Posts Tagged ‘VTR’

Ten Takeaways From NIC Conference

The Fall conference of the National Investment Center for the Seniors Housing and Care Industry (NIC – www.nic.org) was held in Washington, DC from September 14 to September 16, 2016.   This is the largest industry conference for seniors housing and care.

I moderated a panel entitled “Somewhere Over The Rainbow: Where Winning Post Acute Strategies Attract Investors. “   Panelists included: Benjamin Breier, President & CEO, Kindred Healthcare, Inc.; Larry Cohen, CEO, Capital Senior Living Corporation; George V. Hager, Jr., CEO, Genesis HealthCare, LLC and Andy Smith, President & CEO, Brookdale Senior Living.

When I served as an equity analyst I would spend almost my entire time at NIC conferences in private meetings with companies and investors.   As a retired analyst, blogger on seniors housing and care and session moderator, I had many informal conversations with operators, industry organization staff, lenders and investors, a few scheduled meetings and attended more of the actual conference sessions.

My ten takeaways from the 2016 Fall NIC Conference are:

  1. Record Attendance – Guarded Optimism – NIC’s Fall Conference at the Marriott Marquis Hotel next to the Washington Convention Center had a record reported attendance of 2,700. Senior housing operators are guardedly optimistic, with asset prices still high, reasonably positive operating metrics and only spotty reports of rising labor costs.   There is some caution about overbuilding but that threat may be receding (see below).   Skilled nursing and post-acute care operators are struggling with top-line revenue pressure and big transition to value-based purchasing.
  2. Capital Plentiful But Diversifying – Capital for seniors housing property acquisitions and renovation remains readily available as does investment capital for experienced senior housing operators to grow their businesses.   HUD financing is still very attractive for skilled nursing but, with the underperformance of some skilled nursing and post-acute care operators, REITs are diversifying to limit their exposure to these subsectors. Ventas led this charge with its CCP spinoff and new investments in hospitals and university-tied biotech. HCP has announced its intension to spin off its skilled nursing holdings into QCP and Welltower has also announced a desire to reduce its exposure to Genesis.
  3. Construction Lending Standards Tightening – NIC’s in-house economist Beth Mace and NIC’s bluebook featuring key industry trends note a tightening of lending standards for new seniors housing construction as reported by surveys of loan officers.   If true, this may help limit widespread overbuilding of assisted living properties, about which I have expressed concern.   Other conversations I had during the Conference seemed to support NIC’s view that underwriting standards for new seniors housing projects are tightening.   Some finance types I spoke believe the cutback in senior housing construction lending is driven by a broader cutback in lending for multi-family construction projects rather than lenders making a specific determination that seniors housing is becoming overbuilt.
  4. Good and Some Less Good Development Continues – Despite the cutback in lending, many seasoned senior housing operator/builders are continuing to develop projects in markets in which is it is difficult to develop and for which the approval process may have been 3-5 years.   There appear to be a smaller number of projects still being developed by inexperienced players with money from community banks and smaller equity investors and hopefully tightening lender standards will further weed out more of these types of projects in the future.
  5. NIC Continues to Built Its Value For Skilled Nursing & Post-Acute Care – Since adding skilled nursing data to its NIC-MAP data service a number of years ago and adding a Spring conference with more skilled nursing focus, NIC continues to build its data and content for skilled nursing and post-acute care providers and is at the forefront of educating senior housing operators about the convergence of seniors housing and post-acute care.   As post-acute care transitions from a fee-for-service to value-based purchasing, NIC appears well positioned to help educate investors and attract investment capital for this portion of the industry, as it has previously done for seniors housing.
  6. Post-Acute & Senior Housing Providers Have Opportunity to be “Strategic Aggregators” – Former HHS Secretary Michael Leavitt opened the NIC Conference by providing an overview of the broad changes occurring in the U.S. healthcare system with a focus on the shift to value-based purchasing.   Mr. Leavitt believes the shift to value-based purchasing increases the risk that senior housing and post-acute care providers become commoditized fee-for-service price-takers.   But Leavitt also believes that senior housing and post acute care companies that serve significant numbers of patients in their facilities and programs have the opportunity to aggregate patient lives and serve as general contractors making value-based purchases themselves rather than just being price-takers in a value-based payment world.   While the shift to value-based payment is slow and fragmented, Mr. Leavitt quoted Bill Gates as saying, “Don’t overestimate what will happen in the next two years or underestimate what will happen in the next 10.”   He foresees continued consolidation through both mergers and acquisitions and additional joint ventures among operators.
  7. Major Post-Acute Operators Generally Agree With Leavitt – The four publicly traded senior housing and post-acute care operators who participated in my panel are clearly frustrated as they function in a fee-for-service world (Only 1-2% of their revenue is now truly value-based) while pivoting their organizations to profit from value-based payments.   These large operators are pursuing a wide range of strategies to provide post-acute care and adapt to value-based payments (from senior housing operators contracting out all post-acute services, to focusing on being the preferred provider for a few segments of post-acute care, to being a comprehensive provider of all services – LTACHs, IRFs, SNFs, home health, rehab therapy and even hospice – in select markets).   Two common themes appear, however.   Major post acute care providers are positioning themselves to be strategic aggregators and value-based purchasers and major senior housing operators believe offering post-acute services within their buildings themselves or through third parties will be key in continuing to attract and retain senior housing residents.   Most operators are also looking to increase their concentration in select markets.
  8. Managed Medicare Rate Pressure Slowing – NIC reports that the downward pressure on Medicare managed care (Medicare MA) rates to skilled nursing operators slowed in 2Q16 and it will be interesting to see if relentless downward pressure on SNF rates and length of stay from Medicare managed care providers is really beginning to subside. This would be very good news for skilled nursing operators.
  9. Importance of Data/Information Systems Growing – Both post-acute care operators and senior housing operators providing, or contracting with others to provide, post-acute care within their facilities are seeing an increased need for data to measure outcomes in order to make the case to ACOs and other bundlers of post-acute patients and in order to take a more active role themselves in managing patient lives.     Data to predict future performance of facilities in a value-based purchasing world is also key to underwriting future investments for sophisticated investors, like Formation Capital, since past performance alone of a skilled nursing or post-acute care facility may be a poor predictor of how it will perform in a broader value-based purchasing environment.
  10. NIC-Map Making Some Important Strides – NIC-MAP has expanded to an additional forty metro markets for its traditional data reporting and is adding two important products – actual monthly rent, occupancy and turnover information for a national sample of 250,000 senior housing properties and actual monthly rates by payer source and occupancy for a smaller but growing sample of skilled nursing properties.   These are national surveys electronically reported from operator’s actual month end data and NIC hopes to grow these samples.   This will allow NIC to be much more accurate and timing on rent and other key financial metrics on a national basis and provide benchmarking data to participating operators and other industry participants.
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On Tuesday, May 17, 2015 I was featured in a question and answer session over breakfast with subscribers of Senior Care Investor, moderated by its editor Steve Monroe. We covered a wide range of topics.   I summarize below key takeaways from my Senior Care Investor interview and provide a link to the nearly one hour webcast.

