As we reflect on the past year, 2023 presented a landscape of cautious optimism within the senior housing industry. The fundamental need for senior housing remains as strong as ever, but the prevailing lending environment posed notable challenges.

Lenders, while armed with substantial capital, approached lending with a sense of caution. A prerequisite for a 1.2 debt coverage ratio became a standard criterion, allowing loans on a wide range of properties. Some lenders even indicated flexibility with a 1.0 coverage ratio under ideal circumstances. However, they remained steadfast in their reluctance to base decisions solely on enthusiasm, pro formas, or aspirational narratives. For newcomers to the industry, securing a loan proved to be a formidable task.

The landscape of new construction appeared to be at a near standstill, despite a handful of projects in progress. Encouragingly, there was only modest upward pressure on capitalization rates. However, a significant challenge emerged as operators faced accelerating expenses outpacing revenue growth. For many operators, the net operating income (NOI) dwindled compared to previous years, thereby affecting the overall property value.

An imperative challenge for the industry is the necessity to balance operating revenue and expenses more effectively. Several states, exemplified by California, experienced drastic increases in minimum wage without corresponding adjustments in reimbursement. This discrepancy places operators in a tight spot, grappling with rising costs without commensurate financial support.

In one instance, an operator expressed concerns about potential resident exodus if rates were increased. However, it was emphasized that maintaining the status quo could jeopardize the viability of the business, ultimately impacting the well-being of residents. In such a dynamic environment, tough decisions become a necessity for the sustained health of senior housing facilities.

As we move forward, addressing these challenges collectively as an industry becomes paramount. Striking a balance between financial sustainability and resident well-being will undoubtedly define the future success of senior housing in the years to come.

The world of senior housing is divided into distinct sectors: Skilled Nursing, Assisted Living/Memory Care, Independent Living, and Active Adult. Skilled Nursing and Assisted Living/Memory Care facilities are licensed and provide help with daily activities, while Independent Living and Active Adult communities focus more on lifestyle and amenities.

As we look ahead to the second half of 2023, there are still concerns looming over the senior housing sector. The economy, interest rates, and rising costs of food, insurance, and labor are all presenting challenges to industry investors, owners and operators.

Skilled Nursing Facilities present the greatest challenge. With skyrocketing labor and insurance costs, not to mention strict regulations, it’s no wonder owners and operators are struggling. Surprisingly, there’s been a mysterious rise in the prices of SNFs. This could be due to the lack of new construction in recent years. In today’s market, the most common buyers for these facilities are Private Equity firms and REITs who partner with experienced operators known for turning things around. With the lack of new facilities, this trend is expected to continue.

Assisted Living/Memory Care facilities, on the other hand, are seeing their resident numbers rebound. However, their profit margins are under pressure from higher labor costs, insurance premiums, agency fees, etc. In response, senior housing operators are raising their rents by 7-15%, depending on the market and community, hoping to improve the bottom line.

Independent Living and Active Adult communities offer a different kind of experience. Independent living facilities are similar to assisted living but without the added healthcare licensing. They don’t assist with medication management or activities that come with daily living. Active Adult communities, on the other hand, are all about embracing a lively and engaging lifestyle. They offer a wide range of amenities and multiple apartment options. These communities are attracting younger, healthier seniors who want to downsize but still enjoy an active life without the hassles of home ownership. For this reason, many investors eye them as an attractive choice to expand their presence in the senior housing sector.

The senior housing industry is facing some tough challenges. Obtaining financing requires jumping more hurdles, while interest rates climb higher. Lenders have tightened their criteria for cash-flowing deals, making it harder to secure funding. Institutional lenders are even shying away from value-add projects altogether. To fill in the gap, bridge lending has become an option, albeit an expensive one. But even the bridge lenders are scrutinizing transactions more closely. This makes it even more challenging to get funding for those deals.

Unfortunately, there’s often a significant gap between the sellers’ asking price and what buyers are willing to pay. Sellers have to come to terms with the fact that the current reality sets the baseline for valuation in the underwriting process.

To make matters more difficult, many experts predict a recession in the last part of 2023 or early 2024, mainly due to inflation. The Federal Reserve has already raised interest rates by a significant margin, and more increases may follow in coming months. Despite all the challenges, buyers are still finding attractive value-add opportunities and are actively on the hunt for good deals in the senior housing sector.

