Now that the real estate dynamics have shifted on-balance to par or better (majority of markets can liquidate inventory at stable or rising prices with constant or modestly increasing demand), the outlook for Seniors Housing (IL, AL and CCRC) is less murky. The recessionary of the last 7 to 8 years has lifted. What is visible, while still fairly complex market to market, is a picture that is illustrative for the next ten or so years – ample to adequate supply and average to slightly soft overall demand. Perhaps, this is the Brookdale lesson?
Amplifying the above; what we know statistically is that demand has globally peaked and now, flattened. Recall that Seniors Housing is very much local and regionally biased/impacted so some markets may be hotter in terms of demand than others. By example, in 2010 (full recession impact), occupancy in the sector was 86.7%. By the end of 2014 and since, occupancy has recovered but only to an average of 90% (per the National Investment Center). During this same later period, new unit production has increased to an average of 3,200 per quarter (trailing seven quarters since end of 2016). This is a 50% increase over the prior eight quarters. The cause? Less about occupancy reality, more about a growing optimistic economic outlook, improving real estate dynamics (the leading cause) and more accessible capital, particularly as nontraditional sources have entered the sector with vigor (private equity). A quick translation is for an increase of approximately 5,000 additional units in the top 31 MSAs (could be as much as 6,000 depending on where the units are in the development cycle). This additional inventory is entering a market that is showing signs of over-supply (again, is there a Brookdale lesson here?).
In multiple articles, I have written about phantom or perhaps more accurate, misunderstood economic and demographic trends. Seniors housing global demand is very elastic, particularly for IL and CCRC projects that are at or above market (where the bulk of the industry is). Demand elasticity exists where and when, price directly impacts the number of and the willingness of, consumers to consume a particular good or service. As price rises, the number decreases. As price falls, the number increases. For seniors housing, the elasticity wanes and trends toward inelastic demand when the price mirrors “rent controlled or modest income” housing. In this case, demand is constant and actually inverse proportionately (more demand than supply). Better real estate economic conditions and improved investment market conditions (stock market, investment returns, etc.) influence to a lesser extent, the demand outlook as stronger or stable wealth profiles for consumers reduces the anxiety of purchase, especially where entrance fee models are concerned.
From a demographic perspective, the issue at bear is the actual or real number of seniors in the target age range with an economic wherewithal to consume (have the financial capacity). Only (approximately) ten percent of all seniors 75 and above reside in seniors housing specifically (IL or CCRC) and a slightly larger (aggregate)number now reside in quasi-seniors housing projects (age limited housing developments ala Del Webb). Between 2010 and 2016, the 75 plus population grew at an anemic rate of 1.8%. The expected rate of growth for this cohort over the next five years increases to 3.8%. More telling, for this same period, the subset of 75-79 grows at a rate of 5.7%. These numbers present a bit of optimism but in real terms, the demand change (within the demographic) doesn’t create sufficient opportunities for absorption of the inventory growth, if the same remains at its present pace. The demographic fortune doesn’t really begin to change dramatically until 2021 and beyond. At 2021, the group turning 75 represent the start of the baby boomers (2021 -75 = 1946). Prior to this point, the demographics of seniors 75 and above still reflect the World War II trend of birth suppression.
To Brookdale. The operative lesson is that Brookdale has far too much supply for the real organic demand that exists for plus market rate, congregate seniors housing. In my outlook comments below, readers will note how the demand around seniors housing and the congregate model is actually shifting slightly which has negatively impacted Brookdale. The acquisition of Emeritus has since offered proof of some age-old adages regarding Seniors Housing: local, not conforming to retail outlet strategies, very elastic demand, tough to price inflate for earnings and margin, asset intense and thus capital re-investment sensitive, and of course, full of me-too projects that are difficult to brand differentiate. In the Emeritus acquisition, economies of scale and cultural assimilation proved difficult but frankly, such is always the case. The real crux is that the retail outlets (the Emeritus properties) were not accretive -seniors housing doesn’t quite work that way. While the asset value of Brookdale skyrocketed, the earnings on those assets retrenched. With soft demand and a lot of congregate projects highly similar and no room at the ceiling for price elevation, a fate accompli occurred. The lesson? Certain types of Seniors Housing is about played out (vanilla, above market projects) and a heavy concentration of this in a portfolio will evidence occupancy challenges and rental income return challenges (no price inflation). Demand is also soft for reasons mentioned above, primarily demographic but also still, economic in some instances. Similarly, as I mentioned above, seniors housing is very local. A retail brand strategy simply (the Wal-Mart concept) won’t work. Residents identify brand to local or at best regional – national means nothing. If the market isn’t supportive regardless of who or what it is, the project will be challenged. Emeritus brought too many of these projects into the Brookdale portfolio.
Below are my key outlook points for 2017 and the next five or so years for IL and CCRCs (non-affordable housing).
- Demand across most property types will remain soft to stagnant. This means 90% occupied is a good target or number. Of course, rent controlled projects will continue to experience high demand, particularly if the projects are well located and well-managed. Regional and local demand can and will vary significantly. The projects that will experience the softest demand are above market, congregate, non-full continuum (non-CCRC). Projects with the best demand profile contain mix-use, mix-style accommodations with free-standing and villa style properties. While highly amenitized projects will attract traffic, demand isn’t necessarily better due to price elasticity in the segment.
- Improving economic conditions/outlook will undergird and help bolster demand, though the demographics still trump (no pun intended). Some notes to consider.
