Investors are beginning to understand that skilled nursing facilities provide the lowest cost setting in the healthcare continuum, according to Craig Bernfield, CEO and chairman of Aviv REIT, Inc. Since taking the company public earlier this year, he said the sector is on pace for continued growth. Bernfield was recently interviewed by NIC and shares his thoughts on everything from why investors are attracted to the space to risks pertaining to Medicare and Medicaid.
NIC: This year you launched a successful IPO, as a result you have had extensive dialogue with investors. In addition, you and your team have recently attended both NIC and NAREIT conferences. What issues are on the minds of investors and what attracts them to skilled nursing properties?
Craig Bernfield: From our point of view, people have been very interested in our company story, obviously because we were able to successfully execute our IPO in March. At NIC we’re meeting mostly with operators and other people who are attracted to us for capital. But, I think the investor discussions that we’ve been having since the IPO, including most recently at NAREIT, have been very supportive and positive about our presentation of the issues as it relates to skilled nursing.
I think the reasons are mostly self-evident, but for sure investors are attracted to us because of the significant growth opportunities presented by the skilled nursing sector. There are over 16,000 nursing homes in this country and only 10 percent are owned by public REITs at this time. We have very limited competition in the sector. We are gaining access to lower cost of capital all the time and these things are combining to put us in a position, in investors’ minds, to continue what we’ve been doing over a long period of time, which is being a premier consolidator of healthcare real estate, in particular skilled nursing facilities. Public investors are starting to understand that SNFs are the lowest cost facility-based setting in the healthcare continuum. That’s very attractive in today’s economic environment. There’s also a limited supply that resonates with investors.
Then finally, Medicare and Medicaid have been very reliable payors over a very long period of time. We are approaching the 50th anniversary of the inception of the Medicare and Medicaid Act. In the last 12 to 13 years, both Medicare and Medicaid rates have been increasing by approximately 4% percent per year. Even in the fiscal year of 2013, during the difficult budgetary crisis, the SNF Medicare rates were up small amounts and the Medicaid rates, throughout our portfolio in 29 states, at least, were very stable. Those are the things that I think are turning investor’s heads when it comes to investing in our sector over the long term.
NIC: As you examine the history of Medicare and Medicaid reimbursement over the last 15 years, does that help to address the concerns that new investors may have when it pertains to potential reimbursement risks?
Bernfield: First of all, I will tell you, having been in this business for 25 years that investors are always going to be focused on reimbursement risks. As an investor in the space, we of course also are intensely focused on reimbursement as an important topic in the industry and in the risk profile and the risk/return trade off. I think what investors are starting to get is that there may be a significant difference between the perception of risks relative to reimbursement and the actual risks. Of course the perception of risk is very high. But we’ve seen significant stability in rates over long periods of time, particularly in the last 12 to 15 years and we think that the government has been a good partner.
It’s been our experience that the key is working with the right operators who know how to manage within the realities of the reimbursement system, both Medicaid and Medicare, and understand this is not a high margin business, but a business where the government has paid. We do believe that the government will continue to provide adequate reimbursement for operators to continue to be entrepreneurs and to operate the assets. We recognize, as I think investors do, that all investments have risks, but we think the government has proven that they’re committed as a matter of social policy to taking care of our nation’s elderly. Now that doesn’t always translate to easy times, like any other industry there are periods of time where you’ll see hiccups in reimbursement. But for our portfolio we feel very much insulated because our business is 100 percent triple net leases. We have strong overall rent coverage. So reimbursement risk is a big story and it will always be on the minds of investors, but we think that investors are starting to make sense of the risk/return trade off.
NIC: Turning to the future, with the number of Medicare beneficiaries and, therefore, Medicare costs projected to skyrocket in coming years; do you see the effort to control the growth in Medicare costs impacting skilled nursing properties?
Bernfield: Any change in health care policy has the potential to impact, inevitably in one way or another, whoever’s participating, whether it’s healthcare property owners or operators, vendors or suppliers. The fact that Medicare costs are increasing, and there are focused efforts to control the growth in costs is a reality and our point of view is that it’s just one new reality of many that have occurred over a long period of time from owning these kinds of properties. But adapting to change I think is the key to success in any business. We’re working with operators that have proven to us over long periods of time that they have the ability to adapt to a changing environment. We look at three things; one is the interrelationship between rates and revenue, two utilization, and three, desired outcome.
