Part II—Debt Providers Offer Possible Solutions 

Innovative ideas of how to provide housing for the growing number of middle-income seniors were discussed by industry stakeholders at a recent investor summit in New York City. Convened by NIC, the summit also spotlighted new research on middle–market seniors.  

Results of the research were initially detailed at an April policy forum in Washington, D.C. (link to research results). The ground-breaking study, “The Forgotten Middle,” forecasts a shortage of affordable seniors housing and care options for middle–income seniors in the next decade.  

The investor summit included three separate panels of industry participants: equity investors, debt providers, and property operators already piloting middle-market options. Each panel discussed what is needed to make middle–market solutions work from their perspectives. 

What follows is an edited transcript of the second panel discussion which focused on debt providers. (A link to the other discussions is here.)  

The debt panel was moderated by NIC Chief Economist and Director of Outreach Beth Mace. Participants included: Robert M. White, Jr., founder and president, Real Capital Analytics; Michael Patterson, vice president, Underwriting and Credit, Freddie Mac; Christopher Callaghan, group vice president, head of healthcare banking, M&T Bank; and Heidi Brunet, managing director, Newmark Knight Frank. 

Mace: I’d like to introduce Bob White, founder and president of Real Capital Analytics, who will set the discussion in context by providing a profile of debt providers to the seniors housing market. 

White: A transition in the composition of lenders for seniors housing has occurred since mid–2005 through today. Before the financial crisis of 2007-08, the sector relied on the CMBS marketplace; in contrast CMBS is not a source of financing for seniors housing today.  The government agencies have carried lending for the multifamily and seniors housing markets since the crash. At its peak in 2009, the government agencies were 82% of conventional acquisitions and refinancings for seniors housing. The agencies were half of originations in 2011 and 40% in 2018. The highest proportion of bank lending took place in 2018. Regional banks accounted for 20% of the loans and national banks made 17% of the loans. Financial funds accounted for another 12%.  Institutional debt funds will be an interesting component of the capital stack going forward.  

Seniors housing relies on national and regional banks for new construction loans. There are 6,000 banks, but relatively few are active in seniors housing. We need to educate the regional banks about seniors housing. The government agencies and local and regional authorities are generally not active in construction financing which should change if we’re talking about increasing middle–market seniors housing availability   It’s an important factor to meet the upcoming middle–market demand.  

There are differences by market. The major metros—Boston, New York, Chicago, San Francisco, Los Angeles—have the greatest competition among capital providers. The agencies are more active in smaller markets but there are fewer options for financing.   

The seniors housing market has low default rates. By 2011, we had tracked about $300 billion of distressed commercial mortgages nationwide. Seniors housing was less than $3 billion of that.  Default rates in seniors housing were minimal. Losses upon default have averaged 20-25%, comparable to multifamily losses but lower than other property types, especially compared to hotels which had the highest default and loss rates. Some people attribute that to the operating component. It’s   important to track default and loss rates because of new regulations around capital withholding requirements for banking organizations. We could get cheaper debt for seniors housing if we show default and loss rates are lower than industry standards.  

Mace:   What is your viewpoint of lending to the seniors housing sector? 

Patterson: Freddie Mac purchases seniors housing mortgages for independent living, assisted living, memory care and apartments.  We purchased over 200 mortgages last year which were sold to investors as securities. Seniors housing is a good business line for Freddie Mac. The industry is growing, profitable and stable, and it provides a durable income stream.  

Brunet:  At Newmark Knight Frank, we originate the loans and service them on behalf of our clients. Freddie Mac has financed $20 billion of seniors housing with us and the losses are insignificant. 

Mace: Can that same model work for middle–income seniors housing? 

Patterson:  Yes, we make mortgages on durable cash flow and that would continue as long as the properties are stable and have a steady cash flow. We have been able to securitize mortgages and we think that will continue. I have been lending for 35 years and the best thing about securitization is that we can see how the mortgages perform on a monthly basis which informs investors. Education is a big part of what we bring to the process. 

Brunet:   We have green investors and a middle-market product might attract a certain type of investor with a social mission.  

