The Housing Market and CCRC Prospects: What Each Means to the Other
It has been a world-wind few days (make that a week) analyzing all that is or was, health care reform. In some respects, I’m glad that the meat of health care reform is done for now though admittedly, I’m disappointed at the outcome. Suffice to say, I will catch-up on the ramifications of the legislation and the reconciliation package for providers over the course of the next few days. For now however, I need to re-focus on the subject matter pile that is building within my e-mails and my files.
An issue that has drawn a great deal of attention lately is the future and current prospects for CCRCs (Continuing Care Retirement Communities). As I wrote in earlier posts, the CCRC industry was perhaps, the hardest hit by the recent and continuing economic downturn, although not necessarily as bad as some would think. Two highly visible restructurings/bankruptcies involving Erickson and Sunwest placed caution in the minds of the rating agencies and as a result, the analysts at Fitch for example, issued a “negative outlook” for the industry. At the crux of Fitch’s outlook is the dismal residential real estate market performance, the lackluster economy and slow-recovering investment markets (the latter less of an issue today). Correctly, Fitch points out that declines in its CCRC rated borrowers’ financial condition in terms of liquidity and profitability are contributing factors to their negative outlook but they seem to view these conditions as symptoms of the economy rather than tell-tale signs of an exhausted industry.
As I take a close look at the industry and at the comments from Fitch, et. al., it is easy to see how a dim or less than optimistic view can occur. Specifically, here’s what I mean and moreover, why I think there is room for a tad more optimism until one focuses acutely on the real estate market itself.
- The CCRCs that are struggling and those that have gone through highly publicized restructurings, etc. are truly isolated and reflective principally of highly leveraged, aggressively expanded organizations with many unstabilized projects and projects under development. Unstabilized projects and new, in-development projects have unquestionably suffered the most although, some have done fine when they are located in areas or markets that remained more stable during the economic downturn (parts of Texas for example).
- Occupancy dipped a tad as a general condition in 2009 but again, for stabilized operators, not as bad. In fact, the majority of the declines averaged 3.5% to 5% and some operators in good locations, saw virtually no declines, even in projects with 95% to 100% occupancy levels.
- Occupancy dips, such that they were or are combined with price suppression (down economies require providers to hold the line on price increases) and sagging investment values are the cause for the lower liquidity and profitability levels that Fitch reports. The latter two don’t have me terribly concerned as most stabilized and solid operators can handle the modest, temporary price suppression and the once sagging investments should be on much better footing by now as a result of recent improvements in the investment markets.
The residential real estate market is proving to be the biggest lag on CCRC industry performance and unfortunately, I don’t see a lot of cause for optimism that recovery in real estate is near. As much as I am a proponent of creative, strategic marketing for CCRCs as a means of boosting and maintaining occupancy, if a prospective senior can’t sell his/her home or worse, can only do so at a severe discount to value, demand for units and occupancy won’t realistically improve. Entry fee CCRCs will face this predicament in far greater numbers than rental only CCRCs, though rental-based projects will still see some of the same issues. As CCRCs predominantly attract transitioning seniors, those moving from one residential, owner occupied setting to another complimentary setting (CCRC), real estate sales are a significant part of the transition. In short, a lackluster or illiquid residential housing market effectively suppresses the current demand for CCRCs on the part of seniors.
Unfortunately, what I am seeing now in the immediate and near-term outlook for the residential real estate market, particularly for existing home sale prospects, is not encouraging. In January, existing home sales declined by 7.2% over January. This in and of itself is not hard to understand as the November to early December period was a high month for closings due to the expected end of government tax-credits for new home and replacement home buyers. Congress extend the credits through May but the extension occurred a bit too late to match the demand fall-off. The news or trend that is disconcerting in “what” volume is making up the sales and at “what” prices.
More than a third of all current sales are distressed or foreclosed properties and as a result, median sale prices in most markets continue to fall. For a CCRC, the typical prospect is not likely to live in a distressed or foreclosed property and, since the homestead is a significant portion of the prospect’s estate, not as willing to drop the home selling price to match the declining market values. In other words, depressed values and selling prices combined with a great amount of “bargain” inventory means that the senior citizen prospect for the CCRC isn’t likely to sell his or her home in the near future (not enough traffic across all of the inventory options and a seller unwilling or not needing to lower his/her price to match the market price points).
For the balance of the year, especially across the prime sales months of April through September, I expect to see the following occur.
- A gradual increase in sales volume starting now and stabilizing through May – the end of the tax credit extension. April and May should be the heaviest volume months in the first half of the year.
- Average sales prices will continue to decline in the West, South and Midwest regions. Prices seemed to have stabilized and are actually rising every so slightly in the Northeast and in the Northwest. The majority of the suppression on average sale price will continue to come from foreclosures.
- Foreclosures will stay at their current pace for at least the next two quarters, perhaps even to year end. As a result, average prices will remain suppressed as foreclosure sales and distressed sales pull the selling prices down and require sellers to drop asking prices to points or levels proximal to the values of like properties being sold; a dismal trend for seniors wishing to sell a home to move into a CCRC.
- Individual markets and regions will out-perform the nation as a whole but these markets will remain few in number and despite performing better than the national averages, their performance still isn’t great. Examples include Charlotte, NC, Boston, MA, Denver CO, and San Diego and San Francisco, CA. Larger market areas that are performing better can be found in Virginia (D.C. areas), Austin and Dallas Texas areas and the Golden Triangle areas in North Carolina. CCRCs in these areas will find a bit more “rosier” outlooks for converting side-lined prospects to residents in 2010.
- The wild-card for faster more more steady improvement in the residential real estate market is jobs. Improving employment will help to stabilize the real estate market, reduce foreclosures, allow prices to trend back-up slowly and spur more home-buying. As I see only gradual and slow job recovery prospects for the balance of 2010, the spill-over to residential real estate won’t logically occur until months after. Job growth needs to filter to job stability for major investment (consumption) activity to heat back up (there is always a lag).
Hospice Census Issues: A Possible Trend with a Twist?
Lately I’ve been running across intermittent publications/blog posts, etc. regarding a general decline in hospice census. At the end of this post, I’ve attached a couple of links for anyone who wishes to see some examples of what I’ve been reading. Naturally, being the curious consultant and health policy junkie that I am, I started to do a bit of digging. What I found was rather interesting and perhaps, indicative of another trend that may soon emerge.
In my prior career as a health system CEO, I first became seriously interested in hospice in the mid-eighties. The impetus for this was my VP of Religion and Pastoral Care who happened to train with Dr. Elizabeth Kubler-Ross and was (still is actually) a highly respected expert in the field of spirituality, bio-ethics and end-of-life care. Over the years, he often engaged me in debate regarding the high cost of institutional care at the end of life. He also pointed out how inefficient and somewhat demeaning it was for individuals to die in an institutional environment. In our system at the time, we experienced hundreds of deaths annually, the majority in SNFs. With the enormity and complexity of all the SNF regulations, it was extremely difficult to provide lower cost, more creative and thus, more humane end-of-life care in a nursing home. To further complicate matters, like most SNFs at the time (and even still today), our beds were generally configured as semi-private; hardly ideal to accommodate visitors, guests, and privacy.
