COVID-19 Vaccine Could Boost Seniors Housing Occupancy in 2021

This week we received preliminary very positive news that the Pfizer/BioNTech COVID-19 vaccine is 90% effective and that Pfizer could apply for emergency use approval by the end of the year.

On October 22, 2020, the Department of Health and Human Services (HHS) announced HHS’ partnership with CVS and Walgreens to provide the COVID-19 vaccine to residents in long-term care settings will include residents in independent living settings, including standalone independent living residences, IL/AL communities, and life plan or continuing care retirement communities (CCRCs).

Having a vaccine available in limited quantities that will be made available to seniors housing staff and residents on a priority basis could be a boon to seniors housing occupancy in 2021. Senior housing operators will be able to market that residing in senior housing residence will get you priority access to a vaccine, while staying in your might mean waiting 6 – 12 month or longer until a vaccine can be made available in large quantities.

We believe the impact of having access to a vaccine on a priority basis could most dramatic improve occupancy in IL and CCRC properties, where the move into a seniors housing community are most discretionary.

Seniors housing occupancy should also benefit from a track record demonstrating an ability to limiting the spread of COVID-19. For example, Ventas’ 3Q20 investor presentation indicates that its senior housing properties have not experienced a significant increase in new COVID-19 case since April 2020, while in the general community across American infections and death continue to increase.

Converting Colleges To Seniors Housing – Pandemic Creating New Opportunities

I have written twice before on this blog about the opportunity to convert small college campuses in senior housing communities. The first time was February 2, 2019 in response to an opinion piece in the Wall Street Journal about the challenges facing small, private colleges and how many of these would need to close or radically change their operations to survive. I reissued my original post with some updated commentary in September 2019 after Welltower REIT announced it acquisition of a college campus in the Boston area for conversion to a seniors housing community.

Today’s Wall Street Journal has an article entitled “Coronavirus Pushes Colleges to the Breaking Point, Forcing ‘Hard Choices’ about Education. The Journal article leads with the announced closing of MacMurray College in central Illinois after 174 years. The article goes on to indicate 50% of college enrollment managers are very worried about meeting fall targets for enrollment and tuition.

Before the pandemic, Robert Zemsky, a professor at the University of Pennsylvania graduate school of education in his book The College Stress Test indicated that 100 of the nation’s 1,000 private, liberal arts colleges were likely to close over the next five years. He now says 200 of these colleges could close in the next year, according to the Journal. Potential cancellation of on-campus classes this fall, growing impediments to overseas students and the increased appeal of lower cost, closer to home college alternatives all contribute to the growing financial distress of American colleges.

While the seniors housing and care is facing some challenges of its own, including: lower occupancy, some overbuilding, restricted admissions to due Coronavirus self-isolation and high levels of infection and death at some skilled nursing facilities, the number of seniors 75+, when many begin considering seniors housing and care options, is expect to grow about 40% between 2020 and 2030.

Strong population growth in the 75+ senior population, together with the fact that many seniors are looking for more dynamic living environments that include life-long learning, make us optimistic about redeveloping exiting college campuses in whole or in part to seniors housing.

Earlier in my career, before I began to focus on seniors housing and care and health care real estate as a stock analyst and investment banker, I spent more than five years as a real estate market and feasibility consultant doing a lot of work for colleges and universities including: University of Maryland at its flagship College Park campus, its Baltimore professional schools and UMBC in Baltimore County, Johns Hopkins, and Penn State Hershey Medical Center.

Please contact me at jdoc@robustretirement.com if you wish to discuss specific college to senior housing projects.

Converting Private Colleges To Senior Housing – Just Announced Welltower Transaction Shows Opportunity is Real

On September 18, 2019, news sources reported the sale of the Newbury College Campus in Brookline, Massachusetts to the health care REIT Welltower for redevelopment into a senior housing community. Welltower reportedly acquired the nearly eight acre site containing 8 buildings with approximately 142,000 sq. ft. for $34 million. Welltower’s purchase confirm my view, expressed in a February post, that small college campus have the potential to be successfully converted to seniors housing (see below).

