Can you spare a few million? Loan performance at an all-time high.

It can't get much better than this. As confirmation that the seniors housing and care industry is continuing on its road to recovery, the percentage of reported performing loans were the best ever during the first quarter of 2005. In addition, there were no restructured loans and occupancy rates held steady.

Every quarter since 1999, the National Investment Center for the Seniors Housing & Care Industries (NIC) has collected key financial and performance data from the nation's leading senior living lenders, owners/operators and appraisal professionals. The data is then posted as the NIC Key Financial Indicators[TM] (KFIs) on www.NIC.org. Anyone can access the information free of charge.

According to the KFIs, the percentage of performing loans increased to 97.8 percent in the first quarter of 2005--the highest percentage ever tracked by NIC. This was an increase from 95.9 percent in the third quarter of 2004 and 96.9 percent in the fourth.

Also, for the first time since NIC has been collecting the data, there were no restructured loans reported by the industry. This is good news, because lenders tend to restructure loans to avoid having the in go delinquent.

But before we get too optimist, there is one note of caution. That is, loan performance is still not where it should be as an industry. For example, lenders to other real estate classes, such as multifamily or retail, look negatively on anything above a 1.5 percent delinquency rate. But, the senior living industry is clearly inching its way back to that number. The first quarter KFIs showed that the industry is at 2.2 percent delinquency, which is down from 3.7 percent in the first quarter of 2004 and 2.6 percent during the fourth quarter of that year.

Occupancy Rates Holding Steady

Another sign that the industry is recovering is in the slow, but steady, growth of occupancy rates. During the first quarter of this year, median occupancy rates held steady for assisted living at 88 percent, after an increase from 87 percent during the third quarter of 2004. By analyzing the growth pattern of occupancy rates over the previous several quarters, it's likely that the bottom in assisted living was reached early in 2004.

In skilled nursing, however, the median occupancy rate declined from 88 percent during the fourth quarter to 87 percent during the first quarter of 2005. In comparison, independent living remained at 90 percent, where it has stood for about five years. CCRCs also lost some momentum, going from an all-time high of 92.5 percent in the fourth quarter to 91 percent this time. More than 3,200 properties representing more than 375,000 units reported their data to NIC

What This Means to Lenders

What do lenders think about the current property fundamentals and how do these relate to their portfolios? Also, how do lenders' watch list, restructuring and delinquency categories compare from the first half of 2004 to the first half of 2005?

"We've been very fortunate in that we haven't had any loan losses or non-performing loans since inception," said Jim Pieczynski, managing director of the Healthcare Real Estate Group at Capital Source Finance, who participated on a recent NIC Executive Circle conference call. "Most of our loans are performing at or above the underwritten numbers when we did the deals," he continued. "We have had some loans, however, that have certainly underperformed. With some of these, we decided that it probably makes sense to exit out of our relationships with them. And they've actually been able to go out in relatively easy fashion and get refinancing."

Pieczynski added that any underperforming loans he sees are more on the assisted living side, rather than with skilled nursing or independent living. "You see a lot of situations where somebody buys a property at 65 percent occupancy and the plan is to bring in new management, which they believe is going to bring additional occupancy into the building," he explained. "What I find is that, in general, most people tend to over-project when the occupancy rate is going to increase. As a result, it fills slower than expected."

Sarah Sumner Duggan, senior vice president at GMAC Commercial Mortgage, was another lender on the Executive Circle call. "For our first quarter of 2005, overall performance was solid in every category," she noted. "I wonder if the KFI data for the first quarter might have reflected some skilled nursing seasonal downtick, which is typically normal for that time of year?" She added that her company has had a significant reduction in its watch list. In addition, she is seeing increased activity in market acquisitions for all product types. "For example, in states like Texas and Florida, where for a long time there was a lot of inactivity, there's been an increased activity in skilled nursing acquisitions," she stated.

How about preferred property types? Are lenders seeing more interest in any particular sectors from their clients?

"Most deals that are coming our way in construction lending are on the assisted living and independent living sides, than on the nursing home side," said Pieczynski. "However, a trend that I expect to see over the coming years--as the age of many buildings top 30 years--is for construction activity to pick up on the nursing side to replace the older facilities. There are already compelling needs, such as in states like Texas. There, operators are realizing that they can buy the beds of a facility for $2000 a bed, tear down that facility, put up a new one, and in effect, be able to corner a large share of the market ... because there just aren't that many new facilities out there."

According to Duggan, GMAC will be very active with construction lending this year. "We already have closed several transactions and are looking to increase our activity, with the majority of these also on the independent living and assisted living sides," she said. "However, looking long term, I agree that the real opportunity in construction is with skilled nursing. As Jim mentioned, obsolete buildings are going to be a funding issue, as well as a lending opportunity, down the road for the skilled nursing industry."

With market fundamentals improving, and the lending and investment activity picking up, things can't help but look optimistic for the seniors housing and care industry. But providers need to be forewarned that these opportunities may only apply to the best-run facilities in desirable locations. Still, if you're an operator, there's a lot of good news out there.

Anthony J. Mullen is research director for the National Investment Center for the Seniors Housing & Care Industries (NIC). Founded in 1991, this nonprofit organization provides information about business strategy and capital formation for the senior living industry Proceeds from its annual conference--scheduled next for September 28-30, 2005, in Washington, DC--are used to fund research on issues of importance to the industry. NIC's quarterly Executive Circle calls, which feature discussions with prominent industry executives on issues of Importance to the senior living industry, are available only to subscription members. For more information, visit www.NIC.orgor call [phone].