The senior housing sector and what it’s facing as we look towards the second half of 2023 is a complex landscape with various pockets of struggle and opportunity. But the world of senior housing, much like the population it serves, keeps evolving and adapting with time.

 

Southern California, June 1, 2023 – JCH Senior Housing Investment Brokerage (JCH), a leading firm specializing in senior housing investments, is pleased to announce the successful lease negotiation of a Skilled Nursing Facility (SNF) in Southern California. This significant achievement further solidifies JCH’s position as a trusted partner in the senior housing industry.

The SNF, located in Bakersfield, CA, was previously occupied by a reputable regional operator who decided it was time to sell their Leasehold position and enjoy the benefits of being a landlord. JCH’s expert team diligently worked towards securing a new lease agreement with a growing local operator, ensuring a seamless transition for residents and continuity of exceptional care.

As the facilitator of this lease negotiation, JCH played a pivotal role in fostering effective communication between the landlord and the new tenant. JCH’s tireless efforts resulted in a mutually beneficial agreement that not only meets the landlord’s objectives but also allows the new tenant to expand their operations and deliver high-quality care to the local community.

“This particular asset is 100 years old, and it took a few attempts to identify the perfect buyer,” said Jennifer Contreras, Senior Vice President of JCH Senior Housing Investment Brokerage.  “When deals run into challenges, as many often do, I find that our team’s operational understanding, strong relationships with attorneys, and willingness to patiently guide our clients through the process sets JCH apart from other brokerages. We are proud to have played a role in ensuring the continuation of exceptional care for the residents of this facility.”

JCH Senior Housing Investment Brokerage has built a reputation for its expertise in the senior housing sector, consistently providing tailored solutions that align with clients’ goals. With a proven track record of successful transactions, JCH has become a trusted advisor to owners, investors, and operators in the industry.

About JCH Senior Housing Investment Brokerage:

JCH Senior Housing Investment Brokerage is a premier firm specializing in senior housing investments. With a dedicated team of professionals and a deep understanding of the market, JCH assists clients in navigating the complex senior housing landscape. Offering a range of services, including brokerage, advisory, and financing solutions, JCH aims to deliver optimal outcomes for its clients. For more information, visit https://thejchgroup.com.

Alhambra, CA – June 1, 2023 – JCH Senior Housing Investment Brokerage (JCH), a leading real estate firm specializing in senior housing investments, is pleased to announce the successful lease negotiation of a prominent Assisted Living Facility in Southern California. The facility, previously operated by a national operator, will now be under the management of a highly regarded regional operator, thanks to JCH’s diligent efforts and unwavering commitment to excellence.

With its extensive expertise and industry knowledge, JCH played a pivotal role in navigating the complex negotiation process, ensuring a seamless transition between tenants. Overcoming a myriad of licensing challenges and fostering effective communication between the landlord, previous tenant, and new tenant, JCH demonstrated its exceptional professionalism and dedication to achieving mutually beneficial outcomes for all parties involved.

The Assisted Living Facility, located in Alhambra CA, has established itself as a trusted provider of exceptional care and an inviting community for seniors. The new regional operator, renowned for their commitment to personalized care, specializing in programs that provide access to care for low-income residents, and wellness programs, will continue the facility’s legacy of excellence, delivering unparalleled support and enriching experiences to residents.

“Brokering deals is so much more than identifying a buyer and stepping aside” said Cindy Hazzard, President of JCH Senior Housing Investment Brokerage. “In my thirty years of being a Broker I have yet to see a lease deal that took more than a year to close. Through JCH’s coordination, we were able to work closely with all stakeholders to bring solutions, facilitate difficult conversations, and create a path forward. Equally important, we identified a resourceful buyer with strong relationships with local licensing agencies which proved to be critical in navigating a lengthy licensing process.”

JCH’s unwavering dedication to senior housing investments has solidified their position as a trusted industry leader. Their commitment to delivering exceptional results, paired with their extensive network of clients and expertise in navigating complex negotiations, distinguishes JCH from their competitors.

