|
January
2005 issue
The Best of Times... For Now
Stock prices were up significantly
for the second year in a row, the acquisition market came alive in the
last half of the year, cap rates are declining and values are rising and
interest rates remain relatively low. What’s not to like about this market
environment? Nothing, except a little bit of caution would be healthy.
...
Assisted Living Market
A 10-facility portfolio in Illinois closed for $125,000 per unit, and a
$65 million portfolio in Pennsylvania is seeing hot demand. Meanwhile, new
entrant Quality of Life Health Care closed on the purchase of five ALFs in
Michigan, with two more to go. See page 4
...
Independent Living Market
Capital Senior Living closed on two portfolios for $148.8 million last
month. See page 7
...
Skilled Nursing Market
Kindred completes several facility divestitures, and the top price of the
decade is paid for a facility in New York. See page 7
...
Financing Market
$226 million of deals announced. 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
Companies Mentioned in this issue:
January 2005
Advocat p. 1
American Retirement Corp. p. 2
Assisted Living Concepts p. 2
Autumn Group p. 11
Bank of America p. 10
Bridge Healthcare Finance p. 10
Cambridge Realty Capital p. 11
Capital Senior Living p. 7
CareyKramer Company p. 11
Centennial Healthcare p. 3
Chelsea Senior Living p. 6
Citra Capital Management, LLC p. 11
CNL Retirement Properties p. 3 & 7
Collateral Mortgage Capital p. 11
Compass Bank p. 10
CRC Health Care p. 8
Dedham Savings Bank p. 8
Emeritus Assisted Living p. 2
Five Star Quality Care p. 2
Freddie Mac p. 11
GE Healthcare Financial Services p. 4
Genesis Healthcare Corp. p. 2
GMAC Commercial Mortgage p. 7
Guaranty Bank p. 7
Health Care Property Investors p. 12
Healthcare Transactions Group p. 8
Holiday Retirement Corp. p. 11
Horizon Bay Senior Communities p. 3 & 7
HUD p. 4
JPMorgan Fleming Asset Management p. 12
Key Corporate Capital p. 10
Kindred Healthcare p. 6
Laurel Baye HealthCare p. 11
Lehman Brothers p. 7
Leisure Living Companies p. 5
Love Funding Corporation p. 11
LTC Properties p. 11
Marcus & Millichap p. 5
Mariner Health p. 4
Merrill Lynch p. 7
MetroNational Corp. p. 7
National HealthCare Corp. p. 2
NorthMarq Capital p. 11
Och Ziff Real Estate p. 7
Omega Healthcare Investors p. 12
Park Associates p. 4
Pleasant Care Corporation p. 10
Prudential Real Estate Investors p. 7
Quality of Life Health Corporation p. 5
Roscommon Healthcare p. 8
Senior Housing Partners II, L.P. p. 7
Senior Living Investment Brokerage p. 4
Southern Assisted Living p. 6
Sun Healthcare p. 2
Sun National Bank of Vineland p. 6
Sunrise Senior Living 2
Sunrise Senior Living Real Estate Investment Trust p. 12
The Terrace Senior Living p. 7
Triad Senior Living I, L.P. p. 7
UBS Investment Bank p. 12
Ventas p. 12
Wilkinson Corporation p. 4
|
The Best of Times... For Now
During 2004, almost
everything in the senior care market seemed to be moving with all four
cylinders churning away. Stock prices were rising, cap rates were
declining, the acquisition market heated up in the second half of the
year, higher quality properties finally appeared on the market just as the
inventory of distressed properties began to dwindle, and both debt and
equity capital were attracted (again) to the fundamentals of the sector.
Combined with the Medicare
rate increase that finally had a financial impact in 2004, the Medicaid
cuts that never materialized, with some states actually approving large
increases, and the improving occupancy rates in assisted living
facilities, one might say that we have the perfect storm in reverse.
The stock
market is often said to be one of the best predictors of future
performance, and public equity investors jumped on the senior care
bandwagon in mid-2003, producing returns of 131% to 616% for the top eight
performers, while almost all the others had double-digit gains ranging up
to 86%. It is true that the universe of publicly traded senior care stocks
has dwindled over the past five years, and many companies were starting at
a low base price, but that kind of price performance is unusual, and very
difficult to replicate. It is also often followed by a down year, or at
best, a mediocre one.
But this did
not happen in 2004. In fact, it was almost as good as 2003 and one of the
best years ever for senior care stocks. Three companies more than doubled
in value, with Advocat (OTCBB: AVCA), one of the oldest publicly
traded senior care stocks, returning from the depths of financial despair
to jump in price by 1,880%, after starting the year at just $0.25 per
share. Most of the other stocks had double-digit gains, with six companies
increasing in price by 25% to 92%. Other than Sun Healthcare
(NASDAQ: SUNH), all skilled nursing companies posted positive returns,
with Five Star Quality Care (AMEX: FVE), which is really a hybrid
company with significant assisted living assets, nearly doubling in value,
followed by National HealthCare Corp. (AMEX: NHC), up 77%,
and Genesis Healthcare Corp. (NASDAQ: GHCI), up 54%.
The assisted
and independent living segment was led by American Retirement Corp.
(NYSE: ACR) with a 268% price increase, followed by Assisted Living
Concepts (OTCBB: ASLC), which more than doubled in value as the
auction process, featured in last month’s issue, took the share price
higher and higher. Readers will remember that ACR traded as low as $1.00
per share a few years ago, as pressure mounted on management to file for
bankruptcy protection as a large convertible bond issue was coming due.
