Budgeting for capital expenditures has taken on a new complexity. Not only are investors changing their assumptions in the COVID-19 era, but the seniors housing stock is aging. A growing number of older properties need costly updates to stay competitive.

Two sessions at the 2020 NIC Fall Conference addressed the best approaches to capital expenditures, or CapEx, in a quickly changing environment.

 “Regaining occupancy is critical,” said speaker Colleen Blumenthal, COO & managing partner at HealthTrust. “Any investment that helps occupancy will be revenue enhancing.”

Blumenthal was joined in the educational session and a separate peer-to-peer exchange by Lukas Hartwich, senior analyst, Green Street Advisors.

Expenses related to COVID-19 are not expected to have a long-term impact on CapEx allocations or underwriting assumptions. according to the panelists. Aging buildings will be a bigger concern going forward.

But investors question whether some COVID-related costs can be classified as capital expenditures vs. unbudgeted expenses. High-cost items might be considered capital expenditures, according to Blumenthal. These might include new technology platforms and HVAC systems. Rooms converted to spaces for employees to change into personal protective gear might qualify as well.

Rising expenses related to the pandemic have caused investors to defer some capital spending. The replacement of carpeting can wait. Resources are being devoted to keeping residents safe.

Building obsolescence is a big issue. The first wave of seniors housing properties is reaching the 25-year-age mark. “Assets need more capital expenditures as they age,” said Hartwich. Boilers break down. Roofs need to be replaced. 

Capital expenditures can fix some age-related problems, but not others. For example, many assisted living buildings from the 1990s include an ice cream parlor, an amenity out of fashion. That space can be repurposed for another use, according to Blumenthal. But units with eight-foot ceilings, or a property with a lot of studio apartments can’t be fixed.

Even newer properties may need an upgrade.

“Assets need more capital expenditures as they age, boilers break down. Roofs need to be replaced.”  -said Hartwich. 

“Competition is a huge factor in spending,” said Blumenthal. Five-year-old buildings may require a complete interior refresh to compete with a new community that opens nearby. She said the competition is especially intense at the high-end of the market which accelerates capital expenditures.

On average, operators spend about 26% of net operating income (NOI) annually on capital expenditures, according to the 2020 State of Seniors Housing report, compiled by HealthTrust.

The State of Seniors Housing report is based on a sample size of 1,748 properties. Among properties built since the year 2000, spending on CapEx totals about $2,500 to $2,600 per unit. Spending on older properties tends to be higher than for newer properties. Older buildings need more repairs and updates.

Other data sources confirm those numbers, according to Greenstreet’s Hartwich. NCREIF, the industry organization that aggregates commercial real estate data for institutional investors, pegs CapEx in the 20-25% range in recent years.

CapEx Factors

Spending varies based on property type and location.

For example, life plan communities tend to spend the most on CapEx, about $7,000 annually per unit. Life plan or continuing care communities rank as among the oldest of senior living properties. These communities often charge entrance fees and tend to have upscale amenities, such as multiple dining venues, that may require regular capital expenditures. “The more the amenities, the higher the expectations of the residents,” said Blumenthal. “High-end communities are fast to replace carpeting and other items.”  

Owners of properties in tertiary markets are slow to reinvest. Consumers often don’t have a lot of choice of where to live. Competition is scarce, so there’s less incentive to invest in properties.

Another major factor driving capital expenditures is a change in ownership. Spending peaks just before or right after a sale. Those are the times when owners are most likely to spend on big ticket items to help boost occupancy.  

In general, capital expenditures are increasing. “We really see an uptick,” said Hartwich. Much of the increase can be attributed to the age of the buildings.

Over the last decade, capital expenditures have increased at a 9% rate compounded annually. In 2011, spending was about $2,500 a unit and now it’s $5,000 a unit. Communities built prior to 1980 spend about 40% of NOI on capital expenditures. Properties built in the 1980s and 1990s spend about 30% on CapEx.

Interestingly, owners say they are spending less on CapEx in 2020 than they did in 2019. Some of the decline could be due to the disruption caused by the COVID-19 outbreak. Workers have not had access to buildings to conduct renovations. Spending is being allocated for items to improve resident safety, such as touchless light switches.

