Inside This Special Edition of the Insider Newlsetter

Inside this special edition of the Insider Newsletter we focus on the recent 2014 NIC Regional Conference, a skilled nursing and seniors housing investment forum that drew close to 1,200 attendees this year. As interest continues to grow in the sector, small to mid-size regionally focused seniors housing owners and operators and the capital providers looking to work with them, gathered in Boca Raton, Fla. on March 16 – 18 to network, make deals and discuss the future of housing and care services for our nation’s elders.

Download a PDF version of the Insider. 


A Discussion with Doug Korey, Managing Director and Partner with Contemporary Healthcare Capital LLC

Image of Doug KoreyOn the heels of the 2014 NIC Regional Conference, we caught up with Doug Korey, co-chair of the Regional Conference Planning Committee and managing director and partner with Contemporary Healthcare Capital LLC, to discuss his views on some of this year’s conference highlights, industry trends and the evolution of financing for seniors housing.

NIC: With Contemporary Capital having been in the business for 20 years, how would you say that financing for seniors housing has evolved over the years?

Doug Korey: We have gone through numerous cycles in the past 20 years that have influenced the capital markets for seniors housing. With everything from overbuilding in the assisted living sector, to Medicare PPS, the CMBS meltdown, tort liability, and the economic depression of a few years ago, our industry has had a bit of everything push against it. However, the industry has rebounded each time with greater vigor than before. Financing has followed these cycles very closely. I remember trying to raise capital in 1999 into 2000 and really struggling to explain why an investor should want to put capital into this space given the negative news. Investors simply had not gone through enough of a history of the evolution of the “new” seniors housing to fully commit to the space.

Investors very much understood the psychology of the changes that showed people did not want to live in a nursing home if they could live in something more residential, but there was not enough research to support the model. Financing in those days was mainly relegated to banks and some finance companies that financed the accounts receivable for operators. We were one of the few who thought leveraging equity via a mezzanine product could produce better returns for a small operator while stretching their existing equity. Over the years, however, we have seen investors steadily grasp the nuances of the industry and come back faster after each negative cycle. I believe NIC has played a large role in this, given the amount of research that they have produced — this research has been developed with a partnership of both operators and capital providers, thus providing valuable data for the investor. The investor community and thus financing in general has become more sophisticated over these past 20 years. We have recently seen a tremendous amount of capital come back into the market and several finance companies being acquired by large institutions. Clearly, that consolidation and investment is the result of investors being better educated about our space than they were 20 years ago.

We are heading towards new challenges in the next few years. These challenges include dealing with incredibly high prices being paid by REITs and individuals for acquisitions, increasing construction prices, reimbursement pressures on the skilled side and rising interest rates. However, given the growing demographic, the need to build new product will continue. I think that financing will continue to evolve over time but not without some pain. However, I do expect more investors will continue to enter the market and the level of sophistication will improve.

NIC: Last year your company introduced a new unitranche financing product designed to offer some owners/operators better financing choices. Tell us what makes this product unique?

Korey: The unitranche product is really a packaging of our existing products and is a way to better explain what the borrower is getting and paying for. Although we provide senior mortgage, construction, mezzanine, and equity capital, these have traditionally been individually stacked to provide the borrower with the desired financing package. To reduce the complication of this stack, we have combined the various pieces of capital into one borrowing/investment vehicle. This instrument provides leverage that is comparable to a REIT, but with the added benefit of including the working capital needed to lease-up a start-up or turnaround facility. In addition, it is prepayable, so that once the facility has reached some form of cash flow, it can be refinanced at a less expensive overall rate, thus allowing a much greater return on a borrower’s limited equity investment. As opposed to traditional REIT financing, it allows for the borrower to continue to own the real estate and garner the appreciation in the property.

NIC: What were some of the highlights for you at this year’s NIC Regional Conference?