Callaghan:  We can underwrite to a lower margin for permanent debt and get comfortable with the sustainable cash flows.  The challenge is finding the equity for construction. How do you develop a brand new facility? Or find the equity to convert a building into seniors housing? If you look at the ability to take cash out at low margins, it’s a challenge for the institutional markets to get their returns over a five year period.   

Mace:  Would you provide debt for a middle-market product? 

Callaghan: Yes, we’ve done low–income properties and high–end properties in tax exempt scenarios where 20% of the units are for those below the area’s median income. There are a lot of ways to finance a middle-income project. 

Mace: We talked about the number of units needed going forward to house the growing numbers of middle-income seniors. Is there a vehicle that would provide that kind of scale? 

Brunet: If it’s a good sponsor and good operator, the capital will be there though it might be different than the capital we have today. We’re lucky that there’s more liquidity in this space—both debt and equity—and it’s better than it has ever been and it will continue to get better.   

Mace: You sound optimistic. So what is the biggest challenge?  

Brunet:  The industry’s biggest challenge is labor and staffing. As a lender, if you have good operators and good product, whether it’s a new building or repurposing of an older one, the debt piece will be easy. 

Mace: Freddie Mac does affordable multifamily lending, any lessons learned there? 

Patterson: We do affordable and workforce housing and we spent time to learn and understand those markets. We would like to have the opportunity to learn what works whether it’s the shared units we’ve talked about or other ways to operate properties. We need to understand the property to provide financing.  

Mace: Do you think the alignment of interests will change in terms of debt service coverage ratios or loan-to-value ratios? 

Brunet:  It’s important to partner with sponsors or operators who are experienced in the space and have good track records. As a lender, I am not interested in working with a multifamily developer without experience in seniors housing. But if they are experienced seniors housing folks committed to the space, then that’s a different conversation.   

Callaghan:  Lenders will be there as long as cash flow looks strong and sustainable. We may assign a higher cap rate to that kind of project so the loan–to–value ratio is appropriate. But we should think about leveraging community– based services such as Meals on Wheels or tapping into Medicare-funded services.  

Patterson:  When reviewing a deal, we look at the potential tenant pool in the area that can fill the building. One thing this study has shown is that the tenant pool is going to be huge at a certain price point. The ability to understand that allows us and our lending partners to get comfortable with those properties.   

Mace: Why does seniors housing have low default rates?  And do you think that would be the case for the middle–market as well? 

Patterson: Our book of business has a good collection of people who understand the business and run their businesses well.   

Callaghan: Risk models differ geographically. We see strong performance in downtown areas and in places like Massachusetts, New Jersey and northern Virginia. They have the demographics that work to keep those markets strong and losses minimal.  

Mace: What are some innovative or practical ideas about how to spur more options for middle-market seniors today? 

White:  NIC has been great educating investors and making it a major property type on the institutional side. Debt markets are farther behind. The more they hear about the experiences of the banks and lending platforms, the better it will be. Only a few of the 6,000 banks are in seniors housing. Banking specialty groups could be formed to meet the coming demand.   

Brunet:  New purpose–built properties with shared units and repurposing vacant office or malls are two ideas.  The debt will be specific to the project but it will be there. Fannie Mae and Freddie Mac have pre-stabilized programs that allow the borrower to lock in low permanent rates prior to full lease-up.    

Callaghan:  Maybe some of the care can be reimbursed. How do we manage reimbursement avenues to bring in more revenue? The real innovation is on employee and staffing side because costs are going up and the labor pool is tight. Maybe regional training initiatives among multiple providers could help fill the void in workers.   

Audience Q: Could we bring down the cost of development and the unit price by using modular construction? 

Callaghan: My biggest worry is the cost of land in urban areas. It’s a tough challenge.   

Audience Q: Could we look at the hotel industry and its debt sources as a model? 

White:  The CMBS market is interesting. It’s bigger in the hotel market.  Collateralized loan obligations are growing. Lenders need to be educated about the difference between hotels and seniors housing since hotels have higher default rates. Foreign capital—debt and equity—is promising. They like any kind of multifamily development. Aging economies like Japan, Korea and even China are interested in seniors housing in the U.S. as an investment and to get experience to bring the model home.  