To resolve the above issue, we started a hospice in the early nineties. We took a different tack however, developing a place of residence and a site for inpatient care initially. As our focus was principally geriatric, we saw the greatest market need as an alternative site to hospitals or SNFs; a hospice site that would provide a lower cost of care, a private room and incorporate all of the latest knowledge in palliative care. We knew at the time that the majority of our patients died in SNFs and hospitals simply because there was no real alternative and given the age of the patient and the lack of willing or able caregivers to accommodate death at home, home hospice was not the solution. To make a long story short, we quickly expanded to a second location and incorporated a home program within our hospice division. Oddly enough, at the time, we became the first free-standing, inpatient and residential hospice in Wisconsin and the sole “geriatric only” hospice in the State and the in the nation. Also at the time, there was one inpatient hospital unit and one free-standing residence. When I left my position as CEO to form my consulting partnership, there were five additional inpatient/residential hospice options and nearly a dozen home hospice options (some related to the inpatient/residential options).
To the point of this post and my observation: Hospice census is getting soft for a number of reasons but the primary driver of the decline that I can verify is too much supply for what is truly, an undeveloped demand. The primary payer for hospice care is Medicare and as I have written in numerous other posts, Medpac and CMS both have targeted hospice as an industry in need of reform. Their scrutiny is born out of a steady increase in the benefit utilization, rapidly increasing lengths of stay, and an increase in the number of hospices that have SNF contracts. To Medpac and CMS, this means potential abuse and to me it means too much supply chasing too little “real” demand. This is particularly true in a down economy where potential demand ( the universe of all terminally ill individuals at any one point) is somewhat disconnected with the health system due to unemployment related job losses and lack of insurance and other providers compete for a scarcer share of patient days.
The difficulty of gauging the true demand for hospice in the U.S. is that the health system presently in place, somewhat restricts the growth of legitimate patient referrals. Combine this with a traditional cultural and religious predilection which values life and technical advancements focused on the restoration of life and hospice becomes relegated to a choice paired with futility. Physicians, the gatekeepers of hospice referrals, are fundamentally incented to do everything (financially, legally, etc.) other than to make the referral. Patients and their families, ignorant about hospice, often know nothing about the benefits available under Medicare, the care that is delivered in a hospice setting, or that a referral to hospice can occur (and should) significantly in advance of imminent death. Without sufficient information about hospice, save the stereotypes, patients and their families must rely on a health system that actually competes against making referrals. While I know this sounds rather harsh, the reality is that most hospitals and physicians are pushed by economic factors, especially of late, to maximize treatment, to maximize tests, and to maximize patient contact that correlates to higher reimbursement, even if the same will in all probability, not change the ultimate outcome: death. A phenomenal source of data on this very subject is available from the Dartmouth Atlas (http://dartmouthatlas.org/).
While I cannot universally verify a trend of softer census, I can verify that census issues are occurring in a variety of hospices, particularly in larger urban and fully developed suburban areas. From the limited research I did conduct, this issue is not new and in fact, has likely been going on for some time. Where census trends are up or a bit more stable is typically in rural areas, fast growing areas or as a result of new or expanded nursing home and assisted living contracts (the latter a somewhat new but growing phenomenon). Areas that have been hit the hardest in the economic downturn are logically, areas with the greatest number of hospices struggling to capture census. Areas that are truly over-bedded in terms of SNFs and hospital capacity are the areas where the “soft census” trend is evident back to late 2008 and early 2009. Not too surprising, these over-bedded areas will not recover any time soon, if at all.
A new trend that is likely to emerge in the immediate future is consolidation or renewed merger/acquisition activity. Industries that have reached a growth plateau or stage of maturation provide marginally higher opportunities for businesses within the industry to consolidate, especially if the overall, longer-term growth prospects remain solid. I like to think of this phase or stage as a period of digestion. Hospice has grown markedly in the last decade, so rapidly in certain areas that the market area is or was saturated and the recent downturn in the economy served to illuminate, how saturated the market really was. In the period or time when the economy was advancing, a hospice could survive on the margins; the leakage that hospitals, physicians and other providers were willing to forego as other business or patient encounter opportunities were perceived as more valuable. As the economy tightened and reversed, the queue of “other more valuable” business evaporated and all remaining revenue generating patients became valuable again, closing the gaps that once leaked patients deemed “played-out”. This cohort of marginal patients (marginal only from the perspective of revenue opportunities) was a few years ago, the life-blood of a number of hospices in an over-developed market. As all providers are now willing to utilize even the most marginal patient encounters today, marketing or census development activities alone will not generate sufficient new referrals (they simply don’t exist) and the remaining strategy is to merge or be acquired.
I would not be surprised to see a steady growth pattern of hospices affiliating with other hospices, either via merger or outright acquisition. The general prospects for the industry are solid but the intermediate future with likely Medicare payment reform, greater OIG scrutiny and new referral and relationship regulations means that marginal hospice providers probably can’t survive sans an affiliation of some sort. Additionally, while the market will grow slightly year over year, I believe hospice has reached a point of maturity as a service or product line. It is truly a niche’ product, one not fully embraced by physicians or for that matter, the general market of patients and their families. As long as the economic incentives remain heaviest on “cures” and the cultural trend continues to embrace life-elongation at all cost, hospice will remain a secondary option for care, offered too late in the end-journey to a population, woefully uneducated and unaware of how valuable a care option it truly is.
The following are a few links to articles I read, prompting this post.
http://www.kaiserhealthnews.org/Columns/2010/February/021810Gleckman.aspx
http://growthhouse.typepad.com/larry_beresford/2010/03/are-hospice-enrollments-declining.html
http://palliativemedicine.blogspot.com/2010/02/can-hospice-and-palliative-care-escape.html
CCRC Update
Within the past ten or so days, I took some time to review the financial and operating benchmarks for CCRCs. The past eighteen months have likely been the toughest operational and financial period ever for CCRCs. By the end of 2009, a small rebound in the economy via an increase in existing home sales, a solid financial markets recovery, and a bit of moderation in the capital markets improved the industry outlook heading into 2010. Specifically, the lagging trends in occupancy stabilized and improved ever-so gently and key operating and capital ratios started to stabilize. The result is that while key medians and benchmarks slid year-over-year (between 08 and 09), 2010 could be rebound year for the industry. Below, I have included a chart of the 2009 CCRC medians as produced by each major rating agency (chart courtesy of BB & T Capital Markets, a division of Scott & Stringfellow, Inc.).
Where continued issues of concern remain are principally in newer, non-stabilized developments, CCRCs located in extremely depressed real-estate markets and CCRCs that are subject to having to refinance favorable debt packages within today’s lending environment (expiring Letters of Credit, etc.). Concerns that were present in early 2009 regarding entry fee CCRCs seem to have moderated as the improved real-estate market has made it possible for prospective residents to either move via selling their homes or be in a positive position to sell their homes in the near future. Again, individual market dynamics play a major factor in how the upcoming months shake-out for new entry-fee CCRC sales.
An area of continued concern for CCRCs is the capital markets and the ability of owners/operators to access new debt at favorable terms. Failures, albeit few in the industry, have made lenders cautious and today, rates and terms reflect the caution as well as the year-over-year decline in the industry benchmarks. Fitch as well as other rating agencies has not yet fully warmed to the prospects of recovery for the industry as a whole and as such, continue to produce negative to bland outlooks for the industry. Essentially, the story here is twofold: First, the upcoming year will remain a fairly down year for development as capital for new projects will not be plentiful and not at favorable terms, and; second, refinancing existing debt for solid operators with stabilized projects will be possible and increasingly so as the year progresses, though not yet at terms and rates that are better than the periods prior to 2008.