- The real estate economy can benefit, even with a slightly higher interest rate trend, if employment and wages continue to strengthen and de-regulation of some current lending constraints occur. I think the latter two points offset any interest rate increases in the near to moderate term.
- Rising interest rate fortunes help seniors more than stock market returns, though this trend is changing as seniors have been forced to equities to bolster return. Still, most seniors are highly exposed to fixed income investments and a somewhat improving interest rate market will improve income outlooks. Better or improved income does psychologically impact the consumption equation, “positively”.
- Capital access will remain favorable/positive and banking de-regulation to a certain extent, may push banks back to the sector (they have been shy to seniors housing for the last 5 to 8 years).
- Even with improved economic conditions, the mismatch between demand and supply (discussed earlier) will restrain rent increases in the near term. This could present some modest operating challenges for the sector as price inflation on wages, etc. will occur before any opportunity to raise fees/rent. The net effect is a modest erosion in margin. I don’t see much opportunity to fight this effect with increased occupancy.
- Increasing occupancy or in some cases, staying at current occupancy levels will continue to require incentives. Incentives negatively impact revenue in the short-run.
- The average age for residency on admission and across the product profile will continue to move up as a general rule. In addition, the resident profile will continue to slide toward additional infirmity and debility. Providers will continue to work to find ways to keep projects occupied by offering aging-in-place services. While this is a good strategy to a certain extent, the same does harm or impact negatively, the ability to market and sales-convert, units to a more independent resident profile. I liken this to a “rob Peter to pay Paul” approach. It works but not without side-effects and perhaps, unintended consequences that can be very deleterious “down-the-road”.
- The additional inventory that is coming into the sector won’t slow down for another two or so years. This is in-spite of a weak to stagnant demand. Some investors and developers are willing to be somewhat ahead of the baby-boomer curve even though I believe this is unwise (see next point).
- The reason I believe the baby-boomer impact for the sector will be modest and actually, disheartening is that the demographic shift doesn’t equate to product demand directly. Boomers have an increasingly different view of the world and a different set of housing and lifestyle expectations plus economic capacity.
- The first group of Boomers was hurt the hardest by the most recent recession. They lost a great deal of wealth and income profile as many were the first displaced as jobs eroded (oldest employees, highest paid). They also have less employment time to recoup any income/savings losses.
- Generationally, their savings rate is significantly less than their parents. These folks, while still more modest in comparison to Boomers born five to ten years later, didn’t delay gratification or extravagance the way their recession-influenced parents did. Less overall wealth negatively impacts their ability to afford higher-end seniors housing.
- Congregate living (apartments) is less their style. They are the first age group (Boomers) used to a more expansive living arrangement. While they’ll move eventually, they will not see 1,200 sq. feet at $4,000 a month as attractive (not even at $3,000). They will have unfortunately, mismatched expectations in terms of “size” versus cost. They’ll want larger but for less rent than realistic.
- They are generally healthier with a different view of age related to retirement and retirement residency. Don’t look for 75 year older Boomers to be horribly interested in a CCRC or Seniors Housing development, particularly if their health is good. They’ll wait until 80 or older to trigger a move.
- Boomers are more mobile and more detached than their parents. This means in-market moves and the traditional radius markets/math will be less applicable year-over-year with Boomers. They will be willing to shop broader and do so more for value and price – more for less or at least, a perception of the same. They are nowhere near as homogeneous by social construct as their parents.
- Greater pricing flexibility will continue to evolve. This means different entry-fee options, monthly service options with/without amenities, more ala carte, etc. Service infrastructure for certain communities may suffer as residents will continue to want more choice but less bundle (won’t pay inflated fees for what they perceive as things they don’t use or want).
- Because the sector is highly influenced and trended local, some markets will continue to thrive while others will continue to struggle, regardless of national trends.
In my consulting career, I’ve done a fair amount of feasibility work (market, economic, etc.). Similarly, I’ve done a fair amount of similar analyses, primarily related to M&A activity and/or where financing is involved (debt covenant reviews, etc.). Heck, I’ve even done some bankruptcy related work! I’m also queried fairly often about feasibility, demand, market studies, etc. such that I’m surprised (often enough) that a gap still exists between “proper” analysis and simplified “demographic” analysis. Suffice to say, feasibility work is not a “one size” fits all relationship.
I’ve titled this post “CCRC feasibility” principally because the unique nature of a true CCRC project provides a framework to discuss a multitude of related industry segments simultaneously (e.g., seniors housing, health care, assisted living, etc.). Starting with the CCRC concept, a set of basic assumptions about the feasibility process is required.
- Demographics aren’t the arbiter of success or failure – feasibility or lack thereof.
- Demand isn’t solely correlated to like unit occupancy, demographics (now or projected), or for that matter, how many units are projected to be built (following the Jones’ as a qualifier).
- Capital accessibility isn’t relevant nor should it be.
- National trends for the most part, are immaterial. Local, regional and state are, however.
- Projects pre-supposed are projects with inherent risk attached. This isn’t an “if you build it, they will come” type exercise. The results shouldn’t be thought of as a justification for a “specific” project already planned.
