Friday Feature: SNFs Still Make Sense
For some recent years, enhanced by the pandemic, the role of SNFs in the post-acute/senior living industry has tarnished. Residents and families often view the SNF as a “negative place” to reside, even if for short-term recuperation. Clinical staff take a dim view of the care complexity such that the SNF is a downgraded clinical setting, less than a hospital or outpatient setting. Providers, struggling with reimbursement inadequacy and advancing regulation, have reduced beds or closed locations. Some organizations like CCRCs, have minimized bed capacity or completely eliminated the SNF and moved to advanced Assisted Living care as the highest available care option for residents. Yet, in spite of these trends and the tarnish, SNFs have a place in the continuum and in some regards, and advancing place.
What challenges the SNF industry and thus, its reputation, are more external forces than flaws in the core purpose of an SNF. External forces such as onerous and increasing regulation, below cost reimbursement, and labor shortages are the most common forces providers deal with. Gone are the days where nursing homes were locations of long-term stays, typified by years of residency. Where and when this still occurs is for residents with early-age disabilities, or for residents that have minimal financial means such that Medicaid nursing home benefits are the primary level of support for care. With Medicaid supports via waiver programs expanding, long-term skilled nursing care includes primarily the most complicated residents, those with multiple conditions requiring skilled nursing interventions weekly or even, daily. Examples include ventilator care, dialysis, tube feedings, ostomy care, etc. While these services can be provided in the home or a non-SNF setting, location challenges often make an inpatient environment (SNF), the best place for consistent care when required.
The demographics forward, favor a post-acute, SNF setting. Despite the push for post-acute care to migrate to home settings with home health the reality remains, this is not the answer for every patient. The older the patient, the number of comorbidities involved, the nature of the comorbidities, the presence of an aging spouse with health challenges, etc. all are a predicate to whether or not, home care via home health is viable. Today, even access to home health can be challenging if not, impossible. The staffing challenges all health care providers face are particularly daunting for home health agencies where, acceptance of cases, especially complex cases, comes down to having available staff to meet patient needs. As home health care by its nature is inefficient, facility-based care can be more feasible when complexity of the case is at issue and the availability of staff is challenged. In other words, staffing one location that can accommodate say 60 residents, is easier than staffing a caseload of 60 separated by travel with distances expressed in miles.
The SNF industry and the facilities within tend to be some of the oldest classes of assets in the senior living industry. The cost of new construction is high and without access to a very high-quality payer mix, the returns are challenging. For providers than can maintain solid occupancy and high-quality payer mixes (Medicare, insurance, private pay), the returns are solid and the access to capital is there. Medicare Advantage plans are starting to create solid value-based care propositions for good providers with exceptional quality records AND great care coordination partners. For example, an SNF that has a relationship with a Home Health Agency, either owned or in partnership, has the ability to package price disease management approaches by common clinical conditions that include SNF care and HHA care, all bundled, and care coordinated. If the pricing is mapped with overall savings, reductions in re-hospitalizations, improved patient outcomes and satisfaction, the opportunities going forward are significant. I have a number of pathways/algorithms that fit this example. A few can be downloaded here.
What headwinds lie ahead fall mostly around staffing, regulation, and reimbursement. Oddly enough, the failures that will inevitably occur necessitating closures and bed reductions, will make good SNFs stronger going forward. The demand by demographics and patient needs is only increasing. There will be a significant role for SNFs to play in meeting the market needs. The questions that beg are around reimbursement keeping up with increasing costs and how disconnected will new staffing regulations be to the reality of the labor markets. As I have said in other posts, mandates make no sense when in all reality, the mandate cannot be met now, or anytime in the near future.
Bottom-line: Banks are still willing to lend to good providers. REIT capital is available as is private equity for facility improvements and modifications. Demand is decent and recovering. There is a lot of pent-up demand as well, post-COVID. Valuations have remained stable for SNFs as well. Plenty of partners exist, more so than other senior living segments (hospitals, Med Advantage plans, health systems, Home Health Agencies, etc.).
