Elements of Tax Plan ‘Problematic’ for Seniors Housing

ASHA President David Schless, left, and Seniors Housing Business Publisher Rich Kelley ASHA President David Schless, left, and Seniors Housing Business Publisher Rich Kelley

A Q&A with ASHA's David Schless

By Matt Valley

PHILADELPHIA — Amid a proposed sweeping overhaul of the federal tax code, concerns of overbuilding in senior living and increasing cost pressures on operators, ASHA President David Schless took center stage at InterFace Seniors Housing Northeast in Philadelphia last Wednesday, Nov. 8, for a one-on-one interview with Seniors Housing Business Publisher Richard Kelley.

Schless, who has served as president of the American Seniors Housing Association since its inception in 1991, talked for nearly 30 minutes about a wide range of issues and offered this summation: “I’m still very bullish on the industry, but especially if you are an operator there are a lot of things that you are contending with now that maybe you weren’t even thinking about 10 years ago.”

Approximately 240 industry professionals gathered at the Sheraton Philadelphia Downtown Hotel for the second annual conference to network with some of the brightest minds in the business and attend breakout sessions, including the question-and-answer session with Schless. The daylong program included several panel discussions on a variety of topics including technology, operations, market studies, development and investment trends, the state of lending, and the future of skilled nursing.

Schless and Kelley, two industry veterans, delved into some of today’s hot-button issues. What follows is an edited transcript of that conversation. Some of the questions have been rearranged due to their timeliness.

SHB: We’re sitting here the day after several local and state political elections across the country. Is it possible for you, without becoming the subject of some tweets, to forecast how favorable the Trump administration will be for the seniors housing industry? And what do you make of the proposed tax reform bill that seems to have a lot of moving pieces, some good and some bad?

Schless: We’re up on Capitol Hill anytime Congress is in session. We have a Seniors Housing Political Action Committee that really gives us access to key congressmen on really both sides of the aisle. It’s an interesting time in Washington. It’s really quite remarkable. The House bill (known officially as the “Tax Cuts and Jobs Act” and introduced Thursday, Nov. 2) has a couple of provisions that we’re concerned about.

The medical expense deduction, which is eliminated in the House bill, is very problematic. It’s a very bad bill for residents in these communities. We know the older, frailer, sicker residents use this deduction. We’ve paid for this research. That’s a piece of the bill that we’re very concerned about. 

For the not-for-profit side, the bill really wipes out the use of 501(c)(3) tax-exempt bonds. That’s obviously very troubling and very problematic. In other aspects, the bill is probably not that bad for real estate generally. The bill first has to get through the House of Representatives, which may not be as easy as House members thought.

Pay attention to the Senate because if the bill can get through the House, it will likely be the Senate version of this bill that the House ends up adopting. So, there are lots of moving pieces. We’re encouraging all of our members to contact their representatives on the House of Representatives side. There are definitely implications for the industry, whether you are a for-profit or not-for-profit — things that are of concern that we’d like to see modified. 

SHB: So, if you have to bet $5, does a tax reform bill get passed?

Schless: You put me on the spot. I’m not sure that it does. It may end up getting passed in a very stripped down [version]. It may not be as sweeping as what you are looking at right now in the House bill.

The other thing I'll say is this: If you are a student of tax bills, you know that generally they take a long time. If they can do what they’re trying to do by the end of this year, it will be very unlike previous tax bills. I can’t say that was true in the early days of our country, but in the modern era these tax bills take a long time. They are trying to do this incredibly quickly. I guess what I would say is that I don’t think it’s clear that they get something done. If they do, it’s likely to be pared way back.

SHB: It’s hard to get away from what’s going on with Brookdale Senior Living and the trickle-down effect it has on many parts of the seniors housing space. Do you have any thoughts on the matter? (Brookdale reported a net loss of $413.9 million for the third quarter of 2017 compared with $51.7 million for the third quarter of 2016. Andy Smith, Brookdale’s president and CEO, expects intense competition and labor cost pressures to continue through 2018.)

Schless: Obviously, Brookdale has been and continues to be a very important company for the industry. (As of June 1, 2017, Brookdale operated 1,048 properties, more than triple the next highest ranked company in the ASHA 50 survey.) Its challenges have been well documented.

I’ll talk about the scale of the operator. There are always going to be some companies that are bigger. There are certainly some economies of scale to being bigger. When I look at Brookdale, more than the size of the company — although the size has been an issue — it is an amalgamation of a lot of different transactions. Brookdale probably never built more than a handful of its own buildings.

But Brookdale also has got very different product types in its portfolio. That adds to the operational challenge. The entrance fee continuing care retirement community product is very different than some of the smaller assisted living facilities.

SHB: What is the overall state of the industry currently?

