A Q&A with NIC's Robert Kramer

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Robert Kramer
Robert Kramer

Robert G. Kramer, founder and CEO of the National Investment Center for Seniors Housing & Care, recently spoke with McKnight's about the current state and future prospects of independent living, assisted living, memory care and skilled nursing, as well as trends in seniors housing. An abridged version of this interview appears in the 2016 Dealmaker's Handbook, which will be included in the October issue of McKnight's Senior Living and also may be downloaded here.

Q: When you look at the market now, how would you describe the relative health of the skilled nursing, assisted living and independent living operators?

There is a time of great opportunity on both the private-pay and skilled side but also great challenge. On the private-pay side, we're seeing more competition, especially in assisted and memory care. There are also newer products coming on the market, which improves competition. It puts more challenge on operators and how they're able to differentiate their product.

It's also a time of increased differentiation among operators and properties. On the skilled side, it's a time of unprecedented change and uncertainty. The average age of skilled buildings in the major markets is 37 years, and that creates real challenges, especially as you start to see boomers enter the market. Skilled operators will have greater opportunities but need to have laser business focus and the staying power to be able to take advantage of them.

Q: You recently said that skilled operators need to have a two-pronged strategy: short-term for survival, long-term for growth. What is the reasoning here?

If you only focus on the future and what you need to do to be attractive to the new model of healthcare and delivery of payments, you may not survive to get to that future. And if you only focus on present survival, you will suddenly find yourself in a game of musical chairs when partners are chosen and be left out.

We're still in a fee-based system and not one that fully rewards you for outcomes. Operators need to be positioning for the future, which will be an outcomes-based, value-based system and where being attractive as a partner — both to risk-takers such as health systems and physician groups and to private and government-sponsored health insurance plans that will be controlling operators' referrals — and have adequate staffing to accommodate them. But they won't get adequately reimbursed for these investments for the next three to five years. So they will need a tough short-term survival strategy to make the dollars to survive while getting to the point where they are reimbursed for the value they are creating or dollars they're saving the healthcare system. And for many, it's tough to walk and chew that gum at the same time.

Q: According to recent NIC MAP data, it appears that occupancy is going down a bit for independent living. Do you see this as a temporary blip or a more ominous development?

It's far too soon to say whether it's a trend. Over the past several years, what we've seen and are forecasting for the next year is relative stabilization, meaning in any one quarter you may have demand that exceeds supply or supply exceed demand. All senior housing has stabilized at roughly around 90%, with assisted living at 88% to 89% and independent living closer to 91%.

Q: We are hearing more about the need for operators to do a better job of harnessing technology and providing value going forward. Do you believe the sector has the resources to do both in a meaningful way?

You can waste millions of dollars in technology, or you can make some really good investments that really make a difference and provide value in terms of quality of care and life and staff efficiency, for example.

The emphasis on providing value is clearly only going to grow. Assisted living and memory care operators are beginning to see these kinds of pressures from networks of health systems, physician groups and health plans. Operators will need to ask whether they have the technology to adequately capture and report outcomes and have staff levels meet the level of acuity.

The trend is how you use technology and data to better customize and personalize care. Big data will have a transformative impact, but it's going to take some time. It will favor operators that have some critical mass to make the kind of investment needed to harness technology and provide value.

Q: There has been some discussion about possible oversupply in the market. Is this a legitimate concern? If so, is it more of a regional matter or a widespread issue?

It's a concern in some markets. That's why you need to look at that market and then look at the submarkets. It's more important than ever to differentiate yourself and your value proposition to the consumer; know what price point you are at; and understand the competition at your price point for what you provide.

There is definitely a lot of supply in some markets that has come online. But by no means is the assisted living market nationwide overbuilt. In fact, what we see is there are just as many markets where there is absolutely no new development.

A number of operators today tell me continually that their growth strategy is waiting for the multifamily developers to build and fail, and then coming in and buying the building at less than replacement cost. They often do very well. And they'll have a brand new building that was 50% to 60% percent occupied but losing money every day. So they'll come in as an experienced operator and get it to 80% to 90% occupied and will have paid 70 cents on the dollar for it. This is especially popular because construction costs have gone up and there's more construction across the board.