Korey: I have been working with NIC on the regional conference since NIC incorporated the skilled nursing segment. It has been several years now, and this year, in my opinion, was the best yet. Not only has the industry embraced the alternating coast strategy (last year’s regional conference was in San Diego), but NIC has thoroughly honed the concept. Our educational content is fantastic, Senator Bill Frist was one of the best speakers we have ever had, and there were enthusiastic meetings taking place in every nook and cranny of the hotel.

NIC: What value do you think NIC provides to your company and the industry?

Korey: It is the place to meet contacts on a one-on-one basis, there’s no other conference like it. Between the national conference and the regional conference, I don’t need to go to a number of the local agency type of meetings. I can find all of our operators coming to these conferences, which just makes for a more efficient and fun experience. We intermingle between the social, the work and the educational aspects of it. We bring down several people from our company and that’s a very worthwhile investment.

NIC: In your opinion, what’s the big story in the seniors housing and care industry now?

Korey: The largest trend that we’ve seen, and it’s really been over the last year to year-and-a-half, has been the massive price increase in our industry on all types of properties. I think it’s a testament to the amount of capital that’s come back into the markets since 2008 and 2009. I also believe that with that price increase there’s also been an increase in the construction process. So you’re certainly not seeing a bubble as of yet, and I don’t see that for some time, but it is more difficult for lenders such as ourselves to finance certain property types in certain markets.


NIC Regional Conference Highlights

General Session Highlights 

Opening General Session
Practical Implications of Reform: What It May Mean for Senior Care Providers and Investors

2014 NIC Regional - Monday Morning General Session

From left to right: William Shrank, Ken Botsford, Peter Martin and moderator, Dan Mendelson

With talk of healthcare reform continuing to be on the minds of many in the seniors housing and care industry, NIC hosted a timely discussion on reform efforts as it relates to the post-acute, long-term care and seniors housing sectors.

The panelists overwhelmingly agreed that data plays a critical role in healthcare reform conversations and in knowing what impact reform will have on individual operations.

“Some small chain operators don’t really want to see the data,” said moderator, Dan Mendelson, CEO and founder of Avalere Health, LLC. “It’s important to look at and get up to speed on the data.”

Peter Martin, managing director and senior analyst with JMP Securities echoed that sentiment and said that “your best fight is technology, data and awareness of your business model so that you can have a good conversation about what comes down the road.”

He also noted that while overall there are just two new payment models, bundled payments and ACOs, there are a host of payment delivery types within those models.

William Shrank, chief scientific officer for CVS Caremark, commented that he’s not entirely certain how the various payment models will interact with each other.

“Bundles are the ones lined up to be successful first and can be scaled, but it’s a little hard to predict,” said Shrank, adding that the CMMS and large insurers have started to experiment with new value-driven payment strategies.

Shrank added that healthcare reform will force post-acute care centers “to change their game.”

Ken Botsford, chief medical officer with naviHealth, formed two years ago to be able to take risk in the post-acute care space, offered insight into the relationships and networking with post-acute providers in the managed care space and the fee-for-service side of Medicare throughout BPCI bundles.

“Ultimately the way we are going to be more effective in managing this space is to look at post-acute care as one space,” he said. “The biggest thing to accept is the fee-for-service world is not going forward and the move to outcome, value based payments will be more valuable to embrace and learn about it than fighting it.”

Networking Luncheon
What’s the Housing Market Have to do with It? The Trickle Down Effect of Macroeconomic Issues on Seniors Housing

“The housing recovery is underway but it’s a long way ahead,” according to Jed Kolko, chief economist and vice president of analytics with Trulia.

Image of Jed Kolko

Keynote speaker, Jed Kolko

Kolko was the keynote luncheon speaker on March 17 and offered the audience his take on the overall health of the residential real estate market and how it directly affects the seniors housing industry. He explained that while most economic issues are cyclical, preference for seniors housing is structural.

“Seniors housing choices are ones where trends are really more structural than cyclical,” he said. “Structural demographic cultural forces have much more influence and that can be a challenge and an opportunity.”

