Valuations | A Focus on Operating Fundamentals

Market and operating fundamentals are rebounding steadily from pandemic lows, marked by increasing occupancy, robust revenue per occupied room (REVPOR) and moderating expense growth. Fundamentals are being further bolstered by slower construction starts and favorable demographic trends. While recovering, NOI has not fully recovered, leading to short-term valuations challenges and increased financing costs.

The not-yet-stable operating environment leads to higher return expectations, creating a gap between buyers and sellers. Distressed communities are trading at significant discounts to replacement costs, with minimal consideration for future cash flow projections. On the other hand, activity for stable class A communities is beginning to rise as cap rates tighten, a trend likely to persist through the rest of 2024 and into 2025. Upcoming loan maturities, private equity fund expirations, and operator fatigue will present growth opportunities for investors and operators over the next 12-24 months.

Institutional investors are showing increased interest in senior living due to its needs-based market, strong demand, record absorption, and limited supply growth. Investors must build mutually beneficial relationships with operating partners while continuously innovating to improve customer and employee experiences, ultimately enhancing enterprise value.

To sustain values across economic cycles, operators and investors must focus on operating fundamentals that drive NOI and ultimately valuations. The primary focus must remain on driving margins by prioritizing the key pillars of operating cash flow: occupancy, rates, labor, and providing quality care and service to consumers. Operators and owners often are not always fully aligned on financial goals. Managers, whose compensation is linked to revenues, often prioritize occupancy at the cost of rate. Emphasis should be placed equally on all three pillars, making financial decisions that drive the bottom line (NOI/Margin). Investors should explore compensation structures that ensure alignment with financial goals while simultaneously providing more resources to operating partners, allowing them to foster innovation, enhance technology, and hire top talent, all of which will drive bottom-line performance and advance the industry.

In conclusion, the senior living market stands at a critical juncture where attention to operating fundamentals will dictate its resilience and growth. Valuations are influenced by market recovery, demographic trends, and financing costs. Aligning investor and operator goals and leveraging innovative strategies will help the industry enhance value, meet the needs of an aging population, and ensure long-term success and stability.

How Senior Housing Operators Can Make Smart Technology Choices

With a shortage of caregivers and a growing number of older people who need assistance, state-of-the-art technology is essential to the success of senior living properties. The right software platforms can enable the efficient delivery of services and drive positive returns. 

But with so many technology offerings, it can be confusing to sort through the options to find the best solution. “Operators need a roadmap,” said Joe Daniels, vice president of business development at Direct Supply, a senior living products company. Daniels led a panel at the 2024 NIC Fall Conference on how to evaluate, pilot and implement new technologies.

“Where do you start?” asked Daniels. First, he said, operators need six foundational technologies to run their business:

  • customer relationship management (CRM) software,
  • electronic health records (EHR),
  • emergency call platforms,
  • a payroll and human resources suite,
  • an accounting system, and
  • a resident engagement program.

When operators consider adding new technologies, they should ask themselves three questions, said Daniels. Will the technology increase revenues? Will it decrease expenses? Will it improve resident outcomes? “If the answer is ‘yes’ to two of those questions, then it could be worthwhile to take the next step,” he said. 

Pilot

The next step is a pilot of three to four months. Operators should determine what results they expect, how to pay for the system, and how to handle the introduction of a new system to staff members who might resist change.

Morgan Graphman, director of business intelligence at Ascent Living Communities, led the evaluation and implementation of switching out 11 technology systems over 24 months. “We looked at every part of the technology stack,” said Graphman. “We evaluated what we wanted the system to do.” But, she admitted, “It was very overwhelming.”

Key to the process was a strong internal team that was on board with making a change. “Our entire community team really came together,” Graphman said.

Ascent switched out the CRM system first. “We wanted to start with something that wasn’t resident facing,” said Graphman. “That gave us a little more leeway on making mistakes on the backend.”

The switch was successful and had a direct impact on the business. It also gave the team the confidence to move forward with other technology changes.

