NIC’s Kramer: Finding Equity Investors Key to Middle-Market Senior Living

There are are plenty of ideas circulating as senior living stakeholders search for ways to make communities for the vast middle market. But it is not yet clear which ideas will have staying power and who will take risks on untested models — particularly in terms of equity investors.

And any potential middle-market product cannot compromise on the core philosophy private-pay senior living, to offer a desirable and enriching lifestyle, according to NIC Founder and Strategic Advisor Bob Kramer.

Earlier this year, NIC held two events aimed at getting policymakers and investors thinking about reaching the middle market. Senior Housing News caught up with Kramer after one such event in New York City.

In his Transform interview, Kramer described the magnitude of the challenge and opportunity and discussed some ways providers might be able to tackle them.

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On the scope of the middle-market opportunity:

Kramer: The challenge is that the middle-income cohort of those 75 and over, is going to almost double in size to over 14.4 million by 2029. And that’s really just the start of incredible growth.

And so, as this group is growing exponentially, at the same time, they’re less likely to be married. They’ve had fewer children. Their adult children are less likely to live near them, and they’ve had less in savings and they’re less likely to have defined benefit pension plans, instead replaced by 401(k)s.

Their care profile is that 60% will have mobility limitations, two-thirds will have three or more chronic conditions, and 20% will be high-need, defined as three or more chronic conditions and need for assistance with at least one activity of daily living.

We call them the forgotten middle. They’re stuck in this gap, where they have too much to qualify for government support, not enough to afford the options out there that they’re expected to pay for.

You have far greater demand for paid caregiving services and, at the same time, you have the issue of pricing. Can they access these services? What we saw in the study, even with using all of their resources, including home equity, more than half would not be able to afford seniors housing, if it continues to be priced the way it is today.

That means 46% could, so that’s significant. But this 54%, we think, is a conservative number because we used average asking rents for assisted living, which actually includes only a small amount of care. We also only use $5,000 in average out-of-pocket medical costs, but there’s a lot of literature and studies that would say for people 85-plus who have mobility limitations and so forth, their average out-of-pocket costs might be closer to $10,000.

We have huge demand, so it’s an enormous opportunity for the industry.

On the need for big thinking:

As Beth Mace, our chief economist, has said, this is a time of throwing spaghetti up against the wall to see what sticks. Not all these ideas are going to work, some for financial reasons, some because the consumer won’t like them, some because there may be regulatory, legal issues.

One theme was, we’ve been a little bit spoiled in the senior living industry, and so we’ve focused more on bells and whistles for a crowd that can afford it. All of this has added to the cost, and not driven efficiencies.

One theme today was the importance of starting with a price point that the middle-market customer can afford, and then figuring out in all the different areas, how can you design to that price point without sacrificing the philosophical commitments to the kind of housing and care you’re going to provide. That means efficiency in development, it means efficiency in the operating model, it means efficiency in the capital structure.

Right now, you may have to refinance multiple times at each phase, and each time you’re paying closing fees, legal fees, so-on and so-forth. All of which ultimately, the property pays for. It’s baked into the cost of the property.

And there’s the efficiency in terms of the regulatory situation. Do the regulations support enabling you to serve this income group, or do they frustrate that by driving up costs unnecessarily?

On whether equity investors will be attracted to the middle market:

There seems to be some consensus that the debt would be there. But where would the equity come from, and would the traditional real estate investors that have quite literally financed and driven from an equity point of view, so much growth of the senior housing and care sector, are they liable to be the ones to accept lower rates of return? Yes, a consistent, non-volatile rate of return, but that’s going to be in the single figures, not the double digits. Or are they going to unlikely be the ones to lead the way?

The debt will come, but where will the equity come from for the repositioning of an older property? And there are some intriguing ideas there. One was that increasingly insurance providers, particularly that are taking managed care risk … whether or not they themselves would get into investing in, even buying, senior housing platforms, to then wrap a Medicare Advantage plan around, where they could then better manage the overall health care spend for this middle-market population that are their plan members.

Over time, you might almost have a coupon investor, sort of a retail investor, that if you could show a steady rate of return of even 5%, there are some investors where that would be attractive. But that’s not where you’d start. Somebody has to come in first with the equity to demonstrate the power of this market, that you’d fill up faster; the depth of this market, that there’s just so much demand, especially as we look to 2029 and beyond. So, I think the consensus was there’s a huge opportunity, but the way in which deals are structured now, the types of equity that now invest in the sector, and the lack of, at times, true efficiency to design to a price point and to think about that rigorously.

On the need to finance care while selling lifestyle:

You have to do this without sacrificing care, because ultimately, that’s self-defeating. You’re not providing the consumer with what they need.

This may easier to do with the current boomers … so, more of the housing product, which has a lot of technology in it, but where you’re not directly providing care. The labor piece of the operating model, particularly when you’re providing care, is one of the toughest challenges in how you’re going to meet the middle market.

As a housing piece, we may see a product where there’s a lot of interest from multifamily developers, hospitality, folks in the spa and wellness industry, coming in to serve people 65 to 85. But the greater challenge will probably be serving people 85 and above who really need onsite assistance, either because of ADL needs or cognitive impairment.

There was also some discussion of small-house models, and ideas of modular and prefab, and would that be a way to reduce costs?

Amongst all of this, too, there was the understanding that the industry has to get back to selling lifestyle. Whether it’s got the care piece or not, it’s ultimately the customer of tomorrow really wanting to move here because they want to move here, not because they have to.

As we’ve seen the acuity level rise in senior housing and care communities, increasingly many communities have become known simply as the place you went when you had to have care, not a place you desire to move to. So, there’s been discussion that the aging boomer is going to change that, because they don’t want senior housing. That’s their parent’s notion of retirement and housing and care.

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