Looking at 2009 and ahead into 2010, a few key items for CCRC owners/operators to review are as follows.
- Sales always lag marketing efforts and as a result, CCRCs that have stuck to their marketing plans and stayed engaged with prospective residents will reap the rebound “rewards”. Any CCRC that has pulled too far back on continued marketing needs to get busy now to improve their 2010 prospects.
- Entry fee CCRCs need to be continuously vigilant regarding their pricing and the economic conditions of their market place. Entry fee CCRCs have the most elastic demand curve and price positioning is key to staying forefront in the senior’s demand cycle for retirement housing options.
- When and if the GAO produces its report on CCRCs, the principal focus will be on disclosure and customer knowledge. In effect, the key “take-away” here is this process is all about consumer protection. Aside from making sure the finances are solid, CCRC owners/operators need to beef up their consumer disclosures, their education efforts and clean-up their contracts and marketing materials.
- The four key benchmarks, aside from occupancy, that a CCRC needs to focus on for 2010 are: Net Operating Margin, Excess Margin, Days Cash on Hand, and Debt per Unit or Bed. If a CCRC is considering accessing the capital markets or borrowing from any lending source, moving these indicators up or down as appropriate to rank better than the median will improve the terms and rate available to your project.
- Soft and recovering markets call for strategic pricing evaluation and strategy. It is important to continue to increase revenues but doing so simply through rate increases may not be the best approach. Rate increases are one component of an overall pricing strategy. If a CCRC has not done a complete review of its competitive posture, its pricing structure and especially, its value proposition correlated to price, it should consider doing so immediately.
Assisted Living Update
As 2010 comes in and looking back on 2009, the Assisted Living market has been on a bit of a roller-coaster. Without question, the downturn in the economy caused some provider pain most notably among some of the larger, heavily leveraged companies (e.g. Sunrise and Sunwest). Occupancy rates were soft in many parts of the country, particularly those regions with very to moderately distressed housing markets. As residential housing sales have modestly improved, the occupancy rates have gradually moved higher. This is not to say that the housing sales improvement alone has contributed to this trend as providers have also been busy creating incentives to attract additional residents. Providers that have fared the best have been those that are more modern or more updated, less leveraged, already stabilized, in market areas that are not significantly over-built, are priced moderately, and have a solid array of specialized care services to serve a differentiated resident population. The opposite end of this spectrum is where providers have struggled with one addition; newer projects, especially those that are not geared toward Medicaid waiver residents but more so toward the upper-middle end of the price range, have struggled to achieve occupancy projections.
Looking ahead into and for the balance of 2010, I don’t see significant changes in the current trend coming out of 2009. I believe the economy will still negatively impact the housing market through at least mid-year and while sales of existing homes have picked-up somewhat, there is not question that the present demand has been bolstered by federal stimulus/tax credits. Once these dollars evaporate in April, and with a continued slow to no growth job market, demand within the housing market may all but flatten-out or recede. Important to note as well about the housing market is that while sales have moved up, prices continue to fall suggesting that the supply of properties still exceeds the real demand by quite a margin. In fact, a significant percentage of homes sold in the last quarter of 2009 were foreclosures or distressed sales of one type or another.
Another issue which plagued the industry in 2009 was the lack of reasonable cost, available credit. Again, in the mid to latter part of 2009 credit availability softened a bit and the availability of funds via the HUD Lean program helped. Going into 2010, credit remains however, tight and terms still rather stringent compared to four to five years ago. Similarly, banks remain tentative about additional commercial loans as their commercial portfolios have taken the biggest beating over the past year to eighteen months. Regardless of the source of the loan collateral (non senior housing), commercial loan portfolio losses equal tight credit and lending decisions for all industries. Additionally, if these factors are not enough, the Obama adminstration is pushing a new “bank” tax policy that if passed, could significantly chill the credit markets even more. If Washington maintains a negative stance toward the banking industry, all health care lending and senior housing lending will more than likely suffer and any softening that occurred in late 2009 will reverse. Unfortunately, this means that an already tepid transaction climate will cool equally as rapid and prices per unit will need to fall further for any deals to close. In short, tight to no credit means that the realizable asset and business wealth in the industry at least point-in-time, regresses.
Turning to the overall market today and the macro view, what’ s been evident over the last three years is that the Assisted Living market has reached a bit of a maturity stage. This doesn’t mean that growth cannot and will not continue to occur. It does mean however, that the building for building sake boom has ended, operators now predominate the development process rather than real estate developers, and certain markets in certain areas have become truly over-developed. Clearly, the demand curve is far more elastic than originally thought, made plainly evident by the economic downturn. The market also has become more niche’ or specialty driven, moving toward a more integrated and appropriate care model versus a housing model with ala carte services. All that said, the growth in the industry will still primarily come from consumer choices; opting for more residential accommodations to receive basic care services versus an institutional setting such as a nursing home. According to a series of surveys conducted by Genworth Financial, the average annual cost of assisted living care in 2009 was $34,000 compared to $74,000 for a semi-private room in an SNF.
An element of the industry that is changing and perhaps, will shape the industry along a different path in the coming years is the expansion of government as a payer source. A push within the states and at the federal level to reduce the cost of institutional care has created a new market within the traditionally dominant private-pay, ALF arena called roundly, Home and Community Based Services (HCBS). Within the broad HCBS arena, Medicaid waiver programs have had the biggest impact on the ALF industry as a source of once, financially ineligible residents. With both the states and feds embracing more uniformly, the concept of using Medicaid dollars to pay for assistive care as opposed to using a larger pool of funds for institutional care (typically SNF care), Medicaid or Medicaid waiver programs have gradually inched upward as a legitimate consumer of ALF capacity. As this expansion of HCBS and Medicaid waiver programs continues, the industry should not be surprised by a movement at the Federal end to begin to federalize a regulatory framework for ALFs. The fact remains that once government pays for something, it tends to want to regulate it or perhaps more appropriately stated, it will regulate it. As the Feds typically use a very broad brush when it comes to regulations, the industry’s players, regardless of their participation in Medicaid waiver programs, will feel the effect of government regulations. As a friend of mine says, “it is what it is”.
Up until the time that the Feds become more directly involved (and I believe they will in due time), the industry will remain non-centrally regulated. This means that for all intents and purposes, no single licensure or regulatory category is yet in effect and the same will continue to vary widely state to state. As an approximation based on data available, there were 38,000 ALFs (by the broadest definitions) in 2007 consisting of 975,000 units. It is a certainty that the industry has grown somewhat since then. In comparison, the SNF industry has approximately 16,000 facilities and 1.6 million beds. Unlike the ALF industry, the SNF industry has actually been shrinking, somewhat due to the diversion of Medicaid dollars to waiver programs and HCBS programs, eliminating certain residents from the SNF mix as well as other reimbursement and economic pressures across the industry to become more efficient. It is highly likely that the two opposite trends will continue over the next ten years with SNF capacity continuing to slowly decline and ALF capacity continuing to increase, albeit at a much slower pace than in the previous decade.
