Slow but steady, AL occupancy climbs.

Assisted living operators can take heart that occupancy is continuing to show signs of improvement. It's one of several positive trends reported by the National Investment Center for the Seniors Housing & Care Industries (NIC) for the first quarter of 2004 in its Key Financial Indicators.

Anthony Mullen, research director at Annapolis, Md.-based NIC, said the median occupancy rate for stabilized assisted living properties open 24 months or more increased 86 percent during the first quarter of 2004. That's up from 85 percent the previous quarter and up from 83 percent for Q1 2003. "Although this steady climb is encouraging news for the sector and trending in the right direction, it is still not where it should be for most properties to cover the cost of capital to the equity providers," Mullen said.

Average net "move-in rates" for the quarter remained below three per month for assisted living, indicating room for improvement for properties that have been open less than 24 months, Mullen said.

In skilled nursing, the median occupancy rate for skilled nursing fell from 88 percent during the fourth quarter of 2003, although it held steady from last year's first quarter rate at 86 percent, according to Mullen.

Independent living remained at 91 percent during the past two quarters, compared to 89 percent a year ago.

Frank Morgan, managing director of Jefferies & Co., who closely tracks several of the publicly traded companies, said the NIC Key Financial Indicators reflect what he is seeing in the marketplace. "We've seen a slow recovery in occupancy levels over the last few years across all of the industry sectors," said Morgan, during a recent NIC Executive Circle conference call with industry leaders. He also sees "a reduction of new capacity coming online and a growing acceptance of service delivery within seniors housing and care."

Permanent debt delinquencies

While the loan performance rate for performing properties increased for all sectors at 94.2 percent this quarter, compared to 93.1 percent in the previous quarter, loan performance still has room for improvement, Mullen said. "To be comparable with other real estate asset classes, such as apartments, the senior living performing loan rate for permanent debt needs to get to the 97 to 98 percent level."

He added that independent living was one notable exception, continuing its impressive performance streak of no permanent debt delinquencies among the largest permanent lenders.

However, decreases in permanent debt delinquencies for assisted living and skilled nursing are always positive news. "In the fourth quarter of 2003, permanent debt delinquencies for assisted living were 6.72 percent compared to 6.15 percent in the first quarter of 2004," Mullen said. "Permanent debt delinquencies for skilled nursing also fell in the same period from 12.54 to 10.9 percent."

Assisted living also reduced its short-term debt delinquencies to 2.28 percent in comparison to 4.89 percent from the fourth quarter. "They increased slightly for skilled nursing, however, inching up from 7.18 percent to 7.2 percent in the first quarter of 2004," he said.

Decrease in capitalization rates

Assisted living capitalization rates held steady during the first quarter, with the average coming down from 11 to 10.9 percent. One transaction of 8.75 percent illustrated that there is both interest and competition among investors for the very best assisted living properties, which is driving down capitalization rates for the best properties in the sector, Mullen said.

Bob Noonan, chief investment officer of Benchmark Assisted Living, who also participated in the Executive Circle call, agreed that capital is again showing interest in assisted living, both on the equity and the credit sides. "Capital is gravitating back to the marketplace because we're starting to show signs of recovery," Noonan said, "and lenders are getting more comfortable with the risks associated with our product type."

He added, "The availability and the liquidity of capital makes the acquisition market more competitive, particularly for those properties that are of institutional quality."