Key Takeaways

The public markets are much less important for seniors housing and post-acute care than they were twenty years ago when there were as many as 30 public companies including operators and health care REITs.   If you review the investment history of seniors housing and post-acute care there have been a number of “pivot points” where stocks in these sectors experienced significant sell offs and then rebounded strongly.   These pivot point were driven by overbuilding and reimbursement and operating problems that in some cases led to operator bankruptcies.  If you got the timing right, these pivot points provided very attractive investment opportunities in the stocks of private pay senior housing operators, post-acute care operators and health care REITs, with the stocks within each of these industry groups moving on somewhat different events and at somewhat different times.

I see current industry conditions again creating pivot points for investments in senior housing, post-acute care and health care real estate and believe it is the right time for investors to be studying these sectors and deciding when it makes sense to invest.

Private-Pay Seniors Housing – Overbuilding, few publicly traded investment options and operating issues at the largest publicly traded operator, Brookdale Senior Living, Inc. (BKD), have caused most public market institutional investors to flee the private-pay seniors housing space.   I don’t see a quick pivot in private-pay seniors housing because capital remains plentiful for new construction, underlying demand from older seniors (80+) is slower than it was before 2010 (see Slow 80+ Pop Growth, Elevated Construction Spark Concern For Seniors Housing on this blog), and issues at Brookdale will take some time to resolve. I also believe private equity investors will await a more receptive market before bringing other quality operators public.