Looking across the ALF industry today, a summary of its key demographic facts is presented below.
- The dispersion or penetration of ALFs varies widely across the nation. The national average number of facilities per 1,000 elderly was 22.9. The states with the greatest number per 1,000 elderly are Minnesota (104), Virgina (46) and Oregon (43). Hawaii (2), Connecticut (4) and West Virgina (7) had the fewest number of facilities per 1,000 elderly.
- Where the largest penetration of ALFs exists, the demographics in terms of education, median income, and median home values are more favorable than in other areas. There also tends to be a correlation between ALF location and the presence (lack thereof) of minorities. Rural areas tend to have very few to no ALF penetration and the same is true with inner city environments, heavily populated with or by minorities. Not coincidentally, these areas also have lower levels of education attainment, lower levels of median income and lower median home values. Predominantly, ALFs are found in suburban or outer-suburban markets and their census is heavily skewed toward middle to upper-middle class caucasian residents.
- Not too surprising, in areas where there is a greater penetration of ALFs there is also a greater presence of SNFs with stronger Medicare and private pay occupancy levels. In short, there are fewer ALFs congregated close to SNFs with high Medicaid censuses.
- The states that spend the most on Medicaid waiver programs and HCBS programs have higher penetrations of ALFs compared to states with lower spending levels. There is also a correlation between the percentage of the population with long-term care insurance plans and the penetration levels of ALFs – more ALFs, higher percentage of individuals with long-term care insurance.
Sharpen the Sales and Marketing Efforts in 2010
I lost track this past year of how many people I talked to that told me that, “organizationally, we are kind of stalled in developing new business because of the economy and health care reform”. I know that in down economic periods, promotion budgets (advertising, sponsorships,etc.) are some of the first line items trimmed but to me, that’s not really marketing; more of an adjunctive tool that organizations use, typically with limited impact. I understand the health reform subject creating an air of uncertainty although, for most organizations very little changes immediately post-passage (when and in what form that occurs). The reality of the health reform debate is that for every possible implication there is a strategic opportunity that most post-acute providers can develop, capitalizing on the new policy changes. Further, as I have written in previous posts, Congress has shown very little will-power in terms of enforcing the punitive elements of additional Medicare cuts and as such, while I don’t advocate a wait and see strategy, in this case, a bit of skepticism about how much pain will ultimately occur with health reform is warranted. I’m generally more concerned about here and now health policy problems such as Medicaid and the status of state budgets, combined with an overarching concern that economic recovery has a ways to go to qualify as “fully progressing”. All this said however, and in spite of a still lagging economic recovery, the time is right to sharpen the sales and marketing efforts for this new year.
What is different this year (as opposed to last or years before) is that society is still shell-shocked by the economic fall-out. The traditional rules or approaches to a new year marketing and sales strategy will no longer net the same results. In one regard, it is unlikely that any organization’s sales and marketing budget is “bigger” this year than last or better yet than in say, two to three years past. I am literally unaware of any organization (not that some might exist) that has added substantially more resources (dollars or people) to their marketing area. This means, more will have to be done with less or at least, the same level of resources. To that end, creativity and strategy are the terms that best fit.
Strategically, health care marketing has traditionally been focused on selling three “tangibles”: Convenience (ease of access, location), Quality (outcomes), and Depth of Service (capacity, expertise, etc.). Today, I would add two more focal areas to the mix – Value and Stability. I would also re-work the first three to make certain they were in concert with the latter two. Thinking about the latter two, does anyone really ever say that health care doesn’t cost too much? Even at the heart of the health reform debate, while most Americans don’t want the government to necessarily take over their current health plans, they also openly state that solutions that lower the cost of health care (save government take-over) are a priority. Psychologically, when someone believes something costs too much, the rub is not price but value received for that price, particularly in light of the resources available to pay the price. Without being too technical, in a down economy, people become even more price and value conscious, even those who have been somewhat unaffected by the down turn. The news of job losses, falling home values, etc., reinforces caution and conservatism to people even though arguably, health care when needed can’t be completely, competitively shopped or for that matter, deferred for too long. The trick or strategy thus becomes, how to craft a marketing strategy around a value proposition and reinforce that proposition with the concept of stability. Providers that can demonstrate a consistent track record of stability (low turnover, solid financial management, continued reinvestment in products, services, and physical plant) will undoubtedly lower the level of trepidation present in would be referral sources, current referral sources and patient/resident bases (families/significant others included).
Strategically repositioning the marketing program or plan to integrate value and stability looks something like this at a high level (organization specifics of course, would flesh this out deeper).
- Value and Convenience: Review the target market, especially the primary market area. Can customers and referral sources get to you quickly and easily? Are you fully accessible for referrals across all channels (phone coverage, internet, e-mail, etc.)? Are your coverages for referrals responsive and available across elongated business hours? Weekends? Holidays? Do you have a system in place for dealing with emergency referrals or odd hour referrals? Will you go “to” the referral? Do you or can you automate or reduce the paperwork and approval process on a referral? Can referrals access a website for pre-completion paperwork? The more of these tactics you can integrate into your marketing arsenal, the more you can create a value proposition around convenience.
- Key Concepts: Value and convenience tied together is all about delivering more touch points or connections to your products/services than otherwise available in the market area. In a worst case, it may simply be about keeping up with the competition so as not to lose referrals or business – being as convenient. I like a full embrace of reasonable, simple web-based technology and e-commerce applications where possible. Facebook, Twitter, etc. are emerging tools that no provider should ignore as viable means of getting and staying in touch with potential customer sources or current customer sources.
- Value and Quality: This is all about the quality of your service warranty or the notion that price and outcomes are clearly aligned. Health care leaders today would be well served to take a look at other industries and products where price and quality are clearly packaged, marketed and used as competitive tools. I like reinforcing the concept of, “better, faster, and cheaper”. Adopting this mantra means a consistent review of and communication about, how the organization delivers its products and services to its customers in a way that creates a better outcome, a quicker response or in a quicker period of time for the same price as a competitor or hopefully better. This concept is not about convenience or location, though these concepts play-in. This concept is about warranty or the reliability of the service and an implicit and well-communicated promise that customer’s expectations about the reliability and quality of a given service will be met or hopefully, exceeded. Remember, consumers exist across the price spectrum from low price seekers to high price or premium consumers. Products and services can fare equally well across this spectrum, provided that the service or product is aligned with the price paid and the customer clearly understands what the warranty or promise of the service/product quality is in relationship to the price. Arguably, in periods of economic decline or slow-down, premium priced services or products require the most amount of adjustment as pure luster and past reputation will not alone be sufficient to maintain market share. The opposite side of the argument however, is that products or services once viewed as premium can attract the interest of prospective customers faster if price can be adjusted even modestly and quality increased or warranty improved modestly. Everyone loves a bargain and if the market senses or believes that something once unattainable is now available, new customer inertia can be changed (ala the premium outlet mall concept).