The last point typically generates a “heresy” cry from folks and certain industry segments. Regardless, I am adamant here in so much that true feasibility analyses determines “what makes sense” rather or as opposed to, justifying that which is planned (or the implication that the client is paying for a study to justify his/her project). Remember, I am a fan of the fabled quote from Mark Twain attributed to Benjamin Disraeli (the former Prime Minister of Great Britain): “There are three types of lies….lies, damn lies and statistics”. As an economist, I have deep appreciation for this as all too often, I see analyses that smack of this latter type of lie.
(Note: The source of the actual “lies, damn lies” quote is still a mystery…thought initially to be said by Lord Courtney in 1895 but since, proven invalid.)
Carrying this feasibility discussion just a bit further, the approach that I recommend (and use) incorporates the following key assumptions about seniors housing (CCRCs) and to a lesser extent, specialized care facilities (Assisted Living, SNFs, etc.).
- The demand for seniors housing, true housing, is very price elastic. Given the elasticity, all demand work must be sensitized by price. The more specialized or unique the project might or may be, the more sensitive the demand elasticity becomes (greater or lesser).
- Local economic conditions matter – tremendously. This is particularly true for CCRCs and higher-end seniors housing projects, especially real estate conditions.
- Regional and state trends matter particularly the migration patterns, policy issues, job issues, etc. Doubt me? Let’s have a discussion about the great State of Illinois (for disclosure, I have a home and office in Illinois).
- Location(s) matter. I incorporate location/central place theory elements in all of my feasibility work and analyses.
- Demographics are important but not in the normative sense. Yes, age and income qualified numbers are important but education and real estate ownership, location and years residency in the market area(s) can be as impactful.
- Competition is important but in all forms. Given the demand elasticity of seniors housing, the higher the price, the greater the wealth status required of the potential consumer, the greater the options available to that same consumer.
- Ratios matter. The demographics are important but the ratio within the demographic correlated to the project, within various locations, etc. is “money”. (Sales folks love this stuff). How many seniors does it take to fill a CCRC?
Because no one project is equal to another, feasibility work and like analysis is both (an) art and a science. I liken the process to cooking. Recipes are key but taste and flair and creativity are important as well. Honestly, knowing the industry well from an overall perspective is ideal – like being a chef trained by the masters! When I see flawed analysis, it typically comes from a source that follows a recipe; a recipe for market analysis, etc. Knowing the industry, having operated organizations or facilities, being trained in quantitative analysis, etc. separates good or great from average. Remember Twain/Disraeli.
So to the title of this post; the correct or proper methodology for feasibility studies and similar analysis (sans some detail for brevity and not in any particular order)….
New Facility/New Location
- Location Analysis – in economic parlance, the application of elements of Central Place Theory. This includes a review of the site in relationship to key ranked variables such as market/demographics, accessibility, staff/employment access, proximity to other healthcare, other services, etc.
- Pricing – what is/are the core pricing assumption(s)….I’ve written on strategic pricing models on this site. If I am doing the pricing work, I apply the concepts in the Strategic Pricing presentations and worksheets found on the Reports and Other Documents page on this site.
- Demographics – I’ll use my pricing data and my location analysis to frame my demographic analysis. Aside from age and income, I’ll look at migration patterns, education, career history, etc. plus I’ll review the information on a geocoded basis to refine market relationships between customers and other competitors.
- Demand Analysis – From the demographic data and tested against the pricing, I’ll build a demand analysis and a penetration analysis that provides a range of likely target customers, within the market areas, give the pricing information, for a particular product. Historic migration and market area occupancy of like accommodations is used to sensitize the demand analysis.
- Economic Analysis – This is a review of current market conditions and trends that can impact the project’s feasibility, positively or negatively. Real estate, income, employment, business investment, economic outlooks, policy implications such as tax policy, etc. are all key elements reviewed.
- Competitive Analysis – What is going on within the area/regional competition of like or quasi-comparable projects is important as a buffer or moreover, a stability (or lack thereof) check. I like to look at all potential or as many as practical, comparable living accommodations – not just seniors housing (condos, apartments, etc.).
I will complete a major portion of the above with less time spent on location analysis and pricing work (though pricing is still key for accurate demand). I have watched organizations cannibalize their own market share and occupancy levels with expansion projects so accurate gauging of current and pent-up demand is critical along with conditional trends (economic, competitive analysis, etc.).
M&A, Financing, Etc. Projects
Again, all of the above work is relevant but depending on the circumstances, I will incorporate benchmark data from industry sub-sets. For example, for SNFs I look at compliance information, CMS star ratings, staffing numbers, payer mix/quality mix and of course, federal and state reimbursement and policy trends. When I review covenant defaults and provide reports, I narrow the analysis based on the core nature of the default but most often, the issues of late are occupancy, pricing, and revenue models versus fixed and variable cost levels. Pricing work is often key along with a review of marketing strategies.
Is there more to this topic area? Of course and this post isn’t meant to be exhaustive nor a text-book supplement. It is however, a ready framework that can provide guidance to those looking at conducting or contracting for, a feasibility, financing or market analysis. My advice: Getting it done right the first time saves money, prevents future problems, and assists with positive outcomes for any project or purpose.
As regular readers know, I speak at a number of conferences annually. Additionally, I work with financiers and investors in the space literally daily. In all my journeys and conversations, I am still faced with some major myth “debunking” about the nature of the seniors housing and healthcare demand, current. The major myth: Baby-boomers are either here, impactful, or here soon enough that additional supply and different supply is necessary. Nothing is further from reality.
