In “Dramatic Moments in History: Another Period of Disruption,” Kurt Read, Chair of the Board of Directors, NIC; and Principal, RSF Partners; provided attendees of the 2020 NIC Fall Conference with a review of the seniors housing and care industry’s performance characteristics since NIC was founded in 1991. This is the third and final post in our blogging series that provide the key takeaways from that session which reviewed the past 30 years of investment in seniors housing and care. In this post, we touch upon NIC’s role through those years, and look to the years ahead, with thoughts from a new generation of leaders sitting on NIC’s Future Leaders Council. 

The Current Disruption 

Heading into the current period of disruption, Read looked at a number of factors impacting the market. The first factor Read looked at was the cost of capital. Looking at cap rates, he showed that the cost of capital has been going down, through the second quarter of 2020. In seniors housing, compared to apartments, the risk premium on seniors housing has been dropping, particularly since the last recession, indicating that investors, prior to the COVID-19 pandemic, were viewing the sector as less risky. “I’m not sure investors are going to agree with that premise in a post-pandemic environment,” Read opined. 

Looking at NCREIF annualized total investment returns, ten-year and five-year returns are still close to 10%. However, Read points out, the one- and three-year returns are now more in line with other real estate asset types. “We’ve gone from being the darling to one of the team,” he said. Transaction volumes, which for the past eight or nine years have been strong, have now stalled. Comparing 2020 with 2008 and 2009, and referring to his discussion on distress cycles, Read pointed out that, “We’re in that time period where there’s very little price discovery.” 

Looking at occupancy decline, Read emphasized the importance of context. He explained how occupancy decline is partly a function of length-of-stay averages, which vary depending on property type. A CCRC, with a ten-year length-of-stay average, will see occupancy drop far more slowly than an assisted living property with a one-year average length-of-stay. Current data reflects this relationship in today’s occupancy decline numbers, by property type. 

NIC’s Role 

Read concluded his review of the seniors housing and care sector by reflecting on the role of NIC during the past 30 years. “All along that time, a small sector, trying to get capital, needed to grow up. How do you grow up when you’re a sector? You get data, and you get together great leaders who challenge each other to get better. That’s what NIC has been about all of these years.” For the remainder of the session, Read introduced NIC leaders, past, present, and future, to share, in their own words, why NIC was founded, what it is working towards today, and where it will lead in coming years.  

The first to speak was NIC Founder & Strategic Advisor; and President, Nexus Insights; Bob Kramer, who said, of the founding of NIC, “The goal was to provide investors with insights and transparency comparable to that which was available for the major commercial real estate property types.” Looking to the future, Kramer said, “NIC has an extraordinary opportunity to provide leadership, both within and outside our industry, on the resetting of the relationship between ‘where I live’ (housing), ‘what keeps me healthy,’ (health), the where and how of healthcare services delivery, and personal care.” 

Data and Transparency 

In his introduction of Kathryn A. Sweeney, Co-founder and Managing Partner, Blue Moon Capital Partners, Read explained that, as NIC got started in the 1990s it became clear to investors that seniors housing and care lacked the data available to investors in other asset types. Sweeney explained why she and others at NIC piloted and launched what is known today as the NIC MAP^® Data Service. “The seniors housing industry suffered a high cost of capital due to the lack of transparency. Institutional investors saw more risk until the industry could be compared to all commercial real estate types,” Sweeney explained.  

NIC launched a NIC MAP pilot, looking at the Charlotte, NC market. NIC convened a task force of operators and investors and also hired ProMatura Group to collect and tabulate the data. Task force members also worked their relationships with operators in the space to get their participation. The result “wasn’t pretty,” said Sweeney, “but we worked out the bugs and launched in the top 31 markets.” Sweeney concluded with the statement, “Today, NIC MAP is recognized as the most trusted data source for a wide range of metrics, information, and insights. Importantly, the lower cost of capital objective was met.” 

Next to speak was NIC Chief Economist, Beth Mace, who discussed not only the NIC MAP Data Service’s offering of data and analysis, but also the many current initiatives, publications, research, and outreach conducted by NIC. “All of these efforts have resulted in making the seniors housing and care sector more accessible, transparent, and easy to understand. It has allowed more institutional capital to come into our sector, which has helped drive down the price of capital and help create more housing options for seniors.”  

