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NIC on Financing

March 1, 2006
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Innovative Models Provide One Answer for Outdated Nursing Home Stock by Anthony J. Mullen
    The seniors housing and care industry continues to show signs of stability and recovery, particularly for independent living, assisted living, and CCRCs. But that trend doesn't necessarily hold true for the skilled nursing sector.

Every quarter since 1999, the nation's leading senior living lenders, owners/operators, and appraisal professionals have reported their key financial and performance data to the National Investment Center for the Seniors Housing & Care Industry (NIC). The information is then posted as the NIC Key Financial IndicatorsÖ on and accessed free of charge.

For the third quarter of 2005, these indicators showed that loan volume rose to more than $1.2 billion-the highest amount ever tracked by NIC. At the same time, the percentage of performing loans also ticked up to 98.75%-again, the highest ever reported to NIC. That percentage is noteworthy, because it puts seniors housing on the same footing as the long-established office, industrial, retail, and multifamily asset classes.

Problems Remain for Skilled Nursing
The financial indicators also showed that occupancy rates were at a good level for seniors housing and care properties-with the exception of skilled nursing. During the third quarter, the median occupancy rates for independent living (at 92%) and assisted living (at 88.5%) remained stable from the second quarter, when they had reached the highest levels that NIC had tracked since the second and third quarters of 2000. The median occupancy rate also held steady in the third quarter of 2005 for CCRCs, at 91%.

But the skilled nursing sector showed a decline-continuing a slow, but perceptible change that has been taking place year after year. The median occupancy rate for freestanding skilled nursing went down from 87% in the second quarter of 2005 to 86% in the third quarter. For skilled nursing within CCRCs, the median occupancy declined from 86.5 to 84%.

A similar pattern can be found within the nation's top markets, although overall occupancies are higher. The NIC Market Area ProfilesÖ (NIC MAP), a quarterly service that tracks properties specifically in the 30 largest cities or metro areas, show that the median occupancy rate averages 96% for independent living, 95% for assisted living, and 96% for dementia care. But once again, skilled nursing care is the lowest, averaging 93%.

New Solutions for Low Occupancies
Why is skilled nursing having such difficulty in comparison to other sectors? For one thing, with nursing homes averaging 29 years of age and older, there's no question that the dispersion or disparity of (desirable) product in skilled nursing is greater than in the other three sectors.

Fortunately, some operators are starting to see this problem as a real opportunity, and they are coming up with innovative models and product mixes to differentiate themselves in the marketplace. Randy Bufford, CEO of Trilogy Health Services, LLC, recently shared his company's experience with industry executives on an NIC Executive Circle conference call.

The founders of Trilogy-which has properties in Indiana, Ohio, and Kentucky-have been in the skilled nursing business for 25 years. "Over that period, there has not been a significant nationwide repositioning, redevelopment, or new construction in the skilled nursing sector," said Bufford. "Some of the 30- and 40-year-old facilities were built with three- and four-bed wards, and those just are not marketable today. In fact, you'd even have difficulty in some markets selling semiprivate accommodations in skilled nursing. So unless there's a significant capital commitment to some of these older properties or a repositioning of them, I think we might see a further decline in occupancy or more beds being taken out of service."

To answer this need, the company has rolled out its Trilogy Health campus, a model best described as a small-market, nontraditional CCRC, with a continuum consisting of adult day health, assisted living, and skilled nursing. The company's prototype facility is approximately 48,000 square feet and features two separate but attached operations. On one side of the campus, there is a 68-bed skilled nursing facility, and on the other, a 35-apartment assisted living facility. They share common administrative and support space.

"The operations truly are separate," explained Bufford. "They have their own parking, entrances, dining room, and common-space areas. The kitchen and service areas are located between the two parts of the campus and provide hot food directly for both the assisted living and skilled nursing dining rooms.

"In most markets, the assisted living operation is broken down into 23 traditional assisted living units and a separate, 12-apartment, secure dementia wing that has its own complement of secure dining, living, and activity areas," Bufford continues. "Five of the assisted living apartments are set up for double occupancy, so we have a capacity of 40 on the assisted living side of the campus. The skilled nursing portion features a predominance of semiprivate rooms, but each has its own shower and bathroom. Market selection drives the number of private rooms, which varies from as few as four to as many as 32 in very upscale communities. Rehab services are provided from a therapy room located in the administrative section of the campus. It's set up to do both inpatient and outpatient services, so we can provide outpatient services to our assisted living resident population."

Recently, in two markets, Trilogy has established independent living patio homes surrounding the campus to give them a broader continuum. Based on their early success, Trilogy anticipates expanding that concept to additional markets.