The economist in me (and the economist that I am) wants desperately to provide a full-blown lecture here but I’ll refrain and provide a Cliff’s Note version. Demand is a function of supply and to a lesser extent, vice-versa. The two are interdependent. Demand (commercial) requires a supply of consumers, able and willing to pay a price for a given product. Seniors housing and healthcare, especially housing, has a very elastic demand curve. This means that price is a major influencer in demand. The amount of demand for higher-end, above market seniors housing, is less than the amount of demand for moderate and lower-priced seniors housing (at its core).
Demand is also influenced psychologically hence the “willing” component. Seniors housing requires the consumer to make a psychological decision about moving or consuming, a niche’ product. This fact is supported by the demographic reality that less than 12% of all seniors live in a specific “seniors housing” environment. While a greater number reside within a NORC setting (naturally occurring retirement community) such as a condo complex or apartment complex, the reality is that fully 80% of all seniors at anytime, do not reside in seniors housing nor are they “looking”. The core dilemma with seniors housing is that seniors universally, prefer to live in their “residence” in their community. Some, but a rather small number, choose or are motivated to move annually by choice or by need – the latter being the greater motivator (death, family move, health issue, change in neighborhood, etc.).
Consumers, in this case seniors, exist along the full spectrum of age and ability (economic) to pay. Given the elasticity of demand for seniors housing (the higher the price, the fewer number of able consumers) coupled with a plethora of living options for seniors (home, condo, apartment, etc.), measuring the actual demand for seniors housing is a bit more complicated than most want to believe. The complexity lies demographically and economically.
First, the demographics today are not spectacular. While it is true that we have more older adults reaching ages 80 plus than at any time in history, the number of people in this cohort as derived by birth is falling. An individual today aged 80 was born in 1935 – the depression/war years. During this period (depression/war years), birth rates declined precipitously. See chart below.
It isn’t until the post 1945 years and subsequently, into the mid 1950s that birth rates accelerated into what we commonly know as the Baby Boom. Simple math thus tells us that the real expanse of supply of seniors, age appropriate for seniors housing (around age 80) won’t occur for another 15 years minimally. Today, we are actually seeing a reduction in overall “age relevant” supplies of seniors for seniors housing.
Back to the point about seniors housing demand being highly elastic. Fewer consumers (potentially) also means that all consumers by economic status and desire are fewer in number. The point here is that the supply of seniors for higher-end housing is not just smaller in number but smaller in “desire” or motivation. Folks that have the means to spend thousands per month and invest an entry fee of $250,000 to $1,000,000 also have the means to explore multiple different options. In other words, the range of substitute products (alternatives) for this group is plenty and growing. They clearly can afford to remain at home longer, acquire supportive services, or migrate to lifestyle communities or other planned communities that include multiple options and services geared towards “aging in place” (see Del Webb and The Villages as examples).
Today, there is a reason many communities and projects continue to struggle with occupancy. The average nationally remains stuck around 90% and Assisted Living hasn’t broached this level yet – even though projects continue to come forward at a steady clip. A contributing factor? The demographics are not as fluid and as strong now as industry folks want to portray. The industry is in the core openings of the 20th century baby bust. Additionally, not only is this next group demographically smaller, it is economically less well off, by virtue of time of birth, than the cohort preceding and the one following. This is in effect, the double demographic dilemma for seniors housing.
The moral of this present story: Supply of units for the most part, in most regions, is good to surplus. Reinvention in place is what I advise and for growth; acquire – don’t develop. Adding additional inventory is not only expensive it is difficult to support, except in certain markets where certain really good conditions apply, demographically and economically with proper demand analysis. This present condition will last for about the next 10 years and to a certain degree, maybe longer as the age at which seniors seek “seniors housing” elongates – moving into the 80s. Developers need to understand this condition and seek proper demand analysis and economic planning before believing the demographics of “If you Build it, They Will Come!”
Sorry for the slight delay. I had hoped to have the file loaded on this site by the end of last week. Unfortunately, other priorities piled in/up and thus, I am a tad tardy. The worksheet is clearly marked on the Reports and Other Documents page. Tabs at the bottom illustrate pricing worksheets for each contract type. Each sheet has explanatory notes but anyone with questions may contact me directly via a comment to this post (please include an e-mail address for reply) or via e-mail to email@example.com. Happy Pricing!
Earlier this spring (a couple, three moths ago), I spoke at a marketing/P.R. conference and when my session was over, I sat and visited with a number of the attendees. My presentation was about value propositions and marketing; how to align your organization’s core economic value components within a marketplace, within a customer segment. Within the short additional time I spent with these attendees, I learned that a number of their organizations (CCRCs) were still struggling post the recent economic recession/slow-down. In fact, a number of them expressed that in their areas/region, recovery hadn’t yet begun.
Since that event and over the course of the past three months or so, I took notes on various client engagements, discussions and research reports on how the CCRC industry is fairing these days. Before I break down my conclusions/observations, some general prefacing comments about the industry are required. First, the CCRC industry is truly different by location and thus, it is expected that some areas/regions, etc. are faring better than others. Second, established projects have fared differently than newer projects; not always better but different. Third, the capital structure of a CCRC (how much debt and how the debt is structured in terms of rate, etc.) is a major component of how well or not well, certain projects are doing.
