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November
2007 issue
Subprime Meets Senior Care--
Shocks Waves Of The Subprime Meltdown Continue
Even though the subprime mortgage mess has
nothing to do with the seniors housing and care market, the ramifications
will be felt well into 2008. Lenders are skittish, and liquidity appears to
be evaporating from the acquisition market.
...
Consumer Financing
Arrives--
ElderLife Financial Launches A New Tool For Providers
Just in the nick of time, ElderLife Financial is set to start rolling out
its consumer financing program for the seniors housing market. Savvy
providers may be able to increase their census by 3% to 5%.
...
Assisted Living Market
There were a few small one-off deals announced last month, plus one $30
million IL/AL combined community purchased by an unusual buyer.
...
Market Updates
Manor Care shareholders approved the purchase of the company by The Carlyle
Group, but union protesters tried to get in the way. Meanwhile, Sunrise
Senior Living finally had a shareholder meeting, and some shareholders
expressed their displeasure.
...
Financing News
Other than the fact that there is very little financing news, The Ensign
Group is set to price its IPO any day now in what will be the second skilled
nursing IPO this year.
...
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Companies Mentioned in this issue:
November 2007
A
Advocat p17
American Heritage Communities p13
American Senior Communities p18
Americare p4
Ashley Manor Care Centers p10
B
Brookdale Living Communities p4
C
Cambridge Realty Capital p18
Cammeby’s International p14
Canyon Creek Development p10
CB Richard Ellis p10
Column Financial p16
Commonwealth Assisted Living p4
Credit Suisse p16
E
ElderLife Financial p1
Emeritus Assisted Living p4
Extendicare Health Services p12
F
Fannie Mae p18
Fillmore Capital Partners p14
Five Star Quality Care p4
Formation Capital p14
G
GMAC p1
Grannie Mae p2
Grosvenor Investment Management p13
H
HCP p19
Health and Hospital Corporation of Marion County p18
Healthcare Realty Trust p19
HomeStar Bank p2
Horizon Bay Communities p4
HSH Nordbank p14
J
Jefferies & Company p17
K
K. Hovnanian Homes p13
Kindred Healthcare p16
KKR p5
L
LifeHouse Retirement Properties p16
Love Funding p11
Lunsford Capital LLC p2
M
M&I Bank FSB p2
Manor Care p5, p14
Marcus & Millichap p11
Mariner Health p15
Marshall and Ilsley Corporation p2
N
National Health Investors p19
National Health Realty p19
National HealthCare Corporation p19
Nationwide Health Properties p19
P
Pleasant Care Corporation p16
R
Red Mortgage Capital p18
Roseland Properties p13
S
Sallie Mae p2
Savills Granite p13
SEIU p5
Senior Living Investment Brokerage p12
Somerford Corporation p4
Spectrum Acquisition Partners, LLC p11
Spring Hill Assisted Living p4
St. John’s Communities Inc. p12
Sunrise Senior Living p15
Sunwest Management p10
T
The Blackstone Group p19
The Carlyle Group p5, p14
The Ensign Group p18
Turtle Creek Management p18
Tutera Group p17
W
Warburg Pincus p14
WhiteEagle National p10
X
XTend Medical Corporation p11
Z
Ziegler Capital Markets p12
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Subprime Meets Senior Care--
Shocks Waves Of The Subprime Meltdown
Continue
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The great big sucking noise you hear is the liquidity evaporating from the
capital markets, but please don’t shoot the messenger. Although lenders
are still “open for business,” we are hearing of more and more cases where
they are technically open but slow to return phone calls. Don’t blame
them, as they are still trying to figure out where to price debt and who
will buy it, much the same way that buyers and sellers are still trying to
figure out what a market cap rate is and the “right” price to buy or sell.
It is difficult, however, to come up with a “market” anything when there
is no market. We have heard that while some of the big lenders (no names
mentioned here) are still “open,” they have basically told their customers
to wait until January.
With the CMBS and CDO markets in turmoil, and many lenders having grown
out of the habit of keeping their loans on the books, in many cases they
are now forced to price for the long term, which means debt is more
expensive, when it is even available. It is one thing to be aggressive
when you don’t have to worry about being repaid, but quite another when
instead of being an intermediary, you become a partner. And with a healthy
amount of skepticism (called real underwriting), the amount of equity
required in deals has gone up, but we haven’t quite figured out who is
going to provide that equity, and on what terms.
