|
April 2004 issue
When The Market Picks Up Steam, Prices
Will Rise
Statistics are important, but in the
assisted living sector, with the widest range in values, it is important
to get behind the numbers and compare stabilized with non-stabilized
transactions, and arm’s length with non-arm’s length deals.
The IL/AL Market
A few large transactions of
non-stabilized communities dominate the activity, with a few smaller ones
mixed in. A proposed CCRC is getting a new start. See page 2
The Skilled Nursing Market
Manor Care buys four SNFs in Ohio it
was leasing, and an all private pay nursing facility in Florida is sold.
See page 6
REITs
Nationwide Health Propoerties announces
its biggest deal in a while, and Omega Healthcare Investors is back in the
market. See page 9
Fourth Quarter Earnings
Some investors didn’t like what they
saw, but in some cases they may be missing the whole story. See page 10
Sign
up for a trial subscription and get the current issue!
Read more about The
SeniorCare Investor.
Articles Archive
Steve's BLOG on Senior Care |
When The Market Picks Up Steam,
Prices Will Rise Last month we reported that
the average price per unit for assisted living had rebounded by 11% in
2003 from the dismal performance in 2002, a year that saw a nearly 24%
plunge in the average price per unit sold. The absence of lenders willing
to finance an overly-maligned sector combined with a preponderance of
non-stabilized facilities for sale led to this dramatic and unprecedented
drop in average prices paid in the market.
But as we all know,
the national average for assisted living facilities sold doesn’t
necessarily tell the whole story, and the drop in prices in 2002 didn’t
mean that stabilized or high-end facilities had dropped in value. There is
always more behind the numbers.
In compiling our
annual acquisition statistics for the ninth edition of The Senior Care
Acquisition Report, which will be available imminently, it was
suggested that we break out the stabilized versus non-stabilized assisted
living facilities to see where the average prices fell. Using 85%
occupancy as the cut-off for stabilized facilities, we split the sales up
for both 2002 and 2003 and the results, although not surprising, are
interesting and will be more helpful to lenders and investors trying to
dissect the market.
Obviously,
stabilized properties on average sold at a premium to non-stabilized ones
in both years, but that premium changed significantly from 2002 to 2003.
The spread almost doubled from $22,800 per unit in 2002 to $40,900 in
2003, as stabilized unit prices increased by 11% in 2003 while
non-stabilized unit prices dropped by 14%. It could be that higher quality
troubled properties were sold off first in 2002, with the more difficult
sales coming in 2003, but that is just educated speculation. But it makes
sense that as the market conditions in general improved, especially the
capital markets, there were more buyers willing to purchase the more
troubled facilities, and lenders began to emerge that would finance them.
At the high end of the market it will be comforting to know that values
are reasonably strong and approaching the $100,000 per unit threshold.
This brings
up another point of comparison, and a contentious one at that, regarding
the average price paid in arm’s length transactions compared with
non-arm’s length deals. Most non-arm’s length deals involve situations
where the seller was operating the facility both before and after the
sale, or where the seller retains an ownership interest in the facility
after the sale. In most cases, the sale would not have occurred without
one of these additional agreements or conditions. Some people argue that
these transactions represent fair value and should be used for market
comparison purposes. We disagree, largely because there is no fundamental
change in operational ownership or management, and in many cases they
represent a financing transaction and not a complete change in ownership.
For 2003, we
took all of the assisted living transactions that we considered to be
non-arm’s length where we had price and number of units (more than $1.1
billion worth) and compared the average price to the overall arm’s length
assisted living market. The non-arm’s length deals came in with an average
price of $122,000 per unit, compared with $72,600 for arm’s length and
$93,100 for stabilized arm’s-length. To be fair, most of the non-arm’s
length transactions involved purpose-built assisted living facilities
constructed within the past 10 years, with a large portion in the past
five years. These characteristics should automatically result in a bias
toward higher prices, but the size of the difference is certainly worth
noting.
Compared with
the stabilized assisted living facilities sold in 2003, the average price
was 30% higher, which indicates that these financial buyers have been
paying prices that, at a minimum, appear to be higher than what the
operators are paying in the market. And as we stated in the February issue
in our discussion of CNL Retirement Properties and the changing
role of capital in the senior care market, this will have an important
impact on the acquisition market in terms of who will get to the closing
table, at what price and with what conditions. |
|
