NIC on Financing

NIC ON financing
BY ANTHONY J. MULLEN

Headed in the right direction

But the trend of the combined delinquency rate for the entire seniors housing and care industry was positive. In the first quarter of 2004, the rate was 3.7%, as compared with the 4.6% previously reported in the fourth quarter of 2003. According to industry leaders who participated in an NIC Executive Circle conference call on June 29, the decline in the delinquency rate suggested the industry is headed in the right direction.

For the skilled nursing sector, the decrease in permanent debt delinquencies offered was encouraging. In fact, compared with last year’s fourth quarter, delinquencies in permanent debt were down from 12.54 to 10.9% in the first quarter of 2004. For assisted living, permanent debt delinquencies also dropped, from 6.72 to 6.15%. Although the numbers are trending in the right direction, it is clear that a number of troubled properties still have yet to work their way through the system. In independent living, however, permanent debt continued its stellar track record, with no delinquencies among the largest lenders.

Short-term debt delinquencies, however, increased slightly for skilled nursing in the first quarter, from 7.18% in the fourth quarter of 2003 to 7.2%. Conversely, assisted living significantly reduced its short-term debt delinquencies to 2.28%, compared with 4.89% from the previous quarter.

During the recent NIC Executive Circle conference call, Frank Morgan, managing director of Jefferies & Co., in Nashville, commented that the indicators reflect what he’s currently seeing in the marketplace. Morgan, who closely tracks several of the publicly traded companies, says the last few years show a slow recovery in occupancy levels across all of the industry sectors: “In general, we’re experiencing a reduction of new capacity coming online and also seeing a growing acceptance of service delivery within seniors housing and care.”

For assisted living, the average net move-in rate stayed below 3 (2.7) net move-ins per month. This simply means that there’s still considerable room for improvement for those properties that have been open fewer than 24 months.

Decline in Capitalization Rates
Compared with the fourth quarter of 2003, there was a decrease in the average capitalization rate in the first quarter of 2004 for skilled nursing (figure 2), independent living, and assisted living properties. For example, in skilled nursing the average capitalization rate fell from 13.6 to 12.9%, which indicates that investors have become more confident in investing in skilled nursing properties. Capitalization rates for independent living decreased from 10.3 to 10%, while assisted living showed a small decrease in its rates, from 11 to 10.9%.

Results from this quarter also showed some compression in the range of capitalization rates for skilled nursing, with a spread of 620 basis points, compared with 710 in the previous quarter.

Bob Noonan, chief investment officer of Benchmark Assisted Living in Wellesley Hills, Massachusetts, who also participated in the recent conference call, says the reduction in capitalization rates is very positive for the industry, as investors are becoming more comfortable with risks associated within the seniors housing and care product type. “Although there aren’t a huge number of deals getting done, more capital is gravitating to the marketplace, which is encouraging news for operators that have class ‘A’ properties with occupancies of 90% or higher,” says Noonan.

For more detailed breakdowns on the first quarter 2004 Key Financial Indicators, visit www.NIC.org.