Align Stakeholders

Capital partners can provide valuable input on technology decisions. AEW Capital Management is a long-time owner of senior housing properties. “Operators want to hear what we’re seeing elsewhere in our portfolio,” said Jennifer McGurty, AEW’s head of senior housing asset management/director.

AEW recently conducted its second annual operator survey. Respondents were most interested in technology related to fall management, resident engagement, and robots. Obstacles mentioned included costs, return on investment, and staff training. 

Innovative solutions are emerging to integrate real estate, technology, and healthcare. For example, Senior Living Transformation Company (SLTC) was launched about a year ago by investor Arnold Whitman, head of Formation Capital. SLTC provides properties with long-term capital for state-of-the-art technology, robust healthcare services, and community engagement.

“We have built software that brings together data to create operational dashboards,” said Chip Gabriel, partner at SLTC. He noted that data collection is key to the value-based healthcare system that is being adopted by Medicare.

About a year ago, SLTC bought its first project, a 115-unit, 25-year-old assisted living and memory care project with deferred capital maintenance. “We’ve learned a lot,” said Gabriel.

System integration and implementation has been slow. “Don’t do too much too fast,” Gabriel advised. He suggested an ongoing evolution as the best approach to staff training. The focus should be on how to make their jobs easier.

Interoperability is a big challenge. Operators struggle with software systems that don’t communicate with each other. Nurses and caregivers may have multiple log ins to enter data into different systems—a big time waster.

Artificial intelligence could help solve the interoperability problem, according to Arick Morton, CEO at NIC MAP Vision. But that job will most likely be managed by technology vendors. “It’s a key imperative,” he said.

Graphman noted that operators must use their position as buyers to push vendors to innovate, integrate, and move forward.

Morton said that AI will eventually become ubiquitous. But, for now, operators can integrate AI into certain systems to help employees become as efficient as possible. “Think about how to deliver actionable insights,” he added.

Graphman emphasized the key role of the internal staff. “If you don’t have a good tech staff to facilitate the use of AI, it won’t work,” she said.

The experts agreed that the future belongs to senior living communities that successfully adopt and integrate the latest technology. The best way to get there?  “Follow a roadmap,” said Daniels.

Senior Housing Posts Positive Total Returns in Third Quarter 2024; Year-to-Date Index Outperformance Led by Independent Living: NCREIF Performance Report Q3 2024

Senior housing posted a positive total return of 0.71% in the third quarter of 2024, slightly trailing the broader Expanded NCREIF Property Index (Expanded NPI), which posted a total return of 0.83%. Positive income returns for senior housing (+1.15%) were partially offset by negative appreciation (-0.44%), but still resulted in overall positive returns for the quarter. For the Expanded NPI, the third quarter of 2024 was the first quarter of positive total returns in nearly two years. On a year-to-date basis, senior housing returned 1.53%, outperforming the Expanded NPI by nearly 190 basis points.

By senior housing property subtype, both independent living (+1.14%) and assisted living (+0.33%) posted positive total returns in the third quarter. Year-to-date, independent living returned 2.80% while assisted living returned 0.43%. Over the longer term, independent living outperformed assisted living on a total return basis over the one-, three-, and five-year periods. This outperformance may be driven by higher margins typically generated in lower acuity settings such as independent living, which require less staffing and labor expenses than higher acuity settings such as assisted living.

The senior housing income return in the third quarter was 1.15%, in line with the residential sector (+1.11%) and the overall Expanded NPI (+1.20%). The senior housing appreciation (capital/valuation) return was -0.44% in the third quarter, trailing the residential sector (0.00%) and the overall Expanded NPI (-0.37%). The appreciation return is the change in value net of any capital expenditures incurred during the quarter. During the third quarter, the office sector (-2.37%) was the only other property type to record negative appreciation. 

On a longer-term basis, over the 10-, 15-, and 20-year periods, senior housing was the strongest property type except for industrial and self-storage, outperforming the Expanded NPI on an annualized basis by 33, 39, and 312 basis points, respectively. Since the beginning of NCREIF’s senior housing historical time series starting in the second quarter of 2003, income yield drove roughly 60% of senior housing total returns, while price appreciation contributed roughly 40%.

