Senior Housing and the Real Estate Market – Status
While we are seeing incremental occupancy gains in senior housing, the increases are slow but steady. Is there a leveling-off point upcoming? Perhaps. Regardless, even with the recent history of gains, there is a reason to be a bit skeptical for some product types to continue to improve. My skepticism rests at the Independent Living product level, specifically on above-market rate units and entry fee units. The reasons are the real estate market and the economy.
IL housing and CCRC IL units are interconnected with the residential real estate market. Though demand for these product types has proven durable, the demand is highly price elastic. In other words, as these product types tend to be rather pricy, higher than comparable living conditions, economic forces that constrain value (either real estate or estate), shift demand away from higher priced product offerings. Today, the real estate market with its conditions somewhat similar to 2008-2010, is creating a negative drag for senior housing demand, specifically, entry-fee units and high-end above market rate IL units.
Per NIC (National lnvestment Center), while occupancy levels for IL improved in April 2023, the same remain 4.4% below pre-pandemic levels for the same period (March 2020). In the major metro areas that NIC tracks data, only 4 markets out of 31 have moved back or above, pre-pandemic levels (e.g., San Antonio and Pittsburg). Interesting to note however, is that the recovered levels still reflect occupancy averages below 90%.
Demographic trends for senior housing remain solid and new inventory is almost non-existent due to high development costs (interest rates and construction supply and labor costs). These forecast opportunity for occupancy improvement BUT, residential real estate conditions (current) create a significant drag. Higher interest rates (decade plus high) and tighter lending conditions plus a Fed Reserve that is not consuming mortgages today, suppresses buyers. While home values expressed as prices are stable to slightly increasing, the liquidity conditions necessary for homes to be fluidly sold (ready credit, favorable lending conditions), are not favorable today.
Below are some of the current non-favorable residential real estate conditions that are dragging home sales and thus, keeping seniors tight to their residence (and out of a CCRC/IL move queue).
- Supply of homes for sale overall is low, much due to existing residences with low interest rate mortgages (below 4%). These low rates make it exceptionally difficult for the current owner to sell and buy a new home with an equal cost-factor (same mortgage level).
- Zilllow is forecasting home prices to increase modestly over the next two to three years: 3% range with a peak or event slight fallback, possible. The cause is rising interest rates, credit tightening and an increase in housing supply but primarily, rental supply.
- The Case-Shiller/S&P Index for home values/prices illustrates a significant slow-down in home values. As long as mortgage rates remain high, combined with tightened bank credit policies, home values increases will be slower than 2019 to 2020.
- Mortage rate forecast track close to inflation expectations. Most economists believe inflation will remain higher than pre-pandemic levels for at least the next twelve months. While a recession will likely cause Federal Reserve rate reductions, the depth and strength of a full-blow economic slowdown will also, hurt home sales. Recessions typically come with job losses and job losses/higher unemployment drive buyers away from residential home purchases, pushing more people into rental real estate options.
Another overall set of numbers I am watching in conjunction with CCRC/IL demand tie to returns on investment assets or asset classes. CCRC movement in terms of new entrants is yes, impacted by the liquidity of residential real estate but similarly, by the overall condition of the economy. Social Security increases boosted incomes but, the reduction in overall estate values tied to other asset classes, puts a damper on the estate values of seniors. Reductions in investments and estate values, even if real estate prices remain solid, create a general sentiment of negativity such tha timing of making a major CCRC entry fee investment is viewed less favorably. Higher-end IL options are living choices not typically, living requirements. Sentiment, feelings about where the economy is at and where the health of an estate is at, propel or drag, investment and moving decisions. Today the sentiment is “drag”. Below is a graph illustrating inflation, the home value index (Case Shiller) and the Bank of America/U.S. Corp. Total Investment Return index tracked by the Federal Reserve. The blue line is CPI, the red line is the Case Shiller Index, and the green line is the Total Return Index.
While the Case Shiller trend has been modestly up and then steady to slightly down, the investment/total return index has been on a down trend for nearly three years – since September of 2020. Until this index comes closer to the inflation index which, will only really occur as inflation moves down, consumer sentiment about the economy will remain soft. This soft sentiment for senior adults with few years of life left for recovery, creates the pessimism around moving and investing in a higher cost, higher end lifestyle in CCRCs or high-end rental projects.
My outlook is for a softer demand cycle as long as economic conditions for investments and residential real estate remain proximal to their current position. Seniors will have less opportunity to liquidate a primary residence and while those that do will receive decent prices, their overall estate values in terms of real estate and savings, will have shrunk in real purchasing power. Inflation reduces wealth and purchasing power. The cures unfortunately, are a bit brutal and tend to impact middle class seniors the most, especially those in the prime age demographic for CCRCs and IL housing. Operators are going to have to continue to market and be creative and likely continue to use incentives, to gain incremental occuppancy.
Insight: CEO Turnover
During the pandemic and continuing somewhat through current, healthcare turnover has been on the rise. Nursing turnover (from direct care) and retirements exploded by mid-pandemic. Burnout was high as was job dissatisfaction. What became evident is the linkage between staff turnover and staffing difficulties along with COVID policy, and CEO turnover. While 2021 turnover was proximal to prior year norms, 2022 is showing an increase as the pandemic wanes but other headwinds increase.
According to Challenger, Gray & Christmas (executive outplacement firm), there were 62 hospital CEOs that called it quits in the first half of 2022 versus 42 in 2021. The impact is actually a bit more pronounced as the overall number of CEO positions has declined due to consolidations and closures. This same source indicates that the primary causes of turnover are COVID burnout, rising capital costs, capital access constraints, and staffing. Financial pressures due to these factors, evidenced by multi-billion-dollar losses at even the largest systems (Ascension $4.7 billion, CommonSpirit $3.7 billion) further contribute to turnover.
