• Occupancy Continues to Fall, Despite Typical Seasonal Influence
• Managed Medicare represents increasingly larger share of skilled nursing revenue

NIC released its first quarter 2018 Skilled Nursing Data Report last week, which includes key monthly data points from October 2011 through March 2018.

Here are some key takeaways from the report:

1. First quarter national occupancy decreased 30 basis points from the fourth quarter to 81.6%, deviating from the expected historical trend which usually shows an uptick in occupancy from the fourth to the first quarter. Occupancy initially increased in both January and February before slipping back in March. March 2018 occupancy was down 210 basis points from the March 2017 rate of 83.7%. Occupancy declined on a year-over- year basis for both urban and rural areas, while it increased for urban cluster properties from the prior quarter.

2. Skilled mix increased at the national level from the prior quarter as Medicare and managed Medicare patient day mix increased 56 and 54 basis points to 13.0% and 6.6%, respectively. This suggests that seasonality did influence the data as higher acuity patients are often admitted during the winter/flu season which in turn often drives an increase in overall occupancy. However, as overall occupancy decreased there may be other factors at play which are offsetting this influence such as pressures on admissions or length of stay. Skilled mix increased across all reported geographic areas in urban, rural, and urban cluster markets. Rural area properties are now at the highest level of skilled mix within the time-series, ending the quarter at 24.4%.
3. Managed Medicare revenue mix reached a time-series high at the national level in February 2018, demonstrating the growing influence of this payor source. Even among rural properties, where revenue mix for managed Medicare is less than half the revenue mix reported in urban areas, the trend is consistent. Rural areas have been less affected by managed Medicare than others, but the trend warrants attention in the years to come, in all geographic areas. The revenue per patient day (RPPD) from managed Medicare continued to decrease from the prior quarter in all areas, except for urban cluster where it increased slightly.
4. Medicare revenue mix increased in the first quarter and was close to the highs of one year ago in urban cluster and rural settings. While the Medicare revenue mix for urban area properties was up quarter-over-quarter, at 23.7%, it was far below previous first-quarter highs of approximately 28% last seen in 2015. Year-over- year, urban area Medicare revenue mix declined 157 basis points from March 2017. It is now down a total of 474 basis points over the past three years.

5. Nationally and consistently across geographic areas, private revenue per patient day continues to increase, with the fastest growth in rate occurring in rural and urban cluster areas. Nationally, private RPPD reached a six-year high of $262 in February 2018 before ending the quarter at $260. Revenue mix for private revenue reached a six-year low at 7.7%, as the share of private revenue continues to drop.

The NIC Skilled Nursing Data Report is available at http://info.nic.org/skilled_data_report_pr. 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 at http://www.nic.org/skillednursing. NIC maintains strict confidentiality of all data it receives.

First-quarter data showed continued downward pressure on occupancy rates, with assisted living occupancy falling to its lowest level since NIC began reporting data in 2006—85.7%.  A broader measure, the occupancy rate for all of seniors housing (independent and assisted living) for the 99 Primary and Secondary markets tracked by the NIC MAP^® Data Service, had a first quarter occupancy rate of 88.1%, not the lowest on record, but a nadir since mid-2011 and down from 90.0% as recently as Q4 2015.  During the nine quarters since then, inventory growth has exceeded demand by 23,000 units (70,000 units of inventory growth versus 47,000 units of net absorption).

Occupied Penetration Rates. Based on this data, the occupied penetration rate for seniors housing in the 99 Primary and Secondary markets was 9.9% in the first quarter, defined as occupied units divided by the number of households over 75.  If the occupied penetration rate increased by 20 basis points to 10.1%, the occupancy rate would be 90.0% based on first quarter inventory levels.  For this to happen, an additional 17,000 units would need to be absorbed, an achievable number since this number of units was more than absorbed on a net basis in the past four quarters.