Overall, Kolko noted that existing homes sales are back up from the bottom to their normal range and the market is starting to see a slight shift from existing sales to more new construction home sales. He attributed the slow growth in new construction demand to younger adults that “failed to launch.”

Additionally, he explained that within the next few years price gains will continue, but at a slower rate, mortgage rates will rise and affordability will remain strong. Kolko also expects to see interest rates above 5 percent by end of year but explained that number is still down below where rates have been historically.

“Now that prices are moving up it will encourage seniors and others to sell and move now,” he said.

Tuesday Morning General Session
Planning for Tomorrow’s Customer Today…..The Next Phase of Seniors Housing?

Portable ultrasounds, smart cap pill bottles, phone booth healthcare kiosks, and virtual robot visits are all among the new technologies discussed in a session addressing advances in technology that may impact the design and delivery of today’s seniors housing and care properties.

The panel, moderated by Bob Kramer, NIC’s president, included Yan Chow, director, innovation and advanced technology with Kaiser Permanente Innovation Technology, Joseph Coughlin, director of MIT’s AgeLab, Katy Fike, gerontologist and founder of Aging 2.0 and Innovation50, and Tom Grape, chairman and CEO, Benchmark Senior Living.

2014 NIC Regional - Tuesday Morning General Session

From left to right: Bob Kramer, Katy Fike, Joseph Coughlin, Yan Chow and Tom Grape

New technologies are rapidly emerging to address a range of consumer and operator needs that focus on various social, independence, health and wellness and operational aspects. Grape said that handheld devices will become key because they will simplify staff burdens.

On demand experiences coupled with feelings of being in control and the ability to connect with loved ones were noted as having the greatest potential to improve the quality of life in seniors housing.

“Communication and transparency are important. The adult child wants to know what’s going on and that things are communicated properly. Some of these technologies can make it more live time and real,” said Grape.

Chow added to “keep an eye on computer interfaces that will be changing very fast.”

All of the panelists agreed that making sure communication and infrastructure is flexible in newly developed buildings will be a priority. Panelists emphasized that real time and on demand information is what people have come to expect everywhere, including in seniors housing.

“Make sure your installations are reachable and changeable,” said Chow.

Fike also advised owners and operators developing new seniors housing properties to be flexible in their design so that things can evolve as needs change. She said it’s important not to get locked into one particular type of hardwire.

“Do not build a building around technology because it moves way too fast; build flexibilty into the complex,” added Coughlin.

Panelists urged operators to focus initially on implementing technology that enhance the quality of life experience of residents and their family members, rather than concentrating on technology.

Panelists agreed that staff is often the most resistant to the introduction of new technology.

Networking Luncheon
The Transformation of Healthcare: A Dialogue with Senator Bill Frist

Image of Bill Frist

Keynote speaker, Senator Bill Frist

In a discussion about the implications of the Affordable Care Act and its rollout, Senator Bill Frist spoke candidly and offered his multiple perspectives on the issue. He commented that “the principles of Obamacare are the right principles,” while pointing out major mistakes made in how the ACA was enacted and rolled out. Frist said that, while there’s work to do pertaining to the execution of the ACA, he believes that it should be supported, refined and improved.

Frist was the first doctor in the U.S. Senate since the 1920s and served on both the health and finance committees. He has deep roots in both healthcare and longterm care.

He told the audience there’s a huge push in getting away from hospitals to post-acute progressive senior living spaces. He also offered three sweeping predictions for U.S. healthcare:

“There are 5,000 hospitals in American and today and 1,000 will be out of business in the next 8 years as they are 67 percent occupied, insurance companies as we know them will be dead within 10 years and we’ll go from 150 million to 20 million employees taking part in employer sponsored insurance programs thanks to the exchanges,” according to Frist.

