Bad economic times can create great buying opportunities for smart seniors housing investors like Five Star Quality Care. In early December, the Newton, Mass.-based company acquired seven bankrupt seniors housing facilities owned and operated by affiliates of troubled Sunwest Management of Salem, Ore.

Five Star paid $44 million for the buildings. Four properties are in North Carolina, another three are in South Carolina. The buildings include a total of 601 units, most of which are assisted living apartments.

"It was an attractive deal," says Tim Bonang, director of investor relations at Five Star Quality Care. Under the terms, Five Star paid about $73,000 per unit. Bonang says Sunwest outbid Five Star two years ago for the same properties. That was "amidst a frothy market," recalls Bonang.

It's no surprise that building prices have declined lately as financing has dried up. Owners aren't selling unless forced to do so. Buyers are skittish, too.

Sunwest, the largest operator of assisted living buildings in Oregon, has been forced to sell properties to remain solvent because of its inability to get new bank financing. Sunwest executives hired a turnaround specialist in November to salvage the company. Sunwest did not return a call for comment. But a local business magazine says 13 Sunwest affiliated buildings have filed for bankruptcy so far.

The industry hasn't suffered a wave of bankruptcies, according to Casey Moore, managing director at Red Mortgage Capital, a seniors housing lender in Columbus, Ohio. And, considering the economy, seniors housing projects are performing well, he says. "Occupancies have fallen, but it's nothing catastrophic."

A newly released report by the National Investment Center for the Seniors Housing and Care Industry (NIC) shows that occupancy rates in independent living facilities in the third quarter of 2008 declined to 90.4% from 91.4% in the second quarter. Occupancy rates at nursing homes and assisted living facilities also edged lower.

Occupancies at Five Star's newly purchased buildings average approximately 70%. "We feel we can put programs in place to turn up the occupancy," says Five Star's Bonang. The buildings are located in markets where Five Star already owns other properties, which should result in some economies of scale, he adds.

Even though the buildings are not fully occupied, they should turn a profit because of low borrowing costs. The purchase was financed with cash and a UBS credit facility not expected to exceed the London Interbank Offered Rate (LIBOR) plus 50 basis points. "We think the buildings will produce some returns," says Bonang.

Five Star is primarily a building operator. It was spun off by Senior Housing Properties Trust about eight years ago as its operating arm. Five Star currently operates 210 buildings, of which it owns 25. The company went public in 2001. The share price of Five Star Quality Care (NYSE:FVE) closed at $1.32 on Dec. 17. A year ago, the stock traded at $7.63.

In another recent deal, Five Star leased eight Indiana properties purchased in August for $50 million by Senior Housing Properties Trust. The properties included Jefferson Manor in Kokomo. Red Capital arranged the financing. The seller was Retirement Management.

"These are interesting times," says Dave Hegarty, president and COO at Seniors Housing Properties Trust, based in Newton, Mass. He explains that the high property prices, of $100,000 to $200,000 per unit, observed in the market over the last few years have made it difficult for some buyers to cover capital costs.

"If you can buy now at a lower-per-unit basis, you can afford to lower rental rates and charge less than the competition," Hegarty notes.

Like many REITs, Senior Housing Property Trust (NYSE:SNH) has watched its stock price decline. The share price closed at $15.59 on Dec. 17. The stock traded at $20.96 a year ago.

Five Star and Senior Housing Properties Trust have another deal in the works. The trust recently paid $50 million for the 50-acre rental community Meadowood in Bloomington, Ind. Five Star plans to build an assisted living facility on the campus that currently features independent living and nursing units. The property is adjacent to Indiana University.

But, like most investors, both Five Star and Senior Housing Properties Trust are proceeding with caution. "We view our money as extremely precious," says Hegarty. "We will require a double-digit return going forward until things loosen up." Adds Bonang at Five Star, "We are going to exercise the highest level of financial conservatism."