NIC announced their second quarter occupancy and development trends, and unfortunately it was not pretty. After a first quarter which suffered from the ubiquitous flu season census declines, we had expected, at worst, a small sequential decline in the second quarter, but perhaps a small 10 to 20 basis point uptick, maybe even better. For majority assisted living in the top 31 MSAs, for those properties open for two years (stabilized properties) average occupancy dropped 50 basis points from the first quarter to 88.9%, but down 80 basis points from the year-ago quarter.
Historically, the average second quarter sequential decline is 10 basis points, and the current 50 basis point drop was the worst second quarter decline in more than 10 years. When looking at the overall assisted living market, including those properties in lease up, assisted living occupancy dropped 70 basis points sequentially to 86.5% and plunged 140 basis points year over year. We just didn’t think it would be that bad. The independent living market fared a little better, down just 20 basis points sequentially to 91.4% and flat year over year.
Construction as a percent of inventory remains high at 5.8% of inventory, despite market talk of a pull back by lenders to new development and the persistent fear of how to staff newly opened communities, not to mention the spike over the last few years in construction costs. While this was 30 basis points lower than the revised first quarter of 6.1% (increased from 5.8%), it is very possible that the future revised second quarter will also increase.
Many people have been focusing on the strength and stability of rent growth, which was 3.3% for assisted living (+20 basis points sequentially) and 3.5% for independent living (-10 basis points). But for some reason everyone seems to avoid the fact that these are asking rents and not necessarily paid rents. It is easy to increase the asking rent and then to offer discounts to that wavering customer. But how do you factor in two months free rent and fixing that rent for two or three years? The other point is that, if asking rents are really 3.3% to 3.5% higher, is that perhaps driving some consumers away who don’t even get to the point where they are offered a discount? There have to be more explanations than just the new development as to why occupancy continues to decline.
NIC also reported majority skilled nursing occupancy dropped 70 basis points sequentially to 86.5% with very little new construction. This is about 400 basis points higher than what NIC reports skilled nursing trends in its SNF Report which is based on a smaller group of facilities. That report show occupancy between 82% and 83%.
The bottom line is that despite the growing potential customer base, census is lagging which has been impacted by new development, later move-ins by that customer, a customer moving in who is more frail, and most likely leading to shorter lengths of stay. All of these contribute to occupancy weakness. Surprisingly, there was little impact on the share prices of Brookdale Senior Living and Capital Senior Living, which means that shareholders were not expecting positive news. It also may mean that their share prices have bottomed out.