About JCH Senior Housing Investment Brokerage

JCH Senior Housing Investment Brokerage is a leading real estate firm specializing in senior housing investments. With an unwavering commitment to excellence and a deep understanding of the industry, JCH has built a reputation for delivering exceptional results and fostering lasting partnerships. By providing comprehensive services tailored to the unique needs of senior housing investors, JCH continues to drive positive change in the industry.

Published  in Wealth Management Real Estate’s 2023 Market Outlook

December 29, 2022

The senior housing sector is broken into Skilled Nursing, Assisted Living/Memory Care, Independent Living and Active Adult. Skilled Nursing and Assisted Living/Memory Care facilities are licensed and aid with activities of daily living. While Independent and Active Adult are not licensed and are more amenity focused and lifestyle oriented.

As the Senior Housing Sector looks forward to 2023, concerns about the economy, interest rates, higher food, insurance and labor costs are prevalent.

Skilled Nursing Facilities:

Despite all other indicators such as increased costs of labor and insurance, coupled with regulatory factors makes this a much tougher asset to own and operate. There seems to be an ongoing unexplainable creep in SNF prices. This may be due, in part, to the lack of new construction for many years. Private Equity and REITs partner with operators with a track record of turning around facilities and are the most common buyers in today’s market. We anticipate this trend continuing into 2023.

Assisted Living/Memory Care:

The good news here is that census is continuing to rebound from the drastic census declines caused by the pandemic. Senior Housing operators are raising their rents 7-15%, depending on market and community, thereby improving the quality of their revenue stream. Revenues are equal to or better than pre-pandemic revenues, while profit margins continue to be pinched by higher labor, insurance, agency, and raw food costs.  Many operators are optimistic that, moving forward, they do not anticipate a significant continued increase in labor expenses.

Independent Living & Active Adult

Independent living facilities, while similar in design to assisted living, are not licensed and therefore do not assist with medication management or help with activities associated with daily living.

Active Adult communities are centered around “life-style” amenities and many apartment options. Younger, healthier seniors who are downsizing but still want to maintain their active lifestyles without the burdens of home ownership are choosing this option. Many multi-family investors looking to expand into the senior housing sector find this an attractive choice.

Summary

More deals are dying specifically due to tougher financing and high rates. Lenders are tightening their lending criteria on cash-flowing transactions, while many institutional lenders are not even considering funding value-add deals. Bridge lending, while more expensive, has been filling part of the gap. Unfortunately, they are also more closely scrutinizing transactions, making it even harder to finance those deals.

Many new senior housing assets are still struggling in their lease-up phase while established facilities haven’t regained census are being offered for sale.  Unfortunately, there is a big gap between the sellers asking price and the eventual sales price. Sellers, despite lower historic margins, are expecting a big piece of the value-add upside, Lenders are no longer allowing seller pre-pandemic numbers to tell the story; therefore, sellers must adjust their expectations and understand that their current operations are the baseline for valuation in the underwriting process.

All indications are that there will be a recession in Q1/Q2 2023 driven by inflation. The Federal Reserve has already raised interest rates by 375 basis points and will likely raise them again in December of 2022. Interest rates are higher than we have seen in years. However, they are still low with many buyers planning on refinancing in the future when lending rates are more favorable. Buyers are finding many good value-add opportunities and continue to look for opportunities in this sector.

WMRE 2023 Outlook Cover

Senior Housing Market- Post COVID

According to many industry experts, the Assisted Living and Skilled Nursing industries remain under the national microscope post-COVID. How will state and federal regulatory changes impact the industry? What will these changes mean to reimbursement levels, staffing requirements and barriers to entry?

Workforce shortage

The American Health Care Association (ASHA) estimates there was a loss of 241,000 nursing home employees, or 15.2% of workforce, since 2020. To maintain and attract new employees, operators are offering flexible scheduling and increasingly robust benefits packages coupled with more refined recruiting strategies.

Census

Average private-pay Seniors Housing occupancy increased 20 basis points in first-quarter 2022 to 80.6 percent, according to the most recent data from the National Investment Center for Seniors Housing and Care. This is above the pandemic low of 78 percent in the second quarter of 2021, yet well below the pre-pandemic level of 88 percent in the fourth quarter of 2019.

Market Location/Asset Type

Core (Primary): Market locations are consistent with the NIC MAP top 30 MSAs, generally more densely populated, with higher barriers to entry. For Nursing Homes this includes properties in states with a Certificate of Need (CON) or similar restriction on development and states with sustainable Medicaid reimbursement programs.