Litigation risk is still an issue but a recent court case in Washington involving Life Care Centers of America concerning COVID and the liability for infections obtained in an SNF was found favorably for Life Care Centers. One case, however, is not a trend but it is a good sign that perhaps, the SNF industry will not be overwhelmed by COVID litigation pertaining to outbreaks and occurrences in facilities. A synopsis of the case is available here: https://www.mcknights.com/news/life-care-centers-vindicated-in-early-covid-wrongful-death-case/?utm_source=newsletter&utm_medium=email&utm_campaign=NWLTR_MLT_DAILYUPDATE_052323&hmEmail=IjP1GPaY%2BJ2uvsLxTJ79bVeRWY7ycbnr&sha256email=aa4cb7c695037c31a216b9562788596b6fcd012145d566f31440b6fcd139c8a9&elqTrackId=2c80aade4c3647c8ab5b85f72fb85138&elq=8a824ff9b15249a9bf296d2d2c1be9e8&elqaid=4134&elqat=1&elqCampaignId=2746
Well-run, well-capitalized SNFs with more modern physical plants have a solid opportunity in the evolving post-acute industry. Challenges exist but opportunities do as well and, in my opinion, the opportunities outweigh the challenges for operators that understand value-based care models, are willing to develop partnerships, can maintain staff, and have great quality and service records.
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.
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.
Friday Feature: The Economic Realities
For the past two years, as the pandemic emergency waned, and the U.S. and the rest of the world moved back to a more normalized business and social condition, the fallouts of a mish-mashed pandemic policy (federal, states, local) became evident. School closures with virtual learning impacted kids and their education performance (falling performance on reading and math). Enormous governmental outlays and supports to the tune of trillions, revealed fraud (PPP), begat inflation, and assisted in dislocating millions of people from the workforce via subsidies (rent abatements, student loan payment abatement, enhanced unemployment, etc.). What we know is that short-term measures without a longer-term view of the resultant impacts, can lead to troubling economic times, and sometimes, the cure in terms of pain is worse than the original condition.
This morning, core inflation data was released, known as PCE (personal consumption expenditure). What we see is continued inflation above the Fed target of 2%. PCE measures personal consumption, removing volatile components such as food and energy. This report showed that inflation, minus food and energy, ticked-up in March and rested at 5% year-over-year. With energy such as gas on the rise, expect the CPI number with food and energy included, to continue to be at or above 6%. Here is this morning’s PCE release: https://www.bea.gov/news/2023/personal-income-and-outlays-february-2023
Earlier in the week, another key economic number was released – GDP or Gross Domestic Product. GDP data represents the growth rate of the economy as measured by the sum total of goods and services produced by economic activity. The first quarter number was 1.1%. This result is down from the prior quarter measure of 2.2%. GDP releases are initial and then adjusted, with adjustments typically moving the initial number down. With inflation running significantly above GDP 1.1% vs. 5% PCE and/or 6+% CPI, the economy is either in a state of or moving towards (quickly) a condition known as stagflation and perhaps, recession. Stagflation occurs when inflation runs considerably higher than GDP growth. Here is the GDP report: https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate
So, what does this data translate into for the near-term outlook for the economy? Answer: More of the same struggles and perhaps, some additional challenges. Interest rates will continue to rise as the Federal Reserve is likely to add another .25% rate hike to its core borrowing rate (fed funds rate), now at 4.75 to 5%. This will push the rate to 5 to 5.25%. A traditional economic principle starts to become evident: Fed rates at or above the rate of inflation drive inflation via demand reduction, down. If as suspected, the core inflation driver is 5% or thereabout, a fed funds rate at 5% to 5.25% should significantly slow the economy and move inflation down. The problem is the lag in seeing the impact and whether, the impact will in turn, push the economy into recession.
For senior housing and post-acute care, the current economic conditions are problematic (kindly stated). Real wages are not yet, keeping up with inflation meaning staffing costs will continue to have upward pressures. Borrowing costs are now crazy high and yet, reimbursement rates are not keeping up in growth, with the increasing cost of capital. For debt that is variable, providers are getting a rude and frequent awakening with increasing index rates pegged to the borrowing costs on the debt – rates therefore, rising. I’m watching growing debt defaults for senior housing as expenses have risen, borrowing costs the same in some cases, while revenues are flat or modestly higher but in no way, keeping up with the expense increases. The result is margin reduction and of course, reduced cash flow, translating into lower levels of income available for debt (below covenants).
Here’s a quick snapshot of economic data and conditions to watch over the next quarter.
- Bank capacity and willingness to lend. Credit is tightening and banks with deposit runs, are not capable of generating the same lending levels as before. This will hamper access to credit.
- As I have written about before, a non-existent (or very, very sluggish) home sale market due to high borrowing costs turns real estate primarily illiquid. This is not good news for seniors seeking or needing to sell a home to move into a senior housing project. With occupancy rates still below pre-pandemic levels, CCRCs and other senior housing providers will likely continue to struggle to move occupancy up due to the housing market challenges.
- Access to capital for capital improvements is a necessity for the senior housing sector. I expect a year of tough sledding in terms of capital access and thus, a creep-up in average age of plant with deferred maintenance being the driver (this year).
