In mid-September 2020, even as the COVID-19 pandemic continued to drive weaker occupancy rates, higher expenses, and intense media scrutiny of the senior living sector, a ten-property senior living portfolio was successfully closed in a recapitalization and acquisition deal.

Operated by Seattle-based Merrill Gardens, the portfolio of 1,508 independent living, assisted living and memory care and multifamily units, as well as 29,000 square feet of ground floor retail, attracted a $460 million loan from PGIM Real Estate. In the latest of NIC’s ever-popular Leadership Huddle events, “Deal Structures and Alignment of Interests During a Pandemic: A Case Study with an Operator, Lender and Equity Provider,” three of the principal architects of the deal (with a guest appearance from a fourth participant) got together to discuss its details and the realities of underwriting and capitalizing senior living, even in times of distress.

Bill Pettit, President of R.D. Merrill Company, the parent company of Merrill Gardens, explained that his company, an active developer and operator of seniors housing properties, aims to hold properties over the “very long term.” In 2010, Merrill Gardens financed the ten-property portfolio through a RIDEA structure with Welltower, then called Healthcare REIT. When, in early 2019, Welltower expressed interest in creating liquidity with their 80% share, Pettit agreed to support the move – but was not interested in liquidating Merrill Gardens’ 20%. That triggered a search for new partners.

A central theme of the discussion was the value of trusted, well-established relationships.

Underwriting During a Pandemic

Asked by NIC Chief Economist Beth Mace, who moderated the discussion, what it was like to bring this deal to his investment committee at the height of the pandemic, Brian Sunday, Managing Director of AEW Capital Management, explained the company’s investing philosophy. In addition to investing in some ground-up development, he said, “Our goal is to buy core cash-flowing stabilized assets, obviously with strong operating partners who we have really good relationships with.” The relationship with Merrill Gardens had already yielded several deals, dating back to 2016, according to Sunday. When this deal was presented to him, he was open to taking a closer look at it.

Sunday worked with Merrill Gardens’ team to understand how the pandemic was impacting their business, in order to be able to underwrite it. They looked at projected cash flows over the next several years and were able to “get comfortable” with those models, under the assumption that, as vaccinations come online and the pandemic eases, seniors would return to seniors housing. In investment committee, Sunday’s response to questions on the impact of COVID was to point to pre-COVID performance. “This portfolio was 95% leased for 3, 4, 5, 6 years, maybe longer, and had great NOI growth…if this portfolio doesn’t come back, then the senior housing sector in general is in a lot of trouble.”

Asked about expectations on returns, Sunday acknowledged that they were different than pre-COVID deals. “The hardest part about this deal is that we’re underwriting an NOI that is decreasing…we knew NOI was going to dip 20%-30% from where it was pre-COVID.” He continued, “We wanted a little bit higher return expectation for taking that risk. The lynch pin that really got us over here was the debt. Without the debt this thing was dead on arrival. Based on proceeds and spread and obviously, as we all know, interest rates shot down to basically zero. Where we were able to lock rate really helped us to bridge the gap of the negative NOI drop to the rebound, to make up for that increase in returns that we wanted to get.”

It Isn’t If the NOI Gets Back, It’s When

Trace Wilson, Executive Director at PGIM Real Estate, said, “The starting place of the conversation, on our side, wasn’t if the NOI gets back; it’s when.” His team was already familiar with the portfolio’s markets as well as the assets in question, which helped them avoid logistical problems caused by the pandemic. Like Sunday, Wilson’s team looked closely at various COVID-19 scenarios potentially impacting occupancy, expenses, and numerous unknowns raised by the pandemic. Eventually, trust was a deciding factor. Wilson said, “I think it goes back to the performance of the portfolio beforehand and confidence in Merrill to be able to do what they said they were going to do.”

Asked about alignment of interests, Sunday responded by pointing to Merrill’s willingness to put dollars into the joint venture. Pettit added that “alignment of interest, for us, is the number one objective we have when finding any partner. This industry is complex…the experience and willingness to work jointly with the operator to achieve the best result for the asset is critical.”