We all know that once The Carlyle Group (unlike the SEIU, we spell it
correctly) closes on its purchase of Manor Care (NYSE: HCR), we may not be
seeing much private equity in the senior care market, at least for any
large deals that may be left. Does every private equity or investment firm
about to enter this sector now have to worry about Congressional
oversight, investigations, hearings and documentation of its ownership
structures? If a certain amount of capital is scared away from the seniors
housing and care industry because some of our elected officials in
Washington, D.C. want to be in the limelight “protecting” the elderly, it
will be the elderly who will suffer in the long run, because the industry
needs capital to grow and meet the demand that will only begin to
skyrocket in another 10 to 15 years. If they really wanted to protect the
elderly, they would fix the Medicaid and Medicare programs, not to mention
Social Security, but then that would expose the misinformation they have
been peddling for too many years about a supposed “lock-box” and a “we
will fix it when we have to” attitude. But I digress.
In the facility acquisition market, we have had an unprecedented number of
“small” transaction closings postponed by a few months because of the
financing “issues.” By far the most common reason provided has been delays
by HUD in approving the existing loan assumption. In some HUD offices, we
hear, one missing piece of information can compel the underwriter to send
the entire file back, only to start all over again when the file is
resubmitted. In addition, some lenders have been changing their terms or
just getting cold feet, and when the lender’s feet turn cold, the deal can
turn to ice. At the eleventh hour, no buyer wants to be forced to look for
a new lending source, especially in this market.
It is particularly dramatic to look at what has happened to debt spreads,
which will provide a better understanding as to why some people think cap
rates have risen above the 50 basis point increase so commonly tossed
around in casual conversation. From what we have gathered, the spread
between AAA-rated CMBS credits and BBB-rated CMBS credits had narrowed to
well under 100 basis points, and probably to around 60 basis points,
during the height of the market. Now, we understand that the spread has
widened to well over 200 basis points. We have also heard rumblings that
some borrowers in the seniors housing market may be in technical default
on their debt, with lenders putting them on a short leash to improve their
financial performance. This is leading to some speculation that we may see
an increase in defaults later in 2008, and we have already heard of some
investors, with plenty of liquidity, gearing up to take advantage of
either buying debt at a discount or properties at a discount. Perhaps
both.
Getting back to cap rates, when the liquidity was sucked out of the market
this past summer, everyone knew that cap rates would be impacted, and it
was easy to justify a broad stroke 50 basis point increase. The reality,
however, is that no one really knows where cap rates are because any deals
that are getting done now, and they are far and few between, were
negotiated at least a few months ago, back in what some call “the la-la
times.” Well, those times are over, and some people believe they are gone
for good. We will opt to take a pass on that judgment for now, because
cycles do come and go, and seniors housing will see some more “hot” times
in the future.
There are some people who think that cap rates, at least for your
ordinary, 75-unit, “B” quality assisted living facility in a secondary
market, have increased by 100 to 200 basis points, because buyers and
their lenders will no longer do these deals at sub-8% cap rates. Our
response is that for these properties, the spread in cap rates has always
been the widest in this recent bull market, from as low as 7% to as high
as 10% (and even higher), depending on a number of factors. So, our guess
is that those lower-cap rate, plain-vanilla deals will be the ones that
get knocked out of the market (or done at higher cap rates), and that will
be a good thing for the industry (but don’t try telling that to a seller).
The other reason for cap rates going up is that a risk premium is back to
being priced into acquisitions, which is also a good thing for all sectors
of seniors housing and care. While we agree that seniors housing should be
looked at as a separate asset class for institutional real estate
investors, we also strongly believe it is very different than the other
categories, such as multi-family, office, retail and hospitality. These
others ones, rarely, if ever, have Congressional committee hearings about
them, well-publicized SEIU union drives, state regulatory scrutiny,
reimbursement problems and health care liability concerns. And let’s not
forget front page articles in The New York Times whipping up a frenzy of
allegations and calls for change and increased oversight.
Where does the market go from here, and where will the buyers and
investment dollars come from? Speaking of dollars, the value of the dollar
may well be a significant factor in the seniors housing acquisition market
next year if it stays at the current lows for much longer. Foreign
institutional money, primarily from the Middle East, Australia and some
parts of Europe, have already invested in our industry, and while their
returns to date have been depressed by the weakening dollar, new
acquisitions have to be looking very cheap right now. They will be
benefiting from both higher cap rates and a higher value for their own
currency, and that combination can make almost any deal look like a
winner. In addition, the returns are just plain attractive, unless the
dollar continues its dive. When was the last time the Canadian dollar was
at parity with the U.S. dollar? Answer, 30 years ago. Canadian pension
funds have already been active and we expect to see some additional
acquisition activity from them in the next few years.
As for the rest of the market, everyone seems to be sitting on their
hands, unwilling to make a move, other than backing out of deals. It’s not
for lack of interest, but for a desire not to make a mistake. We have
heard from some of the seniors housing brokers that the number of
inquiries regarding selling and actual proposals made has been very high
in the last several weeks. While this may mean that marketing activity
will pick up, we are not convinced that all those sellers are on the same
wave length as the buyers in today’s market. We hope so, or else life is
going to get pretty boring.
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