NIC On Financing


The Slow Turnaround


It wasn’t long ago-2002, actually-that high-powered investors in seniors housing were bemoaning the apparent cratering of nursing homes and assisted living facilities as major capital attractions. Last year, though, saw a gradual reversal of that mood-at least for nursing homes-if sentiments expressed at October’s National Investment Center for the Seniors Housing and Care Industries (NIC) conference are any indication.

Although NIC surveys show investors and lenders still feeling skeptical about the profit potential of nursing homes, this year’s good news-or lack of bad news-about the sector has investors looking again at these high-cap-rate properties and bargain for-sale signs and thinking positively. NIC President Robert G. Kramer noted that none of 2003’s projected horrific scenarios of Medicare cliffs, Medicaid budget slashes, or waves of liability litigation had played out to any significant degree. Whether this good news will hold up in 2004 is a large question; Medicare is not yet finished with costly adjustments, states are still struggling with their budgets, and liability claims can have long tails. And there’s no getting around this year’s short-term debt delinquency rate in the sector of more than 13%. Indeed, some conference observers wondered whether investors weren’t flirting with irrational exuberance. Yet two vice-presidents from nursing home financing stalwart GE Capital Healthcare Financial Services-John Cobb and Gregory Scrine-offered reasonable rationales for investor optimism: the attractiveness of cap rates approaching 14% and the presence of regional operators “with a better idea” looking to prove it by buying and growing nursing homes.

Assisted living, however, still seems locked in the doldrums, with its short-term debt delinquency rate now approaching 10%. NIC studies have disclosed a 35% reduction in the number of seniors housing investors overall, and Kramer hypothesized that most of those leaving were relative neophytes who got burned by assisted living overbuilding after the high-flying mid-1990s. This might be interpreted as good news, noted Kramer, in that some low-performers are “getting washed out of the field”-a process that, however salubrious, might take another couple of years to work out.

All this mixed news about long-term care aside, investors and lenders still show more optimism in general about the more independent, less clinical side of the housing spectrum, according to this year’s NIC surveys. This optimism was belied, though, by a bit of a shocker: In a period when occupancy rates for most levels of seniors housing had at least stabilized (generally in the mid-80s, with the slashing downturns of assisted living seeming to have ceased), the congregate living sector saw its occupancy rate decline from 94 to 89%. In a Seniors Housing & Care Journal article discussing this phenomenon, longtime NIC leader Anthony J. Mullen offered some hypothetical explanations-to wit: (1) increased competition from all-ages, market-rate senior apartments without services and active adult developers offering continued home ownership with amenities; (2) a basic lack of knowledge among seniors concerning their age-qualified options and the advantages of making a single move; and (3) a growing negative perception of senior facilities among those who do, at least, recognize age-qualified options. Mullen noted that one of NIC’s own studies, released at the conference and done in collaboration with the ProMatura Group research firm, indicated that people living in age-qualified facilities tended to be much more satisfied with life than their all-ages, apartment-dwelling counterparts. He therefore urged developers of age-qualified properties to start marketing their advantages more aggressively.

The field got generally poor marks on that score from conference attendees. The remarks of Mark J. Shulte, chairman and CEO of Brookdale Living Communities, discussing the continuum of care were typical: “Providers’ own advertising is blurring the picture. When you have SNFs saying ‘Be as independent as you can’ and independent living communities saying ‘We’ll provide all the care you need,’ it’s no wonder there’s confusion.” Michael B. Lanahan, chairman and CEO of Greystone Communities, opined that CCRCs could double and even triple their customers with adequate consumer education.

When all is said and done, though, the seniors housing investment game is still very much afoot. Remember the aforementioned 35% decline in investors? That doesn’t seem to matter in terms of total investment dollars, which, as of mid-2003, were on track to reach about $10 billion for the year-half again as much as the 2002 total. In short, the money is still out there, still looking for good opportunities. For those facilities-SNF, assisted living, or otherwise-that inspire confidence operationally and culturally, availability of capital on relatively reasonable terms should continue to be no problem. NH

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Publications referred to in this article and available from NIC:

  • The 2003 Lender Survey: Preferences in Financing Seniors Housing and Long Term Care Projects
  • Understanding Seniors Housing Demand, Choices, and Behavior: Insights From the AHEAD and HRS Studies
  • Seniors Housing & Care Journal
  • (2003, vol. 11, no. 1), the journal of the NIC Seniors Housing & Care Program at Johns Hopkins University

Also available is the Fitch/NIC Investment Analysis of Independent Living Properties, October 2003. For further information, phone (410) 267-0504 or visit

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