Historical data and comparisons to other asset classes should be used with caution when figuring CapEx reserves. Seniors housing has more amenities than apartments. Hotels get more wear and tear than seniors housing.

There is some overlap between seniors housing and hospitality in terms of the owner-operator dynamic. But historical data for lodging goes back further. “When you are looking at newer assets, CapEx may seem lower which can cause investors to overestimate returns,” said Hartwich. “The sector is aging.”

CapEx tends to be “lumpy,” according to Blumenthal, uneven from year to year. Spending may be high one year and then low the next. The timing of renovations often depends on broader market conditions.

Allocations for CapEx may also depend on how long the investor intends to hold a property, according to Greenstreet’s Hartwich. Short-term investors with a hold period of say five years may set aside less for CapEx compared to investors that plan to hold the property for a longer period.  

Looking ahead, it’s likely that COVID-19 will not have a long-term impact on capital expenditures. Most costs will be allocated to one-time operating expenses. “Investors will adjust,” said Hartwich.

Managed Medicare revenue mix at 8.2%

NIC MAP^® Data Service released its latest Skilled Nursing Monthly Report on October 29, 2020, which includes key monthly data points from January 2012 through August 2020.

Here are some key takeaways from the report:

1. The trend of declining occupancy rates for skilled nursing continued in the month of August due to the on-going impacts of COVID-19. The downward pressure on occupancy has been significant since the pandemic, with another 81 basis point drop from July to August to a new low of 73.8%. This represents a 9.6 percentage points drop in just the five months since March (83.4%) and a 10.9 percentage point decline since February. On a year-over-year basis, the occupancy rate is down 10.5 percentage points from August 2019. The occupancy trend was consistent across geographies as both urban and rural areas decreased from July to August ending at 73.7% and 75.1%, respectively.
2. Patient day mix across all four payor types, i.e., Medicare, managed Medicare, Medicaid and Private, trended differently as Medicare and managed Medicare increased from July to April but Medicaid and Private decreased. This suggests the weakness in occupancy from July to August may be due to Medicaid admissions and/or patient days.
3. Medicare patient day mix increased 40 basis points from 12.1% in July to 12.5% in August. Since March, it is up 114 basis points and since last year, it is up 125 basis points from 11.2%. In addition, Medicare revenue mix increased 87 basis points from July to August, increasing from 20.8% to 21.6%. The combination of the overall decline in occupancy and the increase in Medicare patient day mix and revenue mix suggests that the waiver of the 3-Day Rule imposed by the Centers for Medicare and Medicaid Services (CMS) is having a positive impact on Medicare days. Meanwhile, Medicare revenue per patient day (RPPD) declined 0.3% from July to August, ending at $549. It has now decreased 1.1% from June after an initial increase during the earlier periods of the pandemic as skilled nursing properties were likely receiving more Medicare RPPD because of additional reimbursement due to COVID-19 positive patients requiring isolation.
4. Managed Medicare admissions have seemingly stabilized after decreasing significantly during the pandemic. Its patient day mix increased 14 basis points from July ending August at 5.9% and up 40 basis points since April. In addition, managed Medicare revenue mix is up 21 basis points from July ending August at 8.2% and up 34 basis points since April. The current stabilization in patient day and revenue mix is at the same time managed Medicare revenue per patient day (RPPD) is decreasing. RPPD decreased from $449 in July to $447 in August and is down 1.1% since February. The latest decrease in August suggests the downtrend in RPPD may be continuing after initial reimbursement stability from insurance companies during the earlier pandemic days. Although some stabilization occurred in August, managed Medicare revenue mix is down 168 basis points since March and down 246 basis points since February when it was 10.7%.
5. Medicaid revenue mix declined 46 basis points from 48.8% in July to 48.4% in August. Medicaid revenue mix has declined 222 basis points since March when the mix was 50.6%. Furthermore, it has decreased 324 basis points from August 2019. Medicaid patient days likely decreased as well, due to lower overall admissions during the pandemic thus far and some Medicaid patients converted to Medicare because of the waiver of the 3-Day Rule. Meanwhile, the increases in Medicaid RPPD seen at the onset of the pandemic have slowed. Medicaid RPPD is up 0.4% since April but has increased 2.5% since March when initial increases in reimbursement from states helped skilled nursing properties related to the number of COVD-19 cases at properties. RPPD was flat from July to August at $233.