Management held firm, and those shareholders that stayed with the company
certainly have reason to celebrate. Emeritus Assisted Living (AMEX:
ESC), which jumped 52% in 2003, tacked on another 57% increase last year
to reach its highest level in five years. And speaking of highs,
Sunrise Senior Living (NYSE: SRZ) is zeroing in on its all-time high
of $53.13 per share, with a 20% share price increase in 2004 after jumping
by more than 50% the previous year.
The average
gain in 2004 of 177% (55% if Advocat is removed from the calculation)
compares favorably with the 152% average gain in 2003. But is there any
room to move even higher? And are the factors that are driving stock
prices the same ones that are causing a drop in cap rates, resulting in
the most aggressive buying we have seen since the late 1990s? At the risk
of disappointment, and without sounding too indecisive, it is difficult to
say. The "scarcity" factor is relevant for both markets, since there are
the fewest alternatives in the senior care public equity market in over 10
years, and the acquisition market, until recently, has been dominated by
distressed property sales.
Consequently,
there is a pent-up demand for profitable, stable and high quality
facilities—whether skilled nursing, assisted living or independent
living—and when they come onto the market, their prices get bid up to
levels that are causing some industry veterans to shake their heads with
that "watch out" look on their faces. And investors have realized that the
public equity market hit bottom two years ago, and figured that there was
only one way to go, but it is doubtful they thought we would see the
returns that eventually materialized.
Despite the
scarcity factor, we believe that the public equity values, by and large,
have gotten ahead of earnings growth. In the skilled nursing market, all
we need is for Congress or the President to act on MedPAC’s annual
recommendation to decrease Medicare reimbursement for SNFs, and share
prices, as well as per-bed values, would plummet. While unlikely to happen
this year, when looking for ways to decrease the federal budget deficit,
Congressional friends of the nursing home industry seem to disappear
faster than a private paying patient.
In the
assisted/independent living segment, in a few months we will be left with
just four alternatives, three of which have already seen substantial price
increases, and two of those still lose money or are at best breakeven. Did
we really say getting ahead of earnings growth? So after two unprecedented
years, senior care stock prices should underperform the market in 2005.
The
acquisition market is a different story, and may lag the public equity
market by 12 to 18 months. Our annual acquisition market statistics for
2004 will not be available for two months, but given the surge in the last
half of the year, we would be surprised if average bed and unit prices
across the board did not increase, perhaps substantially so, from 2003’s
relatively low levels. Some of the highlights of the year include our
first billion-dollar deal in six years, representing one of two publicly
traded companies being sold, the sale of Centennial Healthcare out
of bankruptcy and the $520 million purchase of Horizon Bay Senior
Communities’ properties by CNL Retirement Properties in the
largest private deal of the year. Other than the sale of a few private
companies, the year was dominated by smaller, single-facility sales, but
that began to change by the fourth quarter.
The most
significant news in the acquisition market in 2004 was what happened to
cap rates, and whether it is a temporary phenomenon, driven by a shortage
over several years of quality facilities on the market, or whether it
represents a fundamental shift in investment parameters, especially as
more non-traditional real estate investors enter the senior care market.
It is still too early to tell, especially since interest rates remain near
historic lows. But at least in today’s market, compared with that of the
late 1990s, buyers are purchasing existing facilities with real cash flow,
and in some cases the leverage is quite reasonable. It is just a matter of
time before they know if their return expectations are met at these low
cap rates and high prices. One contradictory factor is that cap rates seem
to be declining just as interest rates are increasing. How that
relationship continues will be interesting to watch, especially as many of
those buyers in the past few years closed deals with low cost floating
rate debt. They won’t look as attractive with another 200 to 300 basis
points added on. HUD refinancing would make a lot of sense at this
point in time.
But the
aggressive buying that seemed to characterize the market in the second
half of the year did accomplish one thing that we had been waiting for—the
appearance of the high quality properties and portfolios for sale that
required a stronger market to make their availability known. Unless there
is little intention to sell, an investor would be foolish not to take
advantage of this market shift and cash out while buyers and capital are
plentiful, and interest rates are low. An opportunity like this may not
reappear for a while.
The stars are
in alignment, but it will not last forever, with any of a number of
factors capable of derailing the current bull market in senior care. At a
loss at how buyers are paying such high prices in the seniors housing
market, one financial intermediary recently quipped, "So what’s the exit
strategy, $200,000 per unit?" As they always say, buyer beware.
In the month
of December, there were certainly a lot of buyers in the hunt, and there
was a good spread of activity among the various property types. Almost all
of the deals were single-facility transactions, but the largest in terms
of dollar size was in the assisted living market. And let’s not forget
that the sale of Mariner Health (OTCBB: MHCA) finally closed in
December, despite all the hand-wringing about the buyer being able to get
the financing done. We assume that Mariner management continues to run the
facilities, but how long that will last is anyone’s guess.
Before moving
on to last month’s acquisition activity, we were saddened to hear that
Neil Chur, co-founder of Park Associates and one of the major
buyers and operators in the skilled nursing market during the past two
decades, died suddenly at the end of the year. Although he had slowed down
in recent years, he completed some of the largest, and most profitable,
deals of the 1990s and added a certain element of intrigue and excitement
to the market. He will be missed by those who knew him. |
|