Below are my observations/conclusions of how the CCRC industry is doing mid-way through the third quarter of 2014. As stated, most of my observations are first-hand (client engagements)* followed by research and conversations with those that work in and around the industry. *(My firm and in many cases me specifically, does capital development/corporate development work within the industry including consultant’s reports when covenant defaults occur, strategic planning, turn-around consultation, M&A work, research for banks and investment banks, and economic, market, and financial feasibility studies. My comments do not reflect any specific client or series of clients or any engagement former or current).
- Late 2013/early 2014, Fitch issued their outlook on the CCRC industry as “stable”. Their conclusion was that improving occupancy rates, stable expenses due to the non-inflationary economy and access to low (historically) cost capital was favorable and thus, their rating. In general, I concur that where real estate rebounded (used inventory down, prices stable and climbing) and general economic conditions improved (unemployment falling, commercial activity rising, etc.), demand for units returned to near pre-recession levels and occupancy increased. However, as I mentioned at the beginning of this post, there remains pockets of weakness, some fairly profound, across the country. The regional/local outlook as opposed to the 20,000 foot national trend is more relevant to the success/struggle of any one project. For example, our clients in “rust belt, heavy manufacturing” areas in Ohio, Wisconsin, Illinois, West Virginia and New York would mount a stiff argument that the outlook is far from “stable”.
- Pricing has remained relatively flat and in many areas, occupancy gains have occurred as a result of discounting and promotions. I don’t see this changing any time soon as while demand is good in some areas, demand is tempered by recent events and still, a large amount of economic uncertainty. The wealth profile of the current demographic has shifted, especially on the income component.
- Approximately half of the projects that were in the development queue in 2008 evaporated or re-scaled. Only recently has the industry returned to a somewhat robust, new development outlook. Access to continued low-cost capital is a key element of fuel for this emerging (again) trend and even though rates ticked-up in November/December 2013, they have since stabilized. Rate however, is just one component. Demand for debt on the part of investors is still at low ebb. Suppressed yields have moved investors out of fixed rate, tax exempt debt en-masse. Deals still are competitive but nowhere close to pre-recession levels. Banks are only now starting to revisit commercial lending to the sector and again, not with the same fervor as pre-2008. The overall number of outlets has declined and the debt to equity levels are still conservative (70/30). Valuations remain a bit low as comps are still weighted by one-off deals, distress deals and work-outs and bankruptcies. Book remains the valuation arbiter and as such, cap levels remain in a narrow range. Overall, the capital outlook is fair but caution and uncertainty remain prevalent and thus, valuations are flat and good deals get done but marginal deals still struggle.
- Rising occupancy and improving economic conditions have slowed defaults and tempered bankruptcies but not eliminated them. Again, certain projects in improving economies have rebounded though others in regions/markets of slow to no-recovery languish. Though average occupancy has once again moved into the low ninetieth percentile across the industry, I still see projects below this level on a regular basis and some, profoundly below. In virtually all instances when I encounter low occupancy, two elements are present. First, the market area is struggling economically – real estate, jobs, infrastructure, etc. Second, the project itself is really viable or relevant. More on this latter point toward the end.
- Projects that have done well, rebounded, stayed vibrant exhibit the following key elements, aside from being in a market area that isn’t still declining or not recovering. First, they were not overly leveraged. Second, they had/have investments and cash reserves. Third, they didn’t defer maintenance to any great extent. Fourth, they stayed relatively lean on the expense side. Fifth, they have diversified revenue streams/bases. Sixth, their pricing was market balanced and actuarially sound. Finally, their management was forward-thinking and had plans in place to address the changing environment. They have a good senses of the economic and market conditions impacting their organization and they plan and address these conditions fluidly.
- Projects that haven’t fared well exhibit the opposite characteristics from above and/or, they simply exist in market areas that haven’t rebounded. The most common element of struggling projects that I see is ineffective senior management and governance. They simply never moved beyond a paradigm that was shifting, shifted and won’t ever return. They aren’t relevant and haven’t learned or developed the current competencies required to compete in a different economic and market environment. For many, the writing is on the wall and for some, revival is possible but a complete turn-around is required.
What I have concluded over the last few months is that industry success is a function today of five components;
- Being in a market area that is economically stable and modestly improving. Real estate fluidity and price stability is important but equally important is the general economic outlook, government infrastructure and commercial economy. Projects that aren’t in this type of environment won’t, no matter what they do, improve beyond a point of mere survival (thriving just isn’t possible).
- Marketing and pricing today require a completely different set of competencies and strategies to achieve success. Pricing must be strategic and financially validated and demonstrative of a clear value proposition. No longer can a project succeed on guessing, market comparables and eyeballing what “management thinks” the budget will support. Marketing is different as well. This is no longer a real estate driven sale and the economic axiom of elastic demand applies. CCRCs have a very elastic demand curve and such, pricing and marketing must unite in the creation and communication of the economic value proposition. More leads than ever are required to generate sales and build and hold, market share. Traditional print and media ads won’t get it done.
- A highly diverse revenue stream/platform (multiple service lines) such that liquidity and debt service covenants can comfortably be made within normative occupancy levels (90th percentile or lower is best). If this is the case, the CCRC also tends to be more market competitive and capable of self-referral and internal market development. In other words, it has multiple channels for referral development.
- Strong, capable management/leadership that isn’t necessarily, tied to the industry conventional wisdom. They are adept at planning, forecasting, and keeping operations structured on high-quality, efficient service delivery. They know the market, know their place in it, know the economic outlooks and demand elements and adjust their products accordingly.