Senior Living/Post-Acute care is walking an almost parallel line in terms of turnover at the CEO level. Longer term, large provider executives are at retirement ages. The industry has not generated younger executive leadership in proportion to the positions that are turning. Talking with some of the larger recruiting firms specializing in Senior Living (e.g., Witt/Kiefer), even prominent positions at large non-profit organizations are struggling to source qualified candidates. The experience levels across the expanding system offerings (e.g., hospice, home health, post-acute services) aren’t universally held in various areas. Demand is high but quality candidate numbers are lower than say, 10 years ago. Further, market challenges in some areas such as high litigation, (low) available staff numbers, and changing demographics (think Chicago, Detroit, Portland) place boundaries on candidate opportunities. Simply put, many candidates have no desire to relocate to challenged locations.
Looking at key position availability by title, LinkedIn shows over 6,000 executive director/C-level openings in senior living. By comparison, LinkedIn shows hospital C-level openings at 738. The average tenure today for any healthcare CEO is a smidge over 5 years. Twenty years prior, the average tenure was between 10 and 15 years. Below are some interesting CEO turnover data points from Becker’s Hospital Review.
The average hospital CEO tenure is under 3.5 years.
• Fifty-six percent of CEO turnovers are involuntary.
• When a new CEO is hired, almost half of CFOs, COOs and CIOs are fired within nine months.
• Within two months of a new CEO appointment, 87 percent of CMOs are replaced.
• Ninety-four percent of new CEOs without healthcare sector experience believe extensive healthcare knowledge is not necessary to replace senior management positions.
• Eighty-nine percent of people involved in the hiring process believe a broad area of business expertise is beneficial in a hospital CEO position.
• Most new hospital CEO candidates come from a venture capital/private equity industry background (42 percent,) followed by finance and accounting (40 percent,) banking (32 percent) and marketing and sales (19 percent.)
An element not often factored into CEO turnover is the ripple effect. According to the American College of Healthcare Executives, the departure of the CEO is followed by departures of 77% of Chief Medical Officers and 52% of Chief Operating Officers. I have seen wholesale executive staff departures (CFO, COO, CPO/HR, etc.) in less than six months post the departure of a popular/effective CEO. In rural settings, the loss of a healthcare CEO can be even more painful as the executive role within the community in terms of service on various boards and civic organizations is lost with the vacation.
Addressing CEO turnover today is a function of understanding the key contributing factors. Below is a solid list that I have compiled over the past three or so decades of my work in the industry.
- Difficult relationships between the CEO and the Board
- The regulatory and reimbursement environment is becoming more challenging
- Profit motives out rank care strategies and growth
- Cultural misalignment
- Geography/location
- Challenges with helping board members understand their roles (often, board members are appointed/recruited from within, without proper training and onboarding)
- Capital access challenges
- Staffing challenges/building and maintaining a core team
- Compensation and benefits (an inability to maintain competitive compensation)
Given the above, and the fact that the majority of turnover is non-voluntary today, the industry volatility creates planning challenges. With average tenure at right around 5 years, constant and consistent succession planning for the healthcare organization is required. I’d argue, given the overall lack of qualified candidates that can be source externally, an internal leadership development process is preferable. What I have seen is that internal candidates tend to create less ripple turnover and have an advantage such that they know the culture and organizational capacity. The downside, however, is that internal candidates can have too many organizational biases and bred relationships such that creating change and new strategies that challenge the status quo (we’ve always done it this way), becomes difficult if not, improbable.
Senior Housing/Senior Living Debt Review
Senior housing in the form of CCRCs, Independent Living and Assisted Living (including memory care) is a large user of debt financing. While equity has become more prevalent via increasing private equity interests in senior living, operators, especially non-profits, continue to rely heavily on bank and bond financing. Private equity and venture capital investment trends tend to curve toward newer projects, acquisitions, healthcare offerings on the post-acute side (home health for example) and other ancillary businesses (SNFists/intensivist physician practices, pharmacy, therapy). Given the current economic conditions and banking environment, now is a good time to take a look at where the senior housing/senior living industry is from a financing perspective.
Perhaps the largest current concern focuses on existing debt that comes due in 2023 and 2024. The industry will see billions of bank and bond debt that matures or has variable rate features that will reprice across the next twelve to eighteen months. Two challenges thus exist. First, the cost of capital, expressed as interest rates, is higher now than it has been for the last fifteen years. While the rate environment (expressed as climbing or falling) seems to tack to a stable point, inflation has yet to fall to Fed target levels. As long as inflation remains high, the risk of the Fed continuing to raise rates remains. Effectively, expiring debt that requires refinancing will cost more going forward. Debt that is variable and repricing will cost more. Depending on the rate increase level, providers may face significant margin erosion and/or operational drag as debt service costs increase. A chart of the last twenty years is below. More analysis is also available here: <a href=’https://www.macrotrends.net/2015/fed-funds-rate-historical-chart’>Federal Funds Rate – 62 Year Historical Chart</a>
The second challenge is capital access. While rate is a concern, accessing capital is also a concern as lending conditions have tightened due to bank capital structural changes and generalized commercial credit concerns – real estate in particular. Valuation challenges also come into play such that operators/owners may find the overall value of their projects has changed, negatively so. Credit access is not only a function of real property collateral (value) but also, the strength of operations to meet debt service requirements. With occupancy challenges remaining, though improvement is occurring, and costs rising faster than revenues in many organizations (labor, energy, supply), credit profiles for providers (owners) have changed – negatively. In short, the spigot of available capital is less open now than it was, pre-pandemic.
The pandemic slowed the pace of property improvement and to a certain extent, the deferred maintenance “bill” for needed improvement is now coming due. Per NIC (National Investment Conference), across 31 markets that they track for senior housing data, two-thirds of the communities in these markets are old and in need of improvement – redevelopment or major upgrade. This of course, begets a need for capital and today, the capital availability is not as prevalent as five years ago and the cost of the capital, three to five times more expensive.