The reality is that hospital stays are becoming shorter and patients are coming to SNFs much faster than they have in the past. So this push from hospitals to lower cost settings, like SNFs in particular, means that where you have well positioned real estate and high quality operators, the result, not in every case but in many cases, will be increases in utilization. We believe that increased utilization over the near and long term will be a positive for SNFs. By the government’s own projection, Medicare and Medicaid expenditures, just for SNFs are expected to grow over 80% from 2011 to 2021. So the expenditures picture looks bright, but navigating the environment is obviously going to depend upon the success of the individual operators.
NIC: Looking specifically at Medicaid, with the trend of more and more states working to outsource their Medicaid programs to managed care companies, what does this trend mean for skilled nursing operators? How do you view this in terms of opportunities and/or challenges?
Bernfield: Again, I’ll just start by saying, contrary to common perception, Medicaid reimbursement, at least in the states in which we own properties, has been remarkably stable. Even in California, which as we know for the last few years has been in Wall Street Journal headlines for budgetary problems, the state is very committed to reimbursement for skilled nursing. There’s been an increase in California in the last 4 years. There are still nonetheless challenges and the operators are definitely in the trenches, working with the state legislatures and their associations to make sure that reimbursement is at least keeping pace with inflation. But we think the trend to outsource state Medicaid programs to managed care companies is going to be a big positive for operators. As we get away from government site control and therefore from historical Medicaid as well as traditional Medicare programs, you see more of a market-based like mechanism that’s moving into focus. This market-based pricing will result in better efficiency throughout the industry. We think that operators will be able to align themselves with managed care organizations, just like they are aligning themselves with hospitals to be part of accountable care organizations. Managed care is just a new constituent and the good operators are adjusting to those realities and beginning to negotiate directly on a market basis for the services which they provide.
If you go back to the fundamentals that you’ve got a need-based, low cost setting in a SNF, and if you combine need-based, low cost services, with good operators and good real estate, those companies that possess those ingredients will be in a position to have a balanced negotiation with managed care organizations and other non-government payer sources for SNF services.
NIC: With the increasing focus on quality and outcomes, operators need to document and demonstrate more than ever before their improved quality and outcomes. Describe what your operators are doing today in order to meet these expectations, whether of hospitals or payors?
Bernfield: I’ve covered a lot of this in my previous remarks about operators taking advantage of, not suffering from, the changes in health care policy reimbursement and regulation. Most of our top 10 operators are among the largest and most sophisticated operators in the country so they have infrastructure and they have made the commitment and the expenditures necessary. They are documenting and demonstrating their quality and their outcomes. They can’t partner with managed care organizations or position themselves with hospitals or frankly with the regulators, unless they are able to demonstrate good outcomes. They’re doing it with a heavy reliance on management and a heavy reliance on IT, and the larger operators, just like any other industry, have the ability to absorb a higher overhead. That investment in technology allows them to track the residents throughout the entire continuum of care. Hospitals are not going to refer patients to skilled nursing operators if they are not getting the people home that are supposed to be home or if they’re supposed to be residing in the facility for long term care services and they boomerang back.
We think our operators are doing a good job of this. Some of the change is happening as we speak and it will unfold over the next few years.
Construction activity in assisted living properties continued to rise, establishing another new cyclical high. During the third quarter of 2013, there were 10,129 units under construction within the 31 primary markets (MAP31), which represented 5.2% of existing inventory. The number of units under construction increased 2% from the prior quarter and 39% from a year ago. The third quarter level of construction is 47% above its pre-recession peak.
While aggregate construction activity continued to accelerate, some metropolitan markets represented an inordinate share of the total. Among the 31 primary markets, Houston and Minneapolis had the most construction activity at 1,071 units and 1,072 units, respectively, accounting for 21% of all assisted living construction in MAP31. Rounding out the top five markets, in terms of units under construction, were Phoenix (858 units), Chicago (676 units), and Boston (675 units). These five markets accounted for 43% of all of the construction within assisted living properties in the MAP31 markets.