   To get more trends from the latest data you can download 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 in order to provide data at localized levels in the future. Operators who are interested in participating can complete a participation form here.  

NIC MAP^® Data Service clients attended a webinar in mid-October on key seniors housing data trends during the third quarter of 2020. Findings reflected the impact of COVID-19 across the seniors housing and care sector, led by NIC’s research team. Key takeaways included the following:

Takeaway #1: Seniors Housing Occupancy Fell Sharply Again in 3Q 2020

• The all occupancy rate for seniors housing fell 2.7 percentage points in the third quarter 2020 to 82.1%, the lowest level since NIC began reporting the data in 2005. This drop in occupancy was directly related to the COVID-19 pandemic as demand (as measured by net absorption) fell by more than 13,000 units. Combined with the second quarter, net absorption fell by more than 28,000 units.
• Separately, supply accelerated to 4,900 units, more than 1,000 units higher than in the second quarter.  
• Since 1Q 2020 the occupancy rate has fallen an unprecedented 5.5 percentage points. The deterioration in the third quarter was just a bit less than in the second quarter.
• Stabilized occupancy for all seniors living properties, defined by NIC as properties that have been open for at least two years or, if open for less than two years, have already reached a 95% occupancy level, fell by 2.5 percentage points to 84.4%, also a record low. The gap between all occupancy and stable occupancy was 2.3 percentage points, reaching its record high difference seen in mid-2019.

Takeaway #2: Nursing Care Occupancy Fell Most in Past Two Quarters

• By property type, the pandemic took a toll its greatest toll on nursing care occupancy in the third quarter, with a drop of 4.2 percentage points from the second quarter to 76.0% in the third quarter. Combined with the second quarter drop of 6.5 percentage points, nursing care occupancy has fallen nearly 11 percentage points since the pandemic began. This reflects the fact that the COVID-19 virus has been particularly hard for frail elders and those with multiple chronic conditions and the fact that elective surgeries had been postponed during some of the months following the pandemic.
• Assisted living was next most affected with a 2.9 percentage point decline in occupancy to 79.1%. Combined with the 3.2 percentage point drop in the second quarter, there was a total loss in occupancy of 6.1 percentage points in assisted living since the beginning of the pandemic.
• Independent living saw a 2.4 percent point decline to 84.9% in the third quarter for a total two-quarter drop of 4.9 percentage points. This pushed the occupancy rate for independent living to a new low.
• In general, residents in independent living tend to be healthier than those in assisted living and nursing care, and hence the lesser decline.

Takeaway #3: Construction Starts Slowed Further in 3Q 2020 for Assisted Living and Independent Living

• Construction starts slowed in the third quarter, with 551 units of independent living initiated in the third quarter and 788 units of assisted living. On a four-quarter aggregate basis, independent living starts totaled 5,018 units, the fewest since 2013. As a share of inventory, this amounted to 1.5%. For perspective, at its peak in late 2017, it was 3.7%.
• Like other residential and commercial real estate sectors, starts are also being affected by tighter lending conditions and shortages in lumber and other key building materials.

Takeaway #4: Not-for-Profit Occupancy Decline Less than For-Profit

• The NIC MAP^® Data Service collects data for majority assisted living and independent living property types, as well as community types such as CCRCs and stand-alone memory, and segment care types such as ADL-focused assisted living, memory care and independent living. They also track market fundamentals data by ownership structure such as for-profit and not-for-profit. These slices of data are all accessible through the NIC MAP Data Service on the NIC MAP Portal.
• Not-for-profit properties have consistently had higher occupancy rates than for-profit properties since the Data Service began reporting the data. The gap between the two ownership structures was smallest at 1.1 percentage points in the 2012/2013 period and has been widening ever since. Prior to the pandemic, the gap was a very wide 6.9 percentage points.
• In the third quarter, this gap grew to 8.8 percentage points, with the not-for-profits experiencing an average occupancy rate of 88.2% and the for-profits having an occupancy rate of 79.4%. The record wide discrepancy in the third quarter reflects the fact that occupancy for not-for-profits has held up better since the pandemic, with a 4.1 percentage point decline, while the for-profits saw a 6.0 percentage point decline to 79.4%.
• Part of the explanation is that not-for-profits typically have a larger share of independent living units which have been less impacted by the pandemic and a smaller share of assisted living units which have been more heavily impacted.  