The performance measurements cited above reflect the returns of 217 senior housing properties valued at $11.50 billion in the third quarter. Overall, the number of senior housing properties tracked within the Expanded NPI grew significantly from the 56 properties initially tracked beginning in the third quarter of 2003.

Third quarter 2024 senior housing market fundamentals showed a continued increase in occupancy rates in the 31 Primary Markets for the thirteenth consecutive quarter, according to NIC MAP® data powered by NIC MAP Vision, as demand for senior housing units continued to outpace new supply. As a result, the occupancy rate for senior housing stood at 86.5%, up 0.7 percentage points from the prior quarter.

By property type, there was a 0.5 percentage point increase in the independent living occupancy rate and a 0.9 percentage point increase in the assisted living occupancy rate, and the gap between the two occupancy rates continued to narrow. Overall, market fundamentals are positive and have shown little volatility, posting steady gains over the past three-plus years.

Read our insights on How Senior Housing Operators Can Make Smart Technology Choices.

Industry Legacies: Parents Pass the Baton to the Next Generation

A Conversation with Caryl Ridgeway, Chris Baker, and Cayden Ridgeway

This article is the sixth in a series showcasing parent/child dynamics across the senior housing and care industry. My conversation with the Ridgeway family of Milestone Retirement Companies explores how our industry has become a family affair.

Tell us about your background.

Caryl: I was first introduced to long term care as a 5-year-old when my grandmother would perform at different nursing homes. I was so enamored by the way the residents looked forward to her visits, they just lit up when she sang. One time I asked her “Why do you do this?” and she said: “Because I may be the only happy face they see all day.” I loved being a part of it. I was certain this would be work that I would do someday, even though I didn’t know what exactly that meant at the time. At 15-years-old, I got a job at the same nursing home I would go to with my grandma, all while my friends were working fast food or retail. They didn’t understand but I knew it was fulfilling a need for me and for the residents.

My father was a civil servant and wanted me to pursue his career path out of high school, but I wanted to continue my servant leadership. My senior year of high school, I qualified as a direct hire for the civil servant test, and they offered me a job. I took the position but knew I missed the human connection that I had watched my grandma create. During my civil servant career in accounting, I obtained my EMT certificate and enrolled in nursing school. I was in my final clinical rotation when the Oklahoma City bombing happened, and I ended up assisting with disaster recovery. I missed my entire final rotation for nursing school, so I didn’t graduate. I ultimately chose not to pursue nursing.

In 2005, I had a life-changing event and ended up with a pacemaker. I decided I was going to follow my passion and make it count. I applied to be an Executive Director at a local assisted living facility and fell in love with the position. I worked in every position within the community and found that good culture can make or break a team.

It was during this time that I met the former Milestone owners. With my ‘operator’ brain and my ‘clinical’ thinking skills, I became an asset for their strategy to course-correct some challenging buildings, which I love to do. I then spent two years being CSO, two years being COO, and the last 20 months being CEO. Last year when my partners wanted to retire and sell the company, I approached my husband Scott about purchasing it and continuing the dream of making a difference.

Chris: As I was growing up, I saw how passionate my mom was about her work. At one point, I was a housekeeper for the property where she started. I went to college for music initially, but after I graduated with my associates degree in vocal performance, I decided I didn’t want to be a musician. I had an early interest in death care and got my bachelor’s in funeral sciences—learning how bodies are prepared, how services are conducted, etc. From a healthcare perspective, it showed me the impact you can make on families in need of comfort, guidance, and direction. I apprenticed at a funeral home in Oklahoma City before joining Integris, one of the largest hospital chains in Oklahoma. I stayed with them for four years as an admitting specialist.

In 2018, I was working for a neurology clinic when the doctor closed her practice. I saw it as an opportunity to try something new and so I moved to Austin and joined a logistics company doing risk and compliance. It was different stakes and a different industry, but I learned so much in the four years I was there. My mom had been observing my work and encouraged me to join Milestone as the Director of Risk and Compliance.

