A stabilizing, but still troubling, situation. (Nic on Financing).

Looking for accurate benchmarks for gauging your facility's performance against that of other skilled nursing facilities, or to see how SNFs compare with other sectors in the senior living continuum?

For more than two years, the National Investment Center for the Seniors Housing & Care Industries (NIC) has been compiling the most up-to-date collection of financial benchmarks in the senior living industry. It is also the largest data source for this type of information. For instance, more than 3,200 properties in all seniors housing and care sectors--accounting for more than a third of a million units--reported their first-quarter 2002 occupancy rates to NIC. In addition, NIC tracks quarterly information on loan volume, loan performance, move-in rates, construction starts and capitalization rates, as reported by the industry's leading lenders, owners/operators and appraisal professionals. (This information is provided free of charge at www.NIC.org.)

Here are some key data from NIC's most recent study:

Nursing home occupancy rates. Since hitting a low of 82.4% in the fourth quarter of 2000, average occupancy rates for skilled nursing throughout 2001 stayed close to that level. Again, for the first quarter of 2002, skilled nursing occupancy rates showed signs of leveling out, although there were still no signs of a significant improvement.

Although the first-quarter 2002 median (i.e., midpoint number among companies) occupancy rate for skilled nursing stayed at 85%, the mean (or average) occupancy rate did go down a percentage point from the previous quarter, to 82.5%. To have that degree of spread--a 2.5 percentage point difference--between the median and the mean indicates that there were likely a number of very low performers that pulled down the average.

And that is significant, according to Harvey N. Singer, NIC's research director, because it confirms what people believe anecdotally. That is, there are some nursing homes that have not yet adjusted to losing their intermediate-care residents to assisted living and, beyond those, facilities that are simply not managed well. No doubt, some SNFs have been hurt competitively because they are housed in older physical plants that need renovation (and, according to some experts, if these facilities don't renovate, many will be forced to close).

Construction lending. The first-quarter 2002 Key Financial Indicators showed no construction lending for any product type from the major national lenders. This information is consistent with the very low number of starts reported by major national providers in the Seniors Housing Construction Report, released recently by the American Seniors Housing Association.

This could be good news for those assisted living markets where overbuilding has been a problem; it indicates that demand could potentially catch up with supply and fill beds. But this information needs to be balanced against activity reported in construction starts overall, where there was, in fact, an increase in every seniors housing and care category. Assisted living went from 53 to 71 starts nationally, a pace sufficient to generate about 15,000 more units a year, if all these properties are built. But these appear to be local projects in secondary markets, neither built by the major national providers nor funded by national lenders. As such, they should not significantly impact occupancy in the primary markets, the top 25 to 50 major metropolitan areas where major national providers have tended to build.

Loan performance. For the first quarter of 2002, the NIC Key Financial Indicators showed that loan performance--categorized here as loans being paid back as required, rather than loan restructurings, delinquencies or foreclosures--stayed approximately the same as the previous quarter. Approximately 90% of outstanding loans were in the "performing" category. That does not necessarily mean that 10% of the outstanding loans were failing; most were restructured and, fortunately, most of those are now "performing," at least under the restructured terms.

About two-thirds of loans reported were in the category of short-term debt. This area seems to be stabilizing (i.e., delinquencies were slightly down). But, says Anthony J. Mullen, managing director of KMF Senior Housing Investors, LLC, and chairman of the NIC Research Committee, the overall number of delinquencies is still not at a level the lenders would like it to be. Current delinquencies appear to be a result of borrowers moving from fixed-rate borrowings to shorter-term, floating-rate loans--a situation, explains Mullen, that results from the rise of credit finance companies (which specialize almost exclusively in short-term, floating-rate loans) as one of the primary sources of capital in the seniors housing and care industry during recent periods.

On the permanent debt side, the skilled nursing sector ran close to a 10% delinquency rate. There were, however, virtually no delinquencies in stabilized assisted living projects. Mullen calls that good news for the industry, because once well-underwritten and well-managed projects stabilize, the risk-adjusted return to lenders is quite high. He also sees signs that nursing facilities are themselves starting to stabilize.

Valuation gridlock. According to the Key Financial Indicators, the total amount of industry project financing placed by the major national lenders in the first quarter of 2002 totaled $444 million, down from $544 million in the fourth quarter of 2001. Moreover, transactions seemed to be down by 50% or more.

Of course owners and operators want to get deals done, especially those wanting to rid themselves of poorly performing facilities. Opportunity investors also want to close these deals; they want to buy something at less than 100 cents on the dollar, and then work to improve the operations. Capital providers not only want to make deals, but they say that, in fact, they have money to invest.

The reduction in project financing does not, therefore, seem to be caused by a lack of available capital or opportunities. It does suggest, rather, a gridlock between fundamental bid and asked price, and an overall lack of agreement between sellers and buyers on valuations and pricing. (This issue in itself is becoming so important that it will be the focus of the NIC conference this October in Washington, D.C.)

Refinancing of short-term debt. Senior living providers and financiers can benefit from NIC's Executive Circle, a members-only section of its Web site. Each quarter, leading providers, as well as debt/equity investors, are asked to respond to a survey on a hot-topic issue. Results are then discussed during a quarterly conference call in which industry leaders participate, and members can listen in and ask questions.

Most recently, Executive Circle members were asked about their maturing short-term debt. Lenders reported that they had about $3.5 billion of seniors housing and care loans in their portfolios becoming due this year. With the difficulty the industry has had lately in accessing debt capital, what would be the implication of this loan volume becoming due this year? There could, very likely, be an increase in the cost of short-term debt capital to entice existing or new lenders to refinance properties that are not yet stabilized or have an excess element of risk. The good news is that lenders generally prefer to work out situations with borrowers, as opposed to taking a tougher stance on delinquency.

What this all means. With occupancy rates holding steady (except for some very low-performing facilities), short-term debt performance stabilizing and permanent debt performance starting to become stable, skilled nursing facilities seem to be holding their own at the moment. Providers, though, might want to keep up to date with the pulse of the industry by frequently checking their facility performance against industry benchmarks.

Robert G. Kramer is executive director of the National Investment Center for the Seniors Housing & Care Industries. Founded in 1991, NIC is a nonprofit organization that uses proceeds from its annual conference to fund original research, particularly that dealing with business strategy and capital formation for the industry. For more information about NIC's Key Financial Indicators and SelectExec Poll, its research and its annual conference--scheduled next for October 16-18, 2002, in Washington, D.C.--call [phone] or visit www.NIC.org. To comment on this article, please send e-mail to [e-mail].