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NIC on Financing

September 1, 2004
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Headed in the Right Direction by Anthony J. Mullen
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NIC ON financing
BY ANTHONY J. MULLEN

Headed in the right direction After several quarters of not-very-inspiring developments in capital markets, signs are growing ever stronger that long-term care has turned the corner. For example, permanent debt delinquencies decreased for skilled nursing in the first quarter of 2004, according to the NIC Key Financial IndicatorsTM compiled by the National Investment Center for the Seniors Housing & Care Industries (NIC). (These financial and performance indicators are reported quarterly to NIC by the nation's leading lenders, owners/operators, and appraisal professionals in the senior living industry. They 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-and, again, things are looking up. Figure 1. Occupancy rates for stabilized properties (those open 24 months or longer). ¬2004 National Investment Center for the Seniors Housing & Care Industries. Industry at a Glance
During the first quarter of 2004, the loan performance rate increased across all of the industry sectors-moving up from 93.1 to 94.2%. Despite this increase, the performing loan rate for permanent debt was still not where it should be. Ideally, the rate should be around 97 to 98% in order for the industry to be on par with other real estate classes.

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. Figure 2. Capitalization rates from transactions involving major appraisal firms specializing in the industry. ¬2004 National Investment Center for the Seniors Housing & Care Industries. Occupancy Rates
Occupancy rates in the first quarter of 2004 (for nursing homes, see figure 1) showed encouraging signs, especially for assisted living. The median occupancy rate for stabilized assisted living properties increased from 83 to 86%, compared with the first quarter of 2003, and from 85 to 86%, compared with the fourth quarter of 2003. The median occupancy rate for skilled nursing held steady, with a first quarter of 2003 rate of 86%, but actually fell slightly from the fourth quarter of 2003 rate of 88%.

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.

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