Q: From an operators' perspective, how would you rate capital availability and terms in the senior living market right now?

If you are an experienced operator with a good track record, the prospects of capital availability are quite good. The cost of capital is still relatively low, as is the cost of debt, both of which are not likely to rise anytime soon.

There is still a pent-up demand for and availability of private equity. And right now the prognosis seems to be that we could very well be headed for a period of low interest rates.

No one is predicting an increase in the short term. We're at historic lows right now.

There are a couple of cautions: There have been some regulatory rule changes for banks that have constrained construction lending, and this is across all of real estate. Some may argue that's a good thing because we'll have less oversupply.

Q: What are the factors shrewd dealmakers are considering as they decide whether to do business with operators?

Experience and track record. They don't want to pick an operator who did well when all the boats were rising.

They're also looking at how they've managed the tough times with rate cuts and multiple regulatory constraints. They're also looking for an alignment of interests between the capital provider and the operator, and the investor's exit strategy.

If it's private equity, they're usually going to be looking at a hold period of three to seven years. Does that fit with operators looking for someone who's really going to support them as they make investments in their property?

There's also more data transparency than ever before, and that's important, as well, to the shrewd investor.

There's also more premium being put on nonfinancial things such as quality metrics (like 30-day readmission rates), especially on the skilled side but more and more on the private-pay side. They're also looking at Centers for Medicare and Medicaid Services star ratings and the operator's ratings history.

Q: Clearly, real estate investment trusts are major players and appear to have a few built in advantages. Do you see these trusts continuing to be major players for the foreseeable future?

Since the Great Recession, REITs have enjoyed a huge capital cost advantage compared with other equity providers. They will continue to be major players. Three large healthcare REITs — Ventas, Welltower and HCP — have a lot of senior and skilled housing right now. But we're seeing them continuing to diversify and prune their portfolios.

In 2011-2015, they were predominantly buyers. Now they're both buyers and sellers. They're also broadly diversifying in life sciences, buying medical office buildings and making investments in Canada and the United Kingdom. Both Ventas and Welltower are doing major acquisitions and investments in the hospital and health systems areas.

Q: Baskin-Robbins is famous for offering 31 flavors of ice cream. You once predicted that we eventually also would see a similarly wide selection of senior living options as well. Do you believe things are still moving in that direction, more toward consolidation or both?

I don't think those two things are mutually exclusive.

No doubt we will see more diversity in product options in the future. The new consumer is going to demand more options.

I also think we're going to see more consolidation. It's going be increasingly difficult for one- or two-property providers to survive for reasons we discussed earlier. I think you'll see consolidation not necessarily nationally, but at least in local markets. And that consolidation also will allow an operator like a Genesis or Kindred on the skilled or post-acute care side, or a Brookdale on the private-pay side, to actually specialize with specific properties in areas like stroke care.

Boomers always may have champagne tastes but not always the budgets to match them. Operators may consider, for example, smaller units. So boomers may be willing to pay up and take less space in exchange for greater amenities.

Q: What are some of the innovative housing and care options you're seeing that really excite you?

We're seeing application of technology such as wearables and other sensors for people who have chronic morbidities and/or multiple functional activities of daily living needs. Adoption won't be fast because of privacy concerns here. It will not be an insignificant issue, and it's more than just Health Insurance Portability and Accountability Act [concerns]. There are a lot of huge breakthroughs, and insurance companies are going to be all over them.

Today's independent living is yesterday's assisted living, so the average age moving into it is mid-80s, and the people are more frail. As a result, we're now tracking people primarily in their '80s, not in their '70s.

The first boomers are now turning 70. Many of these boomers are tech-savvy and attracted to urban settings, but they may not be attracted to something that's age-restricted. Many will be demanding and using web-based concierge services for transportation and food, for example.

The key is, boomers will want to be integrated, not separated, from these kinds of things. They will not be wanting to live only where old people live. We haven't seen those communities yet. But I think they will explode over the next 15 years.

