Still waiting for easy capital

This has been one rollicking year for senior housing developers and owners-and not in a fun way. What with the anemic economy, debt ceiling debate, stock market volatility and Medicare cuts to skilled nursing facilities, there’s very little good news to hang one’s hat on, save for one demographic positive: the burgeoning population of aging baby boomers set to utilize senior housing and related services.

The year didn’t start out so negatively; in fact, the first six months saw an upsurge in mergers and acquisitions (M&A) activity and consolidation in the senior housing sector, driven by REITs (real estate investment trusts) and their ready access to inexpensive equity and debt capital.

“In the first half of 2011, led by healthcare REITS, senior housing was in some instances the most active sector in commercial real estate in terms of deal flow,” says Robert Kramer, president of the National Investment Center for the Seniors Housing & Care Industry (NIC). “[REITs] saw an opportunity to move when others weren’t yet able to sew up deals, thinking they had weathered the worst of the recession.

“The REITs were able to be both aggressive and selective at the same time,” he continues. “And because their cost of capital was so much less, private equity really couldn’t compete with them, particularly on the larger deals.”

Kramer is blunt in his late-summer assessment of the development community’s mood: “Extreme nervousness and uncertainty,” he asserts. “When CMS [Centers for Medicare & Medicaid Services] in early summer announced its proposed rules for RUGs-IV and then the final rule was announced in August-that basically suspended all M&A deals in the skilled nursing sector. People waited to see what would happen, particularly in the larger deals, and I think now they’re reassessing. There’s going to be less money on the table on the Medicare side.”

Concerns over the world and domestic economies have triggered two things, Kramer says. “One, people are more cautious in the marketplace and you’re seeing that reflected in senior care, housing and REIT stocks. Also, people are worried about the future-are we going to have a double-dip recession? We’re certainly in for a bumpy ride.”

Consumer uncertainty-and consumer fear-are having a major effect on seniors’ buying decisions. Persistently high unemployment and the continued poor residential housing market directly affect senior housing-especially for independent living and CCRCs (continuing care retirement communities). “People are bracing for another six to 12 months of, at best, mixed economic news,” says Kramer. “That means seniors will delay moves, just because of the uncertainty. It’s difficult for people to make a decision in that environment. At the same time it has less of an effect on assisted living and memory care, simply because they are more need-driven.”


Overall, the amount of new inventory coming online has fallen to historic lows for senior housing and, in construction starts, it’s still very low except for a slight pick-up in assisted living, NIC reports. Independent living growth remains flat. Yes, money is a bit easier to come by than a year ago, but for construction financing it’s still very tough and for the developer lacking an established track record it’s pretty near impossible unless they have a strong relationship with their bank, Kramer suggests.

Any activity primarily will involve developers who are able to work with established and larger national and regional lenders. “It’s relationship lending for people who have an established track record in the industry,” says Kramer. “There’s also some activity with local lenders such as community banks, but it’s very small scale.”

Federal funding options through Fannie Mae and Freddie Mac are still viable, reports Kramer, and many senior housing developers have refinanced or received permanent financing through these sources, “but [Freddie and Fannie] don’t do new construction so they don’t fund development. However, while they only fund stabilized properties, they continue to be an attractive, necessary source,” he says. On the skilled nursing side, HUD, through its LEAN program, is an important source of financing even though “it takes a lot of time and jumping through hoops to get it.”


Despite the economic doom and gloom, deals are out there to be made and money to finance them can be found. But developers will need to be sharp and on their game to gain a competitive edge when vying for limited capital. The key is being able to demonstrate results, says Kramer.

“Don’t just claim results, but document your results and demonstrate them,” he says. “The ability to show how you’re outperforming your competitors and outperforming the market is going to make you attractive.” To that end, NIC recently announced a new quarterly report in conjunction with research firm Real Capital Analytics (RCA) that tracks individual senior housing transactions in the top 100 metropolitan areas going back to January 2008, including the parties involved, sale price and cap rate, among other data.

The same results-driven focus is imperative to demonstrate to the senior consumer as well. Being able to document how you deliver results in terms of quality of life-not just quality of care-for your residents, is huge, says Kramer. “‘Do you offer a lifestyle that’s truly attractive and appealing to me, that enables me to have as much freedom and autonomy and independence as possible, given whatever may be my physical or other limitations?’” he poses. “The more operators are able to demonstrate how they deliver quality of life as well as quality of care demonstrates value to customers-and that gives you a chance to really distinguish yourself from everyone else in the market.”

Long-Term Living 2011 October;60(10):28-30

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