of liquidity in the market. The labor situation should gradually improve as more people return to work and the labor force participation rate rises.

In an innovative twist, session panelists were asked questions by industry stakeholders on video. The first question addressed the impact of higher interest rates.

Costs will rise, but the panelists expect to see more creative financing packages. “There’s a ton of deal volume out there,” said panelist Jessica Johnson, managing director, Healthcare Banking, Western U.S., BOK Financial. “But the deals that pencil out are harder to come by and it takes more work to get there.” She added that the focus is on high quality operators that understand the senior living sector and know their local market.

Selective Funding for Development

Another video questioner asked about financing trends for new construction vs. value-add acquisitions.

New development will continue to remain at a relatively low volume for now, according to panelist Darrin Smith, executive vice president, Investments, Sabra Health Care REIT. He cited the reasons as compressed operating margins because of the labor shortage and the rising costs of lumber and other materials putting the total cost to build under pressure. The silver lining is that the product that came on the market during the pandemic will be absorbed, he said.

Construction deals are picking up at BOK Financial, according to Johnson. Projects put on hold during the pandemic are now starting to seek funding. “Developers and equity partners are getting comfortable with the fact that they will have to accept lower returns initially and then increase rents over time,” she said.

Johnson noted the tremendous amount of equity in the market fueling interest in new development. Also, more lenders are getting into the space to put their money to work. Rates and cost of funds are rising, but spreads are compressing, she noted, helping to counteract the hikes. “Banks are becoming more competitive,” she said.

Harrison Street is partnering on development deals but focuses on higher barrier-to-entry markets. “We are being very judicious with capital,” said Pessis. He hasn’t seen many distressed property sales, a situation he attributes to lenders that stepped up during the pandemic to help their borrowers in addition to the resiliency of the sector.

BOK’s Johnson noted that skilled nursing properties benefited from federal government assistance during the pandemic. Some states have also helped by raising Medicaid rates, according to Sabra’s Smith. Florida, for example, recently passed a 7% increase in Medicaid reimbursement rates for nursing homes.

Lenders are watching capital expenditures. They want to know the building will still be a high-quality asset at the end of loan term. “We need to make sure there is reinvestment in the building,” said KeyBank’s Morris.

Underwriting Under Review

The pandemic has altered underwriting standards, the panelists said.

The most recent Ziegler NIC Lender Survey showed a wide variety of underwriting parameters leading to various valuations. Some lenders are underwriting COVID-related expenses but not the funds received to help support operations. Other lenders are underwriting all revenues and expenses. “Borrowers need to understand why and how lenders are underwriting the deals,” said panelist Don Husi, managing director at Ziegler Capital Markets.

Another big challenge is how to underwrite labor costs. Financial models should include a wage sensitivity analysis, according to Sabra’s Smith. “Partner with the right operators that understand labor issues,” advised Smith. In many cases, the panelists said, labor expenses are offsetting rental rate increases.

New debt trends are impacting the market. Banks are eager to lend, and debt funds are getting more creative, but bond buyers are risk averse, the panelists said.

Lenders are focused on the quality of operators and finding ways to bridge the gap when a property has upside, but insufficient cash flow. BOK Financial is working more with mezzanine lenders and structuring revolving credit facilities so owners can leverage as much equity as possible.

In wrapping up, the panelists expect some continued pain over the next 12-24 months as the sector continues to recover from the pandemic. But their overall outlook for the industry is quite optimistic given its resilience and the growth of the aging population. “A challenging environment is nothing new,” said Johnson. “Our industry is needs-based and will be more so in the future as baby boomers age.”

The Labor Department reported that nonfarm payrolls rose by 428,000 in April 2022 and the unemployment rate held steady at 3.6%. The report confirms that the labor market remains resilient, despite the war in Ukraine and on-going supply-chain pressures. Concerns about rising wage costs and inflation are also backed by this report. Average hourly earnings for all employees on private nonfarm payrolls rose by $0.13 in April to $31.85. This was a gain of 5.5% from year-earlier levels, just slightly less than the 5.6% gain seen in March.

The data shows that the labor market continues to gain momentum and wage growth is accelerating. The report strengthens the Federal Reserve’s intention of raising interest rates further following the 0.50 percentage point hike in the fed funds rate announced earlier this week.