Thought-Leadership 

The final two speakers were introduced by Read as, “innovative thought leaders that are pushing all of us, and pushing our industry to push ahead.” First to speak was Dana Scheppmann, Senior Vice President, Capital One Healthcare Real Estate, and leader of NIC’s Future Leaders Council. She pointed out that, as healthcare providers move from fee-for-service to a more “outcomes-based model”, they are challenged both to control patient behavior outside of their care, and to track and quantify outcomes.  

Scheppmann relayed a vision in which the seniors housing and care sector could help resolve both issues. “What NIC can do, to help push this initiative along, is to connect these healthcare providers with these owners, with these operators, to make sure we are pitching to them. We can help them with this initiative.” In partnership with healthcare providers, the sector could help ensure better outcomes for healthcare patients, while potentially also attracting more residents coming from the healthcare system. 

On the potential for facilitating such partnerships, the final word belonged to Kelsey Mellard, CEO, Sitka: “NIC’s greatest success in the future will be their ability to continue to convene and drive a data-informed conversation about the intersection of seniors housing and healthcare delivery.” In thanking both young leaders for their contributions, Read reflected on the future of NIC, saying, “As always, it’s incredibly inspiring to me to see the passionate talent that is attracted to NIC and to our industry.” 

Toward the beginning of the COVID-19 public health crisis, I authored a blog post highlighting some of the strategies that seniors housing and care operators were implementing to maintain resident wellness and engagement. Subsequently, I had the opportunity to present on this topic at the 2020 NIC Fall Conference. While preparing, it struck me how much these strategies have evolved over the course of just a few months as operators stepped up to the challenge of delivering an ever-greater sense of connectedness to their residents in this time of a global pandemic.

The most common strategies implemented early in the pandemic frequently involved a simple barrier of sorts, whether that was the window of a building or a plastic “cuddle curtain” for receiving a hug. These tactics gave residents the opportunity to see family and friends and to approximate the physical contact that residents and family members crave. In select communities, essential caregivers can have regular contact and visitation with residents, but when that isn’t possible, adoption of virtual reality, robotic technology, and other creative ways to facilitate companionship are becoming more common. Below, I comment on some of these.

Virtual Reality Technologies

Ten months into the pandemic, virtual reality (VR) companies have established a foothold in the seniors housing and care sector. Virtual reality creates opportunities for socialization that are both digital and physical at the same time. These experiences can provide a 360° video inside a headset, delivering a panoramic view that moves with the viewer. In some instances, virtual reality cameras can be provided to family members so they can film weddings, reunions, vacations, and other family gatherings. These are then stored as part of a content package residents can immerse in, allowing them to feel like a participant, as opposed to simply a viewer.

Facilitated Companionship

Socialization and interaction are key value propositions of senior living. Achieving these value propositions has been made that much more difficult during the pandemic when mask-wearing and physical distancing are known steps for disease prevention or slowdown. In the age of COVID-19, facilitating companionship in any way possible is key for residents.

Pre-pandemic, some forward-thinking Medicare Advantage operators were using a “two birds, one stone” tactic to address both food insecurity and loneliness. Partnerships with organizations like Hunger Action Alliance and Meals on Wheels rely on meal deliverers to do more than simply drop food off. They engage with members, report back to care teams on home conditions, medication adherence, and other potential concerns identified during their visit.

Senior housing operators also use this strategy, recognizing that every touch point is an opportunity for socialization. While the necessary safety measures must still be implemented, each medication distribution, meal delivery, and clinical check-in can be viewed as a chance to engage with residents.

Outside of a property itself, other opportunities exist to facilitate companionship. One such opportunity and organization is Papa which, in the pre-pandemic era, paired motivated college students with older adults and families who needed companionship and assistance with everyday tasks. Papa partnered with health plans to not only address loneliness, but to also provide transportation to appointments, medication pickup, and church or gym attendance. Times are different now, and in the pandemic era, Papa has focused on offering virtual companionship. Interested parties can still sign up for free and request a “papa pal,” to provide company virtually and share an uplifting conversation.