Post-Acute Care – Post-acute care currently has more publicly traded operators with scale than private-pay seniors housing, but deteriorating operating fundamentals and high leverage have also driven public market institutional investors away from publicly-traded post-acute care operators.   Major REITs, such as Ventas (VTR) and HCP (HCP) spinning off skilled nursing assets has underlined the risks investors see in this space.     Increased use of Medicare and Medicaid managed care and ever expanding use of bundled payments are reducing lengths of stay (LOS), pressuring post-acute care rates and volumes and eroding operator revenue and EBITDA.   However, because baby boomers are now beginning to turn 70, the pool of post-acute care patients should grow dramatically over the next 5 – 10 years while the supply of post-acute care facilities and beds is flat or declining and quality operators should be able to attract higher volumes of patients from hospitals if they care demonstrate quality outcomes.   A mild flu season and high operator leverage exacerbated poor 1Q16 financial performance.  I anticipate pressures on rates and LOS stabilizing and volume growth providing upside for post-acute care operators over a 1 – 2 year period while operators are rationalizing their delivery systems and paying down debt.   I believe these factors put post-acute care closer to a performance pivot point than private pay seniors housing.

Health Care REITs – Health care REIT share prices have been buffeted by some of the same issues affecting private pay seniors housing and post-acute care operators but health care REIT share price performance has been much more mixed than that of the operators. Many health care REITs are well diversified, have strong lease coverage and are less exposed to overbuilding and revenue pressures than the operators themselves.   Health care REIT stock performance is also significantly influenced by investor’s views on interest rates and overall economic growth.   Some healthcare REITs, with more significant exposure to seniors housing or post-acute care issues, such as HCP, presumably its future SpinCo, and CCP, have been more directly impacted by the industry and operator issues noted above.   These REITs, and some others, offer larger cap, more liquid investment vehicles than seniors housing or post-acute care operators but likely also have potential for upside from the industry pivot points described above.

Having retired as an equity analyst who followed seniors housing, post-acute care and health care REITs for 15 years, I no longer make Buy, Sell, Hold recommendations.   I do recognize that there are significant risks for private pay senior housing operators and particularly for highly leveraged post-acute care operators. However, experience in the 1999 – 2002 crash of private-pay seniors housing and post-acute care and other sell-offs driven by operating underperformance, reimbursement cuts and regulatory issues show that these sell-offs have often proven to be great investment opportunities and have absolutely been a time to look harder at these sectors and develop an investment strategy and timetable rather than to flee the space.

For a more in depth discussion of these issues, listen to the Senior Care Investor webcast by clicking on the link below. Comments, including those with opposing viewpoints, welcome.

 

 

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UnSenior “Seniors Housing”

Earlier this month I toured The Stories at Congressional Plaza, a new type of “seniors housing” project designed to appeal to seniors as well as those of other ages looking for a high-tech, high-service environment in an urban mixed use setting.  The Stories opened in February 2016 and is a joint effort of Federal Realty Investment Trust and Ryan Frederick’s Smart Living 360.

Federal Realty is a publicly traded REIT (NYSE: FRT) that specializes in the ownership, operation, and redevelopment of high quality retail real estate in the country’s best markets and is increasingly developing mixed-use projects in connection with its retail holdings.   Ryan Frederick has long been known as one of the leading thinkers on the future of seniors housing through his Point Forward Solutions consulting company.   Ryan has now created a new company, Smart Living 360, to work with a retail/mixed use developer, rather than a seniors housing company or health care REIT, to bring us his vision of the future of “seniors housing” in a property designed to appeal to seniors but open to those of all ages.