There was an opinion piece in The Wall Street Journal on Friday, February 22 entitled “America’s Disappearing Private Colleges”, written by Allen C. Guelzo, a professor of history at Gettysburg College. The piece documents the closing of Concordia College, a small historically black school in Selma, Alabama. It goes on to assert “The post-Great Recession baby bust will soon mean not enough students to keep small schools alive.”

In the early 1990s I spent more than five years advising colleges and universities on real estate issues. My clients included the University of Maryland, Johns Hopkins and the Hershey Medical Center of Penn State. Even then, future weakness was evident in demand for higher education once the Echo Boomers (children of the baby boomers) passed through their college years. As Mr. Guelzo documents, the decline in the number of future potential college students has worsened since that time because of the Great Recession.

“Birthrates plunged by almost 13% from 2007 to 2012 and the CDC believes fertility could fall further”. The birth dearth means 450,000 fewer college applicants in the 2020s according to economist Nathan Grawe in Demographics and the Demand for Higher Education.  Hardest hit will be New York, Pennsylvania, New England and around the Great Lakes, areas most populated by private colleges.

Harvard and other well regarded and well-endowed universities will continue to see high demand and have the resources to make their institutions more affordable and more attractive to U.S and international student. Rice University, my son’s alma mater, for example just announced a 30% increase in applications after the University put in place a more generous and more predictable aid formula and my alma mater, Johns Hopkins University, recently announced a major gift from alum Michael Bloomberg to provide more generous aid for undergraduates.

While the best regarded and best-endowed colleges and universities will continue to do well, Mr. Guelzo documents a number of small colleges closing, “17 in Massachusetts alone in the past six years”, and cites estimates that up to half of all U.S. colleges will close or go bankrupt within the next decade. Moody’s estimates that 15 private colleges will close per year. My experience as a real estate advisor to colleges and universities, and as a student of demographics, lead me to believe these dire predictions.

At the end of his opinion piece, Mr Guelzo identifies four options for leadership of small private colleges (1. Get serious about mergers, 2. Focus recruitment strategies westward where the decline in birthrates was lower, 3. Craft a niche for a particular student, and 4. Establish partnerships with local two-year colleges. ) I doubt any of these options alone will be very effective in combatting the “birth dearth” but see another option that small colleges should definitely consider – converting in whole or in part to seniors housing communities.

I make the connections between private colleges and seniors housing because, after working as a real estate advisor to colleges and universities, I spent 15 as a stock analyst covering senior’s housing and care companies and REITs owning seniors housing and heath care real estate. While the demographics driving potential demand for colleges and universities are dreadful in the 2020s, the demographics driving demand for seniors housing and care are very strong. The first Baby Boomers turn 75 in 2021 and turn 80 in 2026.

Senior housing operators and REITs owning senior housing real estate are currently struggling with some overcapacity pressuring rents and occupancy and higher labor cost pressuring margins. I believe the seniors housing industry was too optimistic about the age at which seniors would move to seniors housing, found capital too easy to get, which prompted some overbuilding, and has been less than fully successful in providing living environments to which seniors want to move. Lower levels of seniors housing construction and the continued aging of the population should gradual and significantly improve demand prospects for seniors housing in the 2020s. I believe converting small colleges in whole or in part to seniors housing has the potential to allow small colleges to survive or provide a softer landing for faculty and staff at colleges that need to close; and can also provide a more desirable housing option for seniors and potentially help with labor costs.

Some of the most successful and most attractive senior housing communities i have observed offer campus-like settings with a wide range of social, cultural, educational and recreational amenities. Erickson Living and Senior Living Communities and a number of large not-for-profit continuing care communities (CCRCs) provide attractive campuses with a high level or amenities. (See links below to ericksonliving.com and senior-living-communities.com). Erickson’s first senior housing community was developed on the site of a former convent with some of the same qualities as a small college campus.

https://www.ericksonliving.com

https://senior-living-communities.com/

The challenge of developing large CCRCs is that they require very large upfront investments of money and time to be created on a greenfield basis. Small colleges, which have campuses, dormitories, cultural, educational and recreational amenities in place, could potentially be converted to seniors housing campuses at a lower cost than greenfield development while offering name recognition and character from the outset. One other feature seldom seen in senior housing communities, but which appears to significantly increase a community’s appeal to seniors, is a mixed age environment rather than a senior citizen ghetto. My favorite example remains Merrill Gardens at the University (see link below).