For an occupancy rate of 95%, a rate that is often underwritten as a stabilized occupancy rate for a property recently opened, today’s penetration rate would need to increase by 70 basis points to 10.6%, the equivalent of 64,000 units of additional net absorption.  This is equal to the number of units that have been absorbed in the 99 Primary and Secondary markets on a net basis since the third quarter of 2014 through the first quarter of 2018.

Its notable, however, that a 95% average occupancy rate has never been achieved for the aggregated 99 Primary and Secondary markets; since the fourth quarter of 2009, the average occupancy rate has been 88.9% and only in four of the thirty-four quarters that NIC has reported this data has the aggregated occupancy rate reached 90% or more. That said, this is not the case for individual metropolitan markets (such as San Jose, Baltimore, Portland, Sacramento, Pittsburgh, Seattle, New York, Boston, Los Angeles, Sand Diego, San Francisco and Philadelphia which all had first quarter 2018 seniors housing occupancy rates that were 90% or higher.)

Seniors Housing Inventory versus Multifamily Inventory.  For another perspective on recent market fundamentals, it may be helpful to look at the multifamily sector, where completions (inventory growth) as a share of total inventory equaled 1.8% in 2017 according to estimates by CBRE, the equivalent of 266,000 units.  For seniors housing, inventory grew by 30,000 units from year-earlier levels in the first quarter for the 99 Primary and Secondary markets.   While seemingly small on the surface, for seniors housing this equals a 3.3% increase in inventory.  A comparable estimated increase for the nation would be roughly 45,000 units (under the assumption that the 99 Primary and Secondary markets represent approximately two-thirds of the national inventory which equals the share of 75-plus households for this geographic aggregate relative to the nation).

Further, a comparable increase of 3.3% in apartment stock equals 490,000 units or 41,000 units per month.  The sizeable differences of course are due to orders of magnitudes of differences in the stock of multifamily units versus seniors housing.  Indeed, the multifamily sector is significantly larger than seniors housing (14.7 million units versus an estimated 1.4 million seniors housing units at the national level or 927,000 for the 99 markets).

And How Do Demographics Fit In?  Another way to gain perspective on recent market fundamentals for seniors housing is to compare the estimated 45,000 units of new supply delivered nationally in the past year against the demographic growth in the number of Americans in the 83-plus year cohort for the comparable period. The selection of 83-plus may be viewed as a proxy for those individuals who could be potential residents in seniors housing.  Based on recently updated estimates from the Census Bureau, in 2017 this equated to 8.5 million individuals. In 2018, an additional 138,000 people are projected to age into the 83-plus cohort and by 2025, the Census Bureau estimates that there will be 10.2 million people in this cohort for an increase of 1.6 million people over the eight-year period from 2017 to 2025.  With a penetration rate of roughly 10%, this suggests the need for 164,000 additional units of seniors housing supply over this eight-year period. Using the numbers cited above for the current national run-rate of 45,000 units of stock added in the past 12 months, 164,000 additional units could be added in 3.7 years, outpacing the potential eight-year demand requirement.

However, it is notable that a similar analysis done for a younger cohort–those 80 and older–yields a different conclusion.  In 2017, there were an estimated 12.4 million individuals aged 80 and older versus the 8.5 million figures cited above for those over 83.  By 2025, the Census Bureau estimates that there will be 15.6 million people in this cohort for an increase of 3.2 million people over the eight-year period from 2017 to 2025.  This compares with the growth of 1.6 million for the 83 and over cohort.  With a penetration rate of roughly 10%, the 80-plus cohort growth suggests the need for 316,000 additional units of seniors housing supply over this eight-year period.  Using the numbers cited above for the national run-rate of 45,000 units of stock added in the past 12 months, today’s supply pace of 45,000 units per year would be shy of the demand by roughly one year’s worth of today’s inventory growth or 45,000 units.

So, where does this leave us?  An estimate of demand using the 80-plus cohort suggests that today’s supply run-rate will leave us short of inventory by 2025, ceteris paribus, while the 83-plus cohort analysis suggests excess inventory by 2025.  The answer is probably somewhere in the middle of these two results and points out how sensitive the analysis is to the age-cohort assumption used.