The Stories is a new 48 units apartment building located at 1628 E. Jefferson Street in Rockville, Maryland.   It is part of Federal Realty’s Congressional Plaza redevelopment that includes a high-end shopping center, Federal’s corporate headquarters and an existing 150+/- unit apartment building with structured parking (The Crest), now about 10 years old.   The Stories was developed on a site long designated for residential use as phase 2 of the Crest. According to Ryan, Federal became interested in consciously designing The Stories to appeal to the seniors market because they wanted a way to differentiate the projection from other high-end rental projects in the same area of the Rockville Pike, northwest of Washington and Bethesda.

The Stories is designed to appeal to the baby boomer market, now passing age 67, and other seniors with a “younger” outlook, unlikely to consider independent or assisted living or even a continuing care retirement community (CCRC).   This market is large and rapidly growing and not well served by well served by conventional seniors housing. While those 75 and up are considered part of the senior housing markets in many market studies, the average entrance age for most dedicated senior housing communities is now closer to 85 than 75 (See Slow 80+ Pop Growth, Elevated Construction Spark Concern For Seniors Housing on this blog – http://03c242c.netsolhost.com/WordPress/?p=209.

Ryan and Smart Living 360’s vision for The Stories is derived from a view of what “younger” seniors want in a living environment to enhance their wellbeing and tries to anticipate the growing role of technology for enhancing seniors’ lifestyle and delivering the services they want and need.   It is also purposefully designed to be flexible so it can adapt to the needs of its target market as they are discovered over time.

To understand what Federal and Smart Living 360 have created at The Stories, you need to think outside the traditional seniors housing box regarding design, services and technology.

Physically, The Stories is a attractive 5-story modern apartment community located in high-income, high-wealth, high-education zip code with a unit mix favoring larger 2 and 3 bedroom units (75% 2 bdrms) over one level of structured parking.   With rents from $2,500 to $4,000, The Stories is priced at about half the cost per square foot of traditional IL properties in its market.  But unlike conventional IL properties, The Stories does not bundle food service and activity programs into its rent.   It is part of a mixed-use project including retail, office and other residential uses in a nice residential area a block off a heavily travel arterial street, the Rockville Pike, MD 355.   The property faces other residential uses and fronts on a relatively quiet suburban street.

P1040397

Units within The Stories look like high-end non-age-targeted residential rental units with small balconies that are designed with largely invisible accommodations for an aging senior market – wider doorways and master baths able to accommodate a wheel chair with higher toilets, easy entry showers, modest grab bars in the bath with studs behind the wall to allow more to be installed, roll out lower shelves in cabinets, electrical outlets further up on the wall, etc.   These are accessible units that intentionally look like conventional units.

P1040395

Common areas include a large fitness room with some specialized equipment for seniors that could also be used by personal trainers or rehab therapists, a central lounge with a refrigerator and cooking equipment and a self-serve coffee bar.  
There is a small conference room that is designed so that it can also be used for a visit by a health professional or for telemedicine care.   The entire building is pre-wired for high speed Verizon Fios internet with pre-installed routers; and service providers are available to install Sonos wireless speaker systems and other electronic amenities in the units.   The electronics designed into the building are intended to accommodate increased use of patient self-monitoring and wellness devices that Ryan believes will become increasingly prevalent, sophisticated and integrated over time.

P1040391

The building offers a secure electronic entry system, with an enhanced concierge called a Lifestyle Ambassador (services described below) manning the front desk during the day. The building is monitored in the evening by management personnel from the larger Crest Apartment building that is located at the other end of the block, across a parking lot from The Stories.   The number and length of coverage by on-site personnel is partly limited by the buildings relatively small size, only 48 units.

What really sets The Stories apart as a community that will appeal to seniors is its use of a Lifestyle Ambassador, in this case a hotel industry trained and certified concierge cross-trained in seniors housing design and services.   The role of the Lifestyle Ambassador is threefold – 1. Help residents connect with one another and with the outside community, 2. Provide access to any needed services, and 3. Simplify resident’s lives by taking care of pets and plants while residents are traveling and providing other services.   Smart Living 360 makes use of many off-the-shelf on-demand services, has prearranged for a wide range of additional services to be available to residents of The Stories and will provide referrals to providers, including:

  • Transportation
  • Pharmacy
  • Physicians
  • Food Delivery
  • Financial Advisors
  • Case Managers
  • Home Healthcare
  • Personal Trainers
  • Tech Services

The goal at The Stories is to offer attractive housing, location and services to enhance the well being of baby boomers and other “younger”, generally healthy seniors without the stigma of a traditional seniors housing community with a large percentage of very old, frail people; and to do it in a flexible way that allows it residents to order in any services they may need and to adapt to rapidly evolving technology for medical monitoring and wellness.

