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.

In a new question in the Wave 40 survey, respondents were asked whether they planned to increase, decrease, or not change their current care offering unit mix. Significantly, one-half of organizations expect to increase the independent living care segment over the next 12-months. On the flip side, one out of five respondents (21%) expect to decrease the nursing care segment. Regarding the current share of all full-time open positions across respondent organizations, in the Wave 40 survey, one-quarter have more than 20% of positions currently unfilled. Some innovative methods that have successfully recruited non-caregiving staff include quick hires with orientation scheduled several times during the week, educational incentives, directly recruiting in-person at nearby businesses, and more. The shares of organizations reporting acceleration in nursing care move-ins increased significantly—from 21% in Wave 37 conducted in January to 63% in Wave 40. One-half of respondents to the Wave 40 survey (52%) reported lead volumes above pre-pandemic levels in April—a notable increase from the Wave 38 survey reflecting results in February (33%). However, expectations for occupancy to recover to pre-pandemic levels in the near term have tempered over the past year. One-half of organizations currently expect occupancy recovery to occur in 2023, with the majority expecting it to happen in the first half of 2023.

–Lana Peck, Senior Principal, NIC

NIC’s Executive Survey of senior housing and skilled nursing operators was implemented in March 2020 to deliver real-time insights into the impact of the pandemic and the pace of recovery. In its third year, the “ESI” is transitioning away from the COVID-19 crisis to focus on timely industry topics. While some standard questions will remain for tracking purposes, in each new survey “wave,” fresh questions may be added.

This Wave 40 survey includes responses from April 4 to May 1, 2022, from owners and executives of 65 small, medium, and large senior housing and skilled nursing operators across the nation, representing hundreds of buildings and thousands of units across respondents’ portfolios of properties. More detailed reports for each wave of the survey and a PDF of the report charts can be found on the NIC COVID-19 Resource Center webpage under Executive Survey Insights.

In a new question included in the Wave 40 survey, respondents were asked whether they planned to increase, decrease, or not change their current care offering unit mix—some, or all of which may already be in the development pipeline. Significantly, one-half of organizations expect to increase the independent living care segment over the next 12-months. Of note, one out of five respondents (21%) expect to decrease the nursing care segment.

In the Wave 40 survey, three-quarters of respondents indicated the severity of their staffing shortages across their organizations was moderate (73%). Fewer respondents reported severe staffing shortages in the Wave 40 survey than in Wave 39 (19% vs. 27%). Attracting community and caregiving staff continues to be among operators’ most significant challenges, followed by rising operating expenses (89% and 80%, respectively).

Regarding the most effective methods respondents have found for attracting new employees, increasing wages remain the most often cited. Comparing the Wave 30 survey conducted in June/July 2021 and the Wave 40 survey, 63% to 70% indicated that increasing wages continues to be the most effective.

With regard to the current share of all full-time, open positions across respondent organizations, in the Wave 40 survey, one-quarter have more than 20% of positions currently unfilled. One-half have between 11% and 20% of full-time positions unfilled.

In the Wave 39 survey, respondents were asked to share innovative methods they had found to be particularly successful in recruiting caregiving staff. In the Wave 40 survey, they were asked about innovative ways of recruiting non-caregiving staff. Beyond generally increasing wages, offering flexible schedules, hiring, and referral bonuses—all of which have been reported as effective to some degree—the list below includes alternative ways to attract non-caregiving staff as cited by respondents:

• Quick hires with orientation scheduled several times during the week.
• Quarter for quarter raise structure; all hourly employees receive a $.25 raise each quarter they stay with us.
• Directly recruiting in-person at nearby businesses.
• Attempting a daily pay option as a test to see if it has value as an incentive to staff.
• Opportunities to grow in position by providing educational incentives.
• Use of social media has had the most impact for us.

The timeline below shows the share of organizations reporting an increase in the pace of move-ins during the prior 30-days. Data from the Wave 40 survey reflects an increase in the share of operators reporting acceleration in the pace of move-ins after COVID-19 variant cases declined sharply in the U.S. Note that seasonality also may have an effect.

In the Wave 40 survey (reflecting operator experiences in April), between roughly 40% and 60% of organizations with independent living residences, assisted living residences, memory care residences, and nursing care beds reported an acceleration in the pace of move-ins. Since January, the shares of organizations that reported acceleration in nursing care move-ins increased significantly—from 21% in Wave 37 to 63% in Wave 40.