Robotic Animal Companion Pets and Social Robots

Robotic animal companion pets are also used to address issues of social isolation and can be a creative fit to brighten up the days of a resident. These robotic pets respond to both touch and motion and provide a realistic animal experience. The genuine feel and sound of a cat purring and soft fur mimics a live animal, without the need for trips outside or refilling the water bowl. The realism and interactive play provided by these robotic pets combats the feelings of loneliness amongst older adults.

For those looking to go even deeper into the realm of robotics, there is Pepper, the first social humanoid robot. Originated in Japan by SoftBank Robotics, Pepper can recognize faces and basic human emotions and engages with people through conversation and a touch screen. This robot can offer proactive engagement by calling residents by name, initiating interaction, and proactively moving toward residents to start conversations. Another major benefit is Pepper’s ability to speak multiple languages, which can help with residents who are forgetting native languages due to lack of use.

Creatively Utilize Existing Resources

With all the challenges posed by the pandemic and its impact on resources, it is more important than ever to utilize existing resources to their fullest capacity. This could mean taking advantage of creative chefs and kitchen staff. For example, operators may consider implementing a virtual teaching kitchen with the ability to televise a chef cooking a favorite recipe. It would be even better if the chef can tie that recipe to wellness and use the experience as an opportunity to educate residents about nutrition. This could be something as simple as a mocktail that touts the health benefits of ginger. Mocktail kits can be created in advance and distributed to residents for their enjoyment.

The challenges created by the COVID-19 pandemic have been many. Among them is the need to maintain interaction and socialization opportunities for residents. Seniors housing and care operators have embraced the opportunity to tackle this issue by continuously evolving their strategies to mitigate the side effects of social distancing and isolation. Time, creativity and imagination will no doubt spawn further ideas to combat this very important pandemic-related challenge.

In “Dramatic Moments in History: Another Period of Disruption,” Kurt Read, Chair of Board of Directors, NIC; and Principal, RSF Partners; provided attendees of the 2020 NIC Fall Conference with a review of the seniors housing and care industry’s performance characteristics since NIC was founded in 1991. This is the second of a series of three NIC Notes posts that provide the key takeaways from that session which reviewed the past 30 years of investment in seniors housing and care. 

Development Cycles 

Another way to look at the past 30 years, is to see how this relatively new industry has development cycles, driven by the need to meet growing demand. Read analyzed three distinct cycles, which have occurred since 1991. During the savings and loan boom, cash flowed into real estate. Seniors housing developed at more than double the pace of preceding years. While the boom created oversupply, it also fueled entrepreneurial efforts to improve seniors housing models and products.  

Read recalled a meeting with Bill Colson and Norm Brenden, in 1991, just as the crisis hit, and capital was fleeing the sector. Their company, Holiday Retirement, was looking for capital. “Oh my goodness, did they have a great product. They had consumers, during this time period, during a recession, moving into their properties…they were developing at a 90% occupancy to a 15% unlevered return on cost.” Although other investors “beat us to the punch” on the opportunity, he pointed to this as an example of how, “During a period of disruption, if you have a great product that can earn a really good return for the risk, you’re going to raise capital.” He pointed out that other great companies in the space, such as Sunrise Senior Living and Erickson Living, were able to access capital in the late ‘80’s and early ‘90s, launching their rise, even amid a major disruption in the space. 

During the IPO boom of the mid ‘90s, capital was again flooding into the sector. Read recalled hearing IPO pitches for “newfangled” assisted living properties. “When they got to the part about their growth plans, I could tell this was not going to end well.” Companies were planning to open new properties at an unrealistic pace, and the result, according to Read, was, “too many properties, being built too quickly, in too few markets. We had a huge overhang from that.” As was the case in the previous crisis, new supply fell off dramatically as a result. 

Going into the Great Financial Crisis, there was less supply growth. “That was part of the story for why we had such great performance, relative to other real estate asset classes,” explained Read. New inventory volumes dropped again in 2010-2012. “That set us up for a wonderful period of outperformance. We had better returns than other asset classes. We had demand growth. Capital was available, and here we go – another development boom.” As more new properties came on the market, through the end of the decade, occupancy rates grew, then flattened, then softened on a national basis. Despite record demand, absorption couldn’t keep up with the burgeoning supply.  