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May 27, 2019 

janekadler@gmail.com 

• First year-over-year occupancy increase since January 2015
• Managed Medicare revenue mix reaches time-series high of 12.1%, higher in urban areas

NIC released its first quarter 2019 Skilled Nursing Data Report last week, which includes key monthly data points from January 2012 through March 2019.

Here are some key takeaways from the report:

1. Occupancy has been on an upward trend since June of last year (2018). Overall occupancy increased 77 basis points from the fourth quarter of 2018 to 83.7% in the first quarter of 2019, the highest rate since the first quarter of 2018. An increase in occupancy is typically expected from the fourth to the first quarter, given the flu season and higher admissions in the winter months. However, as occupancy has shown strength over the past several months, it suggests that seasonality is not the only factor in the recent uptrend in occupancy. In fact, year-over-year occupancy was also positive as it increased 28 basis points from March of 2018. This is the first yearly increase in occupancy since January 2015. The occupancy trend was the same in both rural and urban areas as it increased on both a quarterly and yearly basis. The quarterly occupancy increase was more pronounced in urban areas, however, as it increased 100 basis points from the fourth quarter to 84.9% at the end the first quarter 2019.
2. First quarter skilled mix increased from the fourth quarter. The gain was mostly driven by the increase in managed Medicare, although Medicare mix rose as well. This suggests that higher acuity patients were a driver in the first quarter as they are often admitted during the winter/flu season which in turn often drives an increase in overall occupancy. Skilled mix increased 84 basis points from the fourth quarter 2018 to end the first quarter 2019 at 26.0%. However, skilled mix was down 103 basis points compared to the first quarter of 2018 when it was at 27.0%. Skilled mix increased in urban and rural areas as well compared to the fourth quarter 2018 ending at 27.0% and 22.2%, respectively. Urban and rural both declined in terms of skilled mix compared to March 2018.
3. Overall managed Medicare revenue mix reached a time-series high in the first quarter 2019, ending March 2019 at 12.1%. This revenue mix increased 106 basis points from the fourth quarter of 2018 and 169 basis points from the first quarter of 2018 when it was 10.4%. This continued growing influence on operator revenue further demonstrates the importance of the managed Medicare payor within the skilled nursing sector. This trend is evident across both the urban and rural areas. The revenue mix is highest in the urban areas, where penetration is higher due to the density and managed care opportunity, as it ended the first quarter 2019 at 14.0%. Interestingly, the rural areas now register over 5% in terms of managed Medicare revenue mix ending the first quarter 2019 at 5.4%.
4. Managed Medicare revenue per patient day (RPPD) pressures became evident again in the latest data as it decreased from $439 in the fourth quarter 2018 to $432 as of March 2019. It was down $14, or 3.2%, compared to a year ago when the RPPD was $446. This trend is evident in both urban and rural areas as the RPPD decreased on a quarterly basis and yearly basis in both geographies. It ended the first quarter 2019 at $436 in urban areas and $408 in rural areas. The RPPD decrease in the rural areas likely has less of an impact on the business as the managed Medicare penetration is smaller than in urban areas. The managed Medicare patient day mix in rural areas is only 3.4% compared to the 8.6% in urban areas.
5. Medicaid patient day mix decreased to 65.8% in the first quarter 2019 compared to the 66.4% in the fourth quarter 2018. The decrease in patient day mix is likely due to the increase in other payer sources, e.g. Medicare and managed Medicare, rather than a decrease in patient admissions, as occupancy increased overall in the first quarter 2019. The decrease in Medicaid patient day mix from the fourth quarter 2018 to the first quarter 2019 was driven by the urban areas as it decreased 80 basis points to 66.5%. Rural area Medicaid patient day mix increased 22 basis points to 61.9%.

To get more trends from the latest data you can download the NIC Skilled Nursing Data Report by clicking the button below. There is no charge for this report.

In today’s business environment, seniors housing and care leaders can often access capital through a phone call or a single meeting. They can develop strategy on a weekend leadership retreat. When it comes to solving workforce issues, however, no easy solutions have arisen, leaving the industry with a constant problem that just doesn’t seem to be going away any time soon.  