One-half of respondents to the Wave 40 survey (52%) reported lead volumes above pre-pandemic levels in April—a notable increase from the Wave 38 survey reflecting results in February (33%). Smaller organizations saw the most significant gains. Single-site operators with lead volume above pre-pandemic levels rose from 15% to 44% in Wave 40, and operators with 2 to 9 properties increased from 21% to 50%). Given pent-up demand coming out of the pandemic and questions about the sustainability of record-high absorption rates in the last half of 2021 per NIC MAP Vision data, this measure in the ESI may be a leading indicator to watch with regard to occupancy recovery.

Expectations for occupancy to recover to pre-pandemic levels in the near term have tempered over the past year. One-half of organizations (51%) currently expect occupancy recovery to occur in 2023, with 42% expecting it to happen in the first half of 2023. In the Wave 33 survey conducted in the fall of 2021, three-quarters of respondents expected their occupancy to recover to pre-pandemic levels by the first half of 2022.

Wave 40 Survey Demographics

• Responses were collected between April 4 to May 1, 2022, from owners and executives of 65 seniors housing and skilled nursing operators across the nation. Owner/operators with 1 to 10 properties comprise roughly one-half (55%) of the sample. Operators with 11 to 25 and 26 properties or more make up the rest of the sample (20% and 25%, respectively).
• More than one-half of respondents are exclusively for-profit providers (58%), one-third operate not-for-profit seniors housing and care organizations (33%), and 9% operate both.
• Many respondents in the sample report operating combinations of property types. Across their entire portfolios of properties, 75% of the organizations operate seniors housing properties (IL, AL, MC), 22% operate nursing care properties, and 31% operate CCRCs (aka life plan communities).

Owners and C-suite executives of seniors housing and care properties, please help us tell an accurate story about our industry’s performance. If you are an owner or C-suite executive of senior housing and care and have not received an email invitation to take the survey, please contact Lana Peck at lpeck@nic.org to be added to the list of recipients.

NIC wishes to thank respondents for their valuable input and continuing support for this effort to provide the broader market with a sense of the evolving landscape as we recover from the pandemic. This is your survey! Please take the Wave 41 survey and suggest new questions for Wave 42.

NIC MAP Vision clients, with access to NIC MAP^® data, attended a webinar in mid-April on key seniors housing data trends during the first quarter of 2022. Findings were presented by the NIC Analytics research team. Key takeaways included the following:

Takeaway #1: Senior Housing Occupancy Edged Up in 1Q 2022

• The occupancy rate for senior housing—where senior housing is defined as the combination of the majority independent living (IL) and assisted living (AL) property types—rose 0.2 percentage point from the fourth quarter of 2021 to the first quarter of 2022 for the 31 NIC MAP Primary Markets. This marked the third consecutive quarterly increase in occupancy. For perspective, this was a 2.5 percentage point increase from the pandemic-related low of 78.0% recorded in the second quarter of 2021 but was 6.7 percentage points below its pre-pandemic level of the first quarter of 2020.
• The 0.2 percentage point increase in occupancy in the first quarter is encouraging in light of the highly contagious omicron variant that was rampant during the early months of 2022. It is a testament to the success of the COVID-19 vaccines and to the infection control policies operators have put in place to keep residents safe.
• Continued, albeit moderating, demand and weak inventory growth associated with the slowdown in construction starts in 2020 contributed to the occupancy increase in recent months.
• More specifically, demand, as measured by the change in occupied inventory or net absorption, continued to recover in the first quarter of 2022, increasing by 2,761 units in the Primary Markets. This was below the rapid pace seen in the third and fourth quarters of 2021, however. Since the recovery began in second quarter of 2021, 26,683 of the 45,499 units placed back on the market have been re-occupied, or 59% of those units.