Class A: Excellent-quality assets located in desirable core markets, with an average age of less than 10 years. Building finishes and FF&E, are high-end. Nursing Care properties are located on or near a health care campus with state-of-the-art rehabilitation programs and equipment.

Non-Core (Secondary): Market locations are typically outside the NIC MAP top 30 MSAs, generally less-populated areas with a thin target population base and low barriers to entry. Specific to Nursing Homes, the market will not have restrictions such as CON that limits new development.

Class B: Good-to-average quality assets located in core and non-core market locations, with an effective age between 10 and 25 years. For nursing care, the focus is on functional design, primarily containing private and semi-private resident rooms.

Class C: Average-to-fair-quality assets located in non-core locations, with an effective age older than 25 years, may be non-purpose built. Rent and occupancy levels typically fall below market averages. Nursing Homes are located with minimal access to healthcare providers.

Lending all predictions regarding the near-term future of Seniors Housing finance must consider an important question: How much and how fast will interest rates rise? The Federal Reserve raised the fed funds rate by 0.75 percent in June to curb inflation. Higher rates mean higher debt service, resulting in lower debt-service coverage ratios. As cap rates also increase in this environment, stabilized values decline. Bridge Lending seems to be increasing, allowing operators to stabilize value-add opportunities before securing permanent financing.

Outlook

The consensus among most operators is that the Seniors Housing sector has moved into the post-pandemic recovery phase backed by strong long-term demand and increased investor interest.

With state, the federal government, and the Centers for Medicare & Medicaid Services financial aid ending, we expect to see more distressed assets hitting the market in the year’s second half.

 

 

Many years ago, when I was in operations and our Skilled Nursing Facility (SNF) was preparing for our annual survey, I heard that NOC shift employees were sleeping during their shift. I set my alarm for the middle of the night, snuck into the back door of the facility and as word spread that I was on site, staff began appearing at nurses’ stations. However, one particular employee had not heard his peers texting him and I found him fast asleep on the lobby floor. To his surprise he was awoken from his nap, and to my surprise he didn’t understand why this strange lady was so irritated. You see, while I was disappointed that our NOC shift was stealing company time, not answering call lights, or doing what we paid them to do, the ultimate failure was mine. How did the NOC shift feel so removed from our company culture that this behavior ran rampant? Moreover, why did this young Certified Nursing Assistant (CNA) not know who the corporate leadership was, but most importantly why did I not know his name, or really anyone’s on NOC shift? This was an abject failure of leadership, my leadership.

Flash forward to today’s post-COVID environment and “The Great Resignation” that swept through the Senior Housing industry. What if instead of viewing this as employees walking away from Senior Housing, we reframe this moment as “The Great Awakening” when Skilled Nursing, Assisted Living, and Memory Care owners must finally align their goals with that of their staff to attract, retain and grow tomorrow’s leaders? The National Investment Center for Seniors Housing & Care (NIC) Q4 2021 data indicates that between May 2020 to December 2021, in over 14,800 properties, more than 22.2% were missing staff. I imagine by now everyone has researched your starting wages against those of fast-food employers in your area. In Los Angeles County, a CNA average starting wage is $16.83/hour. Whereas the average In-N-Out (regional fast-food chain) associate starts off at $17.15/hour. The great news is that salary is simply one component of the staffing equation. By being creative, Senior Housing leaders can introduce other operational changes, and benefits, that create ideal working conditions to attract/retain star players.

Most companies offer exit interviews, but did you know that many innovative organizations are now treating the employment lifecycle more akin to a sales cycle? By applying marketing/sales strategies to recruitment they create touch points for potential staff by opening their doors each week for Talent Thursdays, and between set hours any one can come in and interview on the spot. They also implement an applicant tracking system, just as your marketing team would for prospective residents. The hiring process should be brief to maintain the excitement of joining your team. Once a team member is hired, do you know your turnover ratio? Does it differ at 30 days post hire and 60 days? In management there is one concept that rings true across all industries, if you’re not monitoring it, you’re not managing it. Employers are now implementing “stay” interviews at 30-, 60- and 90-day intervals to identify challenges new employees may be facing and provide resources to increase their success.