When improvement is required, capital access and cost are relevant but so is the cost of the improvement. The industry is seeing a bit of a perfect storm (currently) as capital is more expensive and construction costs are as well. In this scenario. project feasibility and payback conditions become stressed. Infrastructure improvements or community updates and refreshment may be required just to retain occupancy or to manage market share BUT the same may beget no new revenue or minimal revenue increase opportunities, not proportional to the investment. For many of these older communities, market location and property composition are such that significant increased revenue opportunity is unlikely. Given this prospect, the alternative to improvement via financing may be for some, merger or affiliation. See my post on this topic here: https://wp.me/ptUlY-tH
Bank debt/lending continues to be the primary source for capital but recent banking failures have tightened lending activity. We saw a bit of improvement via mini-perm lending at FYE 2022 but even there, overall loan volumes remained down compared to pre-pandemic levels. Balances did stay near all-time highs for housing but nursing care balances reduced. Construction lending remained soft and I suspect, it will continue this trend for the balance of 2023 and into 2024. Nursing care construction lending remained suppressed and senior housing construction lending sat at a quarter of 2016 levels. A good overview from NIC is here: NIC_Lender_Survey_Report_4Q_2022_FINAL
What I’ll be watching are default levels and loan volume (new levels). If we see a condition of softening rates later this year, volumes will lag but loans in-queue will tick-up. There is definitely some pent-up demand for capital and any condition or combination, of softer rates and lower construction costs due to a recession or slower overall commercial activity will ignite senior housing capital access demand. I’ll also pay close attention going forward, to default or pre-default conditions that motivate additional acquisition and affiliation deals. Softer valuation levels are good for buyers that have existing capital capacity or in some cases, equity raised capital, ready for investment. The key is patience and market conditions that produce deals that have inherent, accretive value prospects.
Friday Feature: Three Trends to Watch
TGIF! This Friday, I’m focusing on three trends that I think, will have a major impact on healthcare and senior living for the balance of the year and likely, at least the first half of 2024. These trends are in no particular order.
Banking and Credit Struggles: This past week, the Federal Reserve provided some not too encouraging data and outlook on the banking sector via their regular Fed Survey. According to the quarterly Senior Loan Officer Survey, the number of banks increasing loan terms of industrial and commercial loans rose from 44.8% to 46% at the end of 2022. No doubt, this percentage is higher (still) for the first quarter of 2023. Among the conditions driving this tightening are lessening liquidity (deposit level shrinkage), credit quality deterioration (poor performance on loans issued/held), and significant reductions in borrower collateral positions. Loan demand, principally due to higher interest rates, is also significantly trending down for 2023.
Credit tightening and fallow credit demand are typically, signs of weakening economy and a possible recession. The challenge for senior housing and healthcare is that these industries tend to be almost recession proof and always, in need of credit for primarily, plant, property and equipment investment. The senior housing sector is a large consumer of credit for ongoing improvements and for expansion or merger/acquisitions. Likewise, the sector is vulnerable somewhat to rising interest rates as a significant amount of current debt is variable vs. fixed. Quick rate increases place loan covenants at-risk for default.
While I see an end to Fed rate hikes, I don’t see an end to inflation in the near term. With recent CPI (Core inflation too) running around 5% and the Fed funds rate, at 5% to 5.25%, we may see a “hold” period while the Fed waits for the lag effects to further diminish inflation. What is for certain, the current economic conditions will be significantly impactful for the healthcare/senior housing industries for the balance of 2023.
Employment/Labor: For all of healthcare, this is a major concern as demand exceeds supply in nearly all categories of employment and most acutely, for bedside/direct patient care staff. A possible recession and other industry slowdown will benefit healthcare and senior living via increased numbers of non-clinical staff needing work, but that same effect won’t move the supply “needle” on clinicians, especially nursing.
The trend here that I am watching is a bit nuanced. I’m watching the regulatory responses around staffing mandates, particularly in senior living/skilled nursing. The Biden administration has said, along with the 2024 SNF PPS rule that a staffing standard is forthcoming. We have yet to see it but states, such as Connecticut are somewhat ahead of the Feds. But, as of late, reality is beginning to settle-in; namely, the funding cost reality. Connecticut posed a per day increase in hours per patient from 3 to 4.1, along with ratios for certain positions. Both long-term care associations lobbied against the bill stating that while desirable for the industry to accomplish these levels, the reality is that supply won’t allow it. The state Office of Fiscal Analysis said the bill would require an increase in Medicaid spending by $26.6 million in 2025 and $15.5 million in 2026 and 2027.
Pennsylvania ticked-up staffing levels from 2.7 hours per day to 2.87, starting July 1. In July of 2024, the hours per day requirement jumps to 3.2 hours (direct care) per patient. Even though Pennsylvania increased its Medicaid reimbursement by 17.5% in 2017, funding woes for providers still persist. The genesis of the staffing level mandate is a report completed by the Pennsylvania State Government Commission. It noted that working conditions, training and career development were sorely needed to combat negatives about work in long-term care. The report further noted that long-term care spending needed an annual investment of $99.9 million to cover the cost of services which, translates to $12.50 per patient day increase or a Medicaid reimbursement rate of $263.05.
Finally, within the employment/labor trend, I’m watching legislative activity around staffing agencies and specifically, a move to cap the mark-ups that agencies can charge providers. Pennsylvania, in its report (noted) above, noted the rapid increase in agency costs to providers resulting from the pandemic and yet, the limited impact the fee increases matriculated to staff in the form of wages. A recently passed Indiana law includes a provision limiting “predatory practices” by agencies, specifically, price gouing. Minnesota is also working on legislation to increase funding and to in some ways, attempt to address staffing inadequacies.