Smart Living 360 hopes to monitor residents of The Stories over time to see if the building’s design and the flexible services it offers will enhance residents’ well being compared to those living in other residential settings. This will be done using the Gallup-Healthways Well-Being Index that measures five factors:

  1. Purpose – Liking what you do each day and being motivated to achieve goals
  2. Social – Having supportive relationships in your life
  3. Financial – Managing your economic life to reduce stress and increase security
  4. Community – Liking where you live and having pride in your community
  5. Physical – Having good health and enough energy to get things done.

What is interesting to me about Smart Living 360’s approach compared to a traditional senior housing facility is that Smart Living 360’s Life Style Ambassador begins with the residents’ wishes and customizes activities and services the resident desires while a traditional senior housing facility has a menu of services into which it tries to fit a resident. I see the Smart Living 360 approach as more resident centric, more personalized and more adaptable over time.

The Stories occupies an interesting place somewhere between non-age-restricted market rate apartments and conventional seniors housing.   Interestingly, the project was voluntarily described as 55+ housing in pre-opening marketing material but the developers have now decided to market its advantages for seniors but without the age restriction, which they believe may be a turn-off for their primary but not only target market.   Of the first several residents moving in, two are seniors and one is age 29 but liked the amenities.

It remains to be seen whether The Stories will be successful in attracting baby boomers and other seniors with a “younger” outlook and how Ryan Frederick’s vision of meeting residents’ needs and increased use of electronic devices to monitor and enhance health and wellness will come to pass.   But I believe, even at this stage, The Stories has some interesting lessons for seniors housing and multi-family developer/operators and institutional real estate investors.   These include:

  1. Non-age restricted housing and un-senior “seniors housing”, as I categorize the Stories, may be more appealing to under 80s seniors, and even those over 80 in good health with younger outlook, than more conventional seniors housing projects.   For a significant portion of the senior population today and I believe for even a larger portion of the baby boomers, living in mixed aged neighborhoods or even in mixed age buildings like The Stories may be preferable to living in a senior ghetto or in an isolated age-restricted community.
  2. We have already seen obsolescence in seniors housing communities, such as IL projects without sufficient provisions for handicapped residents, IL and CCRC projects without AL and memory care units, AL communities with insufficient common space for gyms or rehab care and IL and AL buildings with too many small units.   This history suggests that building flexible design into seniors housing communities, which The Stories has very deliberately tried to do, may be an advantage for the community over time.
  3. Seniors housing located in mixed use projects or higher density urban areas, where services and amenities are close-by, while often more difficult and more expensive to develop than stand-alone conventional IL or AL communities, would seem to offer a lot of appeal for the baby boomer age cohort and other active seniors.
  4. In an age of on-demand services, such as Uber and Foodler, planning seniors housing around services delivered by outside vendors may prove both cost effective and better able to meet seniors desires and needs than the service packages typically available in seniors housing communities.
  5. Seniors, particularly the baby boomer age cohort, are increasingly tech-savvy and should be able to adapt to electronic delivery of health and wellness services, as well as other on-demand services, and may see projects designed to accommodate more high-tech amenities as more appealing than conventional care models.
  6. The resident centric and holistic approach to meeting resident’s needs built into the Lifestyle Ambassador approach that incorporates both social and care needs, seems to offer some advantages over the way conventional seniors housing services are organized with responsibility fragmented between healthcare, activities, dining and caregiving personnel, each of whom may only see themselves responsible for a slice of a senior’s needs.   While the staff in any well managed seniors housing project should get to know the “whole resident”, making resident on-demand centric services the organizing principal of your care delivery system appears to offer some advantages and a have a better chance of assuring a residents need are met.

