Last month we reported that the average price per unit for assisted living had rebounded by 11% in 2003 from the dismal performance in 2002, a year that saw a nearly 24% plunge in the average price per unit sold. The absence of lenders willing to finance an overly-maligned sector combined with a preponderance of non-stabilized facilities for sale led to this dramatic and unprecedented drop in average prices paid in the market.
But as we all know, the national average for assisted living facilities sold doesn’t necessarily tell the whole story, and the drop in prices in 2002 didn’t mean that stabilized or high-end facilities had dropped in value. There is always more behind the numbers.
In compiling our annual acquisition statistics for the ninth edition of The Senior Care Acquisition Report, which will be available imminently, it was suggested that we break out the stabilized versus non-stabilized assisted living facilities to see where the average prices fell. Using 85% occupancy as the cut-off for stabilized facilities, we split the sales up for both 2002 and 2003 and the results, although not surprising, are interesting and will be more helpful to lenders and investors trying to dissect the market.
Obviously, stabilized properties on average sold at a premium to non-stabilized ones in both years, but that premium changed significantly from 2002 to 2003. The spread almost doubled from $22,800 per unit in 2002 to $40,900 in 2003, as stabilized unit prices increased by 11% in 2003 while non-stabilized unit prices dropped by 14%. It could be that higher quality troubled properties were sold off first in 2002, with the more difficult sales coming in 2003, but that is just educated speculation. But it makes sense that as the market conditions in general improved, especially the capital markets, there were more buyers willing to purchase the more troubled facilities, and lenders began to emerge that would finance them. At the high end of the market it will be comforting to know that values are reasonably strong and approaching the $100,000 per unit threshold.
This brings up another point of comparison, and a contentious one at that, regarding the average price paid in arm’s length transactions compared with non-arm’s length deals. Most non-arm’s length deals involve situations where the seller was operating the facility both before and after the sale, or where the seller retains an ownership interest in the facility after the sale. In most cases, the sale would not have occurred without one of these additional agreements or conditions. Some people argue that these transactions represent fair value and should be used for market comparison purposes. We disagree, largely because there is no fundamental change in operational ownership or management, and in many cases they represent a financing transaction and not a complete change in ownership.
For 2003, we took all of the assisted living transactions that we considered to be non-arm’s length where we had price and number of units (more than $1.1 billion worth) and compared the average price to the overall arm’s length assisted living market. The non-arm’s length deals came in with an average price of $122,000 per unit, compared with $72,600 for arm’s length and $93,100 for stabilized arm’s-length. To be fair, most of the non-arm’s length transactions involved purpose-built assisted living facilities constructed within the past 10 years, with a large portion in the past five years. These characteristics should automatically result in a bias toward higher prices, but the size of the difference is certainly worth noting.
Compared with the stabilized assisted living facilities sold in 2003, the average price was 30% higher, which indicates that these financial buyers have been paying prices that, at a minimum, appear to be higher than what the operators are paying in the market. And as we stated in the February issue in our discussion of CNL Retirement Properties and the changing role of capital in the senior care market, this will have an important impact on the acquisition market in terms of who will get to the closing table, at what price and with what conditions.