Developing Industry Relationships is Key

Mace then asked what happens if an operator doesn’t have a long-standing relationship. Sunday said, “that’s a great question. I think that’s why we haven’t seen a lot of deal flow get done.” Discussing how he develops new relationships, he said, “a lot of this happens over time. You’re seeing people at the NIC conferences. Even though you might not do a deal, you’re starting to build on that relationship…it takes time. Obviously, if you’re just meeting someone for the first time during COVID, during travel restrictions, it’s difficult to get that level of trust.”

Mace also asked about when the panelists see markets returning to normal. Sunday pointed out that some markets are already bouncing back, while other, more deeply impacted markets will lag behind. “It’s going to be a tale of two worlds, unfortunately,” he said, adding, “The stronger markets are going to come back quickly.”

Ryan Maconachy, Vice Chairman, Health & Alternatives Assets, Newmark, was involved in recapping and raising the debt for the deal. He also emphasized the importance of the strong relationships involved. “Fortunately, we had a great relationship to benefit from with not only Bill and Brian, from past transactions, but also Trace and Brian. Trace’s history of involvement with these assets prior to AEW’s involvement was a huge catalyst to getting this done. As Brian stated, this wouldn’t have happened without the debt, and this wouldn’t have happened without Brian and his team having a great relationship with Bill.” Like the other panelists, he expressed doubt that the deal could have been executed without established, trusted relationships.

Network, Network, Network

As with all Leadership Huddle events, the webinar was followed with an optional Zoom discussion session. In small group breakout rooms, attendees discussed how underwriting terms have changed. There was general agreement that banks have been requiring more recourse than in pre-COVID days. Some concluded that smaller mom-and-pops will now be looking to exit the space, creating opportunities for investors. But another topic of discussion centered on relationships. As one attendee said, when asked about relationships, “network, network, network.” Some things never change.

You can register to attend upcoming NIC Leadership Huddles, including both the live webinars as well as the optional, first come, first served participation in peer-to-peer discussions, within the Events tab on nic.org. Registrants are provided with a recording of the event, compliments of NIC and our generous sponsors and partners.

Key Takeaway: In absence of local data, feasibility analysts use the so called “70/30” rule, where 70% of a PMA’s potential residents come from within the PMA and the remaining 30% come from outside the PMA. Analysis using VisionLTC data, powered by NIC MAP Vision, shows the story is not that simple.

Why Is It Important? As an experienced market and feasibility analyst who has studied hundreds of unique neighborhoods across the country prior to joining NIC as a Senior Principal more than four years ago, I am excited about the prospects of using VisionLTC data in gaining a more thorough understanding of local market dynamics than one can obtain without getting on an airplane, travelling to an unfamiliar city, and persuading seniors housing and care properties to share proprietary information. This blog post explores one area that has often kept me up at night as I consider how to best estimate demand for an existing or proposed property. In coming blog posts, I’ll explore other topics of interest as well.

Is your investment strategy to split sales with competitors or take market share? Has a development site been identified or is a proposed site being considered? Does a project’s marketing strategy need to be fine-tuned to meet pro forma projections? Or are you hunting for new sales opportunities for an expansion? Regardless of the rationale, the origins and characteristics of where recent seniors housing residents lived are among the most meaningful indicators of future purchase behavior.

Depending upon an area’s target market population density and considering the type of property under study (whether it serves an independent living, assisted living, memory care or nursing care resident), many seniors housing market analysts use generalized assumptions or “rules of thumb” in determining demand.

Referred to as the “70/30” rule, it is broadly estimated that 70% of a property’s residents will come from within a defined primary market area (PMA). But a PMA can be defined in many ways. Some of the more common methods used by market analysts include drawing a 3-mile, 5-mile or 10-mile radius around an existing property or a potential development site (depending on the care segment level served), using drive-time mapping technology to define the limits of how far prospective residents and/or their adult children will travel to the property from where they live or work based on unique traffic patterns and geographic and psychological barriers, and constructing polygons of Zip Codes, U.S. Census Tracts, or Block Groups.

For this analysis, which seeks to determine if data confirms the 70/30 rule, a 10-mile radius is assumed to be the PMA from which a community would attract the majority of its residents. Resident Origin, a product offering of VisionLTC, powered by NIC MAP Vision, is the first data set of its kind in the senior housing industry that provides clients with insight into the resident relocation patterns of 15,000+ seniors housing communities nationwide, illustrating the effective resident draw radius over the past 12- to 18-month time frame.