- Key Concepts: Value and quality is principally about drawing a bright correlation between the price or cost of the product or the service and what a customer can expect to consistently receive. This is about creating a distinct and clear warranty or promise of the service’s/product’s utility(tangible) and the cost and communicating the same. Nothing hurts marketing and sales efforts worse than products priced too high in relationship to their utility. Conversely, products or services that are priced too low may be undervalued by the marketplace and perceived as “gimmicky”. Down economic periods place trepidation into the minds of consumers and as a result, it is incumbent to marketers to be aware that holes or gaps in their product’s/service’s warranty compared to the price or cost, must be adjusted rapidly. I am less in favor of price cutting as opposed to perhaps, a price maintenance strategy. I am always in favor of pushing the value proposition by improving quality (tangible outcomes) upward and holding price in check. The key however, is that health care providers need to sharpen their communication around their product’s/service’s warranty and the cost thereto.
- Value and Depth of Service: Can you or do you provide more services or have more service availability than your competitors for the same price? Alternatively, do you do the same things better or identical to another provider from an expertise stand-point for a lower cost or price? This concept is not about “doing more” (not that additional service depth is bad), it is about comprehensiveness within the product offerings. Taken to the core; products or services, even few in number, should be flushed-out fully so that staff providing the service are viewed as experts, the capacity for comprehensive delivery is in effect and the price associated with such an exceptional level of service is of great value to the customer. Thought about differently perhaps, it is akin to a strategy used by Wal-Mart to constantly expand the amount of goods one can buy while shopping, all at a perceived or real “better” price. Now, Wal-Mart focuses on a particular market with a particular strategy but frankly, few do it better from a classic marketing perspective. My point here is not to say health care providers should be like Wal-Mart but to draw forward, the concept of value correlated to depth of service. The same strategy can apply (and does) to more limited product or service offerings. For example, in my community, a jewelry store named Kessler’s has had continued success and growth by applying this concept, although their focus is just on diamond jewelry. Their marketing strategy consistently drives home a depth of experience, service and even products, focused entirely around diamond jewelry, principally for couples celebrating engagements, marriages or anniversaries. Kessler’s, like Wal-Mart, even correlates price to their service and products and boldly so, I might add.
- Key Concepts: This concept is about taking the very core of what an organization provides or does and making sure that it is extremely well thought out, as good or perhaps better than what is available in the market and then correlating this to cost or price, communicating the same to the customer. It is definitely not about doing more, unless that is a real possibility; it is about doing what you do better or to the best of your ability and making sure that the price reflects, uniformly, the depth of service provided. For healthcare providers, I like leveraging internal capacity and programs to do more across the board or to improve other products and services thereby creating a deeper level of service organizationally. For example, if your organization has hospice as part of your service or product offerings, use the hospice to improve your symptom management expertise and pain management programs and then, promote this capability. Every area of excellence can and should be leveraged to improve others or to add new niches, new depth that creates additional value for customers.
- Value and Stability: For lack of better words, this is the foundation in the current climate from which all other strategies emanate. Customers, community and referral sources need to believe and hear over and over that the value proposition created by the organization is permanent and regardless of the current climate, the organization will remain committed to providing the best products/services for the cost or price (whatever and however this plays out within a market or for any provider). Once customers or referral sources believe or feel that a service or product is diminishing or that prices are in-flux (usually upward), the ability of the organization to draw attention to any other key marketing strategy is significantly damaged. I don’t know of too many customers that are willing to trade for a poorer or weaker warranty or accept poorer service or quality for the same price or for that matter, even for a slightly reduced price. In reality, unless the organization was already offering “second-rate” quality or service for a deeply discounted price (ala scratch-and-dent), maintaining and building upon value and stability strategically, is a first priority to developing additional sales.
It should be somewhat apparent (hopefully) now that these concepts wrap around each other and build or feed off each component. From a sales perspective, the marketing strategies above create the tools that sales people need. Improve the marketing strategies and the sales tools are improved. To achieve better sales outcomes, the organization needs to clearly communicate to the sales staff a set of behaviors and activities that reinforces and makes real for the customer, the organizational strategies (illustrated above).
For providers today, the key is not to avoid via less or no activity, the current economic and health policy issues but to strategically and tactically engage them. The economy in my view, has fundamentally changed the consumption dynamics within the market place, for referral sources and patients. The emphasis is on value and that emphasis is unlikely to shift any time soon. The health policy/reform discussions only sharpen the issues around cost and quality. For providers that can leverage their quality and build a clear value proposition, there is no reason to believe that 2010 won’t be a very good year to attract and develop new business and to solidify existing referral sources and customers bases.
CCRCs: Ready, Set, Market!
Not that I am enamored with the current pace of economic recovery or even a true believer in the sustainability of the present trajectory of recovery, there are now enough signs that should encourage CCRC operators hardest hit by the recent downturn to return to an aggressive marketing strategy. Truth be told, no CCRC owner/operator should have abated their marketing efforts during the doldrums period but many certainly pulled back or restrained their spending to coincide with flagging census and revenue periods. As we head now into the new year, it makes sense for CCRCs to pre-ordain the recovery just a bit and move back into a modest-aggressive posture, qualifying and securing new residents. Consider the following if need be, as fuel for a re-tooling initiative on the marketing plan for 2010.
- Existing home sales in most markets is “up” and should continue to stay modestly up as result of Congress extending the first-time home buyer credit. As most seniors considering a move to a CCRC must sell their existing home, now is a good time to re-encourage them to take that step as “activity” for sales remains and should continue to remain, better than any period within the last twelve months.
- Mortgage rates remain low and for the foreseeable future, show no signs of significant upward movement. Lenders while still more cautious in their lending practices, are less skittish and seemingly more willing to write new mortgages for new/existing home sales. Another positive sign for the senior that needs to sell his/her home in order to facilitate that move.
- While still a distance from fully recovered, the stock market has rebounded and helped many seniors recapture some if not the majority of the wealth they lost on paper. For those prospective residents that did not materialize their paper losses into real losses via wholesale selling as the market was tumbling, their wealth prospects have likely improved enough to entertain a possible move into a CCRC. In other words, their economic pessimism measurement has softened enough that good salesmanship and planning can probably sway them into looking at the CCRC as a proper move.
- The New Year brings about a set of opportunities that most CCRCs can capitalize upon, especially non-profits. Within this list is the chance to position against rising property taxes, the ability to offset gains on investment sales with the applicable deductibility of a portion of the entrance fee relegated to pre-paid healthcare, and the advantage (assuming your CCRC has it) of a predictable history of rent/occupancy fees versus rising home ownership costs.
Even with a glimmer of light at the end of the tunnel, no CCRC owner/operator should expect there to be a great deal of pent-up demand. Seniors aren’t monitoring CCRC opportunities and the market and economic conditions favorable for sales – that frankly is the CCRC’s job. The demand for CCRC units is very, very elastic and the more elastic the demand curve, the less attentive and the more fickle buyers are at any given point in time. Even for those seniors on the “hot” prospect list (some who visited, some who have previously paid deposits, etc.), the economic conditions have been such that their profile has changed and they will need a certain amount of reinvigoration. Re-channeling their attention and presenting the opportunities of considering a move again is a tactical and deliberate process as remember, their attention has waned and moved to other concerns.
In order to get “back in the game” so to speak, a CCRC’s marketing approach may need to be tactically tweaked. The next generation of marketing plans will need to be different, for quite some time, from those of say two years ago. I’ve listed below a series of ideas and concepts that should work and ideally, be incorporated into an updated marketing plan or at minimum, a review of existing marketing plans.