Cayden: College wasn’t for me, and I dropped out three times (laughing). I was accepted, and had a scholarship, to go to Berklee College of Music in Boston but decided not to go. I was playing drums for an artist who made it to the end of American Idol but wrestled between a career in music or business. I saw an opening for a position at the Mansion at Waterford, a community my mom oversaw as regional operations. They were looking for someone to build a new program to capture ancillary revenue from private sitters. I applied and when they noticed my last name, I asked them to not tell my mom. If I got it, I wanted it to be on my own merit, not because she was in regional operations. They ended up going with me and I built out the program.

Caryl: We basically eliminated the risk of third-party sitter agencies by bringing the service in-house. It also ended up saving the residents money and under Cayden the program ended up generating a ton of revenue.

Cayden: After that, I worked in sales at a renewable energy startup. I came on as one of the first few sales guys, and over time helped grow their residential sales business. I did so well in it that I eventually moved up to launch and manage their commercial sales division, helping them become the largest solar installation company in the state. During that time, I wanted to own my first home but what I wanted was too expensive to buy, so I built it myself when I was 22. That little experiment went so well that the developers I worked with urged me to start a construction company and so I decided to do that too.

Fast forward to July 2023, my mom had just bought Milestone, and we were having a conversation about it one night. We talked about where they were, the way that it was structured internally, etc., and I made some suggestions that she thought were valuable. Naturally, being the sales guy I am, I then made a pitch deck and presented it to her and the senior leadership team. They liked my vision and the experience I bring from outside the industry, and that presentation is what led to me being offered the Chief Strategy Officer position. My role now is more like that of a Chief Commercial or Chief Growth Officer as I’m in charge of all marketing, sales, business development, investor relations, and strategy. I’ve found that senior living isn’t where it needs to be, which makes me excited, and bullish, about where we can take it.

How do you keep separation between church and state?

Caryl: Whether willingly or not, these boys and their two other siblings grew up in the industry. Being an executive director meant going to the building at 2:00am when the pipes burst and being on calls on weekends and holidays. The kids were so little that I’d drag them with me to everything I did. They got immersed in that multigenerational culture. I probably “talk work” a lot more than I’m aware of, but since they’ve joined, I’ve been very intentional about cutting back and focusing on family when we’re together.

Chris: I live in a different state, so I get a little dopamine rush when I see my family members’ names pop up over email. Working with them has allowed me more opportunities to connect, which is excellent because I don’t see them every day.

Whenever my mom and I hop on a call, it doesn’t feel like work because we’re on the same page. It’s not laborious. We don’t ever butt heads and she’s an excellent sounding board. I tell people that it’s a surreal, once in a lifetime opportunity to come aboard and help navigate the family company ship. I’m grateful for the balance we’ve created.

Cayden: For me, the reality is that we “talk work” a ton and it’s interwoven into almost everything we do. I didn’t grow up with my mom owning the company, I grew up watching her grind it out and drive generators to her properties. I’ve been so proud watching her ascend into this position because I’ve been witness to many of the sacrifices she’s made to get here. It’s not all easy thoughMom and I definitely butt heads—but I enjoy that. We challenge each other and, in the end, we always arrive at a place that’s best for the company.

What advice do you have for your sons and the next generation?

Caryl: We are a relationship-based industry, and as long as we’re humans caring for humans, that isn’t going to change. The minute you get out of touch with what’s going on in your buildings, you risk losing that relationship component.

I insist on being knowledgeable about what’s going on at the community level. If I’m a desk CEO then I’m no good to the field. My advice is to not lose touch with the relationships that are on the front line driving your business. You can have all the tech in the world, but it won’t matter when you can’t answer questions about a resident when their family calls.

What advice do you have for the previous generation?

Cayden: Man, what a loaded question! I think that for the industry to make groundbreaking change, there will have to be people willing to break outside this senior living box. So many industry conferences are based on accelerating change and while it’s a nice feeling, I don’t see it happening fast enough yet. We need to pull from other industries and apply those to senior living, but it doesn’t work if only a handful of us are doing it. In my opinion, leaning into change (or leading the change) coupled with your ability to adapt to increasingly competitive conditions, will be the make or break for many over the next five years.