The following maps and charts describe the migration patterns of residents of nearby assisted living properties (within 1 to 2.5 miles from each other) in three different geographies: a leafy suburb of a major U.S. city—a mountain retreat vacation destination, and—a typical rural U.S. community. The green, yellow and red colorings on the maps represent the concentrations of where the subject property’s residents lived before moving into the property.

• • As shown by the Resident Origin maps of two assisted living properties in the suburban geography, located within one mile of each other, the resident origin data for both properties is relatively homogenous—both properties have attracted residents from the same general areas with a significant amount of overlap. However, the chart shows that the distribution of residents in miles does not confirm the “70/30” rule—the two suburban geography properties only attract 46% and 56% of their residents from within a 10-mile radius. Said another way, 54% and 46% are attracting residents from outside the PMA.

• • Looking at the maps of two assisted living properties in the resort destination geography, located within 2.5 miles of each other, Resident Origin data for both properties shows varied areas from where residents are drawn. AL property #1 attracts more residents from areas north of the Interstate Highway, including the nearby city, while AL property #2 appears to take share from within the neighborhood served by another assisted living property located along and to the west side of an alternate highway. The chart shows that the distribution of residents in miles, like the suburban geography example, does not confirm the “70/30” rule. The two resort destination geography properties attract 52% and 37% of their residents from a 10-mile radius. Said another way, 48% and 63% are attracting residents from outside their PMAs.

• • The maps below show both a broad and localized pattern of resident-draw typically seen in rural areas. AL property #1, located within the town, attracts more of its residents from neighboring towns than its competitor. AL property #2, located on the edge of the town, appeals primarily to local residents even though both properties are situated within 2-miles of each other. Consistent with the suburban and resort destination geography examples, the chart shows that the distribution of residents in miles, the two rural geography assisted living properties do not fit the “70/30” rule. AL property #2 attracts 42% of its residents from within 10-miles, whereas only 9% of AL property #1 residents come to the community from within 10-miles. Or said another way, AL property #2 is drawing 58% of its residents from outside the PMA and AL property #1 is pulling a full 91% of its residents from outside the PMA.

These maps and charts clearly illustrate the need for an analyst to understand the share of residents relocating from outside of the market area and which neighborhoods residents are relocating from as mileage does vary depending on different conditions. Additionally, many other factors can be considered when determining possible drivers of differences in resident origins among competitors:

• • National or brand-name awareness
  • Proximity to where adult children live and/or work
  • Built and natural boundaries, such as highways, bridges or rivers, and the location of major services such as hospitals and shopping centers influence how and where people travel
  • Zip Code, county, and political and neighborhood boundaries
  • Congruence of psychographic and socioeconomic profiles of current and past residents
  • Reputation, signage, and curb appeal
  • Comparability of the buildings to the character of neighborhood/geography
  • Monthly services fees comparable to neighborhood home sales prices
  • Building age differences
  • Recent or chronic management/leadership/ownership turnover
  • Staffing challenges and/or turnover
  • Size of marketing budgets, skill of marketing staff, and quality of outreach due to better developed referral sources
  • Specific religious affiliation or affinity group alignment

So how well does the 70/30 “rule of thumb” apply? On a national basis, the 70/30 rule is a close approximation when applying a 50-mile primary market area as “in-market” origin. According to VisionLTC data, 75.7% of seniors chose communities less than 50-miles from their homes (in-market) while the remaining 24.3% of seniors chose communities more than 50-miles from their homes (out-of-market). However, the distance a resident or family member is willing to move or travel or visit varies in urban, suburban, and rural markets and by the type of care being sought. The resulting PMA typically serves a much smaller area than 50-miles.

VisionLTC’s Resident Origin data allows the analyst to develop more accurate market areas rather than guessing—and to quickly fine tune a primary market area based on actual relocation patterns and not just assumptions or “rules of thumb.”

About NIC MAP Vision:

NIC MAP Vision is a leading provider of comprehensive market data for the seniors housing and care sector. NIC MAP Vision brings together two strong, well-respected, and complementary teams and platforms – the market-leading NIC MAP^® Data Service (NIC MAP) and VisionLTC’s best-in-class market research analysis platform. For more information, visit www.nicmapvision.com.