 

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Background

I have been pessimistic about maintaining occupancy and pricing and the risk of overbuilding in private-pay seniors housing.   I shared these concerns, along with lessons learned from the last industry downturn, with the NIC Future Leaders Council at the annual conference of the National Investment Center for Seniors Housing and Care (NIC) in early October and will express similar views when I speak at the Senior Living 100 Conference in March.

Since I am more pessimistic about the risk of overbuilding than NIC MAP® Data Service and many industry professionals, I recently reviewed my assessment by examining the most recent census population projections to estimate demand and updated 3Q15 NIC-MAP information on supply. This blog summarizes the results of that review.

NIC MAP Assessment

NIC MAP data indicates a total supply of U.S. institutional quality private-pay seniors housing units (independent living, assisted living and memory care) as 1,404,000 units as of 4Q14.   It shows construction as a share of inventory for the top 99 markets as of the 3Q15 of 3.3% of existing majority IL supply and 7.9% of majority AL including memory care. If I apply these same shares to the inventory of seniors housing for the nation (1.404 million units), then I estimate that there may be 72,838 units under construction as of 3Q15.

NIC staff estimates that these 72,838 units will be delivered over a two-year period for average annual construction of approximately 36,400 units. This compares to peak construction levels of approximately 45,000 units in the late 1990s when the last significant overbuilding occurred.

NIC MAP’s statistics on demand and supply focus on two key items, % growth in the supply of private-pay seniors housing and the percent of the 75+ household population, or penetration rate, required to fill anticipated construction.  Comparing NIC MAP 4Q14 supply in the top 99 markets to the most recent U.S. Census 2015 population forecast for the entire U.S. 75 + population, NIC-MAP data shows a penetration rate for occupied private-pay seniors housing of 6.25% of the 75+ population in 2015 at a 90.05% occupancy level.  The 75+ population is projected to grow at a compound annual rate of 2.9% between 2016 and 2020 while the seniors housing supply is projected to increase by about 2.6% in 2016 if we assume that half of the units NIC MAP estimates are under construction as of 3Q15 are completed in each of the next two years.

The absolute growth in the entire U.S. 75+ population at a 2.9% annual rate is expected be nearly 626,000 annually.   At a 6.25% occupied penetration rate, this equates to demand for 39,125 new seniors housing units annually between 2016 and 2020 compared to annual unit growth from new construction according to NIC staff of 36,419 (72,838/2).   The market’s ability to absorb projected levels of new construction would appear even better on a net basis if obsolete units being removed from the market were to be deducted from the estimated growth in supply based solely on units under construction.   Using NIC MAP estimated supply growth rate (without any assumed demolition) the 75+ occupied penetration rate could actually decrease to 6.1% in 2020 while still keeping private-pay senior housing occupancy at the 90.1% level as of 3Q15 and filling projected development at its current rate to this same level of occupancy.

The key takeaways from this analysis of Census and NIC MAP data are:

  • Private-pay seniors housing construction levels in the US are elevated compared to recent years but below late 1990s peaks.
  • Demand is sufficient to accommodate current levels of construction because the 75+ population is growing at 2.9% annually between 2016 and 2020 vs. supply growth of about 2.6%.
  • Growth in the 75+ population between 2016 and 2020 will produce sufficient absolute growth in demand at a 6.25% penetration rate (39,125 units annually) to absorb projected seniors housing supply growth (36,125 units annually).
  • With the exception of some select markets, NIC MAP data indicates occupancy can be maintained without an increase, and even with a small decrease, in the 75+ occupied penetration rate of private-pay seniors housing.
  • Some older obsolete units will be removed from the market, further brightening the prospects for private pay seniors housing compared with estimates of supply growth based solely on units under construction.
  • Many industry leaders report little evidence of overbuilding in their markets.

Why I Am Concerned

I don’t dispute the NIC-MAP data factually or the view of many industry leaders but I believe they overlook three key items: (1) the increasing age of entry of new residents into private-pay seniors housing, (2) near-term growth in the senior population is concentrated in the “younger” 75 – 79 age group and (3) high turnover means newly constructed seniors housing is very competitive with the existing supply. These are the items that make me pessimistic about the near-term performance of private-pay seniors housing.