Patient Transitions/Care Transitions: I’m continuing to watch the post-acute flow dynamics or the admission/transition referrals from hospitals to post-acute providers. My specific focus is on home health which seems to be struggling the most to sustain a referral dynamic that has home care preference but can’t be accommodated by home health agencies. The benefactor of this referral trend is the SNF industry. In a report from Trella Health for 3rd quarter 2022, the SNF industry saw a referral increase of 5.8% (YOY) and the home health industry saw a 8.6% decrease. Hospice referrals remained essentially unchanged. The data is for Medicare Fee-for-Service patients (traditional Medicare), excluding Medicare Advantage referrals. With the growth of Medicare Advantage, I expect to see a continued preference toward home/community discharges yet, staffing levels will dictate how this preference is realized. While home health has a distinct advantage in cost and desire by the patient typically, the setting has challenges to accommodate volume. Productivity levels are currently near the max for many agencies and thus, referral denials are at record levels.
Happy Mother’s Day to all moms and expecting moms, everywhere!
Senior Housing/Post-Acute Insurance Update
With so much going on in the industry post-COVID, challenging labor markets, rising interest rate costs, high inflation, and supply chain issues still somewhat bothersome, insurers are rightfully skittish about senior housing and the post-acute environment. Of course, good provides with solid track records, high quality records, low to no recent claims, and evidence of financial stability will achieve continued coverage, at the best rates. This said, rates are trending up and even the best providers will experience the industry drag effects that afflict all, some more and some less.
As I’ve written before, litigation is still a big issue and growing. Drivers include staffing shortages, COVID policies that caused isolation and physical/social decline, state laws without liability caps, and a generalized negative view of certain provider segments (e.g., SNFs). Three recent posts address some of these issues: https://wp.me/ptUlY-sg , https://wp.me/ptUlY-sp , https://wp.me/ptUlY-sC .
One developing trend has major forward ramification for liability coverage and worker’s compensation coverage – COVID litigation. A California Supreme Court case argued this week centers on “COVID take-home liability”. Formally, the case is Kuciemba, et.al., v. Victory Woodworks. It centers on the question of whether a spouse that is thought to have acquired COVID at work and subsequently, infected a family member at home, can sue his/her employer. The essential point is whether an employer (under California law) has the duty to exercise extraordinary care to prevent the spread of COVID. If the petitioner succeeds, the door is wide-open for extensive litigation, especially for SNFs, hospitals, and other healthcare settings where COVID outbreaks were prevalent, and staff infections, equally prevalent. The issue will no doubt hinge on the ability to prevent the spread of highly contagious, aerosolized viruses and the ability to detect where and when, the infection occurred. Studies of contact tracing during COVID illustrate the difficulty of identifying sources of COVID. More on this case is here: https://www.mcknights.com/news/employer-protections-in-spotlight-as-court-considers-take-home-covid-liability/
We are currently seeing a widening bifurcation of the industry segments between good performers and facilities/organizations that are more challenged. We are also seeing insurers becoming a bit more leery of location risks within states with litigious history and limited tort reform laws (e.g., California, New Jersey, New York). Greater focus is being placed on risk mitigation programs and compliance programs, so much so that providers without these programs are finding themselves in difficult positions when it comes to renewals (pricing and competition). The big watch of course is as identified in the prior paragraph, COVID litigation and litigation in general.
Below is the generalized trends for renewals, in the senior housing/post-acute industries. The data comes from WTW – Williams Tower Watson.
- General and Professional Liability: Flat to 15% for providers with good history/performance. Higher for poor performers and/or poor venues/locations.
- Property Insurance with high, stable census: Plus 10% to 20%.
- Property with challenged occupancy: Plus 25% to 40%.
- Worker’s Comp: Minus 5% to plus 2%.
- Auto: Plus 5% to 10%.
The challenges on the property side are driven by a number of factors. Recent hurricane losses and winter storm losses hit providers hard though, the driver is more about restoration costs and valuation difference than the actual loss numbers. Loss numbers are on a bit of an upward cycle but the economic conditions of tight supply chains (replacement building supplies), labor cost and shortages in construction trades, and the cost of money/capital are the primary contributing cost drivers. Insurers are wary that valuations are perhaps, significantly understated today and as such, policies are being written with higher retention levels and reduced overall limits to mitigate, valuation (understatement) risks.
Looking forward, I believe more of the same increase trend is on the horizon. It appears that we will begin to see some softer property renewals going forward as valuation risks abate and repair/replacement costs ameliorate. If a recession occurs in the latter half of the year and into 2024, supply costs will reduce even greater and labor costs, the same. The bigger horizon risk remains on the liability side and perhaps worker’s compensation due to COVID litigation. What happens in California will no doubt, have an impact nationwide. Some states and locales are reasonably well positioned with tort reforms in-place while others, are not, To date, absence precedent, COVID related litigation in the future, is unknown and unknowable.
Friday Feature: REIT Update
Like all healthcare/senior housing investments during the pandemic, REITs experienced turbulence and stagnant growth. Coming out of the pandemic, the outlook has started to brighten but, challenges remain in adjusting REIT portfolios. The adjustments are fundamentally, selling under-performing assets within their portfolios.
Rebounds in occupancy are providing some bright spots though assets within, remain a bit murky for most senior housing dominant REITs. Nursing home concentrations continue to lag in terms of recovery as average plant age remains “old”, occupancies are depressed (80% ish), operating costs have increased faster than revenues, and liability headwinds are increasing. Yet, some of the larger REITs are seeing their Senior Housing Operating Portfolios more favorably these days post Covid, primarily as product demand remains strong (demographics) and supply in relation, is rather flat to somewhat down (no real building going on). The strongest performance elements remain housing vs. health care or Independent, Assisted and Memory Care versus skilled nursing.