When you look to the future there may be many companies five to ten years from now with access to lots of capital and terrific strategic plans – but who won’t have the people to execute. We’re seeing that even now in local markets, where providers and investors are tabling certain projects because they just can’t find the workforce. Couple that with the often-observed fact that new projects are often staffed by workers cannibalized from existing local communities and you drive up wage rates, while simultaneously raising the costs associated with losing valued workers to competitors. 

I recently had the pleasure of attending the Milken Institute 2019 Global Conference in Los Angeles, to present on the NIC-sponsored “Forgotten Middle” study that has the seniors housing industry discussing innovative solutions to serve this large and fast-growing market. While I was there I had the opportunity to hear from some of the world’s leading thought-leaders, policy makers, and business executives. Although a number of the sessions I attended were not focused on the future of aging and seniors housing and care, the perspectives and insights I heard will certainly bear on the sector, particularly regarding workforce and culture in the industry. 

What I heard at the Milken Institute provides hope that there’s a viable solution to the sector’s workforce challenges sitting right under our noses, while adding an additional wrinkle to how I believe the sector should approach meeting its staffing requirements. 

One session I found particularly fascinating was “AI Past and Future: A Conversation with David Siegel and Kai-Fu Lee.” Moderated by Bloomberg Businessweek’s Joel Weber, the co-founder of tech investment manager Two Sigma, David Siegel, discussed the challenges and opportunities AI offers for individuals, companies, and societies with Kai-Fu Lee, one of the world’s leading authorities on artificial intelligence – and a highly accomplished figure in the world of tech business. 

Lee talked about AI, explaining how over the next 10-20 years many routine functions will be replaced by AI-enabled technologies. Human beings currently working in back office functions, assembly line work, and truck driving occupations, for example, will become obsolete. In a different session, I’d heard about those truck drivers. Truck driving, a middle-class job providing a decent living to millions, is one of the top jobs in 32 states. As autonomous vehicles and drones come on line, most of those jobs are likely to go away, lost to the superior performance of computers, sensor tech, and AI. 

Mr. Lee was talking about all these assembly line workers, clerical staff, and drivers, and how we need to repurpose and retrain them right now. When Weber, the moderator, pushed for examples, I was shocked to hear Lee’s immediate response. He said you have to differentiate between routine, mechanized tasks and creative, or human interaction work. The area he gave as an example was elder care. China will overtake everyone in terms of how fast they age, and there’s an awareness of the scale of the problem of caring for their elders, many of whom have only one child to care for them. Lee expressed his belief that folks who have worked in routine assembly tasks will find personal gratification in the way they can make a difference in people’s lives, particularly as they move into jobs that require personal interactions, and caring for the personal needs of fellow human beings. His point was that those jobs that require human interaction will be the least likely to be replaced by AI-enabled tech; and his first thought was elder care. 

What do we do with all these truck drivers, whose average age is 47? Imagine the sight of a burly 47 year old truck driver doing lifts and transfers for frail seniors, or a 57 year old grandmother providing care and companionship rather than doing clerical tasks. There is a fantastic opportunity for someone who’s spent 20 or 30 years on assembly lines, or in a drivers seat, and who knows their job will be replaced, and who finds the idea of learning new technical skills to oversee the processes they used to do themselves unappealing. You do not need a lot of schooling to work in seniors housing and care. Retraining should be relatively simple, efficient, and quick. There is plenty of need within the seniors housing and care sector, which can also offer the satisfaction of human connection – and of helping to improve lives.  

This workforce is not 25 years old. Many will be in their 40s and 50s and will have gained enough life experience to value not only a new means to make a living – but to make a difference. Perhaps we’re not thinking out of the box just going after young people. We may be missing a huge opportunity under our noses. At the very moment in which seniors housing and care faces a burgeoning need for workers, millions of workers will be out of their jobs, displaced by technology. They will be mature and will have the benefit of years of life experience. Many will be attracted to the idea of making a difference in someone’s life, and to the idea that they can bring joy to others as they work. That human connection provides value in both directions.  

