Signs of life: capital markets may jumpstart once-stagnant assisted living sector.

If you've been waiting patiently to invest in the assisted living industry, 2004 might be your year.

Industry, economic and financial trends indicate this year is a turning point in the health of the recently maligned assisted living sector, with capital markets ready to make money available to eager entrepreneurs.

Assisted living industry experts believe the market s stabilizing and the economy has strongly rebounded from the 2000-2002 recess on. Most of these experts predict that, at the very least, a gradual yet sustainable recovery will begin by year's end.

"The lending universe is expanding significantly this year," said Robert Noonan, chief financial officer at Benchmark Assisted Living in Wellesley Hills, Mass. "There are a myriad of sources out there now, tracking the industry and taking position, [and making] transactions."

Those financial sources include public and private real estate investment trusts (REITs), institutional investors and companies that are specifically capitalizing themselves for the purpose of making investments, according to Noonan. "There's clearly more liquidity in the marketplace," he said. "I'd be surprised it we looked back on 2004 and didn't see more stabilized acquisitions [than in the past]."

Some industry leaders, such as Chris Coates, past chairman of the Assisted Living Federation of America (ALFA) in Fairfax, Va., are even more bullish about the prospects. "While an over-supply of product in the past five years left some industry stocks temporarily out of favor with investors, assisted living companies now are [seeing] results that point to growth--including increased earnings, reduced debt, repositioning of assets and major transactions," Coates said during a recent Assisted Living Investor Conference hosted by ALFA. "The industry is poised for expansion in the coming months and years."

Positive performance indicators

Key industry data and financial performance indicators support the hopeful outlook shared by Noonan, Coates and other industry officials. In recent months, surveys and reports from the National Investment Center for the Seniors Housing & Care Industries (NIC) in Annapolis, Md. have shown that:

* Occupancy rates have stabilized.

Although still relatively low, assisted living occupancy rates are hovering near the mid-80th percentile and actually increased slightly from 83 percent during the first quarter of 2003 to 85 percent for the third quarter, according to NIC.

* Move-in rates are up. During the third quarter of 2003, the average move-in rate per month (for assisted living properties open less than 24 months) was 4.8 units. That's up from 4.3 in the second quarter and the highest rate in two years.

* Cap rates are down. In rece months, capitalization rates for a number of assisted living loans dropp, below 10 percent. That is an indicati that debt providers are beginning view high performing properties w solid cash flow fundamentals in a mc favorable light, according to NIC.

The drop in cap rates can be attributed to increased investments REITs in the long term care industry in 2003 and early 2004, according to Raymond Lewis, senior vice president and chief investment officer at Ventas Inc. in Louisville, Ky. In today's volatile stock market, REITs are viewed as stable investments with attractive risk-adjusted dividend yields," Lewis said. "Consequently, the REITs are able to raise more money at lower cost. They are redeploying this money into investments in long term care properties."

Major players, such as CNL Real Estate Investment in Orlando, Fla. Health Care REIT Inc. in Toledo Ohio. Nationwide Health Properties n Newport Beach, Calif. and Ventas. nave made significant investments in long term care during the past 18 months, Lewis said. "I would expect this trend to continue as long as interest rates remain low and there is volatility in the general STOCK market," he said.

First nursing homes, now assisted living?

NIC surveys show that capital markets are gaining confidence in the entire senior housing and care industry, with equity investors and debt providers planning to become more active in 2004,.Factors such as the surplus of distressed properties and a construction splurge in the mid-1990s are likely to make assisted living properties especially appealing, according to NIC studies.

* The sector's surplus of distressed or poorly performing properties is rapidly diminishing. NIC's third quarter 2003 financial indicators report places the number of Permanent debt delinquencies in assisted living at 4.3 percent, down from 10 percent in the previous quarter. NIC President Robert Kramer called this result "good news For the industry" and a sign that many of the troubled properties "have continued to work their way through the system."

James Pieczynski, director of real estate for the Healthcare Finance group of Capital Source Inc. in Chevy Chase, Md., agreed with NIC"s findings. He noted that the spate of bankruptcies that hit the assisted living sector at the beginning of the decade is over. As the economy revives, the top performers that have streamlined operations will be well-positioned for strategic growth, he said.

"In many respects, the assisted living market is 12 to 18 months behind-what's been happening in the nursing home sector over the past few years," Pieczynski said. "[The nursing home industry] began to emerge from its slump in 2002 and benefited from a significant infusion of capital in 2003 as it gained stability amidst improved market dynamics."

* Due to a construction splurge in the mid-1990s, an increasing number of assisted living 10-year mortgages are up for renewal. Owners of properties that have been limping along in a low-interest-rate environment will face tough decisions on how to proceed, Pieczynski said. "Many owners] will no doubt will be unwilling or unable to obtain refinancing, particularly if interest rates go up," he said. As more loans expire and marginal operators decide to exit the business, more properties are likely to change hands-a boon for capital markets."

