Inside information: two new lender and investor surveys give insight into the financing environment. (Finance).

Providers can catch a glimpse into the likely activity of lenders and investors by looking at the results of an annual survey report produced by the National Investment Center for the Seniors Housing & Care Industries (NIC). Conducted jointly with CBIZ Valuation Group, the study tracks the accumulated perceptions, opinions and financing criteria of debt capital providers to the industry.

The 2002 Lender Survey shows that capital is available to the senior living industry, although from fewer sources. The survey also offers other types of information of interest to providers.

By the Numbers

First, the Lender survey showed that the number of loan providers to the seniors housing and care industry was down by one-quarter compared to 2001. It was down one-third from the number of active lenders in the late 1990s.

The good news is that the amount of debt capital provided is increasing. This is likely due to larger amounts of capital being provided per lender (and per loan) than to a greater quantity of deals. Lenders are expected to provide more than $7 billion to the industry before the end of 2002. That compares to $6.5 billion placed last year.

Most of the money provided to the industry (through the summer of 2002, when the surveys were filled out), went to assisted living. Almost one-third of the lenders (29.3 percent) said they were looking to increase the amount of money they lent to this sector. Only 13.4 percent said they would decrease it.

Also significant, the required capitalization rates have declined--meaning that lenders are placing more value on seniors housing and care properties to size their loans. Interest rates and yields have also gone down.

One likely explanation for some of the lower capitalization rates, consistent with what has been found in other NIC research, is that lenders are starting to recognize the difference--and assign more favorable terms to--"investment grade" properties that are stabilized and run by management with a good track record versus struggling properties that are in transition.

Also, evidence found in the NIC Key Financial Indicators--a quarterly tracking of financial and operational benchmarks found on www.NIC.org--suggests that the majority of this capital is being provided by local banks and in secondary or tertiary markets, as opposed to large metropolitan areas or provided by national lenders. This emphasizes the importance of building relationships with local lenders.

Consistent with the investment trends over the last couple of years, the most favored product types were those with a larger real estate component and a smaller healthcare component, such as independent living and continuing care retirement communities.

Lenders also listed skilled nursing facilities among their favored investments. This means these lenders are more sophisticated in their understanding of the risks and potential returns associated with this asset class.

However, only about 1 in 4 lenders thought that skilled nursing or assisted living was better from a reward-versus-risk standpoint than traditional real estate, such as hotel, office, industrial and retail properties.

Equity investor tallies

For the first time, the 2002 Lender Survey included the results of a separate Equity Investor Survey. The latter investigated the valuation criteria and investment appetite of the industry's equity suppliers.

This survey showed that those who provide equity financing had increased confidence in the industry. Sixty-two percent predicted that they would increase their investment activity in seniors housing and care during the next 12 months.

In addition, 80 percent of the equity investors expected to acquire one or more properties in the next year. Thirty-six percent expected torecapitalize (refinance and/or restructure) properties. And 37 percent expected to develop new properties, compared to only one-quarter of the lenders who said they intended to finance new construction. The survey also showed that the range of cost per bed to build new facilities is ranging up to $200,000 a unit for assisted living, though costs of $100,000 or slightly higher are more typical.

But nursing home performance issues were a concern for equity investors. They felt that skilled nursing offered the least opportunity to realize increased revenue or contribution to profit. That is because they believed even though private pay revenue would increase, Medicare and Medicaid revenue would not rise enough to offset inflation, and expenses would also go up.

As with the Lender Survey, required capitalization rates for equity investors have also declined.

The two surveys provide timely insights into how the financial community underwrites and views seniors housing investments. Other results include how projects are valued (including projects without earnings): how capitalization rates are derived; reasonable management fees; required reserves; important factors in underwriting decisions; and outlook for revenues, expenses and risk/return dring the next 12 months.

Types of Projects Investors Prefer as First Choice

Active Adult Projects                 5.8
Seniors Apartments With No Services    13
Rental Congregate, No Healthcare     11.6
CCRCs                                24.6
Freestanding ALP                     11.6
Freestanding Alzhaimer's              1.4
Nursing Homes                        27.5
Other                                 4.3

Percentages presented are of respondents who answered the question. 15.8
percent of respondents did not answer the question.

Note: Table made from bar graph

Capitalization Rates

(based on EBITDAR after deducting reserves)

                                     2001   2002

Seniors Apartments With No Services   9.8    9.6
Rental Congregate, Projects          10.3   10.1
Assisted Living                      11.1   11.1
Nursing Homes                        12.8  12.75
Freestanding Alzhaimer's             11.8   11.5
CCRCs                                11.1   10.9

Note: Table made from bar graph

Harvey N. Singer is research director of the National Investment Center for the Seniors Housing & Care Industries (NIC). Founded in 1991, this nonprofit organization uses proceeds from its annual conference to fund original research, particularly dealing with business strategy and capital formation for the industry. Visit www.NIC.org for more information