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March
2008 issue
SNF Prices Hit Record In 2007--
Strong Investor Demand And Quality Boost The Market
With investors looking for yield, combined
with strong institutional demand, the average price paid per bed for skilled
nursing facilities set a record in 2007.
...
AL and IL Prices At New Highs--
Declining Cap Rates And Broad Interest Push Prices Up
As cap rates continued to decline, at least
until the end of the year, average per-unit prices for assisted and
independent living facilities rose again in 2007.
...
Skilled Nursing Transactions
There has been a lot of activity in the skilled nursing market, most of
which is a carryover from 2007.
...
Assisted Living Transactions
One small Wisconsin portfolio is
sold, plus several one-off transactions are completed around the country.
...
Independent Living Market
Details on a recapitalization completed by a Prudential Real Estate
Investors fund have come to light, plus two small acquisitions are
announced.
...
Financing News
Even though the credit markets have
pulled back, there seems to be no shortage of HUD money available for
refinancings.
...
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Companies Mentioned in this issue:
March 2008
A
Alterra Healthcare Corporation p14
American Senior Living Communities p14
Assisted Living Concepts p18
B
Beacon Management p14
Beverly Enterprises p4
Briar Hill Management p5
Brookdale Senior Living p17
C
Cambridge Realty Capital p17
Cambridge/Catalyst Healthcare Finance p17
Capital Funding Group p16
Capital Health Group p14
Capital Senior Living p16
CapitalSource p16
Century Oaks Residential Care p11
CIT p16
Colonial Bank p16
Crestwood Senior Living p11
D
Deer Meadows Retirement Community p14
E
ElderLife Financial p11
Emeritus Corporation p16
F
Fannie Mae p12
Five Star Quality Care p12, p15
Fortress Investment Group p17
Freddie Mac p15
G
Garton Real Estate p12
GE p16
Genesis HealthCare Corporation p2
Golden Ventures p4
Grace Healthcare p8
H
Health Care Advisory Group p12
Health Quest Corporation p4
Healthcare Finance Group p6
Hearthstone Senior Services p16
Herbert J. Sims Investments, LLC p17
Heritage House p5
Holiday Retirement Corporation p1
K
Key Bank p16
Kindred Healthcare p5
L
Lifestyles Senior Housing Managers, LLC p12
Love Funding p6, p17
M
Manor Care p2
Marcus & Millichap p5
Merrill Lynch p19
Merrill Lynch Capital’s p17
Morgan Stanley p19
N
Nationwide Health Properties p11, p19
P
Peregrine Companies p14
Prudential Real Estate Investors p15
R
Red Mortgage Capital p8, p17
S
Senior Care Real Estate Brokerage p8
Senior Care Realty p11
Senior Housing Partners III p15
Senior Housing Properties Trust p12, p15, p19
Senior Lifestyle Corporation p17
Senior Living Investment Brokerage p6
Shelter Senior Living p15
Smith Health Care p14
Sunrise Senior Living p17
T
Trinity Hospice p18
U
UBS Investment Bank p19
W
Westport Capital p14
Z
Ziegler Capital Markets Group p5
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SNF Prices Hit Record In 2007--
Strong Investor Demand And Quality Boost The
Market
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Email Editor
Last August we stated that the entire seniors housing and care market had
hit a peak by the summer of 2007. What we meant was that “new” prices
would not go any higher, on average, than what was paid in 2007, and that
buyers looking at the acquisition market subsequent to last summer’s
credit market meltdown would have changed expectations and face new limits
on accessing capital, both debt and equity. According to preliminary
results from our 2008 edition of The Senior Care Acquisition Report,
which will be released at the end of this month, the average price paid
for skilled nursing facilities did hit a record in 2007 of approximately
$55,200 per bed, or about 6% higher than in 2006, which was a record at
that point in time. The likelihood of remaining at these price levels,
however, seems somewhat remote at this point in time.
So, why did the skilled nursing market hit another record price in the
market? Although there are many reasons, including the high quality of
some of the facilities sold, which always has a significant impact on the
average in any given year, it is safe to say that three main reasons
include high investor demand for the asset class through most of the year,
a continued rise in the cash flow per bed generated, largely as a result
of Medicare reimbursement and, finally, because cap rates in the skilled
nursing market hit a record low of about 12.0%, or just under the 12.5%
average in 2006, which was the previous record low according to our
statistics for the past 20 years.
Paradoxically, with the rising Medicare population and acuity levels in
skilled nursing facilities, these properties are increasingly becoming
more “health care” oriented, and not the real estate that some investors
are looking for, but they are considered to be real estate nonetheless (we
heard the same story in the 1990s market peak). In addition to the legal
and liability issues, this is one reason why many institutional buyers
split the real estate from the operations: different risk levels and
different return expectations. In theory, as the health care component
increases, the returns should be higher than plain vanilla, boring,
un-management intensive traditional real estate assets that have no
regulation and reimbursement problems, no liability issues and the absence
of ambulance-chasing New York Times reporters who use outdated and
erroneous statistics provided by ambulance-chasing malpractice lawyers and
union organizers with a one-sided axe to grind. Are we making ourselves
perfectly clear?