https://www.merrillgardens.com/senior-living/wa/

Merrill Garden at the University is a community near the University of Washington in Seattle that combines a senior housing community, non-age-restricted apartments and retail on a single site with the apartment building and senior housing community sharing an interior courtyard and the senior housing community’s bars and restaurant open to the public allowing apartment and senior housing residents to mix. Senior housing communities developed on or near other university campuses also have been attractive to seniors and appeal to alumni but I believe there is an opportunity to more fully integrate seniors housing into a college or university campus and create more interaction between seniors, traditional college-age students, faculty and staff than has been done to date. It is this type of integrated seniors housing / college setting development that I see as an attractive 5th option to those Mr. Guezlo identifies to save some of America’s small colleges.

Integrating senior housing into an existing college campus or fully converting a small college campus to seniors housing may also offer labor force benefits because students, existing college staff and potentially even faculty could be employed to providing programming, patient care and building maintenance for seniors housing as well as university buildings and might form a base labor force from which senior housing could draw even if the college is closing. Seniors may also be able to help fill college classes, particularly in the humanities or even serve as adjunct faculty.

The most feasible strategy for a college to evaluate and execute a partial or full conversion to seniors housing is to engaged qualified real estate and financial advisors to evaluate the option and help run a process to select a for-profit or not-for-profit senior housing partner. For some religious-affiliated colleges, the same denomination may also develop and operate seniors housing, which might ease some of the anxiety of teaming with a senior housing partner.

I welcome inquiries from colleges and universities wishing to consider a college to senior housing conversion and may be able to help evaluate such options at a strategic level and assemble a team to help a college or university execute such a conversion. For some insights into the process see the link to an article I co-authored in 1996 entitled “Privatizing University Properties” in the Journal Planning for Higher Education.

https://www.scup.org/page/phe/read/article?data_id=31113&view=article

Reusing Suburban Corporate Headquarters As CCRCs

I had lunch yesterday with Robert Kramer, Founder and Strategic Advisor of the National Investment Center for the Seniors Housing and Care Industry (NIC).    In the course of our conversation, Bob mentioned that National Development and Epoch Senior Living were proposing to develop 130 units of upscale senior housing on the former headquarters of GE Capital Corporation in Stamford, Connecticut.  http://www.courant.com/business/hc-br-plans-former-ge-building-developed-into-senior-living-home-20180815-story.html.     This led me to re-post my blog from February 2016 on the opportunity to reuse suburban office locations for seniors housing – see below.

The Wall Street Journal on Tuesday, February 9, 2016 featured an article entitled “Office Glut Strains Suburbs – Landlords, officials at odds over revamping vacant campuses as firms leave for cities”.    The article highlights a growing trend of major corporations abandoning leafy suburban headquarter’s campuses for urban locations where transportation options are better and it is easier to attract tech-savvy Millennials.    The article focuses on the relocation of Pearson Education from its Upper Saddle River, N.J. site to locations in Manhattan and Hoboken, N.J.

The site Pearson is leaving is a 47 acre site in a wealthy town of about 8,000 people located about 30 miles northwest of Manhattan.   It features a “bunkerlike” structure of grey concrete built in 1973 for Western Union with 470,000 sq. ft. of space and few prospects.   The suburban couplex is owned by publicly traded Mack-Cali Realty Corp. (CLI).   The building previously generated annual revenue of $8.6M but after testing the market, Mack-Cali found no office takers.    The company is proposing to replace the former Pearson Education headquarters with 240 apartments, which some in the town oppose because it would change the character of the community and generate expenses for public services while bringing in less taxes than a corporate office property.   Other locations noted in the WSJ article with similar former headquarters locations include:   the former Bell Labs headquarters in Holmdel, NJ; BASF’s former North American headquarters in Mount Olive, NJ and the former home of Merck & Co. in Readington, NJ.