If the word spreads in states like Ohio, Indiana, and Wisconsin, where manufacturing plants will go idle and trucking jobs will become automated, we may benefit from a massive workforce shift – and improve the lives of many more Americans than we may have ever anticipated. 

NIC is pleased to announce that Dr. Janet Yellen, the first-ever woman to be appointed chair of the Board of Governors of the Federal Reserve System, will address the opening general session of the 2019 NIC Fall Conference at 8:00 AM on Thursday, September 12.  

The seniors housing and care sector will likely feel the influence of numerous economic forces in coming years, ranging from interest rates and the shape of the yield curve to the varying impacts of the global economy on regional economies across the United States. Macro-economic trends will influence domestic policy, the regulatory environment, labor markets, the healthcare sector, and other factors that decision makers will be watching closely.  

Perhaps no individual is in a better position to inform and provoke insight on these economic drivers than Dr. Yellen, who served as the “active executive officer” of the U.S. Federal Reserve System from 2014 to 2018. Prior to her four-year term as chair, Dr. Yellen served as vice chair of the Federal Reserve’s Board of Governors and, from 2004 to 2010, as president and chief executive officer of the Federal Reserve Bank of San Francisco. 

The general session will feature a discussion with Dr. Yellen, moderated by Kathleen Hays, the Global Economics and Policy Editor for Bloomberg Television and Radio. Ms. Hays is one of the top economics reporters and anchors in the country, having covered the U.S. economy, the Federal Reserve, and global economy trends for nearly 30 years on television and radio, and in the print and electronic media. Attendees will be treated to an exchange focused on the economic topics relevant to the seniors housing and care sector – and will hear how the former Federal Reserve Board chair views the economic environment.   

While serving as a member of the Federal Reserve’s Board of Governors (1994–1997), Dr. Yellen was appointed by President Bill Clinton as chair of the Council of Economic Advisers. From 1997 to 1999, she also chaired the Economic Policy Committee of the Organization for Economic Cooperation and Development. Earlier in her career, she served as an economist with the Federal Reserve’s Board of Governors. 

Although most famous as an economic policy-maker, Dr. Yellen has also enjoyed an accomplished career in academia. She was an assistant professor at Harvard University (1971–1976) and a lecturer at the London School of Economics and Political Science (1978–1980). In 1980, she joined the faculty of the University of California at Berkeley, where she was named the Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics. Currently, she is a professor emeritus at the Haas School of Business. 

NIC looks forward to welcoming Dr. Yellen as our opening keynote speaker, and to continue a tradition of bringing the most eminent, experienced, and accomplished persons in business, economics, and policy-making to share their considerable insights with attendees of our Fall Conference.  

General Registration for the 2019 NIC Fall Conference is now open.  

The Labor Department reported that there were 75,000 jobs added in May, well below the downwardly revised gain of 244,000 in April and below the consensus expectation of 180,000. The deceleration in growth may reflect the effects of slowing global growth and the waning effects of the tax cuts and government spending. Nevertheless, this marked the 104^th consecutive month of job growth.  The latest three-month average is 151,000, less than last year’s 223,000 monthly average.

Revisions subtracted 75,000 to the prior two months.  Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.

In May, employment in health care rose by 16,000. In the past year, health care has added 391,000 jobs.

The unemployment rate was unchanged at to 3.6% in May.  This is the lowest rate in 50 years or since 1969.  A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—fell to 7.1% from 7.3%.

Average hourly earnings for all employees on private nonfarm payrolls rose in May by six cents to $27.83. Over the past 12 months, average hourly earnings have increased by 3.1%, down from 3.2% last month.   For 2018, the year over year pace was 3.0% and in 2017 it was 2.6%.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work was unchanged at 62.8% in May, very low but up from its cyclical low of 62.3% in 2015.  The low rate at least partially reflecting the effects of an aging population.

This report, in combination with other recent data on economic activity, will support speculation that the Fed’s next move may be to lower interest rates.  In recent weeks, the Fed’s has indicated that it is paying close attention to the risks of an economic slowdown.