Benchmark data can inform project projections

By Lana Peck, Anne Standish and Beth Mace

Among the many factors that determine the profitability of a project is the pace of initial move-ins or leasing momentum. A well-located and rapidly leased-up project can build forward momentum for steady demand, high occupancy and solid revenue growth, and build a strong reputation in the trade area among potential residents and their adult child influencers. This Blog explores the topic of leasing and provides occupancy rate benchmarks by segment type on the median time it takes to lease units at newly opened properties based on a 12-year plus time series of leasing patterns collected by the NIC MAP Data Service.

Broadly, data on range of lease-ups and national trend data for seniors housing and care properties can be used in setting proforma occupancy in new development, studies to support financing, and benchmarking occupancy for non-stabilized communities as they fill up. This can help determine, for example, whether a marketing budget will be sufficient during the fill period or how new assisted living units with 45% occupancy four-quarters post-opening stacks up against others.

Some of the factors that affect lease-up rates include: depth of target market demographics, supply penetration, age and size of the property, quality of and proximity to competition, condition of the residential real estate market, consumer familiarity and acceptance, levels of presales before opening, and operator quality.

The table below provides the median occupancy rate achieved by newly opened distinct care segments by the number of quarters the property has been open. The data blends together properties in the NIC MAP 31 primary metropolitan markets since 4Q2005 and properties in the secondary markets since 1Q2008. To help assess upside and downside probabilities, the exhibits outline the realized range for the 25th and 75th percentiles as well.

As the table shows, eight quarters after opening, assisted living units and memory care units had the highest median occupancy rates of 89%, while independent living was lowest at 84%. After 16 quarters, the median occupancy for assisted living was 95%. Nursing care was lowest at 92%. It is worth noting that median occupancy rates are typically higher than the more frequently cited average occupancy rates.

More detail can also be ascertained from the NIC MAP Data Service data by segment type.  For example, for newly opened independent living care segments during this period, the median reached 84% occupancy eight quarters following the property opening. At the same time, the lowest-performing quartile of these segments had less than 66% occupancy and the highest quartile had above 97% occupancy. By the end of 16 quarters after opening, median occupancy was 93%. The lowest quartile had 82% occupancy or less, and the highest quartile had reached 99% occupancy or more. (Note: The lowest quartile is not always made up of the same units, as low-performers improve and previously strong performers slip.) The median size of an independent living segment at a property opened during this period was 100 units.

This month, NIC, in a strategic alliance with PointRight, is announcing the launch of quality metrics for the skilled nursing sector. This major expansion and enhancement within the NIC MAP^® Data Service platform reflects NIC’s commitment to the skilled nursing sector and builds upon NIC’s present Skilled Nursing Data Report, which focuses on financial data.

Being in-network and having visibility into healthcare outcomes is becoming increasingly important in a value-based world. Providers and investors alike must understand how their skilled properties benchmark within their respective markets.

Some of the benchmarking that this data makes possible is not available anywhere else. It will enable operators and investors to better understand the performance of properties and markets when underwriting new deals, managing portfolios, developing strategies, competitive benchmarking, and gathering market intelligence.

New Solutions

NIC MAP users will now be able to include quality metrics data in their analysis, alongside NIC MAP data, such as market performance data, demographics, wage and employment data, hospital locations, and more.

CMS and its Five-Star rating system, while not the only source of quality measures, is an important source of data for determining eligibility for certain referrals. In addition to CMS, pioneering companies are accessing publicly-available data sets and applying their own proprietary algorithms to estimate various additional outcome metrics.

The following Quality Metrics reports are now available, according to subscription level, at the national, metropolitan, and property levels.  The metro level data is available exclusively through NIC MAP:

• PointRight Pro 30^® Adjusted Rehospitalization Rate
• PointRight^®Pro Long Stay^™ Adjusted Hospitalization Rate
• CMS Overall Five-Star Rating
• CMS Survey Deficiencies (Property level only)

Why PointRight?

PointRight is an industry leader in analytics for post-acute and long-term care, specializing in data-driven quality metrics solutions. The PointRight Pro 30 scores are certified by the National Quality Forum, which means they have undergone considerable examination by a panel of experts. Furthermore, the metrics are endorsed by the American Health Care Association (AHCA).