Dissecting where REITs are at, I took and in-depth look at two of the largest with extensive senior housing portfolios – Welltower and Ventas. Each has a different operating approach with Ventas, strictly providing investment and business guidance and infrastructure services and Welltower, actually providing direct management (though not for every asset). In late 2022, Welltower received permission from the IRS to direct manage 45,000 Independent Living units within its portfolio. Below is a summary of where each REIT is at and what they see as an outlook for the remainder of 2023 and early 2024.
Welltower: First quarter results were better than expected with year-over-year same shop net income growth of 11% advanced by net operating income growth within the senior living portfolio of 23.4%. The drivers were year-over-year occupancy and revenue growth per occupied room of 6.8%
From an investment perspective, Welltower did $785 million gross of investment activity comprised of $529 million in acquisitions and funded loans alongside $287 million in development funding. Within this development number were four projects at $57 million. There was $92 million of property dispositions and loan payoffs.
Welltower continues to rebalance its senior housing property portfolio, reducing SNF holdings and concomitant risk concentration. As part of this plan, Welltower continued to transition and sell its Pro Medica operated facilities (147 SNFs) to Integra Health Properties. In January, Welltower sold to Promedica, a 15% interest in 31 SNFs for $74 million. This represents the second piece of a Welltower/Integra 85/15 joint venture. The remaining components will finalize in 2023.
Going forward, Welltower is expecting continued occupancy improvement to drive same shop operating revenue gains of 9.5%. Improving labor outlook in terms of hiring and retention is also adding positivity to improved performance outlooks. Year-over-year occupancy gains are projected at 230 basis points. From their investment presentation: Positive revenue and expense trends are expected to drive YoY SS SHO Portfolio NOI growth of 17% – 24%.
As the senior housing industry has headwinds, Welltower will no doubt experience some. The question is, how much and when. Higher interest rates and a stronger dollar will affect dividends. The same, could create a recession and thus, drag some occupancy rate projections downward. A recessionary job market, however, could add incremental labor gains at softer prices (wages).
Ventas: Ventas first quarter earnings report is set for release on Monday, close of market. We can, however, see a similar recovery trend for Ventas as with Welltower, improving occupancy, more stable expenses, and increasing same shop revenues via improved pricing and occupancy. Fourth quarter 2022 saw an overall portfolio occupancy improvement to 82.5% and a Net Operating Income for the portfolio of 19.1%.
Like Welltower, Ventas is bullish on demographic trends noting the growth percentage of the 80 plus segment/cohort of the population. In the next five years, the growth rate for this group is forecasted at 23%. Couple this demographic shift with a historically low new unit pipeline (COVID and interest rate impacted), unit absorption of existing product begets a favorable occupancy trend, at least in the near term. For Ventas, 99% of their portfolio is in locations with no new construction starts within 5 miles. A primary market for a senior housing location is 5 to 7 miles.
For occupancy growth, Ventas is projecting year-over-year improvement of between 130 and 170 basis points – a bit less bullish than Omega. Overall portfolio revenue growth of 8% is the forecast with NOI growth at 5%. They are expecting improved hiring and moderating inflation, along with improved topline revenues, to generate the NOI improvement.
Rent increases and care rate increases are forecasted at 10% and 11% respectively. What is interesting to me is the forecast on expense improvements. Labor is pegged at 43% of revenue (61% of expenses) with only 2% equating to contract labor. That is exceptionally low in today’s market and certainly, not indicative of a trend I have seen among most operators. In all other expense categories, Ventas if forecasting decreases (-5% taxes, -4% in food, utilities, and maintenance, and -2% in insurance). This pegs year-over-year expense growth at 5% vs. 2022, at 8%.
To me, the risks of achieving these results are similar to Welltower. First, moderating labor cost may or may not materialize though, a recession could help. Interest rate increases could push the economy into a recession, cramping occupancy gains. Energy is a wild card for me from an inflationary perspective as during a recession, gas/fuel oil will fall via weaker demand and as stronger dollar yet worldwide turbulence, may throw a wrench into this outcome. Insurance costs are rising so it’s odd to me that a savings of 2% is attainable across any senior housing portfolio.
After Monday, I’ll take a peek at Ventas first quarter results and then, add it to my files. Later summer, I’ll take an overall look at the REIT sector and maybe, drop a quick update to this post.
TGIF!
Senior Housing Marketing: Bumpy Road Ahead
On Wednesday, the Federal Reserve added another .25 point to its baseline interest rate – federal funds rate. The rationale is to continue to reduce inflation which, is running at decade highs. The trickle-down effect will begin with capital costs and capital access, impacting all kinds of industries but first and foremost, the real estate industry (commercial and residential). Borrowing costs and access to funds has changed dramatically since 2020. In mid-2020, mortgages were widely available below 3% fixed for 30 years. Residential real estate rode a significant wave in rising housing prices and rapid sales.
Today, the residential market has ground to a near halt. While home prices remain steady to a large extent, buyers have fled due to high mortgage costs and bank lending constriction. Recent bank failures have not helped banking confidence or improved lending access, personal or commercial. As a result of the Fed’s need to fight inflation and to reduce overall liquidity in the monetary system (lower money supply), the Fed quit buying mortgage-backed securities in March, therefore no longer directly supporting the mortgage market. Without the Fed keeping the liquidity of the mortgage market “up”, mortgage rates will remain higher for a longer period and banks will be pickier about lending as the buyers for mortgages are now private entities, more concerned about profit and the underlying credit.
So as not to confuse my readers, the title of this post is right-on and while a bit of economics starts this post, it is relevant to senior housing. Senior housing, especially independent, above-market products rental and entry-fee are very much occupancy impacted by the residential real estate market. I have written and spoken about this connection for years. The typical senior housing move is a transition from a private residence of some sort with the proceeds from the sale, used as a resource for the senior housing stay. With entry fee sales, the net proceeds from the home sale very much correlates to the resource for the entry fee. Market data has shown us for decades that there is a very strong relationship in the sales process between what a resident in a market area can liquidate his/her residence for and what the net proceeds will “purchase” in term of a CCRC unit. Well positioned CCRCs in a market have entry fees very closely tied to the average net sale value of homes in the primary market. Even today, few seniors will want to dip into estate values to pay for a senior housing unit. A good resource is a presentation I did a few years back: Value Propositions and Markteting 4 14
The primary factors that drive new sales and work on impacting occupancy positively, are as follows.