Increasing Age Of Entry – Different studies report different numbers for average age of senior housing residents and average entry age, but it is fair to say that in 2008/09 studies the average age of residents ranged from 82 in majority IL properties to 84 in majority AL properties and has moved higher.   Estimated entry ages for IL and AL are now closer to the mid-80s according to many operators.   This is important because much of the growth in the supply of private-pay seniors housing is in AL and Memory Care units that appeal to seniors over age 85, while much of the growth in the 75+ population will occur in the younger end of this age cohort.

Growth75+

Near-Term Growth Concentrated in Seniors Less Than 80 – The chart above shows projected population growth from the most recent projections of the US Census Bureau for the 75-79, 80-84 and 85+ age groups for the periods 2016–2020, 2021–2025 and 2026-2030.   Focusing on the 2016–2020 period you can see that growth is highest for the 75-79 age group, while much lower for seniors 80 and above.   As a result, when NIC MAP and others use a 75+ penetration rate it may overstate demand for private-pay seniors housing because residents are not moving in on average until 82 – 84 and perhaps 85 or higher for AL.

The chart below further refines population growth for seniors between age 80 and 87 to illustrate how dramatically growth is skewed toward seniors less that 85 between 2016 and 2020.

Growth 80 - 87

Near-Term Outlook Looks Worse On 80+ Penetration Rate – If we look at private-pay seniors housing penetration rates for the 80+ rather than 75+, the 4Q14 penetration rate for occupied units is 10.1% at the national level.   Annual projected demand between 2016 and 2020 for the entire 80+ population at this penetration rate is only 23,123 units, compared to current construction levels of 36,400 units per year and the 80+ penetration rate would have to rise to 10.8% in order to maintain senior housing occupancy and accommodate unit growth at current levels to 2020. (This analysis assumes that the rate of construction as a share of inventory exhibited currently for the 99 markets is the same for the non-99 markets as well.)   Slow growth in the 80 – 87 age group most likely to move into private-pay seniors housing (particularly in the 85+ age group) and the need for a significant increase in the 80+ penetration rate in order to maintain current occupancy levels raise concern about the industry’s ability to maintain private-pay seniors housing occupancy and rate and accommodate new unit growth near term, even if we assume some reduction in the supply as obsolete units are removed from the market.

Turnover – Data for YE2014 as reported in ASHA’s The State of Seniors Housing 2015 shows turnover rates of 26.2% for majority IL properties and 51.6% for majority AL properties for a weighted average of 36.5%.   With a total private-pay seniors housing supply of 1.404 million units and a 90.05% occupancy level, this means that 462,000 units need to be filled annually just to maintain current occupancy.    These relatively high rates of turnover, particularly for AL properties, mean that the existing stock of private-pay seniors housing is constantly competing with any newly constructed units and any degree of overbuilding is likely to quickly put pressure on occupancy and pricing in the existing stock, in my view.

When Will Supply Demand Improve – In order to assess when demand/supply conditions for private-pay seniors housing will improve, in the chart below I project growth in the supply of seniors housing into the future assuming the same rate of annual growth in supply seen in 3Q15.   This rate of growth (5.24% weighted average) is applied to the supply at the beginning of each five year period and held constant over each five-year period.  Once we pass 2020, as the chart indicates, the future of private-pay seniors housing is increasingly bright, with higher demand driven by increased longevity and, after 2026, the long-touted and final arrival of the baby boomers to an age when they might actually consider seniors housing.

Supply Demand

However, when you look closely at the above numbers, you see that 80+ demand begins to exceed the growth in supply only slightly in the 2021-2025 and really strong demand from 80+ seniors relative to the level of supply growth does not begin to appear until after 2026, when the Baby Boomers (1946 to 1964) begin turning 80.

Reasons For Near-Term Pessimism – While not every seniors housing market will get overbuilt and many high-barrier-to-entry markets may avoid the adverse impact of additional private-pay seniors housing development, I believe the data above supports my pessimistic view on private-pay seniors housing occupancy, rate and the risk of overbuilding over the next 3 – 5 years. If we keep building at current levels as a percent of supply and we focus on demand from 80+ seniors, it appears that the seniors housing industry will substantially overbuild the market over the next five years. In the period from 2021-2025, the amount by which projected 80+ demand will exceed projected supply growth should be sufficient to help absorb some of the excess supply created in 2016-2020 but may not be high enough to support a significant increase in occupancy or rate or a true senior housing boom.   The golden age in terms of demand is really a post-2026 event assuming supply growth continues at today’s rate, the health of baby boomers at 80 is about the same as today’s 80 year olds and boomers will find seniors housing as it is currently being designed and built attractive.