Buying Low 

Looking at all three of the economic crises outlined in our first NIC Notes post, Read observed three distinct opportunities to buy quality properties at lower prices. “You put periods of disruption together with a highly cyclical development flow and money flow into our space, and what you get are some really interesting opportunities.” In the savings and loan crisis, many opportunities existed to buy quality assets at low prices. Read’s company acquired a public company, the Forum Group, with “wonderful Class A assets, 26 of them, they had just been built during the easy money times. They were a creation of a firm you may have heard of: Drexel Burnham Lambert.” That company, run by the now infamous Michael Milken, had over–financed the senior living company which had developed most of its properties.  “Financing new development with current pay junk bonds was not a recipe for success.” Recapitalized, the properties were able to get through the recession. “It was a very successful investment for us,” said Read.  

The healthcare real estate crisis also produced buying opportunities, generated by oversupply and a disrupted revenue model in skilled nursing. As C-corps and REITs suffered low occupancy rates, missed lease-up targets, and, simultaneously, skilled nursing operators began to miss lease payments, investors saw opportunities to buy stocks, bonds, bank debt, assets, and companies. As in the former crisis, development fell off significantly. In that environment, many companies were able to acquire assets at low prices and achieve great success. “It was a terrific time to be buying brand new, disrupted private-pay senior housing. Some of the best institutional investors made really great use of this time period and developed incredible track records as savvy purchasers, owners, and managers of senior living assets at this time.”  

Keep Your Eye on Capital Flows 

During the broad financial disruption of the Great Financial Crisis, the senior living industry looked very strong, relative to other real estate asset classes. “The healthcare REIT sector of public REITs was the largest sector by market cap during this time. Bigger than malls, bigger than office buildings, because we were doing so well relative to the other real estate asset classes. This really set up a period of outperformance for our industry. We had demand growth, we had reasonable supply/demand balance, we had good returns, we didn’t suffer during the GFC. Wow, this looked like a great place for people to rotate their capital to, and indeed they did.” 

According to Read, “the takeaway from this is, keep your eye on capital flows into our industry. It’s really a small industry relative to other real estate asset classes. When you see that supply curve bending up and to the right, you’ve got to put your radar up, because we’ve had big cycles in this space. If you think about it, we’re a real estate sector, we’re a healthcare sector, and we’re a hospitality sector. You put those three things together and there are more chances for disruption over a long period of time than there are for a more simple asset class, like industrial, to pick one.” 

Be Patient 

Looking at the NCREIF market value index over all three recessions, Read illustrated how much time it took to recover from each. Investors affected by the savings and loan crises didn’t gain back the value lost until eleven years later. He pointed out it also took 4-5 years to hit bottom. “You’ve got to be patient,” he said, “it was not a good idea to be wandering into the U.S. real estate market, buying a bunch of real estate in the first couple of years of the savings and loan crisis…you had to wait until you got to 1992 before you could plow in.” The Great Financial Crisis, despite sharp declines, took two years to bottom out. “You hear pontificators talk about a “V” shaped recovery, ‘we’ll be back by Christmas’, all this nonsense, that’s not how real estate works,” said Read, “any crisis that affects real estate takes a while.” 

To further illustrate that point, Read examined distress cycles, revealing the lengthy process, from “shock and triage,” through a “price discovery” period, and then workouts and resolutions via distressed property transactions. “It takes time,” Read summarized, “It’s complicated and slow.” 

While much of the programming for the recent 2020 NIC Fall Conference focused on the pressing issues of today, particularly during a time of COVID-19, economic and political uncertainty, and disruption, one session stepped back, and looked at what is happening today through a lens that stretches back to 1991. This is the first of a series of three NIC Notes posts that share the key takeaways from that session which reviewed the past 30 years of investment in seniors housing and care. 

In “Dramatic Moments in History: Another Period of Disruption,” Kurt Read, Chair of Board of Directors, NIC; and Principal, RSF Partners; provided a review of the seniors housing and care industry’s performance characteristics over those last three decades. Following his professorial, yet highly practical, and accessible retrospective presentation he introduced past, present, and future leaders of NIC, to comment on what the organization has achieved over its nearly 30 year history – and where it is leading the industry in coming years.  

