The Outlook for the
Seniors’ Housing Market is Solid
News
from the ALFA Conference The
recent ALFA Conference in Atlanta revealed little shocking news, although the
mood of attendees was generally quite positive. Some think there will be more
business failures and the industry will become more complex. Most agree that
residents and their families will want more choices. Many of the large
investors in the industry today are equity real estate investors. Many also
think that existing AL buildings will be re-engineered, as will programs and
services offered. Technology will help seniors live independently longer;
however, technology won’t replace assisted living because residents will still
need hands-on care with ADLs that technology can’t replace. Residents are not
moving through the levels of care in CCRCs as much as most people think. In
addition, many, if not most of the residents in the SNF component of a CCRC come
from outside of the community.
The average age of entry into assisted living will continue to go up. And while
there will always be a market for small providers to start a business or a
facility, the large providers have multiple advantages, including built-in cost
efficiencies and economies of scale.
But
Are Values Sustainable?
Historically low interest rates and an abundance of investment capital drove seniors’ housing prices to record levels in 2004 and have kept activity strong so far in 2005. As the National Real Estate Investor (May 2005) reports, a question that many investors are asking is whether the consecutive increases in the fed funds rate will put downward pressure on property values, and when that might occur. Most experts expect the Federal Reserve to increase interest rates gradually but consistently over the next six or seven quarters. If the Fed follows that plan, the rate increases will drive up cap rates. And when cap rates rise, all else being equal, property values will fall. That said, property values should be sustainable through the end of 2005, with interest rates having the potential to increase cap rates in 2006. Increases in cap rates, which are inevitable as interest rates rise, will lag the increase in long-term interest rates. NREI goes on to say that there are other factors emerging in the market that should keep values afloat, despite rising interest rates. The first is that there continues to be more demand and capital for real estate than there is real estate available to invest in. The second is that demand is coming from multiple competing sources of capital, which will more than offset the crimp rising interest rates will put on valuation analyses. These issues will affect the seniors’ housing industry as well as the commercial real estate industry.
Improved Assisted
Living Industry
Three trends marked the uptick in the assisted living industry according to Ray Lewis, CIO of Ventas. They were lower cap rates [see below], the beginning of consolidation in the industry [ex. the acquisition of Life Trust America by Five Star Quality Care ($211 million) and the acquisition of Assisted Living Concepts by Extendicare ($280 million)], and the selling by some private equity funds of their portfolios [ex. AEW in the $148 million recapitalization of Benchmark by Kuwait Finance House]. There was little new construction, facilities started to show signs of leasing up, and rents continued to increase (see Anthony Mullen’s quote below).
Cap
Rates
As noted above, assisted living cap rates in 2004 averaged 10.9%. By way of comparison, cap rates for office buildings averaged 7.5%, while cap rates for apartment properties averaged 6.4% in the first quarter of 2005.
Prices
Per Bed/Unit
The average price for an SNF bed in 2004 jumped by just over 40% and reached a 10-year high of $44,600 per bed, while the average price for an ALF bed in 2004 increased by 31% and reached a 5-year high of $95,000 per bed. The average price per unit in independent living facilities in 2004 declined to just over $71,500.Occupancies are
Increasing OverallIndependent Living – 90%
Assisted Living – 87%
CCRCs – 91%
Nursing – 87%What The Experts Are Saying
"Over the last eight years, our industry has achieved about a 4.75% compound annual increase in assisted living revenues and about 4.4% in independent living. Compared to other real estate classes, these are unheard of increases."
Anthony
Mullen, NIC Research Director
"We know of one case where a broker walked away from a potential portfolio
assignment because the seller’s price expectation was almost twice as high as
the broker’s own estimate. That’s just too large of a discrepancy, and a sign
that things are getting out of hand."
Stephen
Monroe, Editor of the Senior Care Report
"Clearly technology is going to play an increasing role in senior
care and services, driven by a need to manage costs and expand services, and an
ongoing labor shortage of qualified caregivers."
Daniel
Schwartz, Sunrise Senior Living’s At Home Assisted
Living Program
"The (CCRC) sector should see improved
liquidity and profitability in 2005 because of better economic conditions and
steady demand. Many providers will need to make substantial investments in their
physical plants to keep up with demands from increasingly affluent seniors and
growing market competition."
Jim
LeBuhn, Analyst - Fitch Ratings
"Clearly technology is going to play an increasing role in senior care and services, driven by a need to manage costs and expand services, and an ongoing labor shortage of qualified caregivers."
Daniel Schwartz, Sunrise Senior Living’s At Home Assisted
Living Program
On Medicaid Reform: "It’s a hundred times harder than trying to reform Medicare.
There are 50 different states and 50 different problems with 50 different state
tax bases and economic results, and none of the states look much alike. So
trying to come up and say ‘let’s reform Medicaid’ with 50 different state
programs is incredibly difficult. And that is unlikely to happen."
Tom Scully, former Administrator of CMS and currently Senior Counsel with Alston
& Bird, LLC
Please share this e-mail Alert with anyone who may have an interest or drop me a line and I'll make sure they receive their own copy. If you no longer wish to receive this communication, please send an email to info@rmfpc.com with "Remove from Seniors' Housing Group Alert email" in the subject line. Wayne L. Kaplan is a Partner at Ruskin Moscou Faltischek, P.C., one of New York's leading healthcare and business law firms, and is head of the firm's Seniors' Housing Group. Wayne was one of the founders and General Counsel of Kapson SENIOR QUARTERS Corp. and is currently Chairman of the Legal Committee and Ex-Officio member of the Board of Directors of the Empire State Association of Adult Homes & Assisted Living Facilities. Healthcare Professionals Alert is a publication for distribution without charge to our clients and friends. It is not intended to provide legal advice, which can be given only after consideration of the facts of a specific situation.
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The assisted living market remains strong and is being led by rising occupancy rates (almost 90%), declining cap rates (2004 average was 10.9%), rising rental rates, no (Medicare) reimbursement risk like the nursing home industry faces, and continued robust investor interest, by both industry veterans and newcomers to seniors’ housing. The improving M&A market is in line with the improving pricing environment after years of companies’ selling distressed and unprofitable facilities.
According to the April/May 2005 issue of Contemporary Long Term Care, a new report by Fitch Ratings entitled, “2005 Industry Outlook for Continuing Care Retirement Communities and Nursing Homes,” states that ILFs and CCRCs will experience a strong 2005. Stronger demand for independent living and an improving economy will mean continued strong cash flows, solid debt service coverage and improved liquidity for CCRCs.
The report observes, “the CCRC industry is headed for a period of consolidation, as regional systems are likely to form.” While the long-term prognosis for the industry is positive, access to capital may be tight, “as the senior consumer will demand more services, bigger living units and nicer amenities.”
The Fitch Report goes on to say that the outlook for free-standing nonprofit nursing homes is negative, due to reimbursement pressures, rising insurance, labor and benefit expenses, expected reductions in Medicare and Medicaid funding, and subsequent reduced profitability,
and notes, “long-term stability in the nursing home sector will not occur without a significant reform of the current reimbursement environment.” Liability insurance costs will continue to be a thorn in the nursing home industry’s side, with premiums increasing “at an accelerated rate.”
The report continues, “relief may only occur when states pass legislation to limit lawsuits and establish meaningful caps on settlements.”
Turnover Rates
Assisted Living – over 50%
Independent Living – 30%