The SeniorCare Investor: Assisted Living Prices Slump; Skilled Nursing Prices Flat - March 2003
No matter what kind of senior care facility you operate—skilled nursing, assisted living, independent living—the past few years have been a very difficult operating environment. Oddly, however, the financial woes of the senior care industry seemed to have had little impact on values in the acquisition market, at least with regard to average prices paid by the buyers who are still in the market.
In 2000 and 2001, investors expected the average price per nursing bed sold to be soft, but after a 10% drop in 2000, the average price actually rose by 4% in 2001. By 2002, with cuts in Medicaid at the state level, Medicare uncertainty, the collapse of the liability insurance market and the limited financing market, prices for SNFs should, by all reason, have been their weakest in more than 10 years. Instead, they remained at about the same level as in 2001 and more than $5,000 to $10,000 per bed higher than in the early 1990s. We’ll explain the reasons for this unexpected result, but first we will look at the big decline in prices last year, which occurred in both the assisted and independent living sectors.
The financial difficulties encountered by many of the large companies in assisted and independent living should have resulted in a significant drop in the average price per unit sold by 2001. Assisted living prices had been rising for five straight years, fueled in large part by the significant amounts of capital available for expansion-minded operators as well as optimistic absorption assumptions associated with the sale of many newly built facilities. But the anticipated decline did not occur until 2002, and when it did, it made up for lost time.
Last year, the average price per assisted living unit sold plunged by more than 23% to $65,200, compared with $85,500 per unit in 2001. The median price, which for the past six years has been below the average price, also dropped by more than 23% to $61,000. (These statistics exclude sale/leaseback transactions that are REIT financings and sales where the seller retains a percentage of the ownership, such as many of the recent Sunrise Assisted Living [NYSE: SRZ] sales.)
As operators and investors are aware, this unprecedented drop in average prices paid does not represent a collapse of the overall assisted living market. Instead, it reflects the abundance of distressed properties sold in 2002, by lenders and operators who, in some cases, finally took whatever price they could get. Many of these facilities were not able to reach stabilized occupancy after three years of operation, some of which were still below 70% occupancy.
The biggest seller in 2002 was Alterra Healthcare (AMEX: ALI), which has been suffering through a two-year process of divesting more than 100 properties in anticipation of restructuring its balance sheet and emerging from bankruptcy protection. Other multi-facility sellers include Atria Senior Quarters, CareMatrix, Regent Assisted Living and the former Grand Court Lifestyles, which sold a variety of assisted and independent living facilities.
It is anticipated that the market will continue to be dominated by these distressed sales for at least the first half of 2003, with any uptick in the market later this year dependent on the quality of facilities coming on the market and the availability of financing. It must be remembered that many factors influence the price paid per unit, but buyers are still in the range of 8x to 10x EBITDA for stabilized facilities.
The independent living market suffered almost as large a drop in average per unit prices paid as the assisted living market, and for similar reasons. After rising for seven straight years, IL per unit prices in 2002 declined by 17% to $81,000 per unit, a level not seen since 1997 in this market segment. Although not reflected in the lower prices paid, the independent living market has been the strongest in the overall senior care sector; it has not been impacted by overbuilding (in at least 10 years), has no reimbursement issues, and has not suffered as much from the liability insurance crisis.
The range in prices paid was consistent with past years, with the top price reaching $200,000 per unit. The decline in the average price paid merely reflects the quality of the communities sold: The average occupancy rate for the properties sold in 2002 was just 80%, while in 2001 almost all of the communities sold had occupancy rates in excess of 90%.
Getting back to the skilled nursing facility segment, there is most likely not one operator or investor who would have bet that the average price per bed sold would not decline in 2002, especially after the Medicare "cliff" expired on September 30, 2002. During most of 2002, some buyers assumed that they would lose at least 50% of the Medicare add-on that has since disappeared, while others assumed they would lose the entire amount when doing their projections. The problem is that for most operators, Medicare was still profitable after September 30—it just covered a smaller proportion of losses from Medicaid in many states.
What was most surprising is that the median price per bed in 2002, at $35,700, was the second highest since we began tracking these statistics in the mid-1980s. Over the past 10 years the median has ranged between $32,000 per bed and $35,000 per bed every year except 1999, when it spiked up to $38,000 per bed. Consequently, from an historical perspective the median in 2002 was not unusually high; it is just that given the market conditions, where everything that could go wrong did go wrong, 2002 was not the year that prices should have firmed up.
Sales in the Northeast helped keep prices relatively high, with five sales priced at over $60,000 per bed. In addition, the average occupancy for all nursing facilities that sold for more than $50,000 per bed was just over 92%, which is not too shabby for an industry that has had its share of difficulty in attracting customers over the past few years. What this tells us is that the nursing home market, at least from an acquisition perspective, is not as weak as most of us had expected, particularly for quality facilities.