Keys To Success In A More Competitive Environment And Future Arrival Of The Boomers

In order to outperform in the more competitive environment for private-pay seniors housing that I see over the next 3-5 years, I believe operators should:

  • Limit new development near term
  • Focus on high barrier to entry markets
  • Try to reduce turnover
  • Design/Redesign/Market properties to attract under-80 or early 80s seniors by focusing on IL rather than AL and rethinking locations and amenities to appeal to “younger” seniors
  • Increase their equity cushion and line up capital in order to be able to bid for more attractively priced acquisitions if occupancy and rates fall and some new product cannot be filled as anticipated

In future blogs, I will discuss some of the cutting edge product that I believe will appeal to Under-80 seniors and look at the housing alternatives to private-pay seniors housing for this age group such as staying in their homes or choosing mixed age condos and apartments, using support services where necessary.

Technical Notes

I want to acknowledge the help of my friends at NIC in preparing this blog, even though it takes a more negative view on the near-term outlook for the industry.   I particularly want to acknowledge the help of Robert Kramer, Beth Burnham Mace and Chris McGraw.   Dave Schless at ASHA also reviewed an early draft and gave me his feedback.

I do not intend to malign NIC MAP data in this blog post. The advent and growth of NIC MAP data is a great tool for the industry and one that should help us avoid the rampant overbuilding seen in private-pay seniors housing in the late 1990s.   NIC MAP makes no statement about the appropriateness of the 75 plus penetration rate and demand, per se. NIC MAP adopted the 75 plus household cohort a number of years ago because it has been traditionally been used in the sector by feasibility analysts and others.

I also want to acknowledge two industry reports that cover some of the same material noted here but reach somewhat different conclusions. These are: Beth Mace’s Demographic Update Commentary, circulated by NIC in July, 2015 and Phil Downey’s and Larry Rouvelas’ A Projection of Demand for Market Rate U.S. Seniors Housing 2010 – 2030 published by American Seniors Housing Association Winter 2013.

NIC defines institutional quality private-pay seniors housing as properties with 20 or more units. NIC normally calculates penetration based by comparing the total supply of private-pay seniors housing in the top 99 markets to the total U.S. 75+ household cohort (not the entire household and institutional 75+ population).

In this analysis, I compare the total number of estimated occupied private-pay senior housing units in the U.S. to the total U.S. population of 75 and over and 80 and over seniors.   I believe use of a penetration rate based on actual occupancy rather than including vacant units is more accurate but use of either an occupied or total supply penetration rate would produce essentially the same result as indicated above.

While households are the standard unit of demand for housing of all types, NIC, other researchers and I also use population to measure future demand because the Census Bureau does detailed population projections by age but not projections of households.   Various commercial data services do project households by age.   One other cautionary note when thinking about demand projections for seniors housing is that male longevity has been improving, meaning more very old two person households and potentially less unit demand for private-pay seniors housing than population projections alone may indicate.

There are also some limitations in how I project supply growth.   I use NIC MAP construction estimates as of 3Q15 for the top 99 markets, make the assumption that these units will be delivered evenly over two years and that this same rate of growth is occurring in the rest of the country outside the top 99 markets and will continue in the future.

While I believe the assumptions used in this assessment are reasonable and have reviewed them with NIC staff, I believe it would be very helpful for the industry for NIC, ASHA or an independent academic researcher to undertake a demand / supply analysis using household projections by age, seniors housing supply and construction data for just the top 99 markets and include in this an updated survey of the actual entry ages for seniors housing today.   Such a study would allow us to better select an aged-based penetration rate at 75, 80 or 85 and would eliminate some of the uncertainty created by mixing population and supply data for the entire U.S. with occupancy and construction stats for the top 99 markets.

I welcome your comments on this blog post.

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