- Demographics in the target market – age, net worth, income level favorably matched against the product (price, demographic, location)
- Overall supply of units in the market current and anticipated. Senior housing demand is very elastic. Supply ranges of product will shift based on the price and the economic conditions within the market area.
- The condition of the residential real estate market in the primary market area. While national trends are one thing, the translation of those trends locally is the key. Not all local markets fare equally to the national trend. Interest rates aside, a growing market may attract more buyers still willing and financially capable of buying homes, even at a premium (see Florid for example).
- The condition of the property/senior living site. Is it in good condition and is its reputation positive.
The trends in occupancy and thus, marketing have shifted dramatically as a result of the pandemic. Occupancy in rental and entry-fee projects for the most part, remain below pre-pandemic levels. While CCRC occupancies are strongest and still growing (albeit slowly), at the present course of improvement, we are approximately 2.5 years away from pre-pandemic levels (91% vs. 87% today). This time period may elongate if interest rates remain high and real estate inventory (for sale), remains low.
During the pandemic, to maintain and attempt to increase occupancy via sales, I noticed a lot of communities resorting to incentives of one form or another. Fortunately for the CCRC/senior housing market, new inventory slowed and remains slow. Existing units today, have a greater opportunity to gain ground as new product is not coming on the market with the same fluidity as pre-2019. Capital access and costs have abated many new, planned projects either permanently or temporarily.
Incentives have long been a staple of generating unit pre-sales, holds, and interest/waiting lists. Conversion to occupancy often includes different incentives, directly tied typically, to rent abatement or stabilization (so many months free, no rent increase for so many months, etc.). Other softer incentives include moving fees (pay for the move), meal additions, decorator services, relocation coordination, etc.
The road however today, is bumpy and will be so for a while. Two difficult financial/economic conditions are at-play and both, hamper demand when the desire, is to sell above-market cost units. First, the real estate market in terms of liquidity, is exceptionally slow. New listings lag from pre-pandemic levels and new sales the same. A good data source that I use to watch these trends is here: https://www.redfin.com/news/data-center/
The second condition is overall estate values are down. Seniors with market investments in their retirement plans have seen minimally, on average, a 25% erosion in value. This constriction reduces their willingness and confidence to buy into, more expensive (real or perceived) housing. Further, familial support or influence tracks a similar downward confidence curve meaning, family become less supportive of a move that is further perceived, as negative to estate values. Remember, the U.S. mindset still has a strong connection to passed-through or down wealth transfer (e.g., kids receiving inheritance from mom and dad).
Strategies do exist for CCRCs and other senior housing projects to make inroads in occupancy gains, even in a tight market. Here are a few that I have used and can recommend as having some value.
- Use equity and/or internal financing mechanisms to assist in achieving liquidity for a senior’s home. Banks will typically step forward if the home has substantial equity and are often willing, if the CCRC is a partner, to provide the loan allowing a move to occur. The challenge then falls on maintaining the vacant property but that is less difficult than one would think with a bit of creativity.
- Defer the entry fee to a later date. Take the move off the table so to speak, allowing the senior to move while the house is still on the market, even if the timeframe is elongated. Another option is to pay the entry fee in installments.
- Work with a realtor that will package a transition service at a reduced commission allowing for home sale/pricing flexibility.
- Purchase the home, if feasible. I have seen organizations do this and then, when market conditions change, resale the home. This is complex and fraught with all kinds of detail issues, but it can be done.
In-Depth: CCRCs First Quarter 2023
The smallest distinct segment of senior housing is Life Plan communities or CCRCs. Assisted Living, Independent Living and Skilled nursing, in each segment, dwarf the number of CCRCs yet, CCRC popularity remains and continues to grow, if ever so slowly.
CCRCs run a gamut between large and small, entry fee to rental, with/without SNFs yet always including some extended care services beyond the housing component. In recent years, I’ve watch CCRCs smartly, expand their service offerings to include home health and personal care, hospice in some cases, and other wellness and medical/care services. Typically, the larger the CCRC or sponsoring organization, the greater the service array (home health, personal care, etc.).
The industry remains dominated by non-profit owner/operators. For profit organizations account for about 25% of the industry, the balance is thus, non-profit. Size as measured by units/residency is largest among non-profits. Additionally, the non-profits dominate the entry-fee CCRC market.
For the last two plus years, COVID has had a profound impact on all senior housing organizations. The fallouts from the pandemic include a diminished workforce (fewer health care and support) workers, inflation, and rising interest rates have hurt all providers and driven all kinds of compensating behaviors such as reducing census due to staff shortages, escalatory pricing, service reductions, etc. CCRCs have not been immune to the pandemic fallouts but have weathered the pandemic and the fallouts better than their segment partners (e.g., Assisted Living and SNF). Similarly, we watched CCRCs experience fewer COVID health impacts (outbreaks, deaths, etc.) than Assisted Living or SNFs.
Through the first quarter of 2023, CCRCs have experienced a steady but slow increase in occupancy. At the start of the quarter, occupancy was still behind pre-pandemic levels at 87% (compared to 91% pre-pandemic). Non-profit CCRCs had stronger occupancy performance than their for-profit counterparts – 88% v. 84% respectively. We also see entry-fee communities outperforming rental communities, 89% to 84%.