Crammed with original charts, and many examples pulled from his own experiences as a long-time investor in the industry, Read’s presentation was a guided tour, pointing out key facts and figures through recessions, building booms, floods of capital both into and out of the industry, major disruptions, and the current worldwide pandemic. The overall effect was of a master class, not to be missed by anyone with an interest in the sector.  

Rising Demand and Falling Rates 

“When you do something for 30 years, it gives you a chance to accumulate a lot of experiences,” Read said, as he launched a series of slides outlining the history of seniors housing and care since 1991, when NIC was founded. He relayed plenty of those experiences as illustrations and examples, throughout the presentation of data, lending a human aspect to the events of the past three decades. He began his remarks with two theses for investment in the sector: “This is a space that benefits, very simply, from increasing demand…and the ‘lucky’ trend that…interest rates have declined over the last 30 years.” The chart showed the rise of the 80+ population from 7 to nearly 14 million over that time, and the 10-year treasury yield over the same period, dropping from over 8.5% to under 1%. Noting the ups and downs of the interest rates over time, as well as the multiple recessions, he said, “It’s not easy, it’s never smooth, but that volatility and those periods of disruption provide for both great challenges and opportunities.” 

In addition to reviewing how disruptions and recessions have yielded opportunities for investors, Read said he also wanted to dig into the characteristics of a disruption, “particularly as it pertains to an illiquid, lumpy asset class like real estate and seniors housing and care as a subset of that.” One of Read’s goals for the presentation was to ask whether the things the industry was “saying and doing right before the pandemic started” were still true today. Another goal, Read explained, was to “spend time with the leaders of NIC over the years and going forward…hear directly from them, in their voices, why they believe NIC is really the collective expression of all of our passion and dedication to this industry, in our effort to provide great environments, and to provide great care to our nation’s elders.” 

Four Major Disruptions 

He started with the four major disruptions which have occurred over the last 30 years, observing that, “there are exogenous factors, government actions, that disrupt markets, that have direct consequences, and indirect consequences.” In the savings and loan crisis of 1986 to 1995, in an effort to stamp out high inflation, the government raised interest rates. “On paper that bankrupted the savings and loan industry almost overnight,” Read said. Ultimately, hastened by the government’s actions to try to help the savings and loans, the real estate industry saw “a torrent of capital into the real estate business, that quickly became speculative.” That lead to a bubble, which then burst, and took investors many years to recover from. 

Ten years later, from 1998 to 2001, in the healthcare real estate crisis, skilled nursing was disrupted by a major shift to the fee-for-service reimbursement model, which was poorly managed by the government. A simultaneous boom in IPOs caused a glut of new construction in assisted living. “Those two forces collided to disrupt both C-corps and healthcare REITS, many of which were public.” The crisis played out in the public markets, in real time. “It was immediately apparent that there was enormous distress in the markets.” Confidence in senior living dropped and capital fled the sector. “This led to a number of very interesting opportunities, but it was a period of great pain and disruption for our industry.” 

In the great financial crisis of 2008 to 2009, overinvestment and excessive leverage in residential and commercial real estate caused a bubble. When the bubble collapsed, the government stepped in to help stabilize financial markets. There were fewer mark-to-market opportunities as a result. “It gave us an opportunity to shine. We looked pretty good, relative to the rest of the real estate world.” 

On the current crisis, Read said, “Here we are in a healthcare crisis, prompting incredibly uneven effects across our industry, as skilled nursing facilities are effected dramatically differently from other types of facilities in our space. We are just at the beginning. It’s very unclear where we are going to go from here.”  

Since May 31, 2020, NIC has been publishing a regular updated weekly surveillance report on the incidence of COVID-19 cases among residents in our nation’s nursing care properties. Using raw data collected and reported by the Centers for Medicare & Medicaid Services (CMS), NIC’s Skilled Nursing COVID-19 Tracker (Tracker) reports CMS nursing home data and provides insights into the rate of virus spread within skilled nursing properties.