 Takeaway #5: Seniors Housing Occupancy Declines Vary Across the Nation

• This map shows the degree of occupancy loss in seniors housing properties by metro area since the first quarter of 2020. The darker the color, the worse the occupancy rate decline. Since March, Sacramento, Denver, Boston, St. Louis have seen the most loss in occupancy, while Washington D.C., San Antonio, and Las Vegas experienced the least deterioration in occupancy.
  

Takeaway #6: More Operators with Assisted Living Report Acceleration in Move-ins

• Since March, NIC has conducted a bi-weekly survey of owners and C-suite operators and executives of seniors housing and nursing care properties across the country in our Executive Survey Insights, The goal of the survey is to gather accurate, real-time information on current conditions and share these results with the industry. The data represents responses from small, medium, and large operators from both not-for-profit and for-profit providers. The data presented here shows findings from responses collected between March 24 through the week ending October 11^th.
• Now currently in its 14^th wave, this is the longest running survey of operators since the start of the pandemic, and NIC wishes to thank survey respondents for their valuable input and continuing support. The results of our joint efforts to provide timely and informative data to the market in this challenging time have been significant and noteworthy. These near-real time insights on the effects of the pandemic on senior living are being closely watched by the media and are working to help ensure the narrative on the sector is accurate.
• In this specific chart, the pace of move-ins for the assisted living care segment is examined across respondents’ portfolios of properties in the past 30 days. Focusing on the center of the chart—Waves 4 through 7, which included surveys from late April to late May, much of the country was experiencing widespread COVID-19 restrictions in physical distancing to mitigate the spread of the virus. Respondents reported organization-imposed and government-imposed moratoriums on admitting new residents, and thus difficulty backfilling residents lost due to normal attrition, residents moving to higher levels of care, and coronavirus illness and related move-outs—and the pace of move-ins ground down.
• By the end of July as shown in Wave 10, with move-in moratoriums easing across organizations, some residents waiting on sidelines with ADL needs could not wait to move any longer, and shares of organizations with increasing move-ins in assisted living was at the highest point to date. Recently, the shares of organizations with assisted living units that reported an acceleration in move-ins in the past 30 days increased in Wave 13 to the highest levels since the survey began in March.

Operators are invited and encouraged to help provide transparency to the market by participating in the next Executive Survey. Click here to complete the survey.

Interested in Learning More?

While the full presentation of the key takeaways from this article is only available to NIC MAP clients, you can access the abridged version of the 3Q20 Data Release Webinar & Discussion featuring my  exclusive commentary below.

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Now more than ever, the actionable data provided by NIC MAP^® Data Service can help you stay informed. To learn more about NIC MAP and accessing the data featured in this article, schedule a meeting with a product expert today.

Seniors Housing and Government Can Work Together for a Bright Future. 

One of the attractions of any NIC Conference is the caliber of thought leadership and insight provided in main stage keynote sessions. Typical keynotes, held in large ballrooms, hardly feel intimate. In contrast, much of the 2020 NIC Fall Conference, hosted on a virtual platform that put every speaker and attendee on a face-to-face basis, felt close, personal, and disarmingly genuine. This dynamic was on display for one of the most anticipated keynote discussions of the nation’s most important seniors housing and care event.

Award-winning journalist Soledad O’Brien adeptly moderated a discussion with Mark Parkinson, president and CEO, American Health Care Association (AHCA) and National Center for Assisted Living (NCAL), and Andy Slavitt, senior advisor for The Bipartisan Policy Center and former Acting Administrator of the Centers for Medicare & Medicaid Services (CMS). Both leaders were frank and forthcoming regarding the impact of COVID-19 on seniors housing and care. Despite coming from the often opposing viewpoints of industry leader and policymaker, the discussion demonstrated that, for seniors housing and care, the pandemic promises to teach industry leaders a great deal – and has created opportunities to work with government to craft a bright future, while delivering better outcomes for America’s frail elders.

