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What Will It Take?By Owen G. Collins and Rod Turner
Current PerspectiveTo understand investors' current perception of nursing home and assisted- living providers is to realize stock market capitalization has decreased by roughly 70 percent between the end of 1998 and today. However, capital sources for the industry have not completely dried up. Many operators have turned to the federal government for help with funding new construction, acquisition and refinancing of assisted-living facilities. The U.S. Department of Housing and Urban Development (HUD) has specialized programs such as Section 232, which insures mortgages for assisted-living communities. In addition, Fannie Mae and Freddie Mac offer financing programs for existing stabilized assisted-living facilities. Local, regional and even national banks will still loan to quality operators with proven track records and an acceptable balance sheet. The loans offered however, are at more conservative (70 percent or less) loan-to-value ratios and require the borrower to bring both hard equity dollars and adequate working capital to the closing table. Tax-exempt bond financing is also available to both for-profit and nonprofit operators, but the same requirements regarding a good track record, equity and liquidity still apply. National OutlookThe number of reported new facilities being constructed in 2000 was at its lowest level in five years. The national vacancy rate is estimated at approximately 10 percent, and can be as great as 40 percent or 50 percent in some highly saturated markets. Certain existing operators in saturated markets are relying on the decrease in new construction to result in truncated absorption periods and higher overall occupancy rates.
Other significant capital sources, such as real estate investment trusts (REITs), that enthusiastically participated in the development boom, find their portfolios heavily weighted toward assisted living. They need to either divest assisted-living assets or restrict further investment in assisted living until their portfolios become more diversified. Several healthcare REITs still have significant exposure in the nursing home industry, which continues to have an adverse impact on their earnings. This in turn, makes it difficult for the REIT to access the capital markets and raise new investment capital. The banking industry, although not completely averse to lending to the industry, is experiencing rising loan losses due to the current weakening of the economy and has responded by significantly tightening its overall credit criteria for all types of loans. This bleak national outlook, however, does not mean there aren't opportunities to develop new, financially viable assisted-living facilities in select markets. What It Will Take?Just like each market has a unique thumbprint, operators increase the odds for their project's success if they can demonstrate a market niche. Certain assisted-living developers have the greatest chance of getting their project financed if they have:
Recently, some regional and local operators have been able to acquire facilities at substantial discounts from some of the publicly held national chains. It's clearly a buyers' market, with some recent purchase prices reported as low as 45 percent of the prior owner's cost to construct just three years ago. Discounted purchase prices can be passed onto the consumer enabling an operator to be a low-cost provider of services in a market. Without a doubt, it is more difficult today than it was a mere two years ago to find lenders and investors willing to fund start-up, free-standing assisted-living facilities, but it is certainly not impossible. Whether developing new or acquiring existing assisted-living assets to ensure a facility's financial success, operators must thoroughly analyze and correctly assess the demand for their proposed service. Accurately forecasting the absorption period and stabilized occupancy rate is the most critical element in planning for a project's success because it is the most singularly important operating element. Without residents, there are no other operational issues that warrant managing. Almost all lenders and investors currently require a market-feasibility study conducted by an independent third party as part of their due diligence when making a decision to fund a project. Many lenders and investors also require an independent prepared financial feasibility study and appraisal. As an example, even HUD's new Multifamily Accelerated Processing (MAP) initiative requires a market-demand study for existing assisted-living projects with a demonstrated history of highly stabilized occupancy levels. The following table summarizes a few funding sources when seeking to finance acquisitions of existing or planned assisted-living facilities.
Owen G. Collins is senior manager and Rod Turner is senior principal for HTG Consultants. The company is a nationally recognized senior-living consulting firm with proven capabilities in conducting market demand and financial feasibility studies, business valuations, and real estate appraisals on behalf of developers, operators, lenders and investors. For more information, call (302) 322-4100.
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Now
that the dust has settled from all the assisted-living development that occurred
in the mid-to-late '90s, industry survivors are wondering if new business
development opportunities will occur. The development boom and subsequent market
saturation in many popular metropolitan areas has left many developers,
operators and, perhaps most important, lenders and investors licking their
wounds. Large national operators, smaller regional companies and local
developers all contributed to the over development in certain markets throughout
the nation. Many operators are experiencing ongoing cash-flow deficits resulting
from partially built developments, protracted absorption periods, low occupancy
levels, escalating resident-care costs, increased regulatory scrutiny, higher
borrowing costs and rapidly rising insurance rates.
Recent
data released from the 2000 Census indicates a first ever lag in the growth rate
of people age 65 and older (12 percent increase) compared to the general
population (13 percent increase). The recent problems experienced by the
industry caused many traditional capital sources to shy away and even bad-mouth
the assisted-living industry, questioning its concept and future viability as a
care alternative. These same capital sources have turned their attention to
other types of senior housing that have either minimal care components such as
independent living and the younger (55+) active-adult market, or a full
continuum of care offered by continuing-care retirement communities.|
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