- A relevant physical plant environment for the market. A project doesn’t have to be new and/or the most glitzy. It does have to fit the market however and be current – minimal to no deferred maintenance. Economic value proposition are about proper product value, inclusive of warranty, for the customer to evaluate the tangible and intangible relevance. The physical real estate elements are a major component of the proposition and properly positioned within the overall project, priced and communicated correctly, the prospects for sales and success are high.
Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so. After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize. Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading. Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%. For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%). Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.
The question for 2014 is will a growth trend emerge? My answer is “no” but the tide will remain somewhat positive. What needs expansion is the following;
- CCRCs and Seniors Housing is very local and regional. Effectively, market dynamics at the local and regional level will play more directly than national trends. As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
- The real estate market, while better, remains vulnerable nationally and moreover, regionally. Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels. Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples). For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
- The overall economy is still mired close to neutral. Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge. The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages. The gains are part-time, lower wage, service sector and seasonal/temporary work. The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high. Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows. Essentially, this means price inflation remains checked, even for seniors housing. With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
- Available product in many markets is still fairly high. While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost. Recall that in April of 2013, unrated and rated tax exempt debt was at record lows and volume in terms of issuance on the uptick. Essentially, demand was equal to and often greater, than supply. Nine months later, the cost in terms of interest is 25 to 50% higher across all rated and unrated categories with new project/new campus debt cost today hovering around 8.5%. Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope. Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.
Given the above, my outlook is good but not great. I see continued occupancy improvements but incrementally. I also see continued regional struggles as some locations are just not in recovery mode. I see enough volatility economically to keep things moving cautiously forward. Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief. Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale. I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation. Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.
Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market. For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability. This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve. This gap however, will narrow if and when, the industry fully rebounds. A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.
Where vulnerability for organizations remains is at the capital structure level. I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants). Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014. We saw some salvation with low rate refinancings but that window has closed for the majority. The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges. What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.
A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market. For lack of a better term (or terms), I call this the Baby Boom Fallacy. Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers. In reality, nothing is further from the truth today, and for the next number of years. The true baby boom period is 1947 to 1963. This means that the oldest Boomers are just above 65 (67 to 68). Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away. Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.
The current resident demographic demand is the baby bust generation or war babies. The World War II era babies are part of time where birth rates declined due to depression recovery and the war. The target range lies within the group born between 1930 and 1943 – pre Baby Boom. This period in time is more bust than boom in terms of numbers. The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate. There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more. Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers. The Boomers, contrary to rhetoric, aren’t here yet as the consumer.
My presentation from this morning’s LeadingAge Annual Meeting session, “Data Driven Marketing Strategies” is available for free download on this site. Go to the page titled “Reports and Other Documents” to access the Power Point.
Among the improvement laggards in the current slow economic recovery was the real estate sector of the economy. Despite record low borrowing rates, home sales seemed stuck in neutral even as positive GDP growth resumed, modest gains in employment occurred, and consumer confidence improved.
Starting late summer 2012 and accelerating in to 2013, the real estate economy has strengthened and improved nicely. Historically, a healthy real estate economy correlates to strong seniors housing starts, sales and occupancy. With many major markets over-supplied as of late in terms of seniors housing units (demand perspective), an improving real estate economy, if trends hold true, imparts hope for the seniors housing sector – or does it?
Seniors housing, as I have written before, has a very price elastic demand curve. Essentially, this means that potential buyers and the universe thereof, is directly influenced by the cost of the housing option. Even when costs remain stable, the demand equation changes dramatically if the buyer for the units experiences change (real or perceived) in his/her economic capacity. Negative changes such as falling real estate prices, constrained ability to liquidate real estate, or reduction in the number of potential buyers for the real estate contribute directly to a senior’s ability and willingness to purchase a seniors housing option. The most dramatic impacts occur within projects that are above-market priced or higher-end as the elasticity of demand for the most expensive options is greatest. In effect, the higher the price the more the consumer of the product or service, will shift to lower cost alternatives, if his/her ability or capacity to purchase has changed (again, real or perceived).
What is most interesting about the real estate economy compared to other economic sectors is that national trends don’t play-out directly, in regional or local markets. Take for example, markets or regions where oil and natural gas production has exploded. Even during the slowest, most depressed times for the real estate economy nationally, the real estate sector in these regions and locales was booming. Housing of any form in areas such as Casper, Wyoming and Williston, North Dakota was (and remains) scarce, pricy, and by timing (supply and demand), development scarce. Conversely, some markets fared far worse than national trends in terms of foreclosures, time on the market and price deflation (Las Vegas and Chicago, IL are examples). Given the regional drivers that impact the real estate economy, recovery will vary dramatically.
Correlating a recovering real estate economy to an improving seniors housing sales and occupancy cycle is simplistic from a global perspective but at the site-specific end, a bit more daunting. What we know generally is that a more fluid, stable real estate market generally improves the occupancy, unit absorption and sales results for seniors housing. We also know that in general, by occupancy and ultimately, price inflation, it improves the operating results of seniors housing projects. What we don’t yet know is whether this recovery is a harbinger of longer-term real estate stability and does the improvement tide wash over all markets at some point and in what time frame.