Schless: It’s a fascinating time in the industry. Certainly, in many respects the industry is much more professional. We are building better buildings. We’re replacing buildings that in some instances are very tired. We obviously have had a lot of new construction activity over the past several years. We’ve built too much of the same product in certain markets. That's the challenge right now when you talk about the industry. 

There are markets that are just fine and where operators have the occupancy rate running in the mid- to upper 90s, even 100 percent. There are other markets in the United States where operators are really struggling and where occupancy rates are running in the 80s — in some instances probably even lower than the 80s.

The positives for the industry are that we will see tremendous demographic growth in the years ahead. The next 20 years should be very good for the industry. 

That said, there are definite issues that are out there that any of the folks in the room here today who are involved on the operations side are really challenged by. Some of it is obvious. You build too many buildings in a particular market, and there are only so many people who have the need and the resources to pay for it. 

The NIC Map data is terrific and has really helped the industry understand what’s happening in the larger MSAs. (NIC provides key metrics for the seniors housing and care sector gleaned from more than 14,000 properties within 140 U.S. markets). But the caveat there is that it is not capturing some of these secondary and tertiary markets. Again, if you overbuild in a small market, it is really difficult to recover. That has happened. 

Obviously, over the course of the conference there will be many conversations about the labor challenges and wage pressures that are all very real. Operators of existing buildings have had their staff hired away to work at new buildings. You have had a lot of that. Lots of things are happening at the property level. “I’m still very bullish on the industry, but especially if you are an operator there are a lot of things that you are contending with now that maybe you weren’t even thinking about 10 years ago.”3Q17 Market Fundamentals PressReleasePage

SHB: Let’s explore those issues in a little more depth. What’s happening on the ground among various property segments, starting with independent living?

Schless: I go back to the financial crisis of 2008. Many in the industry who were focused at that time on an independent living customer pivoted and began focusing more on serving a frailer customer. You saw a lot of companies that had defined themselves as being independent living providers such as Holiday Retirement, Capital Senior Living and others pivoting. Again, it was just the circumstances. It was much easier to get your building filled up with folks who had needs. As an operator, you could re-license your properties and add staff, for example.

The emphasis the industry put on the frail seniors has had an impact on the independent living side of the business. Obviously, if you are in the continuing care retirement community side of the business, you are always going to be very focused on that independent living senior. But much of the industry began focusing on serving frail seniors. There is nothing wrong with that.

We’ve done research and there is a market for independent living. I’m not saying the industry has overlooked it, but I am very interested, for example, to watch what happens. There are multifamily companies getting into the seniors space. Greystar out of Charleston, South Carolina, is one such company. The Wolff Company based in Scottsdale, Arizona and the Inland Group LLC of Spokane Valley, Washington, are two others. (Inland Group owns Affinity Living Communities.)

It’s going to be very interesting to watch what they do. Can they attract that 75-year-old independent, active senior? Again, that bears watching. I’m optimistic that you’ll see some success. There absolutely is a market for that independent senior.

You can build a combination property that offers independent living, assisted living and different levels of care, but it is very difficult to attract that younger, more active senior when a prospect shows up and the property is really looking like an assisted living setting. I am not a fan of mixing folks who have cognitive impairment with independent living residents.

On the assisted living side, the memory care side, it is certainly very labor intensive. It’s one of those products that you’ve got to really be certain where you are building and where you have too much of that product type already.

I always tell this story, so I’ll tell it again. This was back in the late 1990s. ASHA was part of the National Multifamily Housing Council at the time. We had a meeting in Coeur D’alene, Idaho (about 33 miles east of Spokane, Washington). At that time, we used to do site tours, and we decided that we were going to do a site tour in Spokane. Dan Madsen of Leisure Care who is an Idaho native said, “Coeur D’alene is a great market to look at.” (The population of Coeur D’alene in 1997 was 32,087, according to the U.S. Census Bureau).

What happened in Coeur D’alene is that you had assisted living concepts by Emeritus Senior Living, Prestige Care, a local developer and someone else who had built product. So, there were like five new assisted living settings for this [small] population. There was nothing wrong with the buildings. Not surprisingly, they were all struggling with occupancy ranging from 35 percent to maybe 55 percent. It was a mess. I’m not saying that is happening now, but I do worry about some of those markets that are smaller where a lot of new memory care and assisted living product has been built.

SHB: Let’s talk about rates, and rates versus expenses. Can the industry continue to generate the revenue it needs in the face of expenses that are basically going nowhere but up?

Schless: It’s a great question. I always look at the “State of Seniors Housing,” a survey that we’ve been involved with since the early 1990s along with LeadingAge, Argentum, the National Investment Center for Seniors Housing & Care (NIC) and the National Center for Assisted Living (NCAL).

It’s a financial operational performance survey. The sample is different every year. It gives you a good idea of how these properties are performing. There is always a chapter in it. We call it the “same store analysis,” which has properties that have provided data in successive years. So, there is usually data on several hundred buildings.

