Cautious Optimism. (NIC on Financing).

There weren't exactly fireworks at the 12th annual conference of the National Investment Center for the Seniors Housing and Care Industries (NIC) in October--but there wasn't serious negativity, either. Unless, that is, you count the nursing-home provider representatives there, who made no secret of their profound displeasure with federal government inaction on reimbursement issues. Dr. Charles P. Roadman II, president of the American Health Care Association, charged the Bush administration and Congress with lack of leadership; other nursing home spokespeople pulled no punches in their dire assessments of the future if the inaction persisted. And all this in front of potential financiers who typically prefer to hear good news.

One of those financiers--William E. Shine, executive vice-president for healthcare at GMAC Commercial Mortgage Corp.--did acknowledge that if Congress, in this year's lameduck session, fails to address the Medicare "cliff" cutbacks, the size of new loans to nursing homes would likely be reduced considerably, although he doubted that the viability of the industry would be destroyed.

By and large, the investors in attendance--about 1,200, the second-largest attendance in the conference's history--still seemed interested in exploring new opportunities in a field that, while no longer "hot," has obvious long-term potential. There's a growing consensus, for instance, that the nursing home sector has "bottomed out," although there remains considerable concern about its reimbursement, regulatory, and staffing environment, and--more than ever--the liability crisis it has faced since those expensive misadventures in Florida and Texas. Investors who expressed some mystification last year about liability insurance got plenty of information about it this year: two hour-and-a-half sessions, to be exact. Still, some 30% of the active investors surveyed in NIC's annual lender survey released at the conference said they planned to increase their investment in nursing homes in 2003.

Assisted living is still in the relative doldrums compared to a few years ago--for example, net move-in rates in new facilities held steady at less than two per month, according to the NIC survey--but there appears to be considerable construction activity occurring in select locations. In fact, 39% of equity investors that NIC surveyed reported having built assisted living facilities this year. What's more, the assisted living sector easily led all other senior housing categories in sheer dollars invested by lenders in 2002.

Even though lenders said they still preferred nursing homes as an investment, they appear to be suffering from unrequited love. Much of their real enthusiasm is for investment in less care-intensive properties, particularly CCRCs with services for independent elderly and rental congregate properties with no healthcare services at all. Nearly 40% of respondents in the NIC survey said they planned investments in those sectors next year, indicating that the less acute the healthcare involvement, the better it may be for senior housing developers seeking financing at the national level. (Indeed, four of five investors found "traditional real estate" to offer better potential reward for risk than nursing homes or assisted living.)

Yet glimmers of hope shined through for the senior housing and care sector as a whole. The NIC survey disclosed that current and projected funding for 2002 could well exceed the investment totals for 2001. And about half of survey respondents noted an increase in investor confidence this year, compared to 36.5% who did so in 2001; 62% expected an increase in investment activity next year, with 80% expecting to acquire existing properties, and 37% planning to build new.

Thus does hope spring eternal, even on Wall Street. Anthony Mullen, chair of NIC's research committee, observed that "the marginal debt providers have left the field, while the active, committed ones have stepped up their activities." Robert G. Kramer, NIC executive director, added, "There was overenthusiasm on both sides of the fence a few years ago, but not any more. Today, we have smarter investors and better operators." And, he might have added (but didn't), what doesn't kill you makes you stronger.

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