Arguably, this recovery is perhaps different, certainly less uniform and due to other over-arching economic issues, more complex than any post recession period prior. In certain markets, those that were the least impacted by too much existing supply, rapid increases in unemployment and a large number of foreclosures (REO or REJ properties), recovery is impactful for seniors housing projects, especially if the unit supply is normative or about par with pre-recession demand. In other markets where prices fell dramatically, foreclosures were heavy and unemployment greater than national average, recovery will be slow. Even the latest positive economic news regarding the real estate economy is a tad misleading. Yes, most markets are improving. Yes inventory is down, days on the market is improving, listing prices are recovering, etc. (a few markets such as Columbus, OH, Philadelphia, PA and Spokane, WA continue to see price deflation) but the improvements are from a very, low point. In short, the improvements are signs of “recovery” not a validation of stability – yet.
While the road ahead appears somewhat smoother, the opportunity for pot-holes exists and thus, the relationship between real estate fortune and seniors housing is still rocky. My considerations worth noting are as follows.
- Employment and wage growth (personal income) is still stubbornly slow. Under-employment at record highs.
- In some markets, employment and under-employment will never return to post-recession levels. Certain jobs and companies are gone from the landscape for good.
- Interest rates today are less of a function of improving sales even though low rates improve affordability and thus, general increases in eligible buyers. Changes to federal lending laws and mortgage requirements have tightened credit requirements for borrowers. These changes, regardless of how low rates remain or go, preclude a large universe of individuals from securing favorable term mortgages. In short, the supply of buyers has shrunk and permanently so.
- Given how low rates have been and for how long, rate rise to a certain degree is forthcoming. Rising rates inversely impacts the supply of buyers (negatively).
- Price increases for individual homes won’t broach pre-recession levels (actual or inflation adjusted) for years in many markets. In certain markets such as the Metro Chicago region, price increases in terms of realized sales, are years out to achieve pre-recession par.
- The overall economy is still vulnerable and the consumer, still leery of what can lie ahead. Confidence is better but not great. Consumer confidence is critical to a buyer’s willingness to leverage long-term, arguably as critical as financial capability to buy.
- Seniors housing costs are at their low-ebb as expressed by monthly rental and in some communities, entry fees. While costs continue to rise, albeit not dramatically, the pressure to begin to inflate fees is present for many projects. Fee inflation during a recovery period or stabilization period is anathema to improving unit sales and developing new prospects. With the elasticity of the product, rising rates in a market that still isn’t healed can “chill” prospective buyers.
Is the trend improving for seniors housing? Yes but not universally and the real estate economy in many regions remains disconnected. Additionally, I think the direct correlation between a strong real estate economy and the prospect for seniors housing sales has changed. Yes it remains a major factor but property sales cycles will remain slower than prior periods, prices lower than prior periods, and buyers for individual homes, in lower numbers than in prior periods. The take-away is this: The improving real estate economy is good news, not necessarily great news or for that matter, a sign of salvation for projects looking to ramp-up sales with urgency. The trend is improving but full improvement, is still down the road and for certain, the road is different in direction than before.
I have uploaded the Power Point portion of the presentation I did at the recent Leading Age Annual Meeting and Conference in Denver per reader and attendee request. You can find it and download it on the Reports and Other Documents page on this site. The presentation is titled, “Value Propositions and Marketing”. The content essentially covers the application and development of economic value propositions and their resulting use in developing marketing and pricing strategy.
Seems every day this month has been hot and dry – could use a break from the heat and definitely, some prolonged rain. Within the past couple of weeks, I’ve traveled “rural” a bit and as a result, I have a different perspective on what farmers and ranchers in the middle-section of the country are struggling with. Brutal is the best word I can think of.
As this week concludes, Medicaid remains on my radar for a variety of reasons, some attributable to where I have been, discussions with providers in middle-America states, etc., and some attributable to policy news I’m tracking. With that note, here’s my trend list and of course, a couple of brief fall-out issues for the week and early next week.
Medicaid: If you are a policy junkie and economist like me, this issue is truly fascinating, full of complexity, politics, nuances and implications for providers and governments alike. On Monday, the CBO is supposed to release an updated scoring of the PPACA post the Supreme Court decision. What I will look closest at is their analysis of the forecasted costs of Medicaid expansion. The CBO is in a bit of a “between a rock and a hard place” scenario as it must score the law as it “is”, weaving the Court’s decision into the equation. What is unknown is how states will proceed with expansion. I suspect the CBO scoring to be a tad favorable for expansion prospects as the mechanisms with the PPACA for state to state funding support during implementation cover substantially, all of the costs. As the CBO is constricted by its charter and charge in matters such as this, what won’t be touched on is the existing funding problems that states have within their Medicaid programs and the depth of go forward deficits that are not covered by additional federal funding spun from the PPACA. Read on.
Earlier this week, and tied directly to this global issue of Medicaid expansion, CBO estimates, etc., a report was released from the State Budget Crisis Task Force, co-chaired by former Federal Reserve Chair Paul Volcker and businessman and former New York Lt. Governor, Richard Ravitch. Other notables on this task force are economist Alice Rivlin and former Secretary of State George Schultz. (A PDF copy of the report is available to my readers by dropping me an e-mail at firstname.lastname@example.org ). Within this deep report is a section on Medicaid, current issues and likely impact due to expansion under the PPACA. The Task Force’s analysis points directly to comments I have made in other articles on Medicaid: The program is so structurally flawed in terms of funding and government regulatory constraints that expansion will only “pile on” to existing problems and deficits.