As vaccinations rise and COVID-19 case counts fall in skilled nursing facilities, CMS has revised its guidelines for nursing home visits. Effective on Wednesday, March 10, 2021, nursing homes are allowing residents and their loved ones to finally reunite, hug and hold hands after one year of isolation and psychological burden. This is a long-awaited relief for both residents and loved ones.

That said, CMS continues to “recommend facilities, residents, and families adhere to the core principles of COVID-19 infection control, including maintaining physical distancing and conducting visits outdoors whenever possible. This continues to be the safest way to prevent the spread of COVID-19, particularly if either party has not been fully vaccinated.”

On March 11, 2021, when the CDC eased virus restrictions on visitation at skilled nursing facilities, the status of vaccination clinics shows that most skilled nursing facilities participating in the CVS program had completed their clinics. Vaccinations for assisted living and other long-term care facilities were relatively behind.

Data from CVS show that 2,220,499 vaccines have been administered across 7,822 skilled nursing facilities. About the same number of vaccines have been administered for assisted living and other long-term care but across a larger number of properties—37,958 properties. Exhibits 1 and 2 below show that some states started vaccinating assisted living residents nearly two months after nursing homes’ activation date, which partly explains the difference.

The status of clinics from Walgreens (Exhibit 2) also shows that 90% of skilled nursing facilities have completed their third clinic, while only 28% of assisted living and long-term care facilities have completed their third clinic thus far. Notably, 22 geographies have completed their third clinic for nursing homes vs. two geographies for assisted living and other long-term care settings.

Exhibits 1 and 2 below provide summary stats of vaccination efforts and completion status of activated geographies across skilled nursing facilities vs. assisted living and other long-term care facilities participating in the CVS and Walgreens vaccination programs. These tallies have been created by NIC Analytics. See Exhibits 3 and 4 at the end of this blog for more details.

Exhibit 1: CVS Vaccination Results in Long-term Care Facilities

Exhibit 2: Walgreens Vaccination Results in Long-term Care Facilities

Separately, there continue to be promising signs that the coronavirus has turned the corner in skilled nursing facilities. NIC’s Skilled Nursing COVID-19 Tracker shows that newly confirmed cases among residents continued to fall and reached a new pandemic record low of only 0.15%, equivalent to 15 in 10,000 residents tested positive for COVID-19 on February 28 compared to over 300 in 10,000 residents on December 20 (3.03%). And it’s likely that seniors housing, particularly assisted living and other long-term care facilities, are also in the path of curbing COVID-19 since both seniors housing residents and skilled nursing patients were both given high vaccination priority.

In summary, although vaccinations efforts across assisted living and other long-term care facilities are relatively behind those at skilled nursing facilities, given the pace at which vaccines are being administered, seniors housing residents are likely to see fewer visitation restrictions in the coming weeks.

Exhibit 3: CVS vaccination efforts – Data as of March 11, 2021

VIEW PDF

Exhibit 4: Walgreens vaccination efforts – Data as of March 9, 2021

VIEW PDF

On March 10, the House passed the American Rescue Plan, the $1.9 trillion economic relief bill aimed at helping the country recover from the ongoing coronavirus pandemic. On March 11, President Biden signed the bill into law.

The legislation provides $250 million to states for strike teams for nursing care properties with COVID-19 outbreaks, to assist with clinical care, infection control, or staffing for up to a year after the public health emergency ends. The state strike teams will be deployed to respond to skilled nursing properties that are diagnosed to have, or are suspected of having, COVID-19 cases among residents or staff.

An additional $200 million is allocated to HHS for infection-control efforts within skilled nursing properties. The efforts will center around developing and disseminating COVID-19 prevention and mitigation strategies.

For seniors housing providers, however, the bill’s likely passage is not being met with resounding optimism, as the final package does not include dedicated relief to senior living communities that have also been on the front lines. In recent back and forth between the Senate and the House, proposed funds to support long-term care providers were stripped from the bill.

Argentum’s James Balda expressed frustration with the COVID relief package, saying “Given the failure of Congress to consider the needs of seniors and caregivers in this package, there remains a need for targeting support in future legislation and most critically through what remains in the Provider Relief Fund.”