Q: NIC has a reputation for creating unequaled deal-making marketplaces. For those who may be new to this field, can you talk about why your events are different from traditional trade shows?

In one of the first interviews I did in this role with investors in June 1991, I asked what it would take for them to come to one of our events. In a sector most of them were either ignorant of or burned by, they all said they needed an event where all the principals like the C-suite were there.

Secondly, they all did not want another trade show. We've designed our conferences so the people who attend them are confident that if someone is a serious player in the industry, they can count on them being there.

We've made our conferences a utilitarian venue, meaning our guests and members are not coming to play golf. They're coming to meet with leaders of different companies, interview them and get to know them.

We created an environment conducive to people getting to know investors or operators at a very senior level. The average individual who is actively involved with us either as a sponsor, partner, volunteer or board member is going to attend an average of 45 face-to-face meetings over a weeklong event with us.

Q: Going forward, how do you see NIC evolving to continue delivering value?

Ultimately, our data get the most attention, and we have invested more than $20 million in conference proceeds into building our data and analytics.

First and foremost, one of the key things about this industry since the day NIC was founded has been to bring more transparency to the sector, the theory being that this would lead to not just more capital but informed capital. We also envisioned that it would help lead to cheaper capital, not for opportunistic investors who were just looking for outsized returns but for serious, long-term institutional investors.

For another, the industry still does not have a uniform chart of accounts. It also doesn't have a time series of financial performance at the property level. We're working on both of those.

This is an operations-intensive business that happens to work on a real estate platform. NIC has succeeded well in helping investors and operators prosper in that space.

Because of our commitment to senior housing and care, we're continuing to do a great deal of work in senior living leadership development in four leading universities. We want the best and brightest coming out of business schools and hospitality, healthcare and real estate programs who are considering senior housing and care as a career opportunity.

We also have an internship program where we work with about 15 business schools around the country as well as a number of hospitality programs and programs that doing graduate work in aging.

Later this year, we also will be commissioning a major independent research study for which we will be providing grants to what we call middle-market senior housing.

We have a peer-reviewed senior housing journal and are now moving to a Harvard Business School model.

And we will unveil a fourth edition of our investment guide at our fall meeting this year.

Q: What NIC accomplishments/milestones are you most proud of?

Our conferences have a reputation for providing educational programs that are a barometer of where the industry is and where it's likely to go. We're also proud of our focus on transparency and bringing data and analytics to the space.

We did events first. Then data. Then we took data to the local market level, where investment decisions need to be made, and now we have enough data to do meaningful analytics.

Going forward, I'm also excited about these other things we're doing in pursuit of our mission, such as leadership development.

Q: As an NIC founder, you've seen a lot happen over the past two and a half-plus decades. What would you say are the hard-earned lessons that investors and operators need to pay particular attention to?

This is an operations-intensive business that works on a real estate platform. But ultimately, as we enter the era of total reformation of the healthcare payment and delivery system, we're delivering service and care-enriched housing, and it's about the operator and the operations.

NIC has had a role in accelerating investors' understanding of the importance of the operator and the operations. The hard-earned lesson is getting folks to realize how critical the operator and operations are, and it's not just for the investor.

Early on, we had a lot of folks getting into senior housing as a real estate play but also a real estate flip. Build it. Operate it for a couple of years, and sell it and make a ton of money. And as I've said, it usually ended up being someone else's growth strategy, because they couldn't sell it and didn't understand a thing about operations.

It's been important for operators to realize that this is ultimately a customer-driven business. If you screw up as a hotel operator, you give your customer a complementary dinner. People are moving into our communities, often for the rest of their lives. And it's the adult child moving their parents in. It's incredibly traumatic. Their expectation level is pretty darn high, and the social and ethical and cultural commitment you're making is huge.

It goes beyond just the business commitment. This is a people business. We're caring for people who have enormous expertise and wisdom having lived lives of 80, 90, 100 years.

Five years ago, I never got questions about quality. Three years ago, I started getting them. Now I get them every day. And that's a sign of the maturity of the industry and the recognition that, ultimately, this is about the consumer and for the consumer, it's about quality. Regulators care about quality of care. Consumers care about the quality of life.

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