From a practical point of view, there are two ways to prevent today’s occupancy rate of 88.1% from falling lower. The first would be to slow the rate of new supply delivery to below today’s pace especially in markets where occupancy rates are below the national averages due to excessive inventory growth. The second would be to boost demand by growing today’s occupied penetration rate.  And one way to do this would be to attract younger residents because today’s greatest demographic growth is oriented toward the younger old.  (For more thoughts on growing penetration rates see:  http://www.nic.org/blog/boost-market-performance-penetration-rates/)

Benchmark data can inform project projections

By Lana Peck, Anne Standish and Beth Mace

Among the many factors that determine the profitability of a project is the pace of initial move-ins or leasing momentum. A well-located and rapidly leased-up project can build forward momentum for steady demand, high occupancy and solid revenue growth, and build a strong reputation in the trade area among potential residents and their adult child influencers. This Blog explores the topic of leasing and provides occupancy rate benchmarks by segment type on the median time it takes to lease units at newly opened properties based on a 12-year plus time series of leasing patterns collected by the NIC MAP Data Service.

Broadly, data on range of lease-ups and national trend data for seniors housing and care properties can be used in setting proforma occupancy in new development, studies to support financing, and benchmarking occupancy for non-stabilized communities as they fill up. This can help determine, for example, whether a marketing budget will be sufficient during the fill period or how new assisted living units with 45% occupancy four-quarters post-opening stacks up against others.

Some of the factors that affect lease-up rates include: depth of target market demographics, supply penetration, age and size of the property, quality of and proximity to competition, condition of the residential real estate market, consumer familiarity and acceptance, levels of presales before opening, and operator quality.

The table below provides the median occupancy rate achieved by newly opened distinct care segments by the number of quarters the property has been open. The data blends together properties in the NIC MAP 31 primary metropolitan markets since 4Q2005 and properties in the secondary markets since 1Q2008. To help assess upside and downside probabilities, the exhibits outline the realized range for the 25th and 75th percentiles as well.

As the table shows, eight quarters after opening, assisted living units and memory care units had the highest median occupancy rates of 89%, while independent living was lowest at 84%. After 16 quarters, the median occupancy for assisted living was 95%. Nursing care was lowest at 92%. It is worth noting that median occupancy rates are typically higher than the more frequently cited average occupancy rates.

More detail can also be ascertained from the NIC MAP Data Service data by segment type.  For example, for newly opened independent living care segments during this period, the median reached 84% occupancy eight quarters following the property opening. At the same time, the lowest-performing quartile of these segments had less than 66% occupancy and the highest quartile had above 97% occupancy. By the end of 16 quarters after opening, median occupancy was 93%. The lowest quartile had 82% occupancy or less, and the highest quartile had reached 99% occupancy or more. (Note: The lowest quartile is not always made up of the same units, as low-performers improve and previously strong performers slip.) The median size of an independent living segment at a property opened during this period was 100 units.

This month, NIC, in a strategic alliance with PointRight, is announcing the launch of quality metrics for the skilled nursing sector. This major expansion and enhancement within the NIC MAP^® Data Service platform reflects NIC’s commitment to the skilled nursing sector and builds upon NIC’s present Skilled Nursing Data Report, which focuses on financial data.

Being in-network and having visibility into healthcare outcomes is becoming increasingly important in a value-based world. Providers and investors alike must understand how their skilled properties benchmark within their respective markets.

Some of the benchmarking that this data makes possible is not available anywhere else. It will enable operators and investors to better understand the performance of properties and markets when underwriting new deals, managing portfolios, developing strategies, competitive benchmarking, and gathering market intelligence.

New Solutions

NIC MAP users will now be able to include quality metrics data in their analysis, alongside NIC MAP data, such as market performance data, demographics, wage and employment data, hospital locations, and more.

