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NIC on Financing

June 1, 2004
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A Look at the Latest NIC Key Financial Indicators by Anthony J. Mullen
inperspective

NIC ON financing
BY ANTHONY J. MULLEN

A look at the latest NIC Key Financial Indicators Permanent debt delinquencies increased for assisted living and skilled nursing in the fourth quarter of 2003, according to the NIC Key Financial IndicatorsÖ compiled by the National Investment Center for the Seniors Housing & Care Industries (NIC). These financial and performance indicators, reported quarterly to NIC by the nation's leading lenders, owners/operators, and appraisal professionals in the senior living industry, are posted free of charge at www.NIC.org.

In addition to loan performance, the indicators give operators and investors a national snapshot of other financial and performance benchmarks, including loan volume, occupancy rates, move-in rates, and capitalization rates.

Higher Delinquency Rates
During the fourth quarter of 2003, the seniors housing and care industries had a combined delinquency rate of 4.6%. This percentage was higher than the 3.6% that was reported for the third quarter of that year. Unfortunately, the increased delinquency rate shows that the industry still has more troubled properties than optimal.

Also, the reported increase in permanent debt delinquencies took place only in assisted living and skilled nursing, as no permanent debt delinquencies were reported for independent living during that period. Assisted living and skilled nursing were also the only sectors showing an increase in short-term debt delinquencies.

Steady Occupancy Rates
Occupancy rates during the fourth quarter offered slightly better news. For assisted living, the median and average occupancy rates held steady at 85%. The median occupancy rate rose slightly for skilled nursing from 87 to 88%.

For CCRCs, the median (90%) and average (89.5%) occupancy rates dropped slightly from the third quarter of 2003. This was attributed mostly to drops in occupancy of independent living units within the CCRCs.

Results from the fourth quarter of 2003 are continued evidence that occupancy rates for assisted living are not going to jump back up to the mid-90s any time soon. But Kathryn Sweeney, principal of AEW Capital Management, who was a guest speaker during a recent NIC Executive Circle conference call with industry leaders, noted that her company is seeing higher occupancy rates for "Class A"-the very best operated-assisted living companies. "Consumers are making purchases based on quality," she said. "This means that these properties will continue to receive favorable pricing from lenders and buyers." Interest From Traditional Lenders
In fact, signs point to growing interest in the seniors housing and care industries by the financial community.

Loan volume placed in the fourth quarter of 2003-as reported by major national lenders, including Freddie Mac and Fannie Mae-was $763 million in comparison with $834 million in the fourth quarter of the previous year. However, speakers on the Executive Circle call predicted that traditional lenders should become more active and the industry should see an increase in loan volume as the appetite for the higher yields in healthcare and seniors housing continues to grow.

"We're seeing a huge increase in the desirability of the high-yield market for the private placement of corporate debt in healthcare, particularly with the healthcare REITs," said Arnold Whitman, CEO and co-chairman, Formation Capital, LLC, during the call. "Because rates have dropped so dramatically, the extra yield makes it more compelling for traditional debt buyers to invest in seniors housing and care than in apartments or other real estate classes. This, in turn, puts pressure on traditional mortgage lenders to lower their interest rates." In particular, he expects loan volume to improve for assisted living and skilled nursing in 2004.

Decline in Capitalization Rates
More good news: The average capitalization rate came down slightly in the fourth quarter of 2003. For assisted living, the average capitalization rate decreased slightly from 11.4 to 11. For skilled nursing, the rate dropped from 14.2 to 13.6.

"The current capitalization rate spread reflects what we're seeing happen with Class A properties and what they're trading at," said Sweeney. "This is certainly good news for operators with stabilized, cash-flowing properties that have occupancies of 90% or better. For those operators, I think we will continue to see a lower cost of capital."

Spreads also decreased. Assisted living had a 380 basis point spread in the fourth quarter, compared with a 690 spread in the third quarter. The highest capitalization rate for the sector during the fourth quarter was 13.8 and the lowest was 10.

Likewise, skilled nursing saw a decrease in the basis point spread from the third to the fourth quarters, going from 950 to 710. The highest capitalization rate for this sector was 18.6 and the lowest was 11.5 during the quarter.

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