None of the real estate owners or developers cited by the WSJ were mentioned to be considering a continuing care retirement community (CCRC) as a primary reuse for these corporate office sites or as a principal use in a larger mixed-use complex that might combine office and retail and non-age restricted housing together with a CCRC.   Yet, a CCRC would appear to offer a number of benefits.    Principally, a CCRC would:

  • Target the existing older, affluent residents of the wealthy suburbs where these former headquarters are located.
  • Likely generate more in tax revenue than would be required to service the CCRC because CCRC residents would not have children in public schools.
  • Generate less in the way of traffic congestion than conventional apartment or condominium development and less than a former corporate headquarters.
  • Generate spending in the community for existing or to-be-built retail space.
  • Generate demand for additional healthcare and other services that might be found in the community or incorporated on the site.
  • Generate greater demand for employment on the site and potentially taxes than would a conventional housing development.

CCRCs typical range in size from about 250 units including a mix of independent living, assisted living, memory care and skilled nursing or healthcare units/beds to as many as 2,000 units/beds in large complexes that have principally been developed by Erickson Living.    While there is an emerging trend among seniors housing developers, like office developers, to consider higher density, mixed use urban locations, I believe there is still significant demand for suburban CCRCs, particularly in wealthy, aging, hard to develop locations, like northern New Jersey, where the corporate headquarters sites noted above are located.

CCRC’s are typically developed in either an entrance-fee or rental format.   In an entrance-fee format, residents pay an upfront fee that may be partially or fully refundable.   This fee is used to repay construction debt and the non-refundable portion is amortized over time to reduce the monthly cost of housing and care.   In a rental format, there is no entrance fee, more long-term financing is used and monthly rent must cover the full cost of housing and services.    The largest CCRC campuses typically incorporate multiple casual and formal dining venues, pools, gyms, lecture halls, entertainment and recreational amenities and may include full physician practices and their own health plans as well as health centers that provide therapy space.

In 2014, while I was still working in investment banking, I pitched seniors housing as a reuse for some undeveloped or partially developed suburban office locations to a publicly traded suburban office REIT.   However, the sites this company had available at the time were not as large or as well located as the corporate headquarters’ sites noted above and were not well suited to CCRC developments of scale.    While CCRCs are well outside the comfort zone of most office owners/developers, outright sale of large suburban headquarters sites for this purpose or joint venture development with existing owners of suburban headquarters sites and CCRC developers or healthcare REITs would appear to be a very viable option for such locations, particularly in cases where a CCRC would be an element in a larger mixed use campus that might include some conventional apartments (potentially for staff), retail and office/healthcare uses.

 

 

Immigration and Senior Caregiving Linked

It has been several months since I updated my blog because I have gotten busy serving on the Board of Quality Care Properties (QCP) and with some consulting work.   I am also just back from a vacation in Costa Rica about which I hope to soon  do a post.

An article in today’s (January 23, 2018) Wall Street Journal prompted me to do this post.  The WSJ article is entitled  “How Immigration Could Affect Grandma’s Care”  and is in the “Capital Journal” commentary by Gerald F. Seib.  Key points include:

  • American is getting older.  A fifth of the population will be over 65 by 2050 and 4% will be over 85, both records in terms of absolute numbers and as a percentage of the population.
  • A study by PHI, an organization that works with the long term care and home care industry, estimates there are 860,000 immigrants holding “direct care” giving jobs in senior care and perhaps as many as one million when workers providing care independently for families are included.
  • The largest share of these workers come from Mexico, the Philippines, Jamaica, Haiti and the Dominican Republic; the very countries in the crosshairs of the immigration debate.
  • Restrictions on immigration may drive up wages for what are often low paying jobs providing direct care to seniors and this may draw more people into the industry.
  • But forcing dedicated, qualified people from other countries to leave, many of who have lived in the U.S. for years, will be a blow to many including seniors who rely on these immigrants for care.

As you consider you position on immigration policy, you should also consider who will care for your parents and eventually yourself and your peers as you age.

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.

Pivot Points In Seniors Housing/Post-Acute Care Create Investment Opportunities

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.

