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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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AL and IL Prices At New Highs--
Declining Cap Rates And Broad Interest Push Prices Up
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Email Editor
During this decade, seniors housing has certainly come of age
in terms of quality, in terms of investor acceptance turning into
insatiable investor demand and, perhaps most importantly, the coming of
age of a newly educated consumer who is both demanding and accepting of
the various products. This last one may prove to be the most difficult in
the future, because it will be difficult for investors, developers and
providers to understand and predict what the next generation of elderly
will really want, and that will go well beyond the type of real estate
they choose to live in.
The seniors housing acquisition market also came of age in 2007, with new
record average prices paid per unit set in both the assisted and
independent living market. And like the skilled nursing market, this
excludes some of the more high profile transactions, such as the sale of
Holiday Retirement Corporation, which included other assets beyond
the retirement communities. Holiday’s theoretical sales price was close to
$185,000 per unit. Nevertheless, in addition to a record average price
paid, new records were set for highest price paid, which certainly had a
contributing impact on the average. Despite strong investor demand, there
was a slight dip in the average price paid per unit in 2006 for both
assisted and independent living facilities. This had everything to do with
what was actually sold and little to do with any change in market
conditions.
In fact, market conditions were still improving through most of 2006 and
into 2007. In an ironic twist, the acquisition market was actually
beginning to soften after the first quarter of 2007, with the quarterly
transaction volume slowing, but the prices paid nevertheless rose. Once
again, it’s all in what came to market and closed, and that is going to
have a major impact on 2008 as owners of high-end properties may decide to
wait out this current storm in the housing and real estate market and
concentrate on increasing cash flow per unit for a sale another day.
The average price paid for assisted living units in 2007 increased to
$159,100 per unit, or 20% higher than in 2006 but just 13% higher than in
2005. The median price, however, has declined slightly in each of the past
two years, which reflects the impact of the highest priced sales on the
average. The prices paid in the independent living market also increased
by 20% from 2006 to $174,500 per unit, but the median rose by a much
smaller 5%. So many of these IL properties have assisted living units
(about 75% of the sales in 2007) that it is sometimes meaningless to
differentiate them, which is one of the reasons why we also produce
several statistics with both property groups combined. All of the results
of our acquisition data will be published at the end of this month in our
13th Edition of The Senior Care Acquisition Report.
In addition to the quality of the properties sold last year, the other
large influence was what happened to cap rates. For the entire seniors
housing market, cap rates have been in a steady decline since 2002, and
2007 was no exception. According to our statistics, the assisted living
market had the largest drop last year, with the average cap rate
decreasing by 90 basis points to 8.3%, with independent living cap rates
essentially remaining flat with 2006, although the median fell to about
7.6%. Readers must keep in mind that while the high-profile deals with the
very low cap rates get much of the press, there are always a large number
of transactions that come with cap rates that appear to be “above-market,”
meaning high single digits and low double digits.
Speaking of cap rates, while it is still too early to tell what is going
on in the market so far this year, primarily because almost all of the
transactions closing are remnants of the second half of 2007 deal-making,
it is safe to say that cap rates will rise in 2008, partly because of the
liquidity issues in the capital markets and less aggressive bidding as a
result of that, but also because sales of those high-end properties that
tend to have the lowest cap rates will not be as prevalent as in the past
three years.
We have already heard of at least two portfolios with expected prices well
above $100 million, with expected cap rates well below the 2007 average,
that have been pulled from the market because of pricing issues, but we
don’t know when and if they will return to the market later this year or
next. Despite the more conservative environment, there will still be some
very expensive deals getting done this year, with cap rates in the 6% to
7% range, but we expect back-up bids will be fewer in number and wider in
price.
The big unknown, of course, is what will happen in the housing market for
the rest of the year and how much of an impact this will have on seniors
housing values and investor interest. We have already heard anecdotal
stories of residents moving out of independent living communities into the
homes of their children, not to save money but to help their son or
daughter with their mortgage payments. There are financing programs in
place to tide families over until a house is sold, such as the product
offered by ElderLife Financial, but depending upon how bad things
get, the most likely result will be indecision on the part of the
consumer, waiting for a better market, much like a seller in today’s
environment.
We had come to expect about 35 to 40 publicly announced transactions in
the seniors housing and care market each quarter during the bull market,
but this came to an abrupt halt beginning in the second quarter of last
year, when the volume dropped to an average between 25 and 30 sales a
quarter. That being said, we may get a spike up for the first quarter of
2008, despite many market participants complaining about a dearth of
deals, because we are seeing many of the delayed 2007 transactions now
closing or being disclosed. These are mostly small deals, and that is what
we expect to see for much of the rest of the year. Unless, of course, one
of the large companies starts to sell some assets to raise some cash….
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