Serving over 8,000 skilled nursing facilities, PointRight data provides investors, operators and payers the data they need to understand these facilities in terms of quality and performance. Data such as rehospitalization rates, CMS quality measures, and CMS Five-Star ratings, will now be seamlessly integrated into our NIC MAP product.

Supply and demand more balanced; occupancy sustained above 90%

In the first quarter of 2018, among the 31 primary markets tracked by NIC MAP, independent living had an occupancy rate of 90.3%, which was about 70 basis points less than stabilized occupancy. Comparatively, assisted living had a differential of 230 basis points, more than three times as large since there are many more units that have opened but are still in lease up for assisted living than for independent living.

The most recent cycle of independent living inventory growth began in the middle of 2015. Despite a 5% increase in stock, occupancy rates have been sustained above 90% since early 2014 as demand has held up reasonably well. Metropolitan markets such as Atlanta, Houston, Kansas City, and San Antonio, have increased their independent living stock, but other markets such as Washington, D.C., Denver, Detroit, Los Angeles, New York, and Philadelphia, among others, have maintained relatively low-to-moderate supply growth.

Of additional note, the data show a 30-basis point quarterly decline in the independent living occupancy rate to 90.3%, which stemmed from a marked slowdown in first quarter absorption and somewhat weaker inventory growth. Reasons for the slower pace of activity could be related to seasonality patterns typically seen in the seniors housing data including influenza and influenza-like illnesses and winter weather, which tend to subdue both inventory growth and demand. Anecdotally, many properties lost marketing days in January and February due to the weather and flu-related property-level quarantines. Given that these factors were especially harsh during 4Q2017 and 1Q2018, there may potentially be a corresponding bounce back in in the second quarter as delayed move-ins from the winter months take place.

Inventory growth largely concentrated in a few markets

The map below shows the parts of the country that have seen the most change in independent living inventory in the past year. During the past year, there have been more than 11,000 independent living units added to inventory among the primary and secondary markets.

About one third of this growth in inventory occurred in seven metro areas: Dallas, Philadelphia, Columbus, Fort Myers, Houston, Detroit and Austin. While Minneapolis and Miami also saw strong independent living inventory growth over the past year, Baton Rouge, Charleston and Syracuse were geographies that experienced the greatest percentage gains in inventory.

Are construction starts plateauing or rising?

After peaking in mid-2016, construction starts in the secondary markets have been falling on a four-quarter moving-sum basis. In the primary markets, however, the peak was earlier (mid-2015) and the trend for the primary markets appears to be flat or rising.

Of note, anecdotal reports of delays in starts due to the weather and interruptions in starts due to delays in financing and funding may have caused some groundbreaking dates to be pushed back. And while construction starts data are subject to revision for these reasons, the numbers provide insight into what is in the pipeline. Interestingly, while the data shows a potential increase in independent living starts in the 99 primary and secondary metropolitan areas tracked by NIC MAP, it also shows a slowdown in starts for assisted living, which may signal increasing interest in independent living from investors and developers.

Seniors housing and care updated transactions figures show a total of $2.6 billion closed deals in the first quarter of 2018. That includes $1.7 billion of seniors housing, and $900 million in nursing care transactions. The total volume was down 5% from the previous quarter’s $2.7 billion, and down 45% from the first quarter of 2017 when volume totaled $4.7 billion.

The central theme of the first quarter of 2018 is that activity by private buyers—which include any company that is not publicly traded, e.g. a private REIT or single owner or partnership, family offices, etc.—continues to be very consistent. The first quarter of 2018 represented the 19^th consecutive quarter of more than $1 billion in closed transaction volume by private buyers, totaling $1.3 billion.  With only $2.6 billion closing in the first quarter overall, private buyers represented half of all closed volume. Private buyer volume was up 9% from the fourth quarter of 2017. However, it was down 8% from a year ago in the first quarter of 2017 when volume registered $1.4 billion.