- Mergers and Acquisitions will also slow (already down) due to higher costs of capital and economic uncertainty. This may mean, with fewer buyers/acquirers, some projects/providers fall into closure/bankruptcy.
- If there is a bit of good news, it may come a bit later this year, in the labor market. The impact will not be on the clinical side but on the non-clinical side. Layoffs which are occurring, will accelerate if further demand reduction in the economy occurs. This will move people into situations where shifting industries for work occurs. In other words, fall-out in construction could beget maintenance staff (an example).
TGIF and Happy Weekend to all!
SNFs: 3 Overnight Stay Requirement Returning
As the Public Health Emergency (COVID) ends, healthcare providers will revisit pre-pandemic policies as a slew of waivers expire. One waiver particularly impactful to hospitals and SNFs is the requirement of a 3 Overnight (3 Day Stay) for a patient to receive Part A Medicare benefits in a SNF. Recall, the rule pre-pandemic was that a person had to be admitted to an acute hospital with a stay of at least 3 overnights in the hospital prior to discharge to a SNF, in order to qualify for Medicare coverage applicable to the SNF stay. One little wrinkle, rarely experienced, is that the discharge could be to another location within a thirty-day window of the patient entering the SNF, and the patient still could qualify for Medicare benefits in the SNF. In other words, the patient could be sent home, and for whatever reason, subsequently enter the SNF within 30 days of the hospital discharge and still be eligible for Medicare SNF benefits.
While there has been support for the waiver of this requirement to remain via a continued policy change from CMS, it is now apparent that CMS will reinstitute the 3 overnight rule. The primary impetus for this? Of course, cost control. A study from the AMA, appearing in the JAMA Internal Medicine publication (released on Monday 4/24) basically provides CMS with its positional defense. The study is here for anyone interested: jamainternal_ulyte_2023_oi_230019_1681999138.05344
The study analyzed MDS data for patients admitted to a SNF between January 2018 and February 2020 (pre-pandemic) compared to admissions between March 2020 and September 2021 (pandemic period). During the pre- pandemic period, there were 130,400 care episodes per month, 59% of which were female. During the pandemic period, there were 108,575 episodes, again 59% were female. Per the study: “All waiver episodes increased from 6% to 32%, and waiver episodes without preceding acute care increased from 3% to 18% (from 4% to 49% among LTC residents). Skilled nursing facility episodes provided for LTC residents increased by 77% (from 15 538 to
27 537 monthly episodes), primarily due to waiver episodes provided for residents with
COVID-19 in 2020 and early 2021 (62% of waiver episodes without preceding acute care).”
What was interesting to me is where the predominant utilization of the waiver for non-prior hospitalized patients occurred. Per the study, the 80% v. 68% of the LTC waivers (non-prior hospitalized) were for-profit facilities. These facilities had lower overall star ratings on average with the for-profit average at 2.7 stars v. the non-profit average rating of 3.2 stars. The same kind of variance was found looking at the staffing star ratings – 2.5 v. 3.0. Skilled admission spending was $2.1 billion prior to the pandemic and $2.0 billion during but a big jump in LTC (Medicare covered) occurred from $301 million to $585 million. Hospital spending remained relatively unchanged, despite lower overall patient volumes (COVID incentive payments making up outlay differences).
Here is the key takeaway from the study:
Key Points
Question: Did skilled nursing facility (SNF) care volume and
characteristics change when the public health emergency (PHE)
waiver for 3-day qualifying hospitalization was introduced in March 2020?
Findings: In this cohort study of SNF care provided for 4 299 863
Medicare fee-for-service beneficiaries from January 2018 to
September 2021, waiver episodes without preceding acute care increased from 3% to 18% during the PHE in 2020 to 2021. Among long-term care residents, such waiver episodes increased from 4%
to 49%, with 62% of episodes provided for residents with COVID-19.
Meaning: This study found that the use of SNF care for long-term
care beneficiaries without a preceding qualifying hospitalization
increased markedly during the PHE, primarily for care for patients with COVID-19.
So SNFs will return to a pre-pandemic point where coverage for SNF skilled services under Medicare will require a 3 overnight hospital stay as the Public Health Emergency ends. The study cites cost as the main driver, but I also believe, that cost on an escalatory basis is more the concern. As the pandemic has ended and hospital volumes are normalizing, we’ve seen SNF referrals increase. I noted this trend in a post on Monday…link is here: https://wp.me/ptUlY-vL What this means is that a shift toward more expensive post-acute care is happening and may be more longer-term in trend than not. In other words, while a bias toward discharge to home health was prevailing pre-pandemic, the factors of reimbursement policy, staffing dynamics, and increasing patient acuity on discharge have moved the needle (so to speak) toward SNF discharge. Staffing is of course, the main driver.
