The long-suffering seniors housing industry has turned a financial corner. The delinquency rate for permanent loans on assisted living properties dropped from 10.01% in the second quarter of 2003 to 4.3% in the third quarter. For independent living, the figures were just as encouraging with delinquencies falling from 1.94% to only 0.25% during the same period, according to the National Investment Center for the Seniors Housing & Care Industries (NIC). The organization defines permanent debt as fixed-rate loans of 10 years or longer.
But don't expect another wave of construction anytime soon. The industry is still digesting the over-supply of facilities built in the mid to late-1990s. Anthony Mullen, director of research at NIC, says 86,000 assisted living units were built from 1997 through 1999 by the 75 largest developers compared with only 25,000 assisted living units built from 2000 through 2002.
“There is very little construction financing available today,” emphasizes Robert Kramer, president of NIC. “For the most part, well-performing operators will grow through mergers and acquisitions, rather than by building new facilities.”
“Traffic has picked up a lot at these properties as the economy has improved,” confirms David Schless, president of the American Seniors Housing Association. “There is a lot of optimism in the seniors housing sector today.” The top quartile of companies is performing well based on net operating income and occupancy rates, Mullen adds.
Still, occupancy rates are not at optimal levels. In the third quarter of 2003, the median occupancy rate for assisted living facilities was 85%. Although that's up from 83.5% in the first quarter, Kramer says assisted living facilities need an occupancy rate of at least 88% in order for investors to get a return on equity. In 2004, he expects the median occupancy rate to be stable or even increase.
Rental rate increases at assisted and independent living facilities aren't expected to be as strong as in the last few years. “I have seen 4% to 5% increases each year for the last several years,” says Kramer. But this year, he predicts that increases will probably range from 3% to 4%.
Permanent financing will be more available in 2004 and 2005 than at any time in the last few years because of improved occupancy rates and stabilizing liability insurance costs, says Scott Kavel, director of seniors housing for Collateral Mortgage Capital in Atlanta. In recent years, it wasn't unusual for liability insurance costs to climb as much as 500% per year.
The need for permanent financing is great, says Kavel, because many owners of assisted living facilities have been using bridge loans for 12 to 36 months longer than anticipated. Permanent financing is contingent on improved performance. Whereas bridge financing is provided on a recourse basis, permanent financing is given on a non-recourse basis. In the last year, consolidation has picked up, he says. “Some troubled buildings have new owners.”
Investor interest in seniors housing has increased significantly over the past several months, observes Kramer, particularly for stabilized properties with occupancies of 90% or higher. “Investor interest has driven prices up for these properties and has given opportunities to some of the original investors to cash out.”
As an example, Whitehall Street Real Estate Funds, a private entity managed by Goldman, Sachs & Co., announced early this year that it would sell its interest in Horizon Bay Senior Communities, predominantly an operator of independent living facilities, to CNL Retirement Properties.