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September 2003 issue The
Skilled Nursing Market: Coming Back To Life
While statistics for the first half of
2003 show nursing home
per-bed prices declining from last year, the stage is set for
the sector to finally emerge from its troubled recent past. See
page 1
SNF M&A Market
The strongest month of the year was led
by Formation Capital’s
agreement to buy Mariner Health’s Florida nursing home
operations. Several one-off deals were also announced. See
page 2
SNF Updates
Indiana bankruptcy sale takes a new
twist, Pacer Health signs
$39 million letter of intent in California and Sun Healthcare
has up to 41 more facilities to divest. See page 5
ALF M&A Market
CNL buys 14 Brighton Gardens
facilities, and Merrill Gardens
adds four new properties to its portfolio. See page 5
Earnings Highlights
Interesting trends at Assisted Living
Concepts and Sunrise
Senior Living. See page 8
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The Skilled Nursing Market: Coming
Back To Life During the mid-1990s many in
the assisted living sector
wanted to write off the skilled nursing market as an anachronism, a
dinosaur that had served its purpose but was about to become extinct as a
new climate, and philosophy, began to take shape in a much-criticized part
of the health care market. The timing was nearly perfect, and investors,
both public and private, poured money into the hyper-growth assisted
market only to watch it stumble, albeit temporarily, in a wave of
over-supply and leverage that left investors, and perhaps some consumers,
wary of the promises once made.
In the scheme of the entire
retirement housing market, assisted living has really just begun to
scratch the surface, and as an "industry" it will evolve and adapt as
market conditions, as well as consumer demands, change. But during all the
euphoria of a few years ago, something seemed to have been forgotten as
people were writing their eulogies for the nursing home sector.
Although this will change
over time, assisted living is still more residential than health care
oriented, provides little in terms of short-term care (i.e. rehab) and
basically remains a 100% private pay business. True, assisted living
provides a certain level of personal care, usually referred to in terms of
the number of ADLs that residents require assistance with, but the health
care staffing hours are still dwarfed by the nursing home sector in
comparison. This leads to the logical conclusion that the nursing home
industry as we know it is not going away.
There is no question that
the last three years have been difficult for the nursing home industry.
But the major bankruptcies are over, balance sheets have been cleaned up,
leverage is perhaps the lowest it has been in more than a decade (at least
for the publicly traded companies), the declining occupancy rates seem to
have bottomed out, cuts in Medicaid rates have not yet materialized to the
extent feared 12 months ago and Medicare has added back some of its recent
cuts. Sure, liability insurance remains a significant obstacle, but at
least labor issues have eased to some degree.
The acquisition market for
nursing homes has been relatively weak and slow, at least until the past
month, but there are still plenty of buyers out there. Because we are in
the last of three years of the significant nursing home divestiture
programs, with Beverly Enterprises’ (NYSE: BEV) downsizing
continuing into 2004, by next year those companies unwilling to accept
simple internal growth will be back on the acquisition prowl. With
interest rates remaining at low levels, public equity values finally
rising and private equity still lurking in the background, the stage is
set for nursing home per-bed prices to start increasing next year.
For the last three years,
average per-bed prices have been between $35,000 and $40,000, but our
first half-year statistics are showing that for 2003 the average price may
drop to below $35,000 per bed for the first time since 1994. The reason is
more a lack of quality product on the market than a willingness to pay
higher prices, which is a natural result of the final stages of the recent
divestiture programs. But as the large companies re-enter the acquisition
market, increased demand will result in higher prices, enticing the owners
of higher quality nursing facilities back into the market as sellers (for
more details, tune into our Audio Conference on the acquisition market on
September 9).
Much of the same holds true
for the assisted living market, but based on the first half of 2003,
average prices this year should recover from the disaster in 2002, a year
that saw a 24% plunge in the average price per unit sold because of the
high volume of sales from distressed operators or their lenders. Once most
of the inventory of turnaround properties has been sold or closed, which
should be by early next year, the national operators will be looking at
the regionals, and the regionals will be paying up for stabilized
facilities in their market areas. One might say that the cycle, begun in
the early to mid-1990s for both nursing homes and assisted living, has
been completed and that a new era will be upon us shortly. |
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