Jobs grew by an average of 523,000 per month in in the past three months, down from the three-month average of 602,000 in February 2022. Revisions subtracted 39,000 to total payrolls in the previous two months. Nonfarm payrolls were still down by 1.2 million or 0.8% from their pre-pandemic level in February 2020. The market consensus had been for a gain of 380,000.

In a separate survey conducted by the BLS, the jobless rate was unchanged at 3.6% in April 2022. The jobless rate is only 0.1 percentage point above the pre-pandemic level of 3.5% seen in February 2020, and well below the 14.7% peak seen in April 2020. The number of persons unemployed was essentially unchanged at 5.9 million but was still above the 5.7-million-person level seen prior to the pandemic.

Among the major worker groups, the unemployment rates for adult women (3.2%), adult men (3.54%), teenagers (10.2%), White (3.2%), Black (5.9%), Asian (3.1%), and Hispanic (4.1%) were little changed over the month.

The labor force participation rate fell 0.2 percentage point to 62.2% in April and was below the February 2020 level of 63.4%. The employment to population ratio was 60.0%, below the February 2020 level of 61.2%.

The report also showed that workers are returning to their place of work. Roughly 7.7% of employed persons teleworked because of the pandemic, down from 10.0% in the prior month, 23% in February 2021 and more than one third at the height of the pandemic.

The April underemployment rate or the U-6 jobless rate was 7.0%, up from 6.9% in March 2022. This figure includes those who have quit looking for a job because they are discouraged about their prospects and people working part-time but desiring a full work week.

Employment in health care rose by 34,000 in April. Employment in health care was down by 250,000, or 1.5% from its level in February 2020. Employment in nursing care facilities rose by 900 positions to 1.345 million but was 44,000 less than year-earlier levels.

“The increase in occupancy, along with increasing managed Medicare patient day mix, suggests higher demand from managed Medicare beneficiaries for skilled nursing care in the month of February”

-Bill Kauffman

NIC MAP^® Data, powered by NIC MAP Vision, released its latest Skilled Nursing Monthly Report on May 5, 2022. The report includes key monthly data points from January 2012 through February 2022.

Here are some key takeaways from the report:

Skilled nursing property occupancy increased 94 basis points in the month of February, ending the month at 76.7%. This was the highest occupancy level since April 2020, at which time occupancy began to fall rapidly due to the onset of the pandemic. Occupancy continues to recover since the pandemic low of 71.9% set in January 2021 but has encountered challenges given the Delta and Omicron variants. In addition, staffing shortages have created significant difficulties within skilled nursing properties limiting the ability to admit new residents. However, the current occupancy trend does suggest that the demand for skilled nursing properties is recovering, given the 94-basis point increase from January to February. Occupancy has increased 439 basis points from one year ago and 480 basis points from its pandemic low.

Managed Medicare revenue mix increased 83 basis points in the month of February, ending the month at 11.4%. This the highest level since March 2019. This increase, along with improving overall occupancy and rising managed Medicare patient day mix, suggests higher demand from managed Medicare beneficiaries for skilled nursing care. Managed Medicare revenue mix has risen three months in a row and is 151 basis points above its November 2021 level. Patient day mix also trended upward over the past three months, increasing 125 basis points to end February at 8.5%. Meanwhile, managed Medicare revenue per patient day (RPPD) increased in February to $450. The fact that RPPD increased in a month that COVID-19 cases were declining, may suggest higher acuity patient care in February.

Skilled mix increased 41 basis points from January to end February at 28.9%. This increase seemingly was driven by both Medicare and managed Medicare patient day mix as they each increased from the prior month. However, managed Medicare was the main driver as the patient day mix increased 66 basis points from 7.8% and Medicare only increased 26 basis points from 13.7%. In addition, Medicare revenue mix increased 14 basis points to end February at 24.6%, after it increased significantly (386 basis points) from December to January when skilled nursing operators utilized the 3-Day Rule waiver as COVID-19 cases increased in the month of January.

Medicaid patient day mix decreased for the second month in a row, falling 33 basis points from January to end February at 63.3%.  Its patient day mix has declined 163 basis points from one year ago, while Medicare patient day mix increased 68 basis points. Some of the explanation of this yearly decline in Medicaid patient days is due to the spike in Omicron cases in January as operators moved residents from Medicaid to Medicare days as they required isolation and higher skilled care.

Get more trends from the latest data by downloading the Skilled Nursing Monthly Report. 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 to provide data at localized levels in the future. Operators who are interested in participating can complete a participation form on our website. NIC maintains strict confidentiality of all data it receives.