Additionally, he spoke about the importance of branding and noted that it’s important for owners and operators to prove the value of senior living services because “eventually government funding will be tied to quality metrics.”

One of seniors housing’s biggest competitors is the home and Frist said “We are moving toward the home as a locus of care.”

Frist also spoke forcefully about the impact of technology transforming healthcare delivery. He illustrated his remarks about the game-changing role of mobile health and telehealth by showing how his iPhone doubled as a heart monitor with the information gathered through the app being sent directly to his doctor. “It tells your heart rate and whether there’s low blood flow.”

Breakout Session Highlights

There were 17 breakout sessions at this year’s regional conference that touched on a wide range of skilled nursing and seniors housing issues. Below are highlights from a few of those sessions.

Taking the Data Plunge: Transforming Strategic Business Decision Making

In keeping with NIC’s mission of informed decision making, panelists in this session noted that the primary types of data focused on four targets including data specifically geared toward making the investment case in seniors housing, underwriting , asset management and finance and operations.

Data improves transparency, which in turn, panelists said enable better informed investment decisions to help shape the future of the seniors housing and care sector.

Mitchell Brown, chief development officer with Kisco Senior Living utilizes NIC MAP and other data as part of the company’s annual strategic planning process, quarterly performance reviews and for investment purposes when it comes to acquisitions and new development sites.

Christian Sweetser, VP of seniors housing financial planning and analysis with Health Care REIT, Inc., said that his company leverages data to improve both internal and external business decisions. He uses the NIC database to analyze local market influencers and operational results.

Today’s Value Drivers for Seniors Housing

As the seniors housing sector becomes more popular among investors, there is increased interest in the valuation strategies of today’s debt and equity investors. Panelists weighed in on everything from best types of investments to cap rate sensitivity and property location.

“In our estimation we will continue to see occupancy growth and will be able to push value through rent growth and continue to drive NOI,” said Ryan Maconacny, managing director with HFF and moderator of this session.

Meanwhile, Jeff Muchmore, managing director, GE Capital, Healthcare Financial Services, said that the primary valuation tool from his standpoint is the cap rate on cash flow as well as keeping an eye on the competition.

“We like to look at RevPar growth over time and reliable, consistent assets,” he said. “We are active lenders in seniors housing and skilled nursing and we just want to make sure we have the right partners going forward.” He added that skilled nursing is a very “complex property” type due to portfolio risks.

Thad Paul, managing director with The Carlyle Group explained that his firm looks to buy IL, AL and MC properties located in the top 20 to 25 markets and looks for strong absorption.

Philip Kayden, investment officer with Ventas Inc., described Ventas’ investment strategy as focused on high quality markets, assets, and operators with stable cash flow. Their underwriting methodology includes cash flow analysis focusing on occupancy and REVPOR trends, expenses, CapEx, and the regulatory environment.

Constructive Insights on Seniors Housing Construction

With growing popularity comes a new construction pipeline. As construction ramps up in some select markets, panelists, comprised of industry leaders experienced in different segments of new construction, offered their views on assessing the market for new development as well as designing and financing a new building.

Larry Rouvelas, principal of Senior Housing Analytics, said “affluence, demand density and competitors” all influence his decision when it comes to a potential development site.

Panelists discussed how a prospective site’s location, zoning, topography, floor layout and construction cost were all design considerations.

When it comes to financing new projects, Jason Schreiber, senior vice president with PNC Real Estate, listed the key risks in new construction lending including appraisal, adequacy of construction contingency, adequacy of interest and lease-up reserve, interest rate risk, and recourse in obligations and covenants.

Providing Affordable Housing Care for Middle-Income Seniors: Opportunities and Challenges

This panel focused on the underserved population in seniors housing. Income inequality is apparent in the 75+ age group as many seniors do not have sufficient income to afford IL or AL communities, according to panelists.