What does this mean for hospitals, if anything? Maybe a bit of shift in consciousness about length of stay, inpatient admission, and discharge planning will occur. The growing use of observation stays vs. inpatient admits was always a sore spot for SNFs and patients and families. I saw lots of confusion a few years ago among SNFs and, then unfortunately families, when a patient arrived for admission and lo and behold, the majority of the stay was classified as observation vs. an inpatient admission, not meeting the 3-day inpatient admission requirement.
Medicare Advantage plans will also need to rethink some approaches in their care coordination. While the preference may be a discharge to home health, admission acceptance is still on the lower side (lots of rejections). it may just require a shift in focus from Med Advantage plans toward better coordinated SNF stays.
For SNFs, the loss will be felt among facilities that were able to “skill” typically, long-term care Medicaid patients. The missing revenue will be felt without a counterbalance pick-up readily available. For good performing SNFs that have focused on building strong value propositions and positioned themselves well for value-based care, options are plentiful, but they had been prior to the pandemic. Staffing remains the challenge. My advice for these folk? Get your care pathways together and your algorithms and be efficient in cost and length of stay. Use your data to drive partnership referral bases with hospitals and in particular, Med Advantage plans. Now is a good time to take advantage of the shifting policy dynamics.
SNFs and HHAs: A Common, Concerning Trend
Current economic and government policy conditions have converged to create a concerning trend for home health and SNF providers. The trend for both segments is loosely known as “referral rejection”. The number of referrals that both provider types are rejecting is up considerably since the start of the pandemic and for now, I see no change in direction.
The chart above is a snapshot of the issue across the predominant pandemic periods of 2020 through January 2022. One would expect referral rejections to escalate during this period as outbreaks would necessitate, caution and temporary admission holds, especially for SNFs. Yet, even without a winter breakout of COVID, rejection rates in home health increased to 76% for January 2023. Interesting, during this same period SNF referrals increased by 113%. During the pandemic, the referral lines/patterns crossed as home health from hospital referrals increased and SNF referrals, dipped. COVID period hospitalizations also changed and therefore, overall post-acute discharge volumes during 2020 – 2022 dropped. An in-depth look at hospital volumes and discharge patterns is here: COVID-FFS-Claims-Analysis-Chartbook_2022Q1
SNFs are now garnering more referrals at the expense of home health yet, we are seeing shifted patterns around a number of factors. COVID policy and Medicare policy during the height of the pandemic created a preferential shift from SNF to home and hospital admissions (non-COVID related) were down substantially (elective and other procedures). As hospital admission patterns are recovered to near pre-pandemic levels, discharges have shifted to SNFs, not due to a preferential change but due to policy (reimbursement) and staffing.
Though both provider types share staffing and reimbursement concerns, home health has had the biggest negative impacts from the two. SNFs have certain economies of scale in terms of staffing whereas, home health typically, cannot maximize efficiencies with a caseload spread among various locations. In some instances, smaller caseload blocks are possible but in rural and suburban areas, cases are typically spread such that productivity for therapists and nurses is hampered by travel times. Home Health received a pittance of an increase in their PDGM rates for 2023 and CMS is targeting potential reductions going forward to offset programmatic growth and what it believes, is a rich fee schedule for providers.
Acuity on discharge is also up and thus, home health rejection rates seem to correlate. While home health may remain the preferred discharge location for Med Advantage plans and physicians (and patients), finding an agency that can staff the case let alone deal with a higher acuity patient is problematic in most markets. SNFs tend then, to be the beneficiary of the home health rejection.
One thing is certain in the current environment, the 2o ton gorilla in the room is staffing levels – ability to have sufficient number in sufficient roles (RNs, LPNs, CNAs, etc.) to meet patient needs on referral. Similarly, restrictive Medicare rate increases, with staffing costs rising and costs of doing business the same (insurance, supplies, energy), SNFs and HHAs will both be vigilant on patient needs vis a vis, reimbursement. Small margins can quickly get eaten-up by higher wage cost, agency staff, and patient care supply requirements.
As we approach mid-year, I’ll continue to watch this referral trend and how it manifests in terms of rejections and ultimately, care access. I’m afraid that continuation of these patterns will cause access problems if not for post-acute care services in general, but for preferred care locations (home v. facility based). And while it may be nice for SNFs to see a rebound in referrals, I don’t know too many SNFs these days that are able to occupy full capacity (staffing) and to accept without condition, every referral that comes their way.
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