 

 

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 – https://robustretirement.com/?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.

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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.

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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.

 

Our Experience with Social Security & Medicare Better Than The Private Sector Insurers

As my bio indicates, I spent more than 25 years working in the private sector, primarily in equity research and investment banking for publicly traded securities firms.    I, like many with private sector careers and nearly everyone even slightly right of center politically, take as an article of faith that the private sector is more efficient than the government at doing just about anything.    However, when it comes to Social Security and Medicare (technically the Centers for Medicare and Medicaid Services or CMS) my experience over the past year indicates these agencies far exceed private sector insurers in quality of service.

In a single week in January 2016, I applied for Social Security, my wife applied for Medicare and my wife interacted over a billing issue with CareFirst, the Maryland Blue Cross / Blue Shield company.    These interactions highlighted for me the contrasts between dealing with these two Federal government agencies and dealing with a private sector health insurer.  I found the difference in quality in the government’s favor to be so dramatic that I thought it warranted a comment on my blog.

The quality differences with Social Security, Medicare and private insurers start online.    The ssa.gov and medicare.gov websites are well designed and easy to negotiate and the online process to apply for Social Security and Medicare are clear, easy to understand and complete.   Follow up correspondence from the agencies can be couched in bureaucratic language but is timely, understandable and alerts you and your spouse to possible benefits, like Social Security if one of you signs up for Medicare, help paying for drugs or the availability of spousal benefits.

After I recently filed online for Social Security benefits the agency had some questions.  I was contacted via email by an agency employee within 48 hours of filing my application for benefits and asked to set up a time to talk.    I received a call back from a claims specialist within the time slot to which we had agreed.   She was very pleasant and enthusiastic, was able to resolve the questions she had and indicated she would move my application along with formal notification likely coming closer to the month in which my 66th birthday would occur.  She clearly disclosed that the detailed guidelines for staff of Social Security changes included in the recently passed budget bill had not yet been prepared but agreed that May 1 was the deadline, which I had met, for various rules changes.  In short, both my online and telephone interaction with a Social Security claims specialist were easy and pleasant and I believe they will prove effective.

My wife’s experience with Medicare and CareFirst involved only online experiences.   With Medicare she was able to quickly and easily complete her Medicare application and has already received her notice of eligibility with coverage beginning in the month she will turn 65.     She has yet to select Part B and Part D providers, which will be private insurers operating within Medicare requirements.    Contrast this with her almost simultaneous online interaction with CareFirst, which has provided one or both of us with individual health insurance coverage for the last five years or so.

In January, our credit charge used to automatically pay my wife’s CareFirst monthly premium had some information change, so the automatic payment of her CareFirst premium had not gone through.    This was communicated to her with conflicting emails, one auto-generated indicating the payment had been processed and another saying it had been rejected and she risk losing coverage if payment was not received.   This led us to the CareFirst website, where we spent 10 – 15 minutes trying to find the right area to update the payment information and then another frustrating 15 minutes plus because the system would not allow us to update the information on the credit card.   We finally realized we had to first delete the exist card on file for automatic payments and then enter the same card with updated information.   But nowhere was this explained in instructions or in the repeated message that the system was unable to update the card on file.

We have previously had equally or more frustrating experiences with CareFirst online, over the phone and even going to an office and dealing with a person face to face when we initially tried to sign up for individual policies (pre Affordable Care Act Exchanges) and when I shifted from our joint policy to Medicare and we tried to keep coverage in place for my wife.  The letter we received from CareFirst indicating we had first been approved for individual health insurance policies was so badly written that neither of us, despite two sets of graduate degrees, were able to understand it.    It was only when we received a bill that we realized coverage had been approved.   After going to a CareFirst office in person to remove me from our CareFirst coverage when I switched to Medicare but leave coverage in place for my wife, the company still miss-handled the conversion and my wife had to have a number of phone calls with the company before she was able to get her coverage continued.   Lest you think this is only an issue with CareFirst, I have also found Medicare.gov much easier to negotiate than the websites of United Healthcare for Medicare Supplemental Insurance and websites of Medicare Part D drug coverage providers.