As far as the other buyer types, both public and institutional buyers each closed on about $600 million worth of transactions in the first quarter. Public buyers registered $547 million in transactions and institutional buyers totaled $606 million. The public buyer represented 21% of total volume in the first quarter, an increase from a year ago in the first quarter of 2017 when it represented only 9% of volume. The institutional buyer represented 23% of the total volume in the first quarter of 2018, which was down from 55% a year ago.

Institutional buyer volume was down 41% from the last quarter when volume registered $1.0 billion. Volume was down 76% from a year ago in the first quarter of 2017 when institutional buyers registered an unusually high amount of volume for a first quarter at $2.6 billion. The first quarter of 2017 was the highest closed volume for the institutional buyer going back to 2008, primarily because of several large Blackstone transactions.

Public buyer volume was up 36% from last quarter, although from a relatively small base of only $403 million, and up 26% from a year ago, again from a relatively small base of only $433 million. The public buyers have had a harder time competing for deals as their cost of capital has significantly increased over the past year. Below is a graphic which is a good measure of the cost of capital within the sector for the public markets. The orange line represents skilled nursing and includes the cost of capital of Sabra Health Care REIT and Omega Healthcare Investors. The blue line represents seniors housing and includes the “Big 3” healthcare REITs: HCP, Ventas and Welltower.

This graphic shows the premium at which the stocks are trading relative to their gross asset value. That means when the REITs trade at a premium to asset value (asset value is based on the private market capitalization rates and the REIT’s portfolio holdings) then the REITs can go out and buy properties by raising equity and realize an instant increase in value because the private market value is lower than their publicly traded equity value. In other words, their cost of capital is low when the premium is high. This can basically be an arbitrage play when these stocks are trading at high premiums. As seen here starting in 2013, the premium began to trend down, which in turn effectively raised their cost of capital making it harder to pay higher prices for properties. This premium took another leg down in 2015, which is reflected in closed transaction volume as public REIT activity decreased dramatically after the second quarter of 2015 and continued to decline through 2017. Now, well into 2018, we see a significant decrease in the premium and, in fact, it turned negative for seniors housing at nearly -10% in the first quarter 2018.

As private equity is still relatively active in the markets and pricing still remains strong, many public REITs are finding it harder to compete for properties, especially larger portfolios. Anecdotally, many deals closed by public REITs include existing operator relationships.

The Labor Department reported that there were 164,000 jobs created in the U.S. economy in April, below the consensus expectation of 193,000.  This followed a downwardly revised gain of 324,000 jobs in February (originally reported as 326,000) and an upwardly revised gain of 135,000 in March (originally reported as 103,000).  The two-month revision was a positive 30,000 new jobs.

The April increase in employment marked the 91^st consecutive month of positive job gains for the U.S. economy, the longest period of steady job growth on record by the BLS. Through the first three months of the year, job gains have averaged 208,000, stronger than the monthly pace of 182,000 in 2017.

The unemployment rate fell to 3.9% in April from 4.1% in March, its lowest level in 18 years. This is well below the rate of what is generally believed to be the “natural rate of unemployment” of 4.5% and continues to suggest that there will be growing upward pressure on wage rates.  The jobless rate is calculated from a different survey than the survey used to calculate the number of new jobs (the household versus the establishment survey, respectively).

Average hourly earnings for all employees on private nonfarm payrolls rose in April by four cents to $26.84. Over the past 12 months, average hourly earnings have increased by 67 cents, or 2.6%.

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.3 million and accounted for 20.0% of the unemployed.  A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—fell to 7.8% in April from 8.0% in March and was down from 9.2% as recently as December 2016.  April’s rate was the lowest level in 17 years.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work fell by 0.1 percentage point to 62.8% but was up from 62.4% in 2015.  Nevertheless, this remains quite low by historic standards, at least partially reflecting the effects of retiring baby boomers.

Health care added 24,000 jobs in April and 305,000 over the past year.

The April jobs report will provide further support for increases in interest rates through 2018 by the Federal Reserve. Already, the Fed increased the fed funds rate 25 basis points at its March 20/21^st FOMC meeting.  The Fed has raised rates by a quarter percentage point six times since late 2015, and most recently to a range between 1.50% and 1.75%, after keeping them near zero for seven years.  Hence, it is likely that there will be another 25-basis point increase announced by the Fed at its June FOMC meeting.