In terms of rate and inventory, there has been a shift from pre-pandemic levels. Inventory (units for rent) shifted the least for non-profits and where reductions occurred, they did so in nursing care. For-profits had the biggest inventory shifts, across all living accommodations (independent, assisted and nursing). Rent increases are harder to factor but as occupancy has recovered, inflation and labor factors settle-in, we are seeing rather aggressive pricing shifts. Senior Living in general has seen rate increases in the range of 8 to 10%. Diving into living segments, we see memory care and smaller Independent Living units (one bedroom, studios) increasing the most – 9% to 10% – with studios running at 8% plus, the same as Assisted Living. CCRCs tend to have different pricing packages at the Independent Living level vs. at the care levels. Many incorporate various discounts for residents as they transition to the numbers of actual realized rent v. published or asking rent can be quite different (Sources: NIC, LivingPath.com)
As 2023 progresses, there are a number of headwinds for CCRCs still trying to recover from the pandemic and its related fallouts and impacts. Below is my watchlist for the remainder of the year. I’ll touch base on these items from time to time throughout the remainder of the year.
- Interest rate rises will impact cost and access to capital for CCRCs. These organizations tend to be capital intensive as their marketability is tied to heavily amenitized environments requiring constant updates, improvements, refreshment, etc.
- Rising rates have also severely impacted the residential real estate market. New CCRC occupants typically move post a primary home sale. The inability to effectively liquidate their real estate to pay an entry fee will harm occupancy increases. Most CCRCs have units for sale. Depending on the market location, this impact could be very, very profound for the balance of 2023 and perhaps, beyond. The good news is that homes for sale inventory is low so price reductions have not been (yet) dramatic.
- A marketing strategy often deployed by CCRCs is some form of rent suppression, rent reduction or abatement for a period of time to “sell” a unit. Revenues are already suppressed due to lower occupancy and, likely rent suppression in general during COVID. Revenue recovery will be a function of occupancy and the ability to increase rates to accommodate rising costs. This will be a tricky navigation for most operators/sponsors for 2023 and in my view, early 2024 as well.
- Labor will continue to be a major problem hampering occupancy, service expansion, and increasing cost. I don’t see any labor challenge abatement any time soon, beyond 2023.
- In established CCRCs we will continue to see an increase in resident age and debility and a similar trend on admission. This trend, especially on admission, is a lingering pandemic problem as folks avoided moving to CCRCs during the pandemic. As they do now, they are generally older and more disabled.
- Wealth reduction due to market losses will cause some seniors to remain, ill-advised, at home. Couple the liquidity issue (stagnant) on real estate sales (bad market) and estate shrinkage due to investment losses, an impact in qualified seniors for any CCRC but especially, entry fee CCRCs, has occurred. Recovery will not occur in 2023.
- The demand for CCRCs is very elastic such that, there are a number of substitute options available to a senior, such as staying at home with services. As real estate liquidity is a challenge now, the demand curve has shifted a bit similar to what we saw in 2008 to 2010. Expect this shift to remain in-place for at least all of 2023 and likely, until mid 2024.
Top 5 Tips for Recruiting in a Tough Labor Market
I’ve done a number of presentations on the staffing challenges facing providers and how, certain strategies work and others don’t in terms of recruitment and retention. Over my 30 plus years in the industry, I’ve had reasonable (ok, very good) success in building and retaining high-performing teams, including direct care staff. I’ve been fortunate to have many folks who have worked with me, follow me from assignment to assignment, some across the country. Leadership is no doubt key to recruiting successfully as people want to work with winning organizations. Likewise, really good recruiting strategies don’t use the same methodology as the past – namely advertise, incent (throw money at it), repeat. Steve Jobs said it best: “Innovation is the only way to win”.
Most healthcare providers can’t financially compete for staff, consistently. In reality though, staff only work for money when they see no long-term value in the employment proposition. I know travel nursing and agency nursing catch lots of news and sound sexy and high paying. I also know nurses (really, really well as the same are throughout my family) and, the lure of travel nursing is short, regardless of the money. Stability, home base, regularity, working with good colleagues and peers has more value to most nurses.
Before I offer my five “DOs” for recruiting, let me offer a few “DON’Ts” and a reminder. The reminder is recruiting is like marketing – it requires constant, incremental effort to achieve success. Superb marketing campaigns and brands build year-over-year. One misstep, however, can damage a brand significantly (see Bud Light). The “don’ts” mostly focus on money as in don’t think you can buy staff and don’t think, sign-on bonuses buy anything other than applications and temporary workers. Don’t focus on the economic alone but on the goal of recruiting. Like marketing, it’s about positioning the organization to attract workers. The sale or close comes via an H.R. specialist or someone exceedingly good in the organization of convincing people of the value of working for the organization.
My Top 5 tips for recruiting are….
- Focus on recruiting introductory, PRN workers first. Stop advertising for shifts, full-time, part-time, etc. Focus on people who are interested in flexible work and are willing to take a role and see how it goes. This is the “dip your toe in the water” insight. Be prepared to pay well but not necessarily crazy. You won’t be dealing with many if any benefits for this group other than some soft stuff (meals perhaps, incentive rewards like a gift card now and then, t-shirts) so hourly rates can be decent. Likewise, be prepared to pay weekly if not even more frequently.
- Have a killer, multi-media/onboarding/orientation program. Little investment here but not much. YouTube, Tik Tok (can’t believe I wrote that), a website, and other applications can be used to recruit (what it’s like to work for us) and to onboard and orient. The more new staff, even your PRN, feel comfortable walking in the door, the easier it will be to get them and keep them. Giving them a stack of policies and procedures, a big manual, a drone-on HR speaker or a computer-based checklist is a certain turnoff.
- Give the Bonus to the Staff. Turn your own staff into recruiters and pay them for it. Nurses know nurses, CNAs know CNAs, etc. Comp and incent them to bring referrals and comp them well. Sign-on bonuses really don’t work but referral bonuses do. Heck, do individual and team and create a bit of competition and fun.