You can also focus on retention by promoting friendships at work. People like to work where their friends work. Incentivize employee referrals for new hires, and pair new employees with a mentor, who should be given a slight pay increase as acknowledgement of their special role in the retention process. Make a point to occasionally schedule stand-up, or stand-down, meetings in the Memory Care section of your facility, or at 2am with your NOC shift. All shifts and departments should feel seen, included and a part of the success of the team. It’s important to see every team member as a vital part of the facility’s feedback loop. Many operators are also now including one meal per shift. Your staff typically have 30 minutes for lunch and depending on where you’re located that may not be enough for them to leave to buy food and have a moment to sit, eat and prepare for the rest of their shift. A few final trends that we see include leveraging technology to post available shifts, partial shifts, and flexible schedules on a shared technology platform. Employees are now splitting shifts so that they can attend school or provide care for school aged children or aging parents at home.

At the recent American Senior Housing Association (ASHA) 2022 mid-year conference, Retirement Unlimited shared on the staffing panel that there are two value indicators that positively impact employee turnover: respect and compassion. Respect simply means know my name as a part of your team, and ask me how I am. As employers in this evolving space, we have a unique opportunity to meet the moment with compassion. We have moved towards patient centered care, is it not also time that we identify and support the whole-person needs of our incredible staff? We can no longer take for granted that our staff show up each day simply because they have a heart of service. However, we can pivot to evolve our corporate cultures so that we celebrate longevity, promote a work/life balance, lead with gratitude, and never forget our staff have other options of where to work.

NIC Senior Housing Spring Conference 2022 Recap

The JCH team had the pleasure of attending the Mid-year NIC Conference in Dallas last month. It was nice to reconnect with old friends and make new connections.

Overall the conference was well attended, with the majority of attendees having a cautiously optimistic tone. Among the many topics discussed, census, new construction, staffing and increased premiums for insurance were high on the list.

The general consensus is that occupancy rates are improving in Assisted Living, Memory Care, and Skilled Nursing facilities, with a few operators reporting census at pre-COVID levels.  We all agreed that if a facility was struggling pre-COVID in all likelihood that is still the case and may be much worse.

The cost of new senior housing construction is making it much more challenging for developers to bring mid-range priced  facilities to market. Many think that costs might go down again, but rising labor/construction costs and interest rates will likely wipe out the savings. In our discussions with several developers and prominent architects, all indicated that new construction for Assisted Living facilities is running $280,000 per unit and higher.

The cost of operations is outpacing the rate increases. The high cost of insurance and labor, as well as the difficulties with hiring/maintaining staff is of great concern.  Many operators are now considering creative work schedules, improved employee break-rooms etc… in an effort increase hiring and retention. The cost of all insurance has as most know absolutely skyrocketed since 2020 with many operators reporting between a 30-60% increase in their premiums. While many operators have increased rental rates 4-10%  this year, the rise of Interest rates and inflation which do not appear to have an end, leaving many to wonder if these increases will be enough.

It was interesting that much of the conversation at the NIC was that the CAP rates on performing buildings are still going down, thereby raising sales prices. We must stress that stabilized Class “A” facilities in major metro markets continue to see CAP rates being pushed lower. Value add opportunities are taking significantly longer to complete with many hoops that we all must jump through. We are finding creative solutions like seller carry-backs, earnouts etc… on the rise. The silver lining here may be that there is significant capital/equity that has been sitting on the sidelines for the last couple of years needing to be deployed.

More good news from the NIC, with many news pundits predicting a recession next year, many investors are seeking out senior housing as a shelter from the storm. Senior housing has been nearly recession-proof during the last two economic downturns. Higher acuity assisted living facilities and stand-alone memory care facilities largely held their own, with many increasing their profitability. Interest rates are inching up, increasing the urgency for investors to buy now. For those of us who remember the 80’s when the Prime rate was over 14% this had a horrible effect on facility pricing, and yet we made it through and created the best years in our industry’s history.

I am enthusiastic about the 2nd Quarter of 2022 for buyers and sellers alike.