What you have seen in the performance is a mixed story. The increased expenses have impacted the net operating income. We’ve seen some good things. We’ve seen the occupancy go up.

But over the past few years we’ve seen the expenses outstrip the revenue gains in this same-store sample of several hundred buildings.

That is a fundamental issue for the industry. This is one of the issues I’m sure you’ll hear other people talk about — that value proposition. The industry has really got to be very cognizant of that value proposition.

I always enjoyed spending time with the late Bill Colson, who started Holiday Retirement. Bill looked at the world differently than most people. Most people were interested in pushing their rates, and Bill was always interested in finding a way to get his food costs down. There are still lessons for the industry in really trying to make sure you are providing a great value to folks. 

SHB: When you look at the expected groundswell of new residents moving into seniors housing down the road, do you think the industry has enough good operators out there to handle the growth?

Schless: Well, in just looking at the ASHA membership over the past several years, we’ve really had growth in a couple of areas. We’ve seen growth on the capital side in our membership, and the other area for us has really been on the operating side. You have men and women who have worked for some of the bigger companies — the Brookdales, the Sunrises, for example. They have gone off and started their own companies. We’ve definitely seen growth in that area. But yes, finding a good operator is always a challenge.

I would add that there are many companies where the founders and leaders of these companies are really at that point in their career that over the next five, seven or 10 years you would expect to see some succession events. That is another one of those interesting dynamics of the industry. 

SHB: Let’s pivot and turn to ASHA, something near and dear to your heart. Can you give us an update on the status of the “Where you live matters” campaign?

Schless: The initiative marks the first time the industry has tried to collectively educate consumers. We know that nationally we serve about 9 or 10 percent of the [senior] population. We believe it is possible with education to expand the pool of people who consider senior living options.

Anyone who operates these buildings knows that when somebody moves in and once they have adjusted to the community they will say, “I wish I had done this a year or two ago.” We think there is an opportunity with this initiative to get people to move quicker. If the industry could get folks to move six months earlier, that would have huge implications for the industry.

So, “Where You Live Matters” is a social media effort on Facebook. It’s a website, whereyoulivematters.org. We have partnered with GlynnDevins (a senior living marketing agency) out of Kansas City. There is a ton of professionally shot video content, independent experts and editorial. There is just a ton of good information for seniors. At this point, we have really started to see some traction. Through the end of the third quarter this year, we had over 80,000 visitors to the website. We’ve been surprised that the seniors are the ones who are actually using it more than the adult children.

We have not yet really convinced the industry to embrace the website as much as we would have hoped. I’m not going to lie about that, but we’re going to keep at it. At the C-suite level there is an understanding that “yes, if we educate the consumer this is good for the business." But at the property level, the focus is more on filling up the buildings. So, that's a challenge for us we didn’t anticipate. But we're very committed to “Where You Live Matters” and consumer education. We will be adding a search function to the website, which we think will be good for the consumers and for the operators. 

SHB: Would that search function be like a multiple listing service of properties available in a certain area?

Schless: The concept would be to allow somebody to search for a particular property type by zip code and level of care.

SHB: That sounds like a big undertaking

Schless: It’s a big undertaking, but I think there is a commitment to doing that. We think that will be helpful to the consumer, and as I said that would be good for the operators as well. If you haven’t looked at the “Where You Live Matters” website, I would encourage you to do so. There are all kinds of really good materials available there for any type of operator. We’ve tried to cover independent living through continuing care retirement communities and everything in between.

SHB: If we were having this conversation in 10 years, let’s say 2027, what would be the crux of it? Would we be talking about technology, intergenerational product, or perhaps urban senior living?

Schless: Yes, all of the above. It’s hard to predict. Certainly, you will see the industry continue to evolve. There will be product that will be out there for independent living, for more frail seniors. I think there will be more options for folks. The industry will have to embrace technology.

It’s a people business. To me the great benefit to seniors housing is always that opportunity to allow people to be engaged, to socialize, to do things that are meaningful.

There will always be challenges for the business, but I think the industry will probably be in very good shape in 2027. I don't know what the right size company is, but I don’t think it’s 1,200 properties. I think there are a lot of successful regional operators.

It’s going to be a very exciting, successful industry and there will probably be lots of twists and turns along the way. There are always regulatory challenges. The industry needs to be really engaged and active on the local level.

For example, Oregon has always been a state that has kind of led the way in terms of using Medicaid waivers to serve frail seniors in non-institutional settings. It may just be that there are some different personalities and different people at the agency level, but one of the things I hear a lot now is how challenging it is to be an operator in Oregon. The state also has very good representation at the local level.

I point that out because in any given area there are going to be challenges, but the industry really needs to be engaged and work with the various state agencies and the state associations, whether it’s LeadingAge or Argentum, or the American Health Care Association. That engagement is going to be really important for the industry. 

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