The Tracker is an easy-to-use interactive visualization tool that shows where cases are spreading, slowing, or remaining flat. In addition, the Tracker provides charts and tables that depict the incremental week-over-week change rate in three important metrics on a same-store basis, i.e. the same nursing properties are tracked each week across regions, sub-regions, states, and counties. The metrics include: (1) new COVID-19 confirmed cases per same store properties, (2) new COVID-19 confirmed cases as a share of residents, and (3) occupancy rates (based on CMS Data). Importantly, the Tracker allows users to drill down to a smaller market or a specific property and access the underlying data. The Tracker is available in the NIC COVID-19 Resource Center.

As a backdrop, COVID-19 cases are accelerating at a worrying pace across the U.S. and alarming new records are being set every day. According to the Johns Hopkins Coronavirus Resource Center, there were 11,065,237 cases in the U.S. as of November 16, 2020, and 246,626 deaths. This is up from 8,833,396 and 227,000, respectively, as recently as October 28, 2020. Moreover, there were 166,000 new cases and 73,014 hospitalizations reported on Monday, November 16, 2020 according to Johns Hopkins University and the COVID Tracking Project.

For the U.S., these figures represent 19% of the world’s cases and deaths, a disproportionate amount for a nation that only represents 4.3% of the globe’s population. While the mortality rates associated with COVID have declined, the rising incidence rate is disturbing, particularly for operators of seniors housing and skilled nursing properties, given the health vulnerabilities and comorbidities of these populations. Further, staff of these properties have been relentless in their efforts to combat the virus and safeguard residents and a level of exhaustion and fatigue exists for virtually everyone. Unfortunately, heightened diligence is further warranted.

Exhibit 1 – Source: NIC Skilled Nursing COVID-19 Tracker*

The Tracker shows that new infections are on the rise across skilled nursing properties, but the coronavirus hot spots are changing over time within the four regions of the U.S.—Midwest, Northeast, South and West. The trends depicted in Exhibit 1 show when each of the regions peaked in terms of COVID-19 confirmed cases as a share of residents. The number of new cases was highest in the Northeast in late May and reached 1.35% of residents testing positive, whereas the South and West regions peaked in late July and reported 1.50% and 1.29% of new confirmed cases as a share of residents, respectively.

For the week ending November 1, the Tracker shows that positivity rates are increasing dramatically and reaching very undesirable numbers in the Midwest. In the Midwest, all 12 states saw an increase in new COVID-19 confirmed cases from the prior week (October 25). The data also show new confirmed cases in skilled nursing properties reached a record high in the Midwest: 4,688 new cases within 4,499 facilities, or the equivalent to 1.66% of newly confirmed cases among residents. The South reported the second highest rate of 0.91%, followed by the West (0.58%) and Northeast (0.37%).

Although the West and Northeast reported cases remain relatively low compared to the Midwest and South regions, the Northeast saw an uptick in new confirmed cases on November 1, increasing by nearly 0.2% from the week ending October 11. Just like the overall new confirmed cases across the country rising to new records, the new confirmed cases in skilled nursing properties hit new highs on November 1, nearly 1% of residents testing positive within the U.S. skilled nursing properties.

Because of this outbreak of COVID-19 cases, new rules are being reimposed across the U.S. These requirements include more frequent testing, greater emphasis on physical distancing, and masking guidelines. These restrictions continue to be the best weapon against the virus until a vaccine is approved and widely distributed.

The U.S. map in Exhibit 2 below shows the week-over-week change in new COVID-19 confirmed cases as a share of residents within skilled nursing properties by state, as of November 1. Over 40 states showed an increase in new confirmed cases from the prior week (October 25). 

Exhibit 2 – Source: NIC Skilled Nursing COVID-19 Tracker*

To gain in-depth insights and track the week-over-week change rate for new resident cases of COVID-19 within skilled nursing properties, visit NIC.org. You can also access the Skilled Nursing COVID-19 Tracker along with a rich trove of analysis and insight on the NIC COVID-19 Resource Center.

NIC is committed to provide data, analyses and insights that increase transparency and understanding of the sector, especially in this difficult time of COVID-19. We strongly support all actions and efforts that prioritize testing and availability of PPE to protect frontline workers and residents.

*CMS Data – As of November 1