 

 

 

Looking Forward to 2022 in the Senior Housing Sector

To look forward to 2022, one must look back to the unprecedented disruption to the world’s economy caused by COVID-19, in 2020 and 2021.  As we all know, the senior housing sector was hit hard by this pandemic, causing significant loss of residents, and staff, as well as unprecedented financial difficulties.  Fortunately, the federal government stepped up and provided much needed financial assistance which kept many facilities afloat.  According to NIC Map Data Service, Third Quarter occupancy rose in both Senior Housing and Skilled Nursing, which is great news for the industry.  As we move into 2022 there remains some uncertainty caused by concerns related to new strains of the virus. 

Divided into three major market segments: Active Adult, unlicensed facilities such as Independent Living (IL), and licensed facilities which would be Skilled Nursing Facilities (SNF) and Assisted Living Facilities (AL) each are facing unique challenges. In this article we will focus on licensed facilities.

Skilled Nursing Facilities, care for the most “High acuity/high-risk” individuals. While they are experiencing census gains, they are struggling to not only find, but also maintain quality care staff.  Significant upward wage pressures, coupled with staff resistance to vaccine mandates, is the major factor contributor to this. Skilled Nursing facilities are still in high demand for most senior housing sector investors.  

Assisted Living Facilities, which include Memory Care, serve seniors that require assistance with the activities of daily living.  Operators are facing increased expenses including higher staff wages, insurance costs in some instances rising as much as 40%, and higher food costs, which all effect the bottom line. 

Although not licensed, Independent Living/Active Adult communities which serve the younger/healthier population are also seeing census growth.

Having recently attending the NIC conference in Houston, the attendee’s pulse was that of optimism for the sector.  While census is rebounding across the country, many smaller owner/operators are still struggling. 

Most conversations centered around the difficulty in attracting qualified staff and increased expenses which are having a negative effect on NOI.  Perhaps the silver lining is that valuation metrics such as CAP rates, per unit and cost per bed are holding steady.  Lenders, while active in the market, continue to be rather conservative in their underwriting and if the property is still in the process of recovering, the balance sheet of the buyer is of extreme importance.  

We are encouraging investors who are considering the sector to pay close attention to every aspect of the transaction. During the due diligence period, investors need to really evaluate what capital investments are going to be needed especially, what CAPEX the property will need.  They also must evaluate what potential residents are looking for in a facility and what ways they can optimize employee retention. The good news is that transaction activity is picking up significantly in all sectors of the senior housing industry and we expect it to continue as we move into 2022.

Senior Housing is need-driven with strong demographic growth. The factors that make the industry one of the most desirable investments, never really left. Overall, the Senior Housing sector is returning to normal, if at a slower pace than what was expected.

Cindy Hazzard is the Broker and President of JCH Senior Housing Investment Brokerage. She has 25 years of experience in the seniors housing investment industry.

JCH Closes Sale of Skilled Nursing Facility in Fresno, CA

JCH is pleased to announce the successful sale of a Skilled Nursing Facility located in Fresno, CA.  The property ultimately sold for $6,420,000.

The seller who was an owner/operator, engaged JCH to help them find a qualified buyer. JCH initiated a very targeted approach when marketing the facility ultimately identifying an experienced regional owner/operator that was looking to expand their presence in the Fresno area. When their intended tenant opted out, JCH was able to leverage their industry relationships and find a replacement tenant who fit seamlessly into the transaction.

Throughout the transaction process JCH remained actively involved with both the buyer and seller assisting with everything from partnership negotiations, coordination with cost report experts, structural engineers and a myriad of real time survey and due diligence issues.

By working closely with all parties involved JCH coordinated an efficient and timely closing despite the unique challenges this facility presented. Cindy Hazzard and Jennifer Contreras handled the transaction process.

About JCH Consulting Group

JCH is a full-service real estate brokerage firm with the singular focus on the long-term care industry.  JCH brokers the complete spectrum of Senior Care facilities, including Skilled Nursing, Assisted Living, Memory Care, CCRC and Independent Living, as well as Adult Residential Facilities, Hospice and Adult Day Care Facilities.  For more information, contact Cindy Hazzard at 714-463-1672 [email protected] or Jennifer Contreras at 714-563-4253 [email protected]

Want to know what your facility is worth? Call JCH Senior Housing Investment Brokerage at 888-916-1212 or visit https://www.thejchgroup.com

View this article on the Senior Housing Business website.