Ten (10) of the MAP31 markets had fewer than 100 units under construction within assisted living properties, including four markets without any construction in assisted living properties as of the third quarter of 2013.
NIC’s national sales director, John Blumer, represented NIC on a seniors housing and care panel at the recent Bisnow Annual Healthcare Real Estate Summit in Philadelphia. Panelists offered their views on topics relating to the seniors housing and care segment of the healthcare real estate industry.
While conference topics included everything from industry consolidation to demographics to the Affordable Care Act, several themes that came out of the seniors housing and care panel focused on why the sector is currently the hottest real estate asset class. Panelists pointed to compelling demographics and the sector’s resiliency during the Great Recession as reasons for the growing interest in the sector.
Blumer noted below some of the key questions and answers addressed by the panel:
- Has the pace of sales transactions slowed down? Sales transactions continue at a steady pace in terms of dollar volume but have increased in terms of the number of transactions due to the reduction in the number and size of portfolio sales.
- Are higher interest rates putting upward pressure on cap rates? Not so far. Competition for scarce deals seems to be offsetting any pressure from higher interest rates.
- What is going on in seniors housing and care development and new construction? Industry veterans are keeping a close eye on any evidence of overbuilding. Independent living inventory growth and absorption have been more tempered than assisted living properties. Growth in assisted living in 2014 will be somewhat regionally concentrated in markets that make up a significant share of current construction, i.e. Minneapolis, Phoenix, Boston, Atlanta, Philadelphia, Denver, Houston and Dallas. Freestanding Memory Care properties are experiencing the fastest rate of growth of new construction based on a relatively small base of existing inventory. CCRC new construction and development is very low with most growth taking place as redevelopment or the addition of units to existing properties.
- Is capital available for seniors housing and care operators? Debt and equity is readily available for experienced operators looking to expand their operations.
- What is in the future for Freddie and Fannie? The consensus of the panel was that Freddie and Fannie will continue to exist in some form and that there is too much else going on in Washington, DC for Freddie and Fannie to get put on the front burner any time soon.
- What is the forecast for the sector in 2014? Overall, the seniors housing forecast is for balanced inventory growth and absorption with average occupancies approaching 90%. Individual markets may experience some occupancy challenges in the short term as new construction comes on line and needs time for demand to catch up with supply, but 2014 looks to be a solid year.
Plan to join us March 16-18 at the Boca Raton Resort and Club in Boca Raton, Florida for a skilled nursing and seniors housing investment forum. Unparalleled industry networking opportunities and close to 20 educational sessions focused on the seniors housing and skilled nursing sectors will help small to mid-size regionally focused operators make the right connections with capital providers to get deals done.
This year’s line-up of general session speakers includes Senator Bill Frist addressing the next chapter in healthcare reform and NIC’s president Bob Kramer moderating a panel discussion on tomorrow’s customer and what that means for today’s products and services. Additionally, you will hear from industry leaders on such topics as Today’s Value Drivers; From the Ground Up: Design and Build with Confidence; Exploring Growth Strategies for Private Pay Seniors Housing Through Private Equity and REITs; The Quality Curve and Assessing Skilled Nursing Properties; and How to Use Data To Assess Market Opportunities in Skilled Nursing.
Social Security was designed to replace income once people could no longer work. A recent study by the Center for Retirement Research at Boston College points out that the effective retirement age is now 70 years old, not 65.
Key findings of the brief titled, ‘Social Security’s Real Retirement Age is 70,’ include:
- Due to increases in Social Security’s Delayed Retirement Credit, the effective retirement age is now 70, with monthly benefits reduced for earlier claiming.
- Benefit levels at 70 appear appropriate given that rising deductions for Medicare and greater benefit taxation have reduced Social Security’s net replacement rates.
- The shift to 70 should be feasible for many workers given increases in lifespans, health, and education.
- But vulnerable workers forced to claim early will have low benefits and will be particularly harmed by any further cuts.
- Policymakers need to inform those who can work that 70 is the new retirement age and devise ways to protect those who cannot work.