The SeniorCare Investor

SNF Prices Drop, ALF and IL Prices Rise In 2003
In what many hope was the last transition year for the senior care industry, skilled nursing bed prices sharply declined to their lowest level in 10 years, but assisted living and independent living unit prices rebounded from their recent slump. See page 1

Recent Acquisition News
Three bidders showed up at the live auction for Centennial Healthcare, but only one walked away the winner. A sealed auction for the debt on four retirement communities also was completed. See page 2

Bankruptcy News
National Benevolent Association goes Chapter 11 amid some management controversy. See page 6

Fourth Quarter Earnings
Sunrise Senior Living’s fourth quarter earnings announcement sends it share price down 16%, while skilled nursing earnings are boosted by higher Medicare rates. See page 8

Financing News
Sun Healthcare completes a large equity placement. See page 10

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Steve's BLOG on Senior Care

When we did our first-ever audio conference last September that took a look at where the senior care investment market was headed during 2003, we revealed that the average price per bed in the skilled nursing facility market had dropped significantly in the first six months of the year to about $30,000 per bed, or 20% lower than the average for the previous three to four years. At the time, we thought that as more sales were discovered, the average price would probably rise a bit, but that the end-of-year results would still be about the worst in the past 10 years. They were.

Skilled nursing prices in 2003 declined by more than 17% to $31,650 per bed, representing the lowest average price paid since 1993. Pricing pressure came from several directions, most particularly from the divestiture of assets in Florida by several of the large chains during the year. But even if these "highly motivated" sales are removed from the statistics, the average price paid would still be the lowest in… nine years, so Florida’s litigious environment can’t be blamed for the poor showing in 2003.

There are two basic reasons for such a large decline in prices: it was a buyer’s market, particularly for buyers with financing, and the average quality of the nursing facilities sold was about as low as we have seen in years. This is not to say that there were not some high-priced deals in the market last year, but the percentage of transactions at prices above $50,000 per bed was unusually low. Likewise, our preliminary statistics show that 56% of the deals were priced below $30,000 per bed last year, compared with 39% in 2002. Looking ahead to 2004, as profits increase as a result of the Medicare reimbursement increase last October, and if Medicaid rates hold up during the year, values in general should rise and owners of higher quality facilities may be enticed to hang out the for sale sign.

In the assisted living market, although still not back up to the record pricing in 2000 and 2001, the average price per unit sold in 2003 did rebound by 11% from the dismal results in 2002 to just over $72,500 per unit. There is a significant difference, however, between the average price per unit for stabilized facilities compared with non-stabilized ones. Although we are still confirming the statistics, it appears as if stabilized ALFs sold for almost 30% higher than the overall average, while non-stabilized facilities were close to 30% below the average.

The final results of this will be in the ninth edition of The Senior Care Acquisition Report, which will be available next month. In addition to showing the price differential between stabilized and non-stabilized sales, we plan to compare these with the average price paid in what we call non-arm’s-length deals. These are basically transactions where the sale is contingent upon the seller continuing to operate the facility or where it is more of a financing than a true sale. As you may have expected, the prices are rather high for these, but then the facilities in these sales tend to be of higher quality as well.

In the independent living market, which is the thinnest of the three sectors, the average price per unit also jumped by nearly 11% compared with 2002. At least 50% of these communities had an assisted living component, including the six highest priced deals on a per unit basis. Although it is not always the case, the combined IL/AL communities have been very popular with buyers in the past few years and also, most likely, with consumers. Our independent living statistics do not include communities that have skilled nursing beds, as these are classified as CCRCs and, because some are rental and some are entrance fee, it can be very difficult to compare their prices with other communities.

Cap rates across the board decreased from their unusually high levels in 2002, including the nursing home sector, despite the significant drop in the per-bed price for nursing facilities. As we stated in the February issue, cap rates, primarily for independent living and high-end assisted living facilities, may be on a downward trend as new investors enter the market with differing investment parameters. An 8% to 9% cap rate can look very attractive to a "real estate" buyer that is seeing 5% to 6% cap rates (and sometimes lower) in alternative asset classes, as long as they keep in mind the business intensity of many senior care facilities. The latest edition of The Senior Care Acquisition Report will have 60 pages of charts and graphs detailing all of the changes in the market last year, as well as details on the more than 100 publicly announced acquisitions in 2003.

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