SNFs on an upswing: Recent research shows investment environment improving. (Finance).THE NURSING HOME SECTOR HAS CERTAINLY HAD ITS FAIR share of troubles lately and providers know that as industry problems mount, financiers tend to shy away. But better times seem to be on the horizon. Indications that the sector is once again attracting capital can be found in recent National Investment Center for the Seniors Housing & Care Industries (NIC (1) (Network Interface Card) See network adapter. See also InterNIC. (2) (New Internet Computer) An earlier Linux-based computer from The New Internet Computer Company (NICC), Palo Alto, CA. ) research. Supply meeting demand Perhaps the most promising indicator that the nursing home sector will revitalize re·vi·tal·ize tr.v. re·vi·tal·ized, re·vi·tal·iz·ing, re·vi·tal·iz·es To impart new life or vigor to: plans to revitalize inner-city neighborhoods; tried to revitalize a flagging economy. is that consumer demand will outweigh out·weigh tr.v. out·weighed, out·weigh·ing, out·weighs 1. To weigh more than. 2. To be more significant than; exceed in value or importance: The benefits outweigh the risks. supply in the not too distant future. Updated projections in the Case for Investing in Seniors Housing and Long Term Care Properties, a primer for institutional investment in the seniors housing and care industry prepared in conjunction with Pricewaterhouse-Coopers LLP LLP - Lower Layer Protocol and released in December 2001, show that if the present pace of little to no nursing home construction continues, demand will catch up with and, in fact, exceed supply over the next decade. Of course, the key question for operators and investors is when? Although it's less clear exactly when this "demand freight train" will arrive, it's certain that with a growing seniors population-and with no addition to supply-there will be excess demand. Therefore, the need for investment capital will be not only justified, but accelerate. How lenders view Skilled Nursing Lenders have finally shifted to a more positive view about nursing homes. The 2001 Lender Survey, an annual report that tracks the perceptions, opinions, and financing criteria of debt capital providers to the industry, indicates that a number of lenders believe the nursing home sector is on a rebound. Two areas of the survey particularly point to this trend. First, the percentage of lenders who listed nursing homes as their first choice for investments rose to 17.4 percent in 2001 from 11 percent in 2000. At the same time, the corresponding numbers for assisted living as·sist·ed living n. A living arrangement in which people with special needs, especially older people with disabilities, reside in a facility that provides help with everyday tasks such as bathing, dressing, and taking medication. properties dropped Robert G. Kramer is executive director and Harvey N. Singer is research director, both at NIC. Founded in 1991, NIC is a nonprofit organization Nonprofit Organization An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well. Notes: Examples of non-profit organizations are charities, hospitals and schools. 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 visit the NIC Web site, <www.NIC.org>. by half from 14.5 percent to 7.3 percent. (See "Investors' preferences," on this page.) The 17.4 percent of lenders who listed nursing homes as their first choice for investment in senior living properties ranks behind only seniors apartments with no services (22.9 percent) and entrance-fee CCRCs (18.3 percent). Second, in response to the types of projects lenders expected to finance in the future, 25.5 percent said they planned to increase the amount of their lending portfolio directed to nursing homes (and far fewer said they planned to decrease nursing home funding). This was the reverse of the results from the 2000 survey, when more planned to decrease funding to this sector than increase it. Expensive capital But not everything is so optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op . Lenders still viewed nursing homes (as well as assisted living) as worse or much worse in terms of risk versus reward compared to other commercial real estate investments. The 2001 Lender Survey also shows that as capital begins to flow back to the nursing home sector, it's going to be much more selective and demanding. As of last summer, when the survey was produced, maximum loan amounts to nursing homes had decreased, maximum loan-to-value ratios Loan-to-value ratio (LTV) The ratio of money borrowed on a property to the property's fair market value. declined to 77 percent on average, and required debt-service coverage ratios Debt-service coverage ratio Earnings before interest and income taxes, divided by interest expense plus the quantity of principal repayments divided by one minus the tax rate. were as high or higher, when compared to 2000 survey results. The rates at which lenders "capitalized" income to determine a property's value had also increased. As an operator, this means you may need to accept a more conservative valuation of your property than anticipated. And expect that lenders will demand more equity (as well as more collateral and personal recourse) as part of the deal. Savvy Savvy® Gynecology A contraceptive vaginal gel that ↓ transmission of STDs–eg, HIV, chlamydia, gonorrhea. See Contraceptive. operators wanting to know more about what financiers may be looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. would do well to read the Fitch/NIC Investment Analysis of Nursing Home Properties Home Properties (NYSE: HME) is a real estate investment trust (REIT) that owns and manages apartments and apartment properties in the Midwest, New England, Mid-Atlantic and Southeast Florida. It manages or owns over 47,000 apartments. . Prepared with the securities rating agency Fitch Inc., it provides a thorough analysis of this sector and its important underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. considerations.
Investors' preferences
2001 2000
Senior apartments with no services 22.9 17.1
Entrance fee CCRC 18.3 10.3
Skilled nursing facilities 17.4 11.1
Rental congregate with assisted 11.9 14.5
living
Rental congregate no health care 11 10.3
Free-standing ALF 7.3 14.5
ALF with Alzheimer's wing/unit 5.5 8.5
Active adult projects 2.8 6.8
Condo/co-op CCRC 2.8 4.3
Free-standing Alzheimer's 0 1.7
Subacute & specialty facilities 0 0.8
Note: Table made from bar graph
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