- Create a Marketing Campaign and Have Accountability. Recruiting is marketing. Stop thinking otherwise. Sure, many think it’s an HR function but most who do, are wrong. It’s an organization function today requiring the best talent. For people to join your organization as employees, they need to know “why” – what are the tangibles and intangibles. Why should I work for you? This is not about pay and benefits but about the value and benefit internally, of a person working for XYZ organization. What’s the value proposition? What’s the real reason people work and stay for an organization (trust me, it’s not money). Build the case and sell that case.
- Get out of your own way. I watch organizations fail as their message is all wrong – tired, non-descript, sounding like everyone else. I watch organizations fail as their environment and their culture are all the same. Stop and align the incentives. Reward what matters and differentiate. Remember the Jobs quote in the first paragraph. Innovate. Stop looking externally at what everyone else is doing and stop going to the same conference sessions. Direct care staffing has certain red rules but not as many as providers think. In other words, stop the “can’t, regulations won’t let us” and start with WHAT can we do. Maybe even bend a rule or two if the same doesn’t jeopardize patient care or quality. Worklife for nurses and CNAs in terms of direct care has lots of negatives but many that I see are driven by provider foolishness – too much paperwork not necessary, too many meetings not necessary, and very few positive touches and rewards. If your culture and the work create fun, ownership, and staff love their work and their company, recruiting others to join the team just got that much easier.
Upcoming, I’ll touch on the opposite of recruiting – retention.
Merge/Affiliation in the Cards?
I pay close attention to economic trends and to the health care industry in general, as the same are applicable. One trend I’m watching quite closely is business consolidation and mergers/affiliations. In the general economy, a lot of consolidation is occurring post-pandemic. Restaurants are closing outlets (Red Lobster, Krispy Kreme, Burger King, etc.), retail outlets too like Bed Bath and Beyond and even, Wal Mart are closing stores in various locations. The drivers? Simplistically, supply chain issues (increased costs and inability to pass along the same via price) and labor costs plus worker shortage. There is another driver in some closures and that is environment as restaurants and retailers are leaving communities with high-crime and homelessness as they simply cannot generate a sustainable retail climate amidst theft (inventory loss), customer erosion (customers staying away from certain locations, etc.). Whole Foods leaving San Francisco is an example.
Health care and senior living/housing are not immune to these same pressures. Labor is a huge issue facing all providers today. Changing environment, particularly for urban providers is an issue. Supply chain issues and supply costs are additional motivators or drivers. And let’s not forget the impact of COVID (yet to totally abate in health care and senior living) and increasing regulatory costs. Below are some examples of consolidation and affiliation moves that I have seen recently.
- Diversified Healthcare Trust (REIT) merging with Office Properties Income Trust. This is really an access to capital play as Diversified is constrained from refinancing debt due to covenants. It has a pretty large capital need to improve its senior living facilities (primarily IL, AL and CCRC). Like most REITs with senior living holdings, the occupancy levels remain below targets/desired levels.
- Good Samaritan Lutheran/Sanford is offloading a large amount of skilled nursing facilities and other senior living centers across 15 states (primarily western states). Good Samaritan was the second largest chain provider of senior living.
- Sanford, which merged with Good Samaritan, is in the process of affiliating with Fairview Health. Fairview includes Ebenezer (senior living) which, is the largest non-profit manager of senior living projects in the country.
- Theda Care health system in Appleton, WI announces an affiliation plan with Froedtert/Medical College of Wisconsin health system. The two, primarily hospital and clinic-based organizations will offer services along with locations throughout the eastern corridor of WI, primarily Milwaukee metro area and the Fox Valley area (Appleton and Green Bay as the metro reference).
Looking at the press releases and then, reading other disclosure information and knowing players in each of these scenarios, a similar series of factors are driving the affiliation/merger/consolidation activity. Not surprising, these factors are not unique to health care/senior living. They are the same factors in many cases, driving decisions across all businesses/industries.
- Labor availability and cost. Affiliations and outlet reductions reduces labor cost and vulnerability to staff shortages.
- Stagnant volumes and revenue shortfalls. Senior living is not back to pre-pandemic occupancy levels and frankly, while the trend is improving, it could be a while before we see pre-pandemic occupancy levels.
- In the case of senior living, further movement toward home and community-based care options is eroding demand. This means, provider capacity is impacted. Closing outlets or selling them to more localized providers such as the case with Good Samaritan, make sense. Local providers have inherent market advantages that large, national or regional players simply don’t have.
- Supply chain improvements are possible with a larger platform though by experience, they are not as large and impactful as often forecasted. Single-source buying is good and can achieve discounts but often, the reliance on one source may challenge quality targets and innovation. I’ve seen this definitely occur with food and food service supplies.
- Overhead reduction is the biggest gain or biggest possible gain. Reducing management layers and consolidating overhead functions can cut millions of dollars of duplicative positions. In really good mergers/affiliations, bureaucracy is also reduced netting more efficiency and better care/service. This however, comes over time.
- Access to capital can improve as scale improves. In other words, larger organizations have more opportunities and outlets to raise capital when needed, especially if the scale achieved is margin positive.
- Increased market share and increased market opportunities can occur. For example, in the case of the Theda Care and Froedtert affiliation (if it closes), both systems get access to new markets via their affiliation and new customers without having to “build new” or “start new”. New building and starting new locations/outlets is expensive and time consuming. Leveraging the business footprint with a synergistic partnership is much faster and in theory, less expensive.
More mergers/affiliations to come? No doubt. While the economy is moving toward a recession and labor remains challenging, providers will have to look toward possible strategic opportunities that include adding services, becoming more efficient, building/improving capital access, and accommodating rising costs without concurrent increases in reimbursement or additional rate. Affiliations make sense for some providers, especially when selling is not a real or viable option (non-profits).
I’ll provide a merger/affiliation strategy document/post soon!
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