- Review and Re-Work Entry Fee Pricing: CCRCs need to critically review their entry fee structures and make sure that their prices reflect the residential real estate trends in their primary markets. If entry fees are at a significant premium to residential real estate values (current), the required value proposition is out of alignment and new sales to new residents will be difficult. Consider adding new options for financing, lower entry-fee levels in exchange for less refundability, less guaranteed healthcare, and/or quicker amortization. Offer buy-up plans for additional healthcare guarantees allowing new residents to gain entry (with lower benefits) but still buy additional healthcare (if qualified) at some point certain in the future. Bottom line: If a CCRC does not have pricing that is reflective of the current real estate and general economy in its market area, no marketing plan ever created will budge new sales enough to justify the expense of the activity.
- Re-Evaluate Your Value Proposition: All CCRC sales (or at least nearly all) are to prospective residents with enough financial means to pursue a myriad of other options. To hone in on prospects and convert them to residents requires the CCRC to qualify a value proposition that makes emotional, social and economic sense. In order to fully understand the value proposition, re-survey current residents, analyze the trends in the market place (economic and other) and the healthcare trends in the market area as well as regionally and nationally. Finally, take all of the gathered intelligence data and place it on a plus/minus grid that can be qualified against the price of moving into and staying within your CCRC and be prepared to make adjustments (if possible) to any weak areas or at least, to intelligently counter the weakness with a positive intangible (assuming the intangible is weighty enough to offer a counter-balance impact).
- Market the Current, Not the Past: Remember, CCRC sales are fairly esoteric and always occurring across a very elastic demand curve and as such, psychology is as important a factor as economics. Marketing the current means getting in experts in areas such as real estate and investments that can speak to how things have changed and why the progression is now forward. These “current” condition testimonials help to create a new thought paradigm for the senior, moving from “pulled-back” to “ready to explore”. If the CCRC can sell optimism, promise and a sense of positive energy now and going forward, the senior is much more likely to re-explore the move opportunity.
- Update Tactics: Sales will now occur in a totally different environment and as such, tactics need to be updated. The United States has just bottomed-out from the worst recession since the Great Depression and been through a period of economic decline unwitnessed by most, including potential new residents. New sales will need lots of consultation, creativity and reinforcement. Sales persons will need to be re-trained to understand the mind-set and to provide new information and new resources. The CCRC itself should be well-armed with a multi-media approach, fully deploying web technology, e-mail, radio and television, print, and direct mail. If a sale two years ago took six touches to get through the qualification process, the sale today will take double – be prepared and expand the number, quality and accessibility of possible touches.
- Focus on Brand/Focus on Information: Effective CCRC marketing requires a solid brand and a commanding presence across the range of housing options within the marketplace. If your CCRC is not a “destination” for seniors and senior related information, it needs to be. Build rapidly, the number of resources that the CCRC can deploy to seniors throughout the market with respect to finances, economics, real estate, healthcare, etc. Information is key to keeping seniors engaged with the project and to qualify consistent, high-value leads. Most important, brand is built on reputation and consistency and if the CCRC has not consistently stuck with an aggressive marketing campaign, even during the downturn, reinvigorating brand will be key to building a solid constituency of prospective seniors.
Even though most CCRCs won’t feel or see results right away, getting back into the game now, slightly ahead but in pace with the gradually recovering economy will be key to reaping new sales and staying positioned as the recovery hopefully, gains additional momentum in 2010.
Healthcare Reform Update: Inside Baseball Time
If you are a baseball fan, you’ll appreciate the correlation between a baseball game and the present course of healthcare reform. A baseball game starts with anticipation and fanfare; speeches, the throwing out of the first pitch, the national anthem and the players taking the field. The fans settle in and the game begins with cheers for the first hit, the first strikeout or the first double play. As the game progresses, the typical fan loses a bit of interest and seemingly, little is happening across the middle innings. People begin to mill around the stadium, seeking concessions or the restroom and the scoreboard becomes more of a video game/entertainment center, trying to keep fans engaged and entertained as the game appears to offer little excitement at the moment. Nothing going on, right?
The course of healthcare reform has now entered the middle-innings. The fanfare of the opening ceremonies and the introduction of various bills and propositions, the committee work and the initial passage of the “first-cut” of legislation has passed. The news is now technical and policy oriented just like the stats laden reporting in the middle of the baseball game. Polls show people have turned away; headed to the concession stands or the restroom until the cheering erupts again. Frankly, it is tough to watch as little substantive seems to be happening at the moment. Who wants to hear about more stats and trivial poll data? Does anyone really care about the current batter’s hitting streak over the past two weeks or the pitch count (or the fifth poll of the week comparing the last four polls of the weeks prior)?
So, if you like subtlety, drama, a bit of intrigue and the nuances of the game, you’ll appreciate this Inside Baseball view of healthcare reform. Just like the middle innings of the baseball game, a lot is going on that will definitely shape the action in the latter innings; or, in this case, the actual votes on the respective floors.
- This period of time is all about “vote counting” for the Democrats in the House and the Senate. As of right now, there are not enough votes in favor of a bill containing a “public option” – at least not the fully loaded version. Speaker Pelosi and Majority Leader Reid in the Senate will be posturing different options back and forth to gauge where the tolerance level is and in what form for any kind of a public option. They also will be discussing a “trigger”; a clause in the legislation that will kick-in a public option in the event certain provisions are not met (such as number of insured, access to low-cost healthplans, etc.).
- There is a budget buster monster that both the Senate and the House have to deal with and that concerns physician reimbursement under Medicare. Right now, physician fee schedules are tied to GDP growth and the lack of GDP growth (actual shrinkage) in 2008-2009 would require a cut in physician fees under Medicare. In order to provide for a modest increase in MD payments, Congress needs to infuse an additional $250 to $500 million into the fee schedule. This amount is in-addition to the cost associated with the various healthcare reform proposals. The Senate version (the Baucus Bill) skirts the issue a bit by offering a one year fix with a higher level of taxation as an offset. The House has tried to remove the issue and deal with it outside of the healthcare reform activity. No matter how each side deals with the issue, the price tag is large and physicians are a powerful voice in the process. Make the doctors unhappy and the prospects for major reform become dimmer by the day.
- The financing of the legislation is still a major issue – in both the Senate and the House. Two major components will bear the majority of the scrutiny; Medicare cuts and taxes. Despite the rhetoric from the President regarding “savings” under Medicare, the reductions in Medicare spending in the healthcare reform bills are cuts in spending – not gains via reduced fraud or improvements in efficiency. Medicare cuts and programmatic changes raise the ante for seniors and providers (including physicians). Taxes, especially in the Senate version, are already being targeted by fiscal conservatives and anti-reform proponents as a breach of the President’s promise not “to raise taxes on the middle-class” and as a huge added cost to private insurance policies.
- The issue of whether any final reform package can be truly deficit neutral will continue to be debated in the background and the foreground. A great deal of pressure will be put on the CBO to use the most creative math possible in forecasting the costs associated with any final bill brought forward for a vote. As of right now, neither major initiative as each stands is anywhere close to budget neutral – regardless of what is being said on the Hill.
- Where does the President stand? The President and the White House are oddly silent on their exact preferences and as a result, no one is quite sure when and if, Mr. Obama will attempt to push a particular package forward. The reality is, the President is quietly maneuvering behind the scenes, watching and charting, hoping to make a move at the opportune moment. To date, his moves including his speeches, have been less than effective in getting any piece of legislation closer to passage.