With no dedicated funding for senior living, the pressure for Provider Relief funds – allocated through the CARES Act around this time last year – to be distributed promptly is at an all-time high. Senior living providers have been beleaguered over the last year with a slow dispersal of relief funds and frequent denials that don’t offer clear explanations.

The Provider Relief Fund was originally created to reimburse healthcare providers’ eligible expenses and lost revenues because of COVID-19. The current slow-paced delivery of funds may not see improvement as a result of the bill’s passage, either. The bill includes $5 million to the HHS Office of Inspector General (OIG) for oversight with respect to the Relief Fund. This will likely increase OIG’s planned efforts to audit and review the Fund’s spending.

Despite the money going towards oversight, there were no additional dollars allocated to the Provider Relief Fund through the American Rescue Plan. Provisions were developed to include a fund for premium pay to essential employees and grants to their employers, which American Seniors Housing Association President, David Schless, says “may be a source of relief for senior living employers.” This will be welcomed by the sector, as labor costs associated with keeping residents safe and communities open have risen significantly during the pandemic.

“The pandemic has necessitated many changes in the way seniors housing and care operators do business. In the NIC Executive Survey Insights Wave 23 results, respondents were asked to list one of the things that their organization plans to keep doing, stop doing, bring back and further develop. In addition to maintaining COVID-19 and infection mitigation protocols, organizations will continue leveraging virtual technologies for a variety of uses including digital marketing campaigns, entertainment, remote visits, and some activities. With 80% of survey respondents’ residents fully vaccinated on average, seniors housing and care operators are looking forward to bringing back communal dining, group activities, resident/employee gatherings, and discontinuing visitation restrictions, meal delivery, pandemic staff benefits, and frequent COVID-19 testing.”

–Lana Peck, Senior Principal, NIC

NIC’s Executive Survey of operators in seniors housing and skilled nursing is designed to deliver transparency into market fundamentals in the seniors housing and care space as market conditions continue to change. This Wave 23 survey includes responses collected February 22 to March 7, 2021 from owners and executives of 69 small, medium, and large seniors housing and skilled nursing operators from across the nation, representing hundreds of buildings and thousands of units across respondents’ portfolios of properties.

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. Additionally, the full range of time series data for each wave of the survey by care segment for move-ins, move-outs and occupancy rate changes can be found here.

Wave 23 Summary of Insights and Findings

• According to Wave 23 seniors housing and care survey respondents, roughly 80% of residents and 55% of staff of their respective properties—including all care segments across their portfolios—have been fully vaccinated. From late January to the present, resident uptake of the vaccine increased as the vaccine reached more and more residents. Staff uptake of the vaccine has, however, appeared to have leveled off. Prior surveys (Waves 21 and 22) explored the many ways organizations have promoted COVID-19 vaccinations to residents and staff. The positive impact of the vaccine on decreasing new cases and deaths relative to the total U.S. population is clearly illustrated in data compiled in NIC’s Skilled Nursing COVID-19 Tracker.

• A slim majority of organizations surveyed in Wave 23 indicate they will probably not or definitely not make the COVID-19 vaccine mandatory for staff (55%); however, one-quarter probably will or definitely will (25%). The share of organizations considering making the vaccine mandatory for staff has increased since Wave 22 (11%).

• Many operators have been eagerly anticipating a boost in occupancy due to the COVID-19 vaccine availability. One-third of organizations responding to the Wave 23 survey noted an increase in prospect interest specifically related to the vaccine—up from 25% in Wave 21. Nearly two-thirds of survey respondents (62%) expect their organizations’ occupancy rates to recover to pre-pandemic levels sometime in 2022.
• For the third successive survey wave, the shares of organizations reporting acceleration in the pace of move-ins is higher than those organizations reporting deceleration for each of the care segments. Furthermore, organizations reporting deceleration in the pace of move-ins has shrunk to time series lows in the memory care, assisted living and nursing care segments.

• Looking specifically at the independent living care segment—considered a “choice-based” move-in because of the type of and lower level of care services delivered compared to assisted living, memory care and nursing care (considered needs-based move-ins)—it is interesting to note that the pace of move-ins has also trended positively since the Wave 20 survey, reflecting operator experiences in December 2020. In Wave 23, 40% organizations with independent living units in their portfolios of properties noted acceleration in the pace of move-ins—the highest in the survey since Waves 9 through 14—surveyed late-June through the end of October.