This is becoming a growing challenge as many new seniors housing consumers lost critical years of wealth accumulation during the Great Recession leaving a huge market underserved in the seniors housing industry. Data shows that seniors housing fees consume a large share of income for the 75+ population. Median assisted living rent is $49,000 per year, an amount which only 22% of households age 75 and up could afford without negatively impacting their net worth.

Panelists explained that solutions to this challenge will require a combination of factors including cheaper real estate, low cost finance, scaled-back operations and lower resident expectations.

It was noted in the session that “the least expensive seniors housing properties maintained better occupancy than the most expensive ones, likely by using price as a lever.”

A multi-faceted solution to the problem is needed as panelists agreed that the situation is not likely to improve given the Baby Boomer’s lack of preparation for retirement.

Conference Highlights:

  • 4 General Sessions
  • 17 Breakout Sessions
  • 60 speakers
  • 14 hours of CEU credits
  • 4 Networking Receptions
  • More than 1,150 attendees
    • 31% Operators
    • 31% Lender/Financial Intermediary
    • 21% Industry Services
    • 13% Investor/Private Equity
    • 4% Developer
    • 19% first-time attendees
Image of Capital Provider Reception Image of Networking
Image of Opening Reception Image of Opening Reception 2
Image of Tuesday Networking Luncheon

NIC Hires Chief Economist, a First for NIC and the Seniors Housing and Care Industry

Beth Burnham Mace, NIC’s and the seniors housing and care industry’s first-ever chief economist, was officially welcomed to NIC’s office on March 10. Mace, who will also serve as director of capital markets outreach, will work on improving transparency in the sector with the objective of showcasing seniors housing as an investment opportunity to new sources of equity and debt capital and advancing the NIC mission of facilitating informed investment decision in the sector. She will also be meeting with capital sources for other property types to discuss the opportunities and risks associated with investing in the sector.

“Ultimately, my goal is to help the seniors housing and care sector become an accepted and better understood property type within the commercial real estate umbrella,” said Mace. “Institutional investors generally allocate 5-12% of their investment portfolios to income-producing real estate and seniors housing should capture some of this capital allocation. If this were to happen, the sector would be poised for solid growth that could appropriately meet the future demographically-driven demand needs of the sector.”

Mace started working with NIC in 2004 when the discussion of collecting market fundamentals data for the sector just began.

“Now ten years later, through the incredibly hard work of the NIC staff and volunteer leadership, the seniors housing and care industry has a market fundamentals data base that rivals or exceeds comparable databases in the other commercial real estate property types,” she said, adding that “It’s been incredibly exciting and really satisfying to watch the sector mature and I am excited that I have been given the opportunity to contribute to this endeavor.”

Mace has served as a member of the NIC Board of Directors for seven years and most recently chaired NIC’s Research Committee. In her new role she will continue many of the initiatives that were originated in the research committee. Among these will be using econometric analysis to try to tease out and understand the relationships between the economy and seniors housing and care performance. She will also work with other organizations, such as NCREIF, to continue to work on developing a performance returns index for the seniors housing and care sector.

Prior to joining NIC, Mace was a director with AEW Capital Management in AEW’s Research Group. She worked with the firm’s Direct Investment Group to provide primary research support to its core and value-added investment strategies and supported the group in underwriting, asset and portfolio management decisions. Her economic forecasting experience spans more than 25 years.

“I’m looking forward to watching the sector mature as an asset class for institutional investors,” she said.


Introducing NIC’s Future Leaders Council

To further the development of its future leadership, NIC established the Future Leaders Council (FLC) five years ago, in 2009, to provide select industry participants with a unique opportunity to advance NIC’s mission, develop volunteer leadership skills and form meaningful relationships with current NIC leaders.

Consistent with NIC’s mission of facilitating informed investment in the seniors housing and care industry, the council is closely aligned with, and integrated into, the work of NIC task forces and committees on NIC’s many existing and upcoming initiatives.