Trump and COVID

O’Brien’s first question was for reactions to the news which had just broken, that President Trump and the first lady had tested positive for COVID-19. Parkinson took the opportunity to express his hope that, “As bad as the news is, maybe it will be a wakeup call some people needed, that you’ve got to take this stuff seriously. You have got to wear a mask because anybody, under any circumstance, can get this virus.”

Slavitt pointed out that, in addition to the President, “43,000 other people were diagnosed with COVID yesterday.” He agreed that while we shouldn’t be politicizing the President’s health, the country might learn two lessons from the news, “One is, a thin piece of cloth would have prevented this from happening…the second lesson is simple consideration. Trump and his staff and his family entered a room, sat around Chris Wallace, were feet away from Joe Biden. None of us know whether we have COVID-19 or not…that’s why we wear masks.” He hoped that, like (UK Prime Minister) Boris Johnson, who fell seriously ill with the virus, Trump would take this more seriously, wear a mask, and encourage others to do so.

The Second Wave

Asked whether the seniors housing and care industry is prepared for a second wave, Parkinson was optimistic. “We are. We were completely unprepared for the first wave.” He explained that the virus’ ability to spread via asymptomatic carriers wasn’t understood at first. That, and the lack of masks and appropriate PPE, “really caused it to spread like wildfire in nursing homes and assisted living facilities across the country…the other thing we needed was testing, and we didn’t have that either.” He pointed to “horrendous policy mistakes made at multiple levels, that created the challenges we had.”

Parkinson continued, “For phase two we’re in better shape. The policymakers have not done great, but the scientists have. The testing we now have…as well as a little better position on PPE, I think we’re in a much better position. Clinically, we also know a heck of a lot more about how to take care of people, so the mortality rate is down.” Nevertheless, he echoed Slavitt’s frustration with America’s failure to enact simple preventive measures. He said, “We don’t have to have a second wave. What’s so damned frustrating about this is that if everyone would just wear a mask, just that simple, considerate thing, if we would just make a decision as a country that everywhere we go we wear a mask and socially distance, we wouldn’t eliminate this in two weeks – but we would grind it to very low numbers.”

Slavitt raised community spread as another key factor impacting nursing homes. He said, “It is very, very difficult, once there is community spread, to prevent that spread from getting into the nooks and crannies where everybody lives.” While agreeing that the industry today is better prepared to protect frail elders, he appealed to everyone, politics aside, to be considerate of others and help to contain the spread of the virus.

“A Business Disaster”

The discussion turned to the state of the industry, which has seen a fall in occupancy rates and a simultaneous rise in costs associated with fighting the pandemic. Parkinson said that, “My overriding message to the folks who are watching this, who are primarily investors in long term care, is that we’re going to get through this, and this is going to continue to be a good space to invest in and that’s not just hollow cheerleading. I believe there’s good data and good reason to believe that.” He went on, however, to outline how the pandemic has caused a “clinical nightmare and a business disaster.”

Parkinson offered a litany of dismal facts, including over 50,000 deaths in nursing homes, and tens of thousands in assisted living facilities. He pointed to census data that dropped from 85% to 75% in just a “month or two,” and half that in assisted living. He pointed to major increases in expenses, as operators scrambled to acquire PPE, often at “ten times the normal rate” on the black market, while paying ‘hero pay’ to staff and incurring other related expenses.

Asked how he can be optimistic in the wake of such grim realities, Parkinson said, “The good news is the government recognizes that we are an essential service, and thank god for the CARES Act funds, that have now provided nursing homes a combined, probably, almost 20 billion dollars.” He also pointed to long-term demographic advantages, saying, “people need our services. We have a growing demographic, really exploding in the age group that we take care of, and as reluctant as people will be for a while to move into our buildings, which I completely understand, people don’t move into our buildings because they want to, they move into our buildings because they have to. They just can’t be taken care of safely at home anymore. It will be bumpy, and it will take some time, but the demographics are compelling. We will win the public’s confidence back, and I think this will be a good space to be in, eventually.”

