What Happened?
By Dwayne J. Clark, Aegis Assisted Living
This is the question administrators, owners, shareholders and analysts
have been asking. What is going on with our prosperous little assisted-living industry? A
year ago stocks soared, good operating people set their own salaries and there were
properties popping up on every vacant lot in America. An experienced employee could hardly
make it through the week without a headhunter calling to try to lure him to greener
pastures. It felt like it could go on forever.
In the last six months, however, things have slowed down substantially. Many people
would say they had been expecting it, but the slowdown may be for reasons other than what
people had anticipated. The most common expectation was that the boom was going to hit the
skids because the market was becoming saturated, or some felt that people would get tired
of the concept. This certainly is not the case. Americans have embraced assisted living
everywhere. The concept is here to stay and will continue to grow, albeit at a lesser rate
in the near term.
Since the audience of this magazine is comprised numerously of administrators, I
thought it would be nice for you to see some of the reasons that are being given for the
slowdown.
Growth capital in short supply. Last fall, the commercial
mortgage-backed-securities market went south. As interest spreads grew, access to capital
shrunk. This lack of capital was not limited to assisted living, but rather a variety of
growth-oriented industries outside our sector. The amount of lenders willing to lend to
our industry has shrunk substantially. Those lenders who are lending have tightened
criteria for loans, thus making it harder for new or small, inexperienced companies to
obtain money. This has resulted in fewer new companies getting involved in the industry.
Prospective Payment System (PPS). Although PPS doesn't affect assisted
living directly, it has affected those companies that operate assisted living and have
ties to nursing-home corporations. As you watch the major nursing-home players scramble to
save their bread and butter (i.e., the nursing home side of the company), many of the
assisted-living divisions may suffer. Assisted-living growth in those nursing-home
companies will be stymied, and lay-offs in their companies will continue.
Good management. Constructing a set number of buildings at a certain
rate and by a certain time is reasonably easy to forecast and is based substantially on
predictable outcomes. It is another situation altogether to blindly presume that you will
operate at a certain expectation, because that relies heavily on finding and hiring the
right people. Development of properties has always been a minor problem compared to
finding and keeping good management. There are only so many people experienced in this
type of management in our industry. It takes time and money to find and train new people.
The typical search happens while the building is being constructed, which makes the time
available very limited.
We all know that when you don't have good people, your buildings suffer because they
don't fill on schedule. It follows that when the building doesn't fill, you can't
refinance it and pull equity out to finance other new development.
Acquisitions can dilute the management pool further. Although it would seem that a
consolidation would make more people available in the industry, key management employees
will often opt to get elsewhere rather than accept a new owner. This can create a scramble
for the new owner as he searches for more experienced people to fill vacated key
positions. This is a common picture in our industry because there are so many mergers and
acquisitions going on. It has taken its toll on the management pool.
The entire perspective has altered. Ten years ago, if you had asked an average regional
employee to be responsible for 15 properties in various states with different time zones,
they would have stared at you in wide-eyed amazement. If we added that most of the
buildings were new construction and that they were expected to take all of them to 95
percent within 12 months, they would have looked at you as if you were crazy. This,
however, is a common job description in our industry.
The other ingredient to add to this picture is that with an acquisition, we usually
need to train 10 or more executives from the company we just bought and also teach them
our existing company's culture and way of doing things. As a further consequence, the
people in the field who already work for us start screaming that they do not get as much
time as they used to with our corporate and regional staff. Is it any wonder that this all
results in buildings not performing like they are supposed to?
Too many chiefs. Here is one that always leaves me shaking my head.
Have you noticed that everyone is an expert about our industry? Analysts who have spent
less time in here than the average assisted-living director are making statements,
predictions and recommendations based on very little industry knowledge. They certainly
understand the complexities of business, and it's true that trends can effect certain
business cycles, but that is an incomplete picture. It will be a while before they
understand how regional issues effect an operator's success, and that succeeding or
failing will not be dependent on federal regulations or reimbursement. It will be
dependent upon how the grass-roots service in each state will drive market conditions. In
the interim, many analysts will continue to do what analysts do, and that is to gain an
audience for their predictions, no matter whether they are accurate or not. Misinformation
may confuse leaders and investors and make them much more cautious.
State regulations. Yes, they are getting tougher, but not unbearable.
As the rapid growth of our industry continues, the lack of attention we were receiving in
the past has raised some flags at the state level. We are starting to hear about some
homes being put into stop placement. While some providers may cringe, I would like to
point out that this is actually a positive thing for our industry. It will clear out the
poor providers. Tougher state laws will create a barrier to entry for the old
stereotypical apartment developer who wants to own an assisted-living company because they
think that there is so much easy money to be made. Quality care is not their focus, and
they think of assisted living as another real-estate venture, not the issue of being
entrusted with the lives of frail senior citizens.
So what does all this mean? What is happening? Those are good questions, but the answer
depends on who is doing the asking. I don't claim to be an analyst, but I will give you my
take on what is going to happen.
- Consolidation will continue because it has to. The big and more-profitable, publicly
owned, assisted-living companies will want to demonstrate growth and market dominance to
their shareholders, so they will continue to acquire and merge. The smaller, less
profitable, public companies will struggle, join the major companies and be swallowed up
because their options are limited. The merger mania will continue until there are only
five to six public companies in the market in the next 18 months.
- There will be fewer private companies starting up in the near term because equity
capital is tough to come by. Those who are starting will need to have extensive management
experience and a private source of equity with deep pockets.
- This may be a great time for private, well-established regional players. They have the
best of both worlds. They don't have to worry about growth or their stock evaluation, and
can take advantage of the chaos in the public sector. Their advantage can be enhanced
because they can spend more personalized time in each community and therefore gain market
share on a neighborhood by neighborhood basis.
- The states will continue to scrutinize regulations and upgrade area requirements for
medication dispensing, Alzheimer's training and staffing ratios. The federal government
will continue to be an influence.
- Stock prices will go up and go down based on the varying quotes by government officials,
aspiring analysts or the fluctuation in interest rates. This is not as great an issue as
you might suppose since these public companies control less then 8 percent of the
entire industry.
- Money will flow back into the industry. Some lenders are saying that we should see a
substantial inflow of equity capital back in the market by the third quarter of this
year.
- Nursing-home companies that have their hands full dealing with PPS will not be in the
growth mode into assisted living within the next year. You may see even more nursing-home
companies carve off these divisions and sell them to larger, pure, assisted-living
companies, reminiscent of the Manor Care/Alternative Living Services deal.
In conclusion, we should all be optimistic. The confusion of the last few months has
served us well. It has pushed fly-by-night moneymakers out of the sector. Barriers to
entry have risen in the industry, leaving more of it in the hands of the experts with
years of experience. The quality of our product has risen out of necessity in order to
compete, and this has been an enhancement for our customers. This very small slowdown in
an infant industry is a necessary step toward quality and commitment. In the end, our
entire spectrum of long-term care will be better off.
Dwayne J. Clark is president and chief executive officer of Aegis Assisted Living,
a start-up assisted-living company based in Redmond, Wash. With more than 13 years of
assisted-living experience, Mr. Clark is a former executive vice president of Sunrise
Assisted Living, a founding member of the Assisted Living Federation of America (ALFA) and
past president of NorALFA, the regional affiliate of ALFA. Within the next five years,
Aegis Assisted Living plans to build 35 to 40 communities throughout the Western United
States, emphasizing optimal living for its residents and creative care for Alzheimer's
disease.
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