Despite the fact that skilled nursing cap rates hit a record low in 2007,
as did practically all cap rates in other real estate asset classes, their
decline was relatively slow and steady, and the spread between the highest
average cap rate (2002) and the lowest (2007) over the past 15 years was
just 280 basis points. This level of decline is relatively insignificant
in the scheme of the overall markets, and especially when compared to the
assisted/independent living market that has a 460 basis point spread
between the highest average cap rate (1993) and the lowest (2007) in that
same time period, and a 340 basis point decline since 2002.
The point is that extremely low cap rates have not been driving the
skilled nursing valuation market, although the recent decline has
certainly not hurt, and cap rates in this sector are still quite high
relative to traditional real estate investments that had dropped to the 4%
to 6% range until late last year. And, we might add, skilled nursing cap
rates should be higher than most any other real estate asset class because
of the much higher business risk, despite some of the stability provided
by limits on new bed supply and “guaranteed” reimbursement. It’s called
finance theory 101.
The skilled nursing market hit another record in 2007 despite the fact
that we did not include in our statistics acquisitions such as the sale of
Manor Care or Genesis HealthCare Corporation, both of which
closed last year, because both sales involved a combination of leases,
management agreements and ancillary businesses which preclude us from
generating an unbiased price per bed for the skilled nursing component.
Because the derived price of Manor Care’s nursing facilities was more than
$125,000 per bed, and Genesis HealthCare’s more than $80,000 per bed, the
national average would have been even higher than the record we reported.
But we have never included the sale of publicly traded companies in our
statistics because of the reason mentioned above as well as the fact that
they are not reflective of the generic property acquisition market. They
do, however, set the tone for the market and investor expectations, as
well as seller expectations when they see some of the prices paid and the
bidding wars.
So, what will keep skilled nursing facility prices strong in 2008 and
beyond? First and foremost is a strong Medicare reimbursement environment
combined with an increasing higher-acuity census. This is the driver for
stability in cash flow per bed and the benefits of any ancillary service
businesses. Private pay patients are fine, but they are a declining
population, especially as assisted living facilities reach out to higher
acuity residents for their programs. Foreign buyers looking for yield and
a real estate asset class that will not succumb to overbuilding will also
help to keep prices high, and the skilled nursing market looks
particularly cheap relative to their own markets given the low value of
the dollar. And they may hope for currency gains down the road whenever
the dollar begins to stabilize.
In addition, there has been some attention diverted away from the assisted
and independent living market, which is considered to be more real
estate-oriented in a period when real estate is not too popular with
investors and lenders. And don’t forget that as the economy worsens and if
it dips into a recession, health care and health care assets have usually
been considered a good recession hedge, and skilled nursing is more of a
health care business now than at any time in the past. Finally, the demand
for skilled nursing beds is going to outpace the supply for many years to
come, even with the competition from higher acuity assisted living
facilities. We would assume that more states may follow the lead of states
such as Connecticut and Massachusetts that have closed some small and
inefficient facilities and are hesitant to approve new CONs because of
budgetary constraints. While the growth rate of the elderly population 85
and older is taking a temporary breather, it will resume later in the next
decade and explode thereafter. The beds simply will not be there, which
bodes well for the owners of existing beds in the future. Unless, or
course, the whole nature of how we provide “long-term care” changes, and
it might.
On the negative side of the ledger, what would cause prices to decline in
2008 and 2009 would obviously be a tightening in Medicare reimbursement,
or worse, some rollbacks in the rates themselves. There are some powerful
members of Congress who really do not like to see nursing home companies
making a decent profit overall, especially if it is based largely on their
Medicare census and reimbursement. We still don’t understand why they
don’t understand the concept of low-cost producer, and if SNF operators
decided to no longer take the higher acuity patients if reimbursement made
it financially not worthwhile, the cost to the health care economy would
certainly rise if they went to rehab hospitals or had longer stays in
acute care hospitals. When you have a committee head whose basic desire is
to rid the system of for-profit health care providers, well, more than
Houston will have a problem if that attitude gets any traction (it won’t).
Second, although Medicaid is not very popular with providers, as the
economy weakens and state budgets come under pressure, this payment source
will become even skimpier, with the only result being adverse pressure on
quality of care when a lack of pay increases causes employee turnover to
get worse.
Speaking of “out there” congressmen, if hearings resume this year on the
so-called problems with private equity ownership of skilled nursing
facilities, and if they get ugly, that is going to make more than a few
large equity investors look elsewhere for their next investment. In the
long run, the absence of private equity and leveraged buyout firms from
the marketplace could provide some price stability and a more even playing
field for strategic buyers, but in the short run it would put a negative
damper on valuation attitudes, especially with what is going on in the
credit markets. No one knows how much worse the credit market situation
will get, but we haven’t talked with anyone who thinks it’s not going to
get worse as the year unfolds. That being said, the skilled nursing
industry should be relatively stable, and we believe the market will be
dominated by small sales, usually single facilities selling in the $35,000
to $60,000 per bed range. Unless some high-end properties sell, the
average for 2008 is not expected to set any records.
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