May 2005 issue

REITs Are Up, SNFs Down And ALFs Are On Cruise Control
While it can’t be called the perfect storm, during April all health care REIT stocks rose, all SNF stocks dropped, and the four remaining AL/IL stocks received a little jump.
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Assisted Living Market
The assisted living market remains the hot area of senior care, especially for high quality properties and portfolios. But there is still a good market for the struggling and middle market properties.
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Skilled Nursing Market
A few one-off deals get done, but the market is relatively quiet as all wait to see what the Medicare rate cut will be.
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Transaction Updates
Bidders are working on their projections and valuations for the Beverly Enterprises auction, while the Benchmark and Aegis deals are getting closer, and the pricing is expected to be high.
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REITs
Ventas does the REIT deal of the year, and others are securing low-cost debt before rates rise.


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Steve's Blog on Senior Care

REITs Are Up, SNFs Down And ALFs Are On Cruise Control

Rarely is there a month when the stocks of all sectors perform in perfect unanimity, so April was certainly unusual. Every health care REIT stock rose, with increases ranging from 1% to 16%, every skilled nursing stock dropped, ranging from 5% to 27%, while all assisted living/retirement housing stocks posted modest gains. After suffering through a horrendous first quarter, health care REITs were bolstered by the expectation of new investment activity and the continued availability of low-cost funds, such as the $250 million raised by Health Care Property Investors (NYSE: HCP) at a cost of 5.67% over 12 years, an attractive 140 basis point spread. The dividend increases announced by five of the REITs during April didn’t hurt either.

April was a difficult month for the stock market in general, including the worst single-day decline in nearly two years. Investors are focusing on earnings reports, the slowing economy, and the prospect of inflation and rising interest rates. But in the skilled nursing sector, there can only be one thing investors are thinking about, and that is government reimbursement. Although not referring to the skilled nursing market, a recent headline in The Wall Street Journal questioned whether "April Showers Bring May … Clouds?" And because of the uncertainty, primarily with Medicare reimbursement, the outlook for nursing home stocks, and valuations, is murky until investors and buyers know what the Medicare reimbursement cut will be, and everyone expects there to be some cut.

The SNF pullback began in early April when Frank Morgan of Jefferies & Company lowered his ratings on a few skilled nursing stocks and lowered price targets to levels below the current prices at the time, based on limited upside potential until the Medicare fog lifts. The market shuddered on the news, sending the whole sector down. What is remarkable is that this was really not news, as everyone has known about the potential Medicare cuts, but not what the ultimate number will be. We suppose it just had to be put in black and white for the reimbursement-challenged investors to finally take notice that earnings, and cash flow, may in fact decline a bit next year, unless operating costs can be cut dollar-for-dollar (doubtful) or divine intervention reduces liability costs enough by 2006 to make up for the lower Medicare rates. And we still have that bridge for sale.

Meanwhile, after a tremendous run-up in value last year, both in terms of stock prices and property values, the assisted living and retirement housing market continues to chug along, helped by continued strong investor appetite for this asset class, rising occupancies, declining cap rates and no reimbursement risk. Two of the four stocks in this sector hit new 52-week highs in April—a month that for the overall market was the worst in more than two years—with Sunrise Senior Living (NYSE: SRZ) topping $50 per share for the first time since late 1998. The only cause for concern right now is that investor appetite is so strong for quality properties that industry veterans fear that prices are reaching into nose-bleed territory, even though some of those same veterans are the ones doing the buying and financing, with no bloody noses, yet. And we hear that even those portfolios on the market, with prices that people laughed at a month ago, are seeing a lot of competition.

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