Variable rates will probably be the way to go right now, due to a lack of fixed-rate permanent debt options for senior housing and long-term care, according to Lewis. HUD, the traditional source for such financing, has implemented new insurance requirements that will make it extremely difficult and expensive for borrowers to qualify, he said. Fannie Mae and Freddie Mac have also tightened underwriting parameters. "Short of the sale-lease back financing offered by REITs, there are very few long-term, fixed-rate, financing options," Lewis said.

Favorable economic, demographic indicators

The apparent robustness of the ongoing economic recovery bodes extremely well for the assisted living market, according to Pieczynski. For example, the Gross Domestic Product--a gauge of products produced by all companies operating on American soil--increased 4.1 percent in the fourth quarter of 2003 and was projected to top 8 percent for the year. According to a recent USA Today survey of 60 top economists, 2004 will be even better, as they predict the U.S. economy will grow at its fastest pace since the 1990s.

The assisted living market will also benefit from Baby Boomers--the sector's most critical demographic segment--who have the most to gain from an economic boom, Pieczynski said.

"A rising economic tide will lift their financial:boats highest of all, since they are in their peak earning years and already have significant funds invested for retirement," he said. "Also, they often are the most influential factor in their parents' assisted living care decisions. If the economy and STOCK market continue to climb upwards, middle-class Boomers will fee more secure financially and will have more discretionary income available to pay for their parents' assisted living care and housing."

* Age is a factor

Changing--or perhaps aging American demographics will also benefit the assisted living industry. As the population ages, lives longer and develops more chronically debilatating conditions, the customer base for assisted living properties will continue to expand because:

* People are living longer. In 2000, the average life expectancy of a 65-year-old American was 18 years--an increase of 3.7 years from 1960, according to the National Center for Health Statistics in Hyattsville Md.

* There are more senior citizens. U.S. Census figures indicate there were 25.6 million persons age 65 or older in 1980 and 35.1 million such persons by 2000. The number s expected to reach 40.2 million by 2010.

* The number of disabled is growing. A study by AARP in October 2003, Beyond 50 2003: A Report to the Nation on Independent Living and Disability, found that among individuals age 65 or older, the lifetime probability of becoming disabled in at least two activities of daily living or of becoming cognitively impaired was 68 percent. The probability of disability increases sharply with age, meaning there will be a greater need than ever for assisted living when Boomers come of age.

Onward and outward

Given current conditions, it's reasonable to assume that the boom/bust cycle sparked by the overbuilding of the mid-1990s is nearing the end of its course, according to Pieczynski. "Market and demographic factors will be a catalyst in moving the occupancy rates up from their current levels," he said. "With the economy and capital markets showing signs of sustained vigor, assisted living properties are likely to be better positioned financially than at any time during the last decade."

Benchmark CFO Noonan said the turnaround is part of a natural cycle for the industry "We had a resurgence in the mid 1990s as a result of the attraction to Wall Street. Wall Street ended up funding 16 publicly traded companies before a I was said and done. Then everybody hit the wall in the late 90s, ... and here we are again," he said. "This is absolutely an inflection point in terms of a turnaround [of the industry ... capital is coming back."

There's also a chance that development may return in the minds of long-term care investors.

"The market peaked with development activity and new units coming online in 1999. [Since then] there's been a drastic reduction in even discussing pursuing potential development opportunities," Noonan said.

"But under the right circumstances and the right sub-markets, and the right sponsorship and management, equity sources and commercial lenders would be willing to entertain the idea of doing ground up development again," he said.

Noonan said such projects would likely be in selective "high barrier" markets--locations where the approval process may be extremely challenging, for example.

But, "at the end of the day, I think the opportunity, because of pent-up demand not being serviced by existing supply, makes the risks worthwhile."

HIGHS AND LOWS
Cities, regions and states with the 10 most expensive and least
expensive average per-month rates for assisted living facilities
in 2003:

2003's 10 Least Expensive

Rank   Locality            Monthly Change   Rate f/2002

 1.    Jackson, MS             $1,020          +72.3%
 2.    Columbia, SC            $1,281          -53.8%
 3.    Detroit, MI             $1,297          +10.0%
 4.    Grand Rapids, MI        $1,381           -9.3%
 5.    Scranton, PA            $1,444           +6.6%
 6.    Phoenix, AZ             $1,536          -11.0%
 7.    Dell Rapids, SD         $1,557          -19.2%
 8.    Denver, CO              $1,564          -21.0%
 9.    Little Rock, AR         $1,587          +41.6%
10.    Kansas City, MO         $1,608          +20.3%

2003's 10 Most Expensive

Rank   Locality            Monthly Change   Rate f/2002

 1.    Washington, DC          $4,429          +48.9%
 2.    Stamford, CT            $4,073          +14.3%
 3.    Statewide, AK           $4,036          +69.7%
 4.    Bridgewater, NJ         $3,886          +26.0%
 5.    New York, NY            $3,830           +3.6%
 6.    Highland Park, IL       $3,775          +22.4%
 7.    Chicago, IL             $3,659          +31.4%
 8.    Wilmington, DE          $3,383           +0.4%
 9.    Brunswick, ME           $3,297          +42.8%
10.    Madison, WI             $3,210          +41.2%

National Average               $2,379          +10.2%

Source: MetLife Mature Market Institute 2003