Takeaway #2: More Than Six Percentage Points Needed for Occupancy to Recover

• For senior housing, occupancy had fallen 9.2 percentage points from peak to trough and through the first quarter of 2022, occupancy has recovered by 2.5 percentage points. This means that another 6.7 percentage points of occupancy has to be recovered.
• The strongest recovery to date has been in assisted living. Overall, occupancy is up 3.7 percentage points from its low point, but it remains 6.8 percentage points below its Q1 2020 pre-pandemic level of 84.6%.
• IL occupancy was 1.4 percentage points above its low point, but remained 6.6 percentage points below its pre-pandemic peak, almost the same as for AL.
• And lastly, nursing home occupancy fell a very large 12.5 percentage points and has thus far recovered 3.6 percentage points of occupancy, almost the same as for AL, but it remains furthest behind its pre-pandemic occupancy at 77.6%, with a 9.0 percentage point gap. Note however, that the first quarter occupancy rate for NC is almost the same as for AL at 77.6% versus 77.9%, respectively.
• Within senior housing, AL occupancy remains below IL occupancy, but the pace of occupancy recovery has been more in the need-based AL majority property type. That said, anecdotally, we are hearing that the socialization aspect of IL is attracting new residents after the long-extended pandemic related period of isolation for so many older adults.

Takeaway #3: Construction Activity Still Slow in Most Markets

• This heat map shows which metropolitan markets are experiencing the most construction activity. Looking at the right-hand part of the grid, those markets that are shaded brighter red are seeing the most construction as a share of inventory. This includes Miami where construction as a share of inventory amounted to 10.7% in the first quarter (2,739 units in 17 properties). This was the second most ever (first was in 2Q 2021). And at 8.5% of inventory, Portland, Oregon’s construction was at an all-time high at 1,813 units in 12 properties.
• Atlanta stands out on this heat map, with its red shades, but construction as a share of inventory was relatively low for Atlanta at 9.4% (18 building and 2,371 units). This is well below the 17.4% share seen in Atlanta in mid-2017, when there were 30 buildings under construction (over 3,000 units). Since that time, the inventory of senior housing in Atlanta has increased by 33% (more than 6,000 units).
• The flip side is Sacramento where construction as a share of inventory shrank to 1.3% in 1Q 2022, down from 16.8% in 2019, with only three buildings underway with 160 units. Pittsburgh is also notable in that construction as a share of inventory was virtually zero in 1Q 2022. This was a dramatic shift from a share of 9.5% in 2019.
• For perspective, for senior housing, this equals 5.3% of inventory for the Primary Markets and it peaked at 7.8% in late 2017 and more recently at 7.5% pre-pandemic 1Q 2020.

Takeaway #4: East and West Coast Markets Outperforming Other Markets

• The map below shows occupancy rates for the NIC MAP Primary Markets in the first quarter benchmarked to the Primary Market average of 80.6%. Markets with higher occupancy rates are colored deeper shades of green, while those poorer performing markets are colored deeper shades of red.
• It becomes clear that the strongest occupied markets are along the coast and the lesser occupied markets are generally in the center of the country.

Key Takeaway #5: Transaction Activity Dominated by Private Buyers in 1Q 2022

• Of the $1.2 billion of closed deals in the first quarter of 2022, private buyers represented $877 million, or 76% of the closed volume. For context, private buyers represented 43% of closed volume in 2021 for the entire year, with the public buyers coming next, representing 35% of closed volume in 2021.
• Private capital has been a steady source of capital for many years, especially the private partnerships and family regional owner/operators have been a steady source of liquidity. Private buyers have represented 35% or more of buyer activity in seniors housing and care every year since 2016.
• The private buyer is any company that is not publicly traded—for example, a private REIT or single owner or partnership, family offices, etc. The public type is just that: any publicly traded company. The institutional type is usually the equity funds that manage pension money or other types of institutional money. And cross-border represents any buyers from outside the United States.
• Note that the transactions data discussed in this key takeaway is only the closed property sales transactions throughout the United States. It does not include deals that have been announced in the quarter and not yet closed. It is also important to remember that this data is preliminary for the first quarter of 2022 as data points could be updated with other deals being captured as we learn about their closings. These updates typically occur as public records become available and given slower recordings within public records it is possible this data is updated more so than usual, especially when it comes to single property transactions that are under the radar from public announcement and reporting.

Interested in learning more?

• While the full key takeaways presentation is only available to NIC MAP clients with access to NIC MAP data, you can access the abridged version of the 1Q22 Data Release Webinar & Discussion featuring my exclusive commentary below.

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• To learn more about NIC MAP data, powered by NIC MAP Vision, an affiliate of NIC, and accessing the data featured in this article, schedule a meeting with a product expert today.