- Polls, elections and timing are all being gauged carefully now. Similar to vote counting, each legislator that faces an election battle in 2010 is carefully counting the days between a possible vote and the scheduled primary. Poll results that continue to show an anti-overhaul sentiment nationally or in a particular region will definitely influence a legislator as time ticks closer to election season. In other words, the reform window will only be open so long for a number of legislators and therefore, forging a workable, viable plan is urgent business for the Senate and the House.
- Finally, the economy is behaving like a two ton weight that each party is carrying at the moment – one uphill and the other down-hill. The Democrats, as the party in power, must carry the weight uphill and cannot trip over healthcare reform as they go for fear that the overwhelming weight of both issues will send them crashing down, ultimately buried by the weight of both issues. For Republicans, the weight is carried down-hill as they can use the deficit, the costs of healthcare reform, and other news of slow recovery to their political advantage. The trick however in carrying a heavy weight down-hill is not to let gravity take over, pulling you down so fast that you lose control and tumble, risking the weight crashing down on you.
To close with some baseball lingo, don’t be surprised to see a squeeze play, a double-switch, a hit and run, and possibly even a steal or two go on over the next few weeks. Remember, this is the middle of the game and a rhythm and tempo has been set. Each party is charting the course of the game and has sufficient data now to begin to try to out-maneuver the other party. Most of the moves will be subtle and may bear no relationship to what appears to be happening at the moment but rest assured, this is the time where the game is truly, most often, won or lost.
Healthcare Economic Outlook
As my work is focused on healthcare and more succinctly, post-acute healthcare and senior housing, I follow overall economic trends and conditions and translate the same for the healthcare economy. As healthcare remains a private industry today, albeit one that is heavily tied to the Federal government, the general economy does impact the healthcare industry. Arguably, as with the current state of the general economy, public policy has the greatest ability to impact the healthcare economy, in the short-run and structurally, for the long-term.
Healthcare is the largest private industry in the U.S. economy, accounting for 17.5% of GDP. The U.S. spends more on healthcare in total than any other country in the world and when taken as an economy by itself, the U.S. healthcare economy (in total dollars) is larger than the GDP of nearly all world nations save five (Great Britain, Germany, Japan, China and France). This means that the U.S. spends more on healthcare for example, than the total dollar value of the Canadian GDP. Its economic wealth and value as part of the U.S. overall economy is enormous and as many would argue (and we agree), its prospects in the future as related to the overall U.S. economy are critically important.
Today, the spending profile on healthcare in the U.S. is at the center of public and governmental debate. The rate of spending on healthcare as a percentage of governmental budgets and personal or household budgets continues to grow at rates exceeding the rate of consumer inflation. As a percentage of governmental budgets, healthcare spending is practically unsustainable in its present form without significant modification to the financing side of the various entitlement programs. In other words, without a broader and deeper taxation base, there is no way that governmental healthcare spending in its present form and at its present trajectory can be sufficiently paid for. The forecast for example for Medicare in its present configuration shows a $46 trillion deficit over the next seventy-five years.
Important to understand about the healthcare economy is the role two separate parties play; government and the private sector. In 2009, government spending as a percent of total healthcare spending will represent 30%, principally on Medicare and Medicaid. There are estimates from various sources that within three years, government spending will account for 50% of all healthcare spending in the U.S. I of course, am skeptical that the amount will rise to quite this level but agree in principal that government entitlements will continue to consume a larger share of total spending in the near future. The largest driver of increased government spending on healthcare is U.S. demographics; an older population living longer, particularly with chronic disease and disability. Another driver of this trend is the economy itself and public policy. As governments continue to create more entitlement programs (state and federal) with easier or more fluid eligibility criteria, the government effectively “buys” more insureds or beneficiaries. An example of this is the changes to SCHIP that increased the income level for eligibility and increased federal funding.
The private portion of the healthcare industry is not directly connected to the government portion but interdependent nonetheless. As government becomes a larger and larger consumer, the inadequacies of government payment and the inefficiencies and bureaucracy of government programs add costs to the private portion of the industry. For many provider groups, government programs are the largest customer (e.g., nursing homes) and therefore, the largest contributor to inflation realized by the provider. Arguably, no other private industry has as much of its economic outlook and revenue and expense profiles controlled by government as healthcare. When the private industry portion is reviewed and its inflationary profile examined, one cannot discount the large role government is playing in contributing to the increasing costs and declining real revenue via reimbursement, arising from its own bureaucracy and legislative tinkering.
Given the present public policy environment, my outlook for the overall healthcare economy through 2010 is somewhat less clear than perhaps at any time prior. I assume that the continued reform debate will produce some legislation though my assumption is for a package that is significantly different than what exists in HR 3200 or the Senate companion, Baucus bill. Below are my general economic and policy assumptions for the healthcare industry.
- My forecast is for inflation to run at 10% in 2009 and slightly lower in 2010 – 9%. History indicates that economies in a recession and then in the early stages of recovery produce higher healthcare inflation as a greater share of GDP is consumed by healthcare. Further compounding the inflation problem is the relative weak value of the dollar and the higher interest or debt costs providers are facing as a percentage of revenue (revenues in the industry are flat or slightly down). Even though interest rates are at historic lows, providers are finding that the debt markets are less than open for refinancing.
- I expect bad debt to continue to run higher than in prior years as typically, every 1% increase in unemployment produces 1.1 million uninsured citizens. Even though non-urgent and elective healthcare spending has fallen, care will still be required by people who have less means of paying for it now and in the near future than two to three years ago.
- I continue to believe that the credit markets will remain fairly tight through all of 2010 and while interest rates will remain lower than normal, the accessibility of credit will be tighter than recent past. This assumption means that credit may likely be accessible but appraisals will continue to produce lower than historic values and creditors will require more equity as a condition of financing.
- I am forecasting only modest increases in supply costs and energy costs, unless of course legislation such as Cap and Trade becomes law. The continued weak economy, even with a modest growth profile, will not produce inflation across these commodities in more than modest amounts.
- The non-specific, general labor market will remain favorable for providers although the skilled, allied health professions will remain competitive, especially in certain clinical areas such as pharmacists, nurses, and physical therapists. Combining the two pools, I see minimal wage inflationary pressure on the horizon as jobless rates will remain high. On average, I see overall wage and benefit increases averaging less than 3% and certainly, could come closer to 2.5%.
- Without a general shift in unemployment looming and a more rapidly growing economy coupled with new insurance mandates from Washington, the trend toward high deductible health plans and Medical/Health Savings Accounts (MSA and HSA) will continue. Plans such as these impact health consumption as consumers seek lower cost treatment alternatives or forego non-urgent medical care entirely.
- As a result of the point immediately above, I continue to see a strong growth profile for non-institutional delivery models of care such as clinics within grocery stores and Wal-Marts. I also see strong growth for continued use of generic medications although the total number of generic alternatives to brands is relatively saturated with no high dollar brand patents set to expire in the near term.
- Merger and acquisition activity will be strongest in the pharmaceutical and bio-tech segments, as has been the case in 2009. While I believe this activity will also pick-up in other segments, the dollar value of transactions and the overall number will continue to be down from prior years.
