The SeniorCare Investor: REITs Are Up, SNFs Down And ALFs Are On Cruise Control

Rarely is there a month when the stocks of all sectors perform in perfect unanimity, so April was certainly unusual. Every health care REIT stock rose, with increases ranging from 1% to 16%, every skilled nursing stock dropped, ranging from 5% to 27%, while all assisted living/retirement housing stocks posted modest gains. After suffering through a horrendous first quarter, health care REITs were bolstered by the expectation of new investment activity and the continued availability of low-cost funds, such as the $250 million raised by Health Care Property Investors (NYSE: HCP) at a cost of 5.67% over 12 years, an attractive 140 basis point spread. The dividend increases announced by five of the REITs during April didn’t hurt either.

April was a difficult month for the stock market in general, including the worst single-day decline in nearly two years. Investors are focusing on earnings reports, the slowing economy, and the prospect of inflation and rising interest rates. But in the skilled nursing sector, there can only be one thing investors are thinking about, and that is government reimbursement. Although not referring to the skilled nursing market, a recent headline in The Wall Street Journal questioned whether "April Showers Bring May … Clouds?" And because of the uncertainty, primarily with Medicare reimbursement, the outlook for nursing home stocks, and valuations, is murky until investors and buyers know what the Medicare reimbursement cut will be, and everyone expects there to be some cut.

The SNF pullback began in early April when Frank Morgan of Jefferies & Company lowered his ratings on a few skilled nursing stocks and lowered price targets to levels below the current prices at the time, based on limited upside potential until the Medicare fog lifts. The market shuddered on the news, sending the whole sector down. What is remarkable is that this was really not news, as everyone has known about the potential Medicare cuts, but not what the ultimate number will be. We suppose it just had to be put in black and white for the reimbursement-challenged investors to finally take notice that earnings, and cash flow, may in fact decline a bit next year, unless operating costs can be cut dollar-for-dollar (doubtful) or divine intervention reduces liability costs enough by 2006 to make up for the lower Medicare rates. And we still have that bridge for sale.

Meanwhile, after a tremendous run-up in value last year, both in terms of stock prices and property values, the assisted living and retirement housing market continues to chug along, helped by continued strong investor appetite for this asset class, rising occupancies, declining cap rates and no reimbursement risk. Two of the four stocks in this sector hit new 52-week highs in April—a month that for the overall market was the worst in more than two years—with Sunrise Senior Living (NYSE: SRZ) topping $50 per share for the first time since late 1998. The only cause for concern right now is that investor appetite is so strong for quality properties that industry veterans fear that prices are reaching into nose-bleed territory, even though some of those same veterans are the ones doing the buying and financing, with no bloody noses, yet. And we hear that even those portfolios on the market, with prices that people laughed at a month ago, are seeing a lot of competition.

Companies Mentioned in this issue:
May 2005
A
Aegis Assisted Living p6
Ambrose Capital p8
Aspen Retirement Corporation p8
Atria Senior Living p3
Avery Company p5
B
Benchmark Assisted Living p6
Beverly Enterprises p5
Brookdale Living Communities p6
C
Cambridge Realty Capital p10
Canyon Creek Development p3
CB Richard Ellis p3
Charlesbank Capital Partners p6
Christopher Place Senior Communities p4
CNL Retirement Properties p11
Complete Care p5
Complete Healthcare Resources p5
E
Encore Senior Living p11
F
Fannie Mae p8
Formation Capital p6
Fortress Capital Finance p4
G
GE Healthcare Financial Services p8
Generations LLC p8
H
Health Care Property Investors p1
Health Care REIT p11
Holiday Retirement Corp. p8
HUD p4
J
JDK Management p5
Jefferies & Company p2
K
Kindred Healthcare p11
L
Lexington Retirement Properties, LLC p5
Life Care Centers of America p8
Love Funding p8
LTC Properties p10
M
Marcus & Millichap p5
Merrill Lynch Capital Healthcare Finance p8
N
National Benevolent Association p6
Nationwide Health Properties p5
O
Omega Healthcare Investors p11
P
Provident Senior Living Trust p10
R
Red Mortgage Capital p8
Ridgeline Management Company p4
S
Secured Health, Inc. p5
Senior Comfort & Care, Inc. p4
Senior Living Investment Brokerage p4
Senior Living Valuation Services p2
Summerville Senior Living p4
Sunrise Senior Living p2
Sunwest Management p3
T
Tenet Healthcare p11
The Marshall Group p8
Transitional Health p11
V
Ventas p10
Virginia Housing Development Authority p10