The SeniorCare Investor: It May Still Be Bad, But Is It Better Than It Looks?

Twelve years have passed since 500 industry leaders, investors and lenders gathered in Washington, D.C. for the first NIC Conference. At the time, the nursing home segment was emerging from a difficult period in the late 1980s when Beverly Enterprises (NYSE: BEV) teetered on the edge of bankruptcy and subsequently flooded the market with the sale of more than 400 nursing homes.

The retirement housing segment was regrouping after the "build it and they will come" disaster in the 1980s, with the Resolution Trust Corporation and the FDIC about to launch one of the largest seniors housing asset divestiture programs the industry had ever seen. As for assisted living, it was just getting onto the radar screen, replacing a much-disparaged personal care and adult home industry.

The point of the conference was to bring together the providers of capital with the operators who needed financing, and help to educate the former about the senior care business and explain both the underwriting risks and the investment opportunities. The timing could not have been better, and during the next decade all sectors of senior care flourished, with investors and lenders clamoring for more business in a market that appeared to have unstoppable growth for the next 50 years. Al Gore probably wanted to take credit for that too, but the FOBs warned him that the Internet was a better pitch.

But after years of excess, with all parties guilty as charged, there is the same disconnect between the industry and the investment community now as existed 12 years ago. Lenders are concentrating on selling off their distressed loans and properties, equity investors are bottom feeding (but haven’t eaten much) and the public markets are practically nonexistent. Twelve years ago, Beverly was trading at $6.25 per share, compared to $2.42 today, while Sunrise Assisted Living (NYSE: SRZ) went public six years ago at $20 per share, compared to $21.45 today (but much healthier than its peers and the only one still above its IPO price). Can one blame investors for having lost faith?

This month more than 1,000 industry leaders will once again descend upon the nation’s capital for the annual NIC Conference. The mood will not be as somber as in some of the most recent years (1999 comes to mind), if attendees can put aside the fact that the stock market just had one of its worst quarterly performances in the past 70 years. In part, this is because for many providers, the worst is behind them. All but one of the major nursing home chains have emerged from bankruptcy; American Retirement Corp. (NYSE: ACR) recently averted its own potential bankruptcy filing (more on this later); occupancies are slowly rising in the assisted living segment with minimal new development; and the liability insurance crisis is finally beginning to get the attention it requires. The obvious missing link, at least for skilled nursing home owners, is the resolution of the Medicare "cliff," but that may be decided before the October 16 NIC kick-off.

One of the biggest problems for the industry now is the lack of debt financing. With HUD and Fannie Mae dominating the lending market, it seems like we are back in 1990 when HUD was the lender of last resort, but also the only lender for many providers. This too will pass, but not until the wounds have healed and the senior credit officers have turned over (if they still have their jobs). More than anything else, this lack of liquidity is driving the acquisition market and, specifically, valuations downward. Buyers’ conservatism is being matched by lenders’ timidity, and the usual result is that those willing to take the risk will obtain above-average returns, even in this market.