Chris: My advice is to always navigate the space with the people who you’re serving in mind. Risk can be viewed in a very non-human way, but I remind myself that I serve our residents and the people who work for us. The biggest distinguishing factor from working at a great company to working at a not-so-great place, is how people are treated.

Is there anything you want to add?

Caryl: I want to take a moment to shout out the people not on the call. My daughter-in-law Shelby has been my assistant for many years before the boys joined the company. I wanted to give her honorable mention for the time she’s spent putting up with me.

Chris: Shelby is a key player to our success for sure.

Cayden: And then there’s our dad Scott, who serves as Milestone’s Chief Technology Officer. From working for Cerner to his time at EPIC, he’s become a wizard when it comes to medical technology systems.

Caryl: There are so many others who are basically like family, too. I have people working for Milestone today who have worked with me for more than 20 years.

Cayden: The number of people in our family and outside our family that want to follow my mom is a testament to how great of a mother and leader she is.

Caryl: Thanks Cayden, you just got a better Christmas present!

Lease-Up Trends Show First Year Critical: NIC SHARK Second Segment Report 

The NIC SHARK report series is designed to deliver actionable, data-informed insights and forward-looking perspectives to help senior housing capital providers, operators, and developers prepare for the future and better serve America’s older adults. 

This second segment of the NIC SHARK series reviews senior housing lease-up trends over two key periods in the past decade and provides projections for the next three years. The analysis examines how these trends can shape senior housing lease-up strategies, highlighting the importance of the first year in setting the trajectory for success. These SHARK insights aim to drive a renewed growth cycle in the senior housing sector. 

To learn more, download the second segment of the NIC SHARK Report.  

Key Takeaways: 

  • Constant S-Shaped Lease-Up Curve: Lease-up trends over the past decade consistently followed a similar S-shaped curve, with occupancy starting low, accelerating in the second year, and stabilizing by the third and fourth years after opening. However, the steepness of the curve varied between periods. 
  • Importance of an Early Leasing Push: The first year is decisive in setting the trajectory for a property’s future performance. After the first year, all percentile curves tend to follow similar paths, with properties exhibiting stronger lease-up momentum in their initial year being better positioned to capitalize on accelerating demand in subsequent years. The first-year momentum makes a notable difference and impacts long-term stabilization outcomes and overall success.  
  • Renewed Growth Cycle with Faster Stabilization and Higher Lows: While properties opened in 2022 and 2023 experienced a relatively slower start due to some stabilized properties still recovering occupancy from the pandemic, they are projected to stabilize faster, with a steeper lease-up curve than in past cycles and new occupancy records. Half are on track to reach or exceed 97% occupancy by the fourth year, while another quarter is expected to reach between 87% and 97%, reflecting a higher low at 25th percentile (87%). 

What does this mean for the senior housing sector? It means that a strategic focus on marketing, pricing, and outreach during the initial lease-up phase is vital. The first-year push isn’t just about filling units quickly; it’s about establishing a trajectory that sets the stage for long-term success. The data shows that properties with limited lease-up success in the first year often struggle to accelerate the pace of lease-ups in a meaningful way in the second year and beyond.  

While market supply and demand dynamics play a role in shaping lease-up trends, the S-shaped curve and the importance of the first-year lease-up push remain constant in our industry. These dynamics offer actionable insights for adapting our strategies, whether we’re operating in a balanced market, navigating a period of supply surge, or preparing for anticipated population growth for older adults, increased demand, and moderate new supply. 

However, it’s important to remember that it’s not just the market dynamics are changing – operators are actively shaping them. The collective efforts put into that first year have the potential to propel the industry forward, allowing senior housing operators to reach more potential residents. By leveraging the first-year lease-up push, marketing and sales professionals have the power to change the dynamics of the future and redefine success for senior housing. 

We would love to hear your feedback! For questions or feedback, please contact  analytics@nic.org  

Stay tuned for upcoming segments of the NIC SHARK series.  

Download the second segment of the NIC SHARK Report