The Opportunity to Improve

In agreement with Parkinson, Slavitt said, “industries through time emerge stronger from crises, often, if they do some self-examination, like Mark’s talking about, if they really, genuinely look at what they’re doing and say, ‘here are four or five things that can help us.’” He added, “This is an industry that everybody cares about, every Congress person, every senator, every presidential candidate needs this community to be successful. It’s not too big to fail, it’s too important to fail.” He said, “I love the fact that the industry is opening dialogue, that the industry is talking to the White House and HHS every day, that we’re figuring this out together.”

Parkinson warned industry decision makers not to miss this opportunity to improve. “The knee-jerk reaction for some might be, ‘Hey, let’s just get this behind us and try to move on with business as usual.’ That would be a huge mistake. You cannot ignore the fact that close to 100,000 people have died in long term care facilities. If we don’t use that as a moment of reflection, to not just look at what caused this, outside of our control, but look in the mirror and figure out those things that were within our control that could have slowed some of this down, and what could we do to be better in the future, then we’re missing an enormous opportunity.”

Regulatory Reform

Both panelists agreed in other areas, as well. On the burden of regulations, Parkinson pointed out that skilled nursing is more heavily regulated than “virtually all other healthcare providers,” and stated the “amazing statistic” that “80% of the enforcement budget at CMS is spent on nursing facilities.” He suggested that CMS focus regulations on “things that really matter,” such as infection control, person-centered planning and activities, and other areas where nursing homes can improve care for their residents.

“Mark’s right. You can’t regulate culture,” Slavitt responded, then advocated for “what works best,” which he described as an industry that recognizes what it needs to improve and asks for investment from the taxpayer to get there, as well as the accompanying regulations, which, “would make everybody comfortable, and provide assurances.” He added, “If the industry is able to move itself to that point, I think the industry will find a very ready and willing partner in the government, no matter which government…”

Workforce

On workforce issues, Parkinson said, “We don’t pay our healthcare workers enough, particularly the frontline workers in long term care.” He asked the question, “What do we do to make sure that we not only have enough people to work in our facilities, but that they can do so and take care of their own lives?” He linked the answer to the need for funding, as well as immigration reform. In response, Slavitt again offered some agreement, saying, “Right now, people who spend their day caring for the rest of us, if they somehow don’t have enough money to make ends meet, that is a litmus test that we should address…there’s plenty of resources in this country to do that.”

On immigration, Parkinson advocated for resolving the “dreamer problem,” as well as reviving programs that bring nurses in from foreign countries. “The challenge that economies will face in the 21^st century, is where they will get the workers that are needed. The demographics of a declining workforce are very bad across all of the developed world.”

Addressing the politics of immigration, and acknowledging the need for workers, Slavitt said that “there actually is a center point of agreement on a number of these topics.” He explained that while they may not make everyone happy, they offer solutions to “add fairness” and move the country forward. “Sometimes it takes an event, sometimes it takes a new Congress, sometimes it takes a new way of looking at things, but one day, hopefully soon, we can resolve some of these issues.”

Medicare and Medicaid

Another issue that both experts addressed was Medicare and Medicaid. On Medicare, Parkinson acknowledged that the new payment plan, PDPM, initiated under Slavitt’s administration and recently put in place, is working well. He views Medicaid, on the other hand, as a politicized program that is now underfunding care in many states. “We’re going to have to figure out what our priorities are. Instead of just talking about these workers, these heroes, and the greatest generation, are we really willing to put some resources behind that, to give them the kind of care, and the kind of jobs, that they deserve.”

Slavitt responded, “In some point of time, whether it’s before or after the election, we’re going to have to do that [fund Medicaid], or many people who are on Medicaid today are going to face challenges, and payments are going to get even lower.” He pointed to a recent actuarial report that indicated, “Over the last year, Medicare lost two years of the life of its trust fund, and is now projected to turn insolvent in 2024.” What worries him, he said, is that during the next presidential term, the program will become underfunded. He explained that the next President may be in a position either to fund the program or cut benefits and payments under the program.

Towards the close of the discussion, addressing national priorities, Slavitt said, ”What we need is some radical introspection, as a country, into what kind of country we want to be. Part and parcel of this is the question of how we take care of people who need our help; they’re no longer at the stage where they can care for themselves, whether it’s because they have a disability, whether it’s because they’re aged, whether it’s because they’re low income, whether it’s because they’re sick. I think that is an enormous part of our national debate.”