- Capital spending trends will remain depressed for the balance of the year and 2010 across the industry, principally due to financing availability and a continued focus by the industry in general on achieving margins. I believe this is an area of concern going forward as inadequate investment levels for infrastructure and aging plants could produce negative equity worth and operating inefficiencies across the industry.
Assisted Living/Senior Housing Update
For the past nine months we’ve watched the cap rates trend up, occupancy trend down and the transaction market remain stagnant. The credit crisis of one year ago definitely chilled the “buyer” side and as a result, shoved values downward. The deals we did see done were few and far between, lots of one off deals in regional markets and clearly, value plays. Where we did see some larger deals in the works, these deals were slow in closing and in some cases, did not close at all due to appraisals that did not support the purchase price or sellers that were unrealistic about values once the appraiser confirmed the “lower” market value.
Despite the fact that the credit markets haven’t really expanded dramatically and lenders are still a bit gun-shy and conservative on terms, we are seeing the makings of more deals and predict that the third and fourth quarter will see more closings. The two biggest factors contributing to this “modest” rebound in market dynamics and deal dynamics are sellers coming to terms with where the values are today and occupancy rates that have moved upward (in general) across the industry. This is not to say that these occupancy increases have come without a price as many providers have been forced to get creative in terms of discounting and packaging to fill incremental units. Incidentally, as the residential real estate market is still lagging in most geographies, we don’t see the discounting trend to fill units abating any time soon. Many markets are border-line overbuilt and/or close to saturation and as a result, demand is still lagging compared to the supply of units available at traditional, pre-recession price per unit levels. In short, providers will still be challenged to stay creative if they wish to keep their occupancy numbers trending upward or stable. Interesting to note is that in comparison to a year or so ago, the incremental additional unit sales for most providers are not contributing to profitability at the same rate as a result of the discounting that was required to fill these units. We believe that it may take as long as an additional year to wash this effect through the market, essentially returning to post-recession per unit pricing levels in mid 2010 or the third quarter of 2010 (of course, some regional markets may take longer and some may recover a bit quicker).
On a product level, Assisted Living facilities that offer a higher-level of care within a more bundled pricing structure have tended to weather the down times better. For example, we have seen better performance and stronger occupancy levels from facilities that “specialize” in areas such as memory care and/or are specialized to a targeted population such as extremely frail elderly. Additionally, facilities that are connected with an SNF, CCRC or hospital have performed better than those that are free-standing. This trend may remain for quite some time as the maturity of the market implies that the next step toward success for the Assisted Living industry is less real-estate focused and more program and product specific. Without question, values in the industry will rebound but likely not soon to the to the pre-recession levels witnessed in 2007 and early 2008. For free-standing facilities, especially those that are non-distinct in terms of their product via a specific program or other twist (connected to a CCRC or SNF), their value expressed in a CAP rate may not return anytime soon to 2007 early 2008 levels, especially if they continue to struggle for occupancy or have to discount fees to attain higher occupancy levels.
In specifics, this remains a Buyer’s market for Assisted Living facilities. Sellers should continue to be prepared to be creative and reasonable if they wish to sell their property. What is reasonable? As few sellers are attempting to rid themselves of Grade A properties, the majority of the market is full of product that quite honestly, has some “hair” on it. By “hair” I mean either a dated building or a building in need of some improvement, one that has some occupancy problems or both. Sellers also need to be conscious of the market area in which they are attempting to sell their properties. Regardless of what anyone quotes as deals done with a particular cap rate of “X”, the reality is that cap rates are regionalized and definitely market specific. In other words, a deal done at an 8 cap in suburban Illinois does not translate to the same cap rate for a deal looking for a buyer in suburban Green Bay, Wisconsin. Similarly, rural markets and even over-bedded suburban and urban markets can dramatically influence pricing and valuations. Even facility size and of course, age of plant can have a dramatic impact on what a Buyer is willing to reasonably pay for a particular property. In some cases, Seller creativity can also play a role in what level of deal is attainable. Sellers, for example, that have some wherewithal to assist with financing either via a land contract or a similar lease to own or installment sale clauses can add value to the transaction without taking a “price haircut” to get the deal done.
On the Senior Housing side (non- ALF), the market remains rather tepid. Similar to the ALF side, financing is difficult to obtain and values are down, though not as dramatic as in the ALF market. Perhaps the strongest product remains the CCRC and as such, precious little volume in terms of transactions is occurring. Occupancy rates in this product are wide-ranging with nearly all markets seeing a continued softness in demand, though some far less so than others. Free standing, older congregate style (apartments) remain the most common type of property on the market and cap rates seem to have stabilized for the most part, north of 9. Again, markets and regions play a major factor as does the actual property, in terms of what cap rates are tied to what deals. For example, I have seen listings with occupancy problems seeking a 7 cap that have been on the market for a substantial amount of time – wholly unrealistic. I’ve also seen decent properties, solid A minus or B plus facilities that as little as a year or so ago that would have sold in the 8.5 cap range sit, even though the pricing is negotiable above a 9.5 cap. And still, I see properties close at 10 caps and higher; deals that literlly make sense. Projects that remain fairly attractive in the market are modest to lower income sites with stabilized occupancy, a clean building and are tax-credit financed or HUD financed. As the initial owners/operators explore the “out” windows in these deals, buyers still seem willing to step in and pay solid prices for these properties (no wonder).
Where the ALF market will take perhaps another year or more to recover, the Senior Housing market appears to be less far away from recovery. New development is still occurring, though not at the pace it was a couple of years ago. Lenders also seem to be a little more willing to work on straight senior housing projects, perhaps because the real estate component is the majority of the finance. Older projects with deferred maintenance or occupancy issues will still encounter wary buyers and depressed prices. A seller needs to be particularly cautious and understanding of the economics of the market and his/her property. If for example, the project is older and needs some upgrades, a buyer will be looking to acquire the property based on the “up-side”, necessitating a pretty solid discount to replacement cost. If the market area has a depressed economy and modest to declining wealth demographics, the buyer will be cautious and may have to seriously consider a re-development or re-packaging stategy to turn the project to profitability post-deal, again necessitating a more sizable discount than perhaps, the seller had considered. In summary, the projects most likely to find buyers are those that are priced at 50% to 60% of replacement cost, in decent economic markets with solid demographics, and can be viewed as having “up-side” potential, either in terms of additional occupancy, additional room for expansion, or capital upgrades that can position the project for new, higher rent paying occupants. A final word of caution for sellers is to be extremely cautious about current pricing for current tenants and the occupancy demographics thereto. Depressed rents, while presenting an up-side to a buyer in theory, may also foretell a problem that a buyer does not wish to inherit; having to play market “catch-up” with a tenant base that cannot afford it or within a market area that will view rapidly rising rents as “negative”.
On a final note, for non-profit owners of ALFs and Senior Housing projects, the most fertile ground for transactions today remains sales to or mergers with, other non-profits. The economics make far more sense for a non-profit to seek another non-profit as a partner and value can be extracted out of the deal for the “seller” in ways that a true asset sale to a for-profit buyer would never allow. This is not to say that a non-profit owner should seek exclusively a non-profit buyer, especially if the product for sale has solid occupancy and is well positioned in the market. It does mean however, that non-profits can leverage value and take advantage of a presently, more flexible and fluid market for transactions, by exploring a transaction (merger, other) with another non-profit – food for thought for non-profit buyers and sellers.
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