So, for seniors and their family members, take heart.   Our experience indicates that Social Security and Medicare are much easier to deal with than your current private insurer.   Kudos to the dedicated employees working at the Social Security Administration and the Centers for Medicare and Medicaid Services and keep up the good work.   America’s seniors need you.

For all of us as citizens, we need to admit there are times when government works and may even work better than the private sector – despite what you will hear during this Presidential election year.   And before you say it – the cost to operate Social Security and Medicare is also lower on a percentage basis than the cost to provide private insurance.

 

Observations from NIC 25th National Conference

The National Investment Center for Seniors Housing and Care (NIC) http://www.nic.org held its 25th National Conference this week at the Gaylord National Harbor, just south of Washington.   I attended the first NIC Conference, which was a much smaller affair at a hotel in Crystal City, also just south of Washington but on the Virginia side of the Potomac.    Having spent much of my career in seniors housing and care as a real estate analyst, stock analyst, investment banker and now occasional consultant, it was very gratifying to see how much the industry has grown and matured in 25 years.

My only official role at the conference was to address the Future Leader’s Council (FLC), which is a carefully selected group that goes through three years of NIC leadership development activities before “graduating”, with a third of the group rotating each year.    I was impressed with the FLC members with whom I interacted and with the thoughtful way NIC is helping talented professionals grow into leadership roles at their organizations and in the industry.

My address to the FLC group was entitled “Back To The Future” and focused on lessons learned about the impacts of overbuilding and higher interest rates in the severe 1999/2000 industry downturn.   Most FLC members were still in primary or secondary school when this downturned occurred.

I would say the overall atmosphere of the industry at NIC’s 25th National Conference was “nervous optimism”.

The nervousness comes from:

  • generally unsettled economic conditions in the U.S. and around the world that could lead to higher interest rates and growing wage pressures on an industry for which labor is 50% or more of costs,
  • recent softness in private-pay senior housing occupancy,
  • a increase in the number of units being developed (particularly assisted living and memory care) and signs of overbuilding in select markets,
  • integration stumbles at the largest and largest publicly traded senior housing operator, Brookdale Senior Living (BKD),
  • some signs of a plateau in senior housing property capitalization rates and pricing,
  • a late summer sell off in healthcare REITs and generally unsettled conditions in the equity and debt markets, which appear to be driving the pause or potentially a backup in cap rate compression.

The optimism comes from:

  • a 15 year rebound in fundamentals from the last major industry downturn,
  • generally outperforming other real estate sectors through the Great Recession,
  • still strong consumer acceptance of newly open properties, particularly in high barrier to entry markets,
  • plentiful availability and still growing interest in the industry from both debt and equity capital providers, if perhaps at higher prices that were seen a year ago,
  • knowing that the industry continues to get closer to the holy grail of  75M + Baby Boomers becoming seniors housing and care customers (although still 10 – 15 years away).

Unless you are concerned about substantial overbuilding in private-pay seniors housing, which most thoughtful insiders are not (there will be some), the recent pullback in both healthcare REIT and operator pricing is making me more interested in investing in publicly traded healthcare REITs and private pay operators but there are few publicly traded operators to buy.    On the care side of seniors housing and care, there has also been a pull back that makes skilled nursing and post acute care company stocks attractive from a valuation standpoint.    Here, however, the slow evolution of a more integrated healthcare delivery system and new value-base purchasing and an uncertain political situation through the next Presidential election may keep a lid on valuations for another year or two.    Either way, it feels like a time to be considering investments in seniors housing and care for the long term investor.   I will leave it to those still working as equity analysts in the space to recommend specific stocks.

There are also signs at the conference that innovations in technology, property location and design are alive and well.  At least two efforts are underway to develop new senior housing properties in Manhattan.   The most interesting new building model I saw at the conference is a mid-rise product located in an urban main street location that looks more like an upscale yuppie rental project or W hotel, with services delivered on demand by the likes of Uber, Amazon Fresh and online home health providers.     This project is being developed by Smart Living 360 and Federal Realty Trust (FRT) in Rockville, MD and is scheduled to open in the Spring of 2016.   See website http://www.thestories.com/ for more information.