Each of the 28 FLC members contributes to existing NIC projects as well as approved initiatives generated by the FLC. The work of the FLC is overseen by an NIC board-led committee which selects new FLC members in a highly competitive application process and works with the FLC leadership in developing the FLC’s annual plan. The FLC is comprised of professionals from some of the leading companies in the seniors housing and care and finance industries.

“One of the best ways to cultivate and motivate a new generation of leaders and develop leadership skills is to provide meaningful opportunities to work alongside current NIC leaders,” said Bob Kramer, NIC’s president. “Members of the FLC collectively represent the best and the brightest who are committed both to the mission and work of NIC and to advancing the products and services available to meet the housing and care needs of America’s seniors.”

Pursuant to their goals, the council meets four times year including at the National and Regional NIC Conferences as well as individual FLC meetings. Members audit conference sessions providing feedback on speakers and topics and are provided the opportunity to attend receptions at the conferences with members of the NIC Board of Directors and NIC staff.

“The FLC is focused on three major themes this year including better targeted initiatives, bringing new capital into the seniors housing and care industry, and preparing future leaders of NIC,” said Kelly Sheehy, FLC’s chairman.

The FLC is currently participating in the following NIC sponsored initiatives and committees:

  • Investor Presentation Task Force
  • NIC Research Committee
  • University Internship Program
  • Investment Guide Update
  • Skilled Nursing Data Initiative
  • Debt-lender Survey Initiative
  • National Conference Support
  • Regional Conference Planning Committee
  • NIC MAP Focus Group

In addition, the FLC has developed its own Idea Lab through which each year FLC members develop and propose to NIC leadership a new initiative to advance NIC’s mission.

Read the Insider each month to learn more about FLC activities.

For further information about the FLC, please contact Jessica Palmeri, managing director at NIC at 410-267-0504.


Seniors Housing and Care Industry Calendar

 

April 2014:
9-11 2014 ULI Spring Meeting, Vancouver, BC
May 2014:
7-8 NIC Spring Leadership Meeting, Dallas, TX
8-9 ASHA Spring Executive Board Meeting, Dallas, TX
19-22 ALFA 2014 Conference and Expo, Phoenix, AZ
June 2014:
3-5 REITWEEK: NAREIT’s Investor Forum, New York, NY
September 2014:
30-Oct. 1 ASHA Fall Executive Board Meeting
October 2014:
1-3 24th NIC National Conference, Chicago, IL
5-8 ACHA/NCAL Annual Convention and Exposition, Washington, DC
November 2014:
5-7 NAREIT’s REITWorld Conference, Atlanta, GA

NIC Partners

We greatly acknowledge our partners.

[LOGOS title=”Premier Partners”]

[LOGO src_id=1865 href=”http://www.avivreit.com/”]

[LOGO src_id=1866 href=”http://www.capitalonecommercial.com/”]

[LOGO src_id=1867 href=”http://www.gehealthcarefinance.com/home”]

[LOGO src_id=1868 href=”http://www.hcreit.com/”]

[LOGO src_id=1869 href=”http://www.ventasreit.com/”]

[/LOGOS]

[LOGOS title=”Official Partners”]

[LOGO src_id=1871 href=”http://www.berkadia.com/default.aspx”]

[LOGO src_id=1872 href=”http://www.contemporarycapital.com/”]

[LOGO src_id=1873 href=”http://www.directsupply.com/”]

[LOGO src_id=1874 href=”http://www.genesisrehab.com/”]

[LOGO src_id=1875 href=”http://hhcfinance.com/”]

[LOGO src_id=1876 href=”http://www.key.com/corporate/financing/commercial-real-estate-loan-investment.jsp”]

[LOGO src_id=1877 href=”http://www.midcapfinancial.com/”]

[LOGO src_id=1883 href=”http://www.nhireit.com/”]

[LOGO src_id=1879 href=”http://www.surfacelogic.com/”]

[LOGO src_id=1880 href=”http://www.theprivatebank.com/”]

[/LOGOS]


Access all past Insiders