The Year of Uncertainty
The Year of Uncertainty
As 2016 wound down, many professionals with ties to senior housing were anxiously curious to see how a new administration would affect both healthcare and the economy.
Throw in unexpected market swings, remaining uncertainty about interest rates, and the rising tidal wave of retiring baby boomers, and lenders, developers and operators were all watching for signals that 2017 would usher in favorable financial news.
Skilled nursing providers — who have seen census fall, construction come to a virtual standstill and Medicare pressures continue to mount — need some positive movement in the year ahead.
One thing is certain: It won't be politics as usual.
Low interest rates encouraged reinvestment over the last two years. But the U.S. Treasury jumped 40 basis points in the first two weeks of November, and stocks swung higher.
And President-elect Donald Trump has questioned whether the Federal Reserve held rates artificially low and suggested he would appoint a new chairman. The Fed did raise its key short-term rate to 0.5% to 0.75% in December.
Steve Kennedy, senior managing director at Lancaster Pollard, says the new Republican administration's promise to be more fiscally conservative also injects potential uncertainty into Medicaid funding.
If the Affordable Care Act is gutted in its entirety, a proposal Trump backed away from immediately after the election, it would take with it the framework for value-based payments that hospitals and long-term care facilities have been working toward. The potential elimination of the Affordable Care Act also could undercut delivery of improved preventive and drug benefits.
Beth Burnham Mace is the chief economist and Director of Capital Markets Research at the National Investment Center for the Seniors Housing & Care Industry. She predicted Trump's pledge to increase spending on infrastructure and defense and pass tax cuts — both corporate and individual — would have a stimulating effect on the economy. That's especially true for 2017 and 2018, when he'll have a Republican-controlled Congress weighing his proposals.
“That should allow the economy to grow faster in 2017 than it has otherwise,” Mace says. “That should be good for seniors housing and skilled nursing because the demand for those products will be stronger. But at this point, my crystal ball supports the idea that stronger interest rates could potentially hurt.”
Trump has vowed to “modernize Medicare,” a phrase the Kaiser Family Foundation links to premium support for various public or private plans, and a higher eligibility age. He's also proposed funding through block grants to states, which would be given incentives “to seek out and eliminate fraud, waste and abuse.”
Any federal changes to Medicare could soften the market, at least as long as it takes to understand all of the impacts.
In its fall market update, Healthcare Realty Brokerage warned customers that buyers are “acutely aware of any threat of potential spending cuts, however small or unlikely” and base acquisition decision in part on their understanding of reimbursements.
“There's going to be some kind of shake-up and that's going to cause some weakening in the market,” Mace says. She predicts those who depend most on government reimbursements — stand-alone skilled nursing facilities — will suffer more than CCRCs, where a majority of residents are private payers.
Pressure to stretch Medicaid dollars against an impending crush of recipients has already moved some states to support development that steers residents away from traditional skilled nursing facilities toward less costly alternatives.
In Illinois, for instance, state-designated Supportive Living Facilities accept Medicaid patients who need support with limited ADLs. According to Lancaster Pollard, the state pays a median daily rate of $62 daily for SLF residents, versus $141 daily for skilled nursing patients.
Kennedy sees the creation of similar programs as ideal in a 2017 financial market.
“While there is undoubtedly a massive need for affordable assisted living development, projects that minimize the reliance on government support have the clearest path forward,” he says. “Look for more vertical integration to help control construction costs via the alignment of incentives with owners and contractors.”
REITS give way
Increasing pressures on skilled nursing led to large numbers being snapped up by real estate investment trusts in the early 2010s. But many are now divesting themselves of skilled care entities.
In August, Ventas spun off a skilled nursing/post-acute REIT named Care Capital Properties with the goal of creating two faster-growing companies with different strategies. Welltower, meanwhile, announced in November that it was offering a 75% stake in one portfolio of long-term and post-acute properties, and selling another 64 skilled nursing homes outright for $1.1 billion.
Mace expects that trend to continue into 2017, with the largest trusts adding life science campuses and medical office buildings to their mix in place of the less favorable SNFs.
As for REITs continuing to sell off, there have to be buyers, Mace points out. Welltower's entities were purchased by two Chinese companies, Cindat Capital Management Limited and Union Life Insurance.
Private investors and lenders are keeping a foothold in the market, knowing the eventual arrival of the Baby Boomers will increase demand for all levels of care.
BMO Harris Bank created a new national commercial real estate healthcare lending group in March. Though the bank's U.S. base is the Midwest, group managing director Imran Javaid wants to broaden the company's reach nationwide and ensure funding goes to a more diversified pool of projects.
“We see the industry sort of peaking in 2026 — when the baby boomers start peaking,” he says. “We want to grow through then and improve our name recognition.”
Mace says providers are also smart to broaden their reach and expand services, such as Brookdale's move into home care. The extra line buffers against the current national trend of shrinking beds, but also draws in clients who might one day need a skilled environment.
Stretching for support
David Sharp, managing director of real estate for MidCap Financial Services, says the construction lending market for skilled nursing and senior housing will tighten in 2017.
Underwriters will be scrutinizing internal pressures and business plans that rely on sizeable changes in revenues or expenses.
But the right renovation projects will still find lenders if improvements will enhance a revenue stream by adding units or offering different programming opportunities, such as short-term rehab beds added to a traditional skilled nursing home.
“Unless the facility is currently underleveraged, it will be difficult to find financing for improvements that will just bring the facility back to competitive standards,” Sharp says. “On a limited basis, any new construction for pure-play skilled nursing opportunities will likely be positioned for the short-term, high-therapy residents in markets with dense population bases and strong demographics.”
According to the NIC MAP data service, projects in Dallas, Chicago, Denver and Miami make up 54% of current skilled nursing construction. Sharp says new builds close to major hospitals, physician networks and major highways also are more attractive to lenders.
In any location, investors will lean toward projects or purchases that deliver a balance of care with only a minor post-acute presence.
“We'll do it when the opportunity is right,” says Javaid, noting MainStreet Health's recent creation of a cross-border REIT that includes post-acute facilities in a large, mixed portfolio. “There's definitely an ongoing need (in senior housing), but is there a need for skilled nursing beds? No, it's a need to reimagine that space or the use for that space.”
According to NIC's 2016 third-quarter numbers, the latest available, the majority of current skilled nursing construction projects — 33 of 62 — are expansions or renovations. That represents just 0.6% of the U.S. inventory, while about 7.3% of independent living and 8.1% of assisted living units are under construction.
That's despite the average age of U.S. nursing homes nearing 38 years.
For companies that have both a solid plan to deal with regulatory, payment and economic shifts — and a solid track record — 2017 should still hold plenty of financing options.
Javaid says he wants partners who can maintain decent profit margins, fill beds and get high quality ratings.
“We'll still be lending to good operators who are doing good by their clients, their customers and their employees,” he says.