• Although increased resident demand was cited by three-quarters of respondents (77%) as a reason for acceleration in move-ins in the past 30-days, only about one in ten respondents in the Wave 23 survey reported that their organizations had a backlog of residents waiting to move in (11%)—lower than at any other time since the question was first asked in late July. Possible reasons may include the previously mentioned trend of the pace of move-ins increasing across each of the care segments taking up some of the slack in pent-up demand, residents moving to different levels of care, the lifting of restrictions due to vaccine uptake among residents, and potentially less turnover of inventory in some properties as the pace of move-outs continued to slow in the Wave 23 survey.
• The share of organizations currently offering rent concessions remains around 50% since W12, surveyed mid- to late-September. Of those organizations with multiple properties, nearly two-thirds (64%) say they are offering rent concessions in more than 50% or all of their properties.
• The Wave 23 survey data shows a trend in the shares of organizations reporting an increase or no change in occupancy since the prior survey for the assisted living, memory care and nursing care segments. Roughly half of organizations with nursing care beds in their portfolios of properties reported higher occupancy rates from one-month prior in survey Waves 22 and 23.

• The chart above shows that in Wave 23, 54% of organizations with nursing care beds reported increasing occupancy rates in the past 30-days. As shown in the chart below, the majority of the increases were larger than reported in the Wave 22 survey. (The blue and orange-hued stacked bars correspond to the solid bars in the chart above indicating the degree of change by the saturation of color.) In the Wave 22 survey, 30% of respondents with nursing care beds reported occupancy increases of 0.1 to 3 three percentage points, however, in the Wave 23 survey, one-third (35%) reported occupancy increases of 5 percentage points or more.

• One-third of respondents—similar to the share of organizations in the Wave 10 survey—expect an increase in their development pipelines going forward (33% and 30%, respectively). It is interesting to note that organizations’ expectations have not changed much since last summer. Among those who expect their development pipelines to increase, reasons such as current and future market demand, and continuation of expansion plans prior to the pandemic, were cited most frequently.
• In the Wave 23 survey, respondents were asked to list one of the things that their organization plans to keep doing, stop doing, bring back and further develop. Respondents mentioned that their organizations would keep doing and/or further develop COVID-19 infection mitigation, and virtual technologies for entertainment, remote visits, and some activities. Others would keep doing and/or further develop employee engagement programs, and digital and social media marketing campaigns.
• Respondents are looking forward to bringing back communal dining, group activities and resident/employee gatherings, and discontinuing visitation restrictions, meal delivery, pandemic staff benefits, and COVID-19 isolation of residents, and frequent testing.

Wave 23 Survey Demographics

• Responses were collected between February 22 and March 7, 2021 from owners and executives of 69 seniors housing and skilled nursing operators from across the nation. Owner/operators with 1 to 10 properties comprise just over one-half of the sample (58%). Operators with 11 to 25 properties make up about one-quarter of the sample (23%), while operators with 26 properties or more make up 19% of the sample.
• One-half of respondents are exclusively for-profit providers (52%), one-third (33%) are nonprofit providers, and 15% operate both for-profit and nonprofit seniors housing and care organizations.
• Many respondents in the sample report operating combinations of property types. Across their entire portfolios of properties, 73% of the organizations operate seniors housing properties (IL, AL, MC), 28% operate nursing care properties, and 37% operate CCRCs (aka Life Plan Communities).

Owners and C-suite executives of seniors housing and care properties, we’re asking for your input! By demonstrating transparency, you can help build trust. The survey results and analysis are frequently referenced in media reports on the sector including in McKnight’s publications, Mortgage Professional America Magazine, Senior Housing News, Multi-Housing News, Provider Magazine, and other industry-watching media outlets. The surveys’ findings have also been mentioned in stories by Kaiser Health News, CNN, the Wall Street Journal, and other major news outlets across the U.S.

The Wave 24 survey is available and takes 5 minutes to complete. If you are an owner or C-suite executive of seniors housing and care and have not received an email invitation to take the survey, please click this link or send a message to insight@nic.org to be added to the email distribution list.

NIC wishes to thank survey respondents for their valuable input and continuing support for this effort to bring clarity and transparency into market fundamentals in the seniors housing and care space at a time where trends are continuing to change.