Summarized, Medicaid spending is growing faster than current state revenues. Today, Medicaid for most states is their largest outlay, surpassing education spending. The prolonged recessionary period has shrunk and constrained state revenues while simultaneously increasing Medicaid eligibility and enrollment; a burgeoning gap between revenue inflow and outlay. Under the ARRA (Stimulus), states received enhanced federal support but with a policy catch; the enhanced funding could only go to expand programs under Medicaid. At the end of 2011, the enhanced funding disappeared while state fortunes in terms of revenue and expanded enrollment remained virtually the same, creating enormous structural deficits, larger than pre-recession years. The enhanced funding provided under the ARRA served as a band-aid only, allowing states to have sufficient current funds to avoid raising taxes or restructuring their Medicaid programs. Restructuring however, is not an easy option as states are presently finding as doing so requires federal approval, often slow to come and limiting in creativity or significance. Similarly, any revisions to Medicaid that occurred within a state’s plan before or after passage of the PPACA are tied to a Maintenance of Effort provision under the law. In short, this constriction forbids states from reducing benefits or program eligibility and thereby, spending.
The report’s conclusion is that regardless of the PPACA impact, Medicaid will remain a significant crisis issues for virtually all states. The simplest reason is that the PPACA additional funding serves one purpose; expanded eligibility. All other existing structural problems for the states such as bureaucratic plan and program requirements, lack of flexibility, increasing long-term care utilization (not addressed by the PPACA), slow economic recovery (no new revenues), and existing debt levels within state budgets aren’t changed at all by the PPACA and Medicaid expansion. Similarly, states have a current and real (justifiable) fear that the Federal government will not be able to sustain the projected funding levels provided with expansion. Federal deficit reduction actions will require cuts to entitlements and grants to states for federal program support. Among the largest current state grant expenditures is Medicaid. With looming deficit reductions at the federal level necessary, no real revenue change forecasted for states via increased tax revenues, Medicaid eligibility growth not subsiding, provider balk at payment reductions (reducing outlays), there is real justification that Medicaid is set for some level of substantive reform, arising out of a near financial melt-down.
Drugs, Drugs and More Drugs: A topic that won’t go away is anti-psychotic/psychoactive drug use in nursing homes. Whether the news comes from the OIG at DHHS or via CMS, this issue has clearly got attention in Washington. While I have yet to see surveyors take this issue to task at individual facilities (at least not at an in-depth level), the buzz I hear suggests that regulatory engagement will ramp-up and facilities need to be prepared. The latest news is from CMS regarding incorporating anti-psychotic use numbers under Medicare Compare. The message, and I have said this before (repeatedly), providers beware and get on this issue!
Changes to CCRC Entrance Fee Financial Reporting: For CCRCs that charge entrance fees (most do), a change is occurring regarding the reporting of entrance fees subject to refundability provisions. The Financial Accounting Standards Board (FASB) has revised a former requirement that the refundable portion of an entrance fee tied to reoccupancy (the refund trigger) be amortized to income over the useful life of the physical plant housing the unit will change requiring the CCRC to book the full liability of the refund due if the refund provision within the contract does not specifically state that the proceeds from unit re-occupancy are the trigger for the refund. In other words, any other limiting provisions that provide for a refund separate from strict reoccupancy, regardless fo the time period lapse, will necessitate the treatment of the entrance fee as a liability versus quasi-equity. Application of this new treatment will require CCRCs affected to reverse their prior cumulative amortization and establish the refund liability provision on their balance sheet. There may be some spill-over impact for affected CCRCs in terms of their FSO (Future Service Obligation) calculation as the deferred revenue component within the calculation goes away. I don’t personally believe this issue to be material for the industry (the FSO issue) but I do anticipated that certain CCRCs will have to take additional time explaining the changes to their Boards and bankers as implementation will cause some point-in-time “funk” to their statements.
Here are this week’s Fall Out issues (stuff worth noting briefly but not important enough to continue to watch – for now).
- Department of Agriculture reports are warning that persistent heat and drought are certain to lead to significant summer crop yield reductions. As a result, current corn commodity prices are up 31% since June. Beef, pork and poultry prices will rise accordingly as will corn-based Ethanol and thus, mixed blend gasoline to a certain extent (although oil prices continue to remain fairly flat and oil is the biggest driver of gas prices). For providers, food costs will rise and in this environment, especially for SNFs and Hospitals, it’s just another nuisance when there is no foreseeable increase in revenue.
- Soft census seems a national trend right now from hospitals to SNFs, home health and hospice. My group is watching this issue closely and as of today, we can’t correlate this into a shift of some discernible reason or sets of reasons. I know the nation isn’t healthier and perhaps the only driver in-play is continued economic malaise that is causing folks to avoid elective procedures, forestall health spending as much as possible, etc. Still, we are seeing this even for Medicare utilization. Perhaps more on this next week.
- No real news on healthcare stocks post the Court decision on the PPACA. We are watching this group closely to see if anything perks but so far, not much – a mixed bag. There are some clear winners if the PPACA remains full intact post-November – insurers and MCOs are an obvious winner. Providers are less clear but in time, certain hospital groups and well positioned post-acute providers could do well, especially if they are aligned with ACOs, etc.
- The weather deserves a note here just because; its lousy, nasty, hot, dry, etc. Don’t know anything more to say other than nationally, providers and my healthcare contacts and colleagues universal are experiencing extreme weather hang-over. For some, the excessive heat and drought is causing building problems and higher than anticipated utility costs and for others, just a general crankiness among staff, physicians, etc. Pray for rain and a shift in the jet stream!