CMS and its Five-Star rating system, while not the only source of quality measures, is an important source of data for determining eligibility for certain referrals. In addition to CMS, pioneering companies are accessing publicly-available data sets and applying their own proprietary algorithms to estimate various additional outcome metrics.

The following Quality Metrics reports are now available, according to subscription level, at the national, metropolitan, and property levels.  The metro level data is available exclusively through NIC MAP:

• PointRight Pro 30^® Adjusted Rehospitalization Rate
• PointRight^®Pro Long Stay^™ Adjusted Hospitalization Rate
• CMS Overall Five-Star Rating
• CMS Survey Deficiencies (Property level only)

Why PointRight?

PointRight is an industry leader in analytics for post-acute and long-term care, specializing in data-driven quality metrics solutions. The PointRight Pro 30 scores are certified by the National Quality Forum, which means they have undergone considerable examination by a panel of experts. Furthermore, the metrics are endorsed by the American Health Care Association (AHCA).

Serving over 8,000 skilled nursing facilities, PointRight data provides investors, operators and payers the data they need to understand these facilities in terms of quality and performance. Data such as rehospitalization rates, CMS quality measures, and CMS Five-Star ratings, will now be seamlessly integrated into our NIC MAP product.

Supply and demand more balanced; occupancy sustained above 90%

In the first quarter of 2018, among the 31 primary markets tracked by NIC MAP, independent living had an occupancy rate of 90.3%, which was about 70 basis points less than stabilized occupancy. Comparatively, assisted living had a differential of 230 basis points, more than three times as large since there are many more units that have opened but are still in lease up for assisted living than for independent living.

The most recent cycle of independent living inventory growth began in the middle of 2015. Despite a 5% increase in stock, occupancy rates have been sustained above 90% since early 2014 as demand has held up reasonably well. Metropolitan markets such as Atlanta, Houston, Kansas City, and San Antonio, have increased their independent living stock, but other markets such as Washington, D.C., Denver, Detroit, Los Angeles, New York, and Philadelphia, among others, have maintained relatively low-to-moderate supply growth.

Of additional note, the data show a 30-basis point quarterly decline in the independent living occupancy rate to 90.3%, which stemmed from a marked slowdown in first quarter absorption and somewhat weaker inventory growth. Reasons for the slower pace of activity could be related to seasonality patterns typically seen in the seniors housing data including influenza and influenza-like illnesses and winter weather, which tend to subdue both inventory growth and demand. Anecdotally, many properties lost marketing days in January and February due to the weather and flu-related property-level quarantines. Given that these factors were especially harsh during 4Q2017 and 1Q2018, there may potentially be a corresponding bounce back in in the second quarter as delayed move-ins from the winter months take place.

Inventory growth largely concentrated in a few markets

The map below shows the parts of the country that have seen the most change in independent living inventory in the past year. During the past year, there have been more than 11,000 independent living units added to inventory among the primary and secondary markets.

About one third of this growth in inventory occurred in seven metro areas: Dallas, Philadelphia, Columbus, Fort Myers, Houston, Detroit and Austin. While Minneapolis and Miami also saw strong independent living inventory growth over the past year, Baton Rouge, Charleston and Syracuse were geographies that experienced the greatest percentage gains in inventory.

Are construction starts plateauing or rising?

After peaking in mid-2016, construction starts in the secondary markets have been falling on a four-quarter moving-sum basis. In the primary markets, however, the peak was earlier (mid-2015) and the trend for the primary markets appears to be flat or rising.

Of note, anecdotal reports of delays in starts due to the weather and interruptions in starts due to delays in financing and funding may have caused some groundbreaking dates to be pushed back. And while construction starts data are subject to revision for these reasons, the numbers provide insight into what is in the pipeline. Interestingly, while the data shows a potential increase in independent living starts in the 99 primary and secondary metropolitan areas tracked by NIC MAP, it also shows a slowdown in starts for assisted living, which may signal increasing interest in independent living from investors and developers.