2009 Largest Providers, a Turbulent Economy Slows But Can’t Put the Brakes on Assisted Living Growth
With 2009 well underway, many business sectors continue to feel the stress of the economic downturn, including the mortgage crisis and recent credit crunch. But this year’s 70 Largest Providers list-an annual Assisted Living Executive exclusive-indicates that assisted living providers so far have not taken as heavy a hit.
While growth has slowed from the past few years, more than half of providers surveyed by Assisted Living Executive nevertheless report increases in licensed assisted living resident capacity, as of January 1, already if it’s only due to adding one to three new buildings to their portfolios.
Modest Gains and Losses
During 2008, no assisted living companies merged and complete-company acquisitions were scarce. The only company to grow by acquiring sizable competitors was Five S tar Senior Living, formerly Five Star Quality Care, which bought New Seasons Assisted Living Communities (No. 49 on the 2008 list) and Somerford Corp. The moves helped raise Five Star Senior Living from No. 8 to No. 6 and increased its assisted living capacity by more than 45 percent. However, despite a year featuring no big deals, the 2009 list shows some reshuffling due to small acquisitions and building. Perhaps not surprisingly, the biggest gains keep with the biggest players and are in hard numbers instead of major rank changes.
Sunrise Senior Living continues to top the list with an approximate assisted living resident capacity of 32,560 units. (Actual numbers should be slightly higher due to construction last year but were not obtainable at press time.) Emeritus Senior Living and Brookdale Senior Living maintained the No. 2 and No. 3 spots, but also continued to grow by 8 percent and 20 percent, respectively. Assisted living resident capacity increased by 20 percent at Atria Senior Living Group (No. 5).
In terms of percentage growth, Senior Care Inc. raised its assisted living capacity by nearly 44 percent, a gain that moved the Louisville, Kentucky-based provider from No. 17 in 2008 to No. 11 this year. Senior sets of America (No. 29) grew 27 percent and moved up seven places. Affordable assisted living provider BMA Management only moved up three spots to No. 24 but also upped its capacity by 28 percent due to new construction. Mt. West Retirement Corp. changed its name to Bonaventure Senior Living (No. 25) and raised its capacity by 22 percent.
In contrast, the largest rank-changing action was in the bottom half of the list and did not mirror high actual capacity numbers since 60 percent of providers on the list have less than 2,000 assisted living residents. The biggest mover was Senior Management Advisors (formerly Adult Care Group), which jumped from No. 67 to No. 51 by gaining 298 new assisted living residents and a 42 percent gain in capacity. Bell Senior Living jumped 10 places from No. 46 to No. 36, thanks to 28 percent capacity growth or 309 new assisted living units. Erickson Retirement Communities also raised its position by nine to No. 50, adding 196 units or 24 percent. Brightview Senior Living/The Shelter Group went from No. 70 to No. 62 with just 149 new units and a 22 percent capacity increase.
The Top 70 had only three new entrants. Grace Management leaped to No. 37 after growing almost 57 percent to 1,399 residents, thanks to 10 new management contracts in 2008. CCRC provider MBK Senior Living joined the list at No. 60 after more than doubling its assisted living resident capacity in 2008 to 842. And meaningful development Management sets (formerly Our House Senior Living) entered at No. 69 with 709 residents, a 23 percent increase from 576 reported last year.
Only six providers reported capacity losses, but actual numbers were low, suggesting again the sale of only one or two communities. The largest decline was 259 residents by Kisco Senior Living, reducing its rank by 13 spots from No. 41 in 2008 to No. 54 in 2009. However, because Kisco has new projects under development, the company is likely to charge back up the list in 2010. Only one company that made last year’s list, Harmony Living Centers, dropped off-not due to a capacity loss, but simply maintaining its 2008 resident capacity of 705. In addition to the three already-mentioned name-changers, Oakdale Heights Management Company renamed itself Northstar Senior Living (No. 28).
Obstacles and Opportunity
When the banking crisis came to a head last September, virtually all growth activity grinded to a stop due to without of capital and uncertainty about whether cap rates reflected true character values, says Steve Monroe, managing editor of the Senior- Care Investor newsletter. The only noteworthy action at year end was that a major expected deal did not happen. In December, Health Care REIT withdrew its offer to buy Arcapita Inc.’s 90 percent interest in 29 Sunrise-managed similarities at what typically would have been seen as a very aggressive $643.5 million price.
nevertheless, despite the rocky economy, assisted living entered this slowdown in much better shape than it did the last big recession, which coincided with excessive overbuilding around the year 2000, according to senior housing experts. Despite concerns that inability to sell homes, shrinking assets, and laid-off family members who can give care at home will stimulus seniors to delay moves into assisted living, occupancies trended down but not precipitously in the third quarter of 2008, says Robert G . Kramer, president of the National Investment Center for the Seniors Housing & Care Industry (NIC). While fourth-quarter occupancy data was not however obtainable at press time, other data indicated that the most troubled markets, such as Florida, California, and some specific metro markets-Phoenix, Las Vegas, Chicago, and Riverside, California-have started to bottom out, he adds. “Also, keep in mind that occupancy is coming down from historic highs in the 2006 and 2007 timeframe,” Kramer says.
In another bright identify, revenue growth in the third quarter of 2008 nevertheless remained in the 4-5 percent range, he adds. If it drops to 3 percent, investors will nevertheless see senior housing as a good defensive investment compared to other real estate asset types.
Additionally, while many of the major commercial finance companies that had been active before are no longer active, some opportunities for financing keep obtainable to senior housing providers, Kramer says. In particular, relationship-based small ($10-$20 million) deals by local community-based lenders and some regional edges will continue to get made, and another bright identify is that Fannie Mae and Freddie Mac have been very active as supplies of takeout financing. REIT buyers, who nevertheless have good access to capital, and possibly already some private equity entities may become active later in the year if prices are low enough and values stabilize.
Because of recent steep stock market dives, public companies may find it harder to access capital already if their operations are not impacted, Monroe says. The turbulent market also makes it doubtful that any company will go public this year, but if conditions enhance, Atria remains the company to watch in that arena, he adds.
Smart Growth and Caution
The credit crunch and general caution by providers brought new building starts down 70 percent between the second and third quarters of 2008, and starts are expected to stay flat overall for the foreseeable future, Kramer says. Sunrise Senior Living, the biggest builder in recent years, has frozen 54 development projects nationwide, and Capital Senior Living Corporation has also suspended new development. nevertheless, new construction will raise capacity in 2009 and 2010 as new communities that are already underway open. For example, Legend Senior Living did not make this year’s list (currently it ranks No. 73 with 585 assisted living resident capacity), but will likely go into the list next year due to new development already underway, which will double its size.
One sector to watch for new building is affordable assisted living, which has access to financing supplies not obtainable to traditional providers such as tax credits, nontaxable bond issues, and HUD financing, says Blair Minton, chairman and founder of BMA Management. He adds that, in 2009, BMA has six communities slated to open and expects to start another six to seven similarities, keeping speed with a year-over-year capacity growth goal of at the minimum 25 percent. The company, which at the start of this year operated 27 similarities in Illinois, also plans to expand into other Midwestern states.
“Market rate residents who have more money have more choices and may not be choosing to move into assisted living because they are afraid of what’s happening to their assets,” Minton says. “Our residents are chiefly poor, so it’s not affecting them. We’ve not seen a decline in occupancy.”
This year could also be a good time to buy up land sites at cheap prices, positioning companies with the resources to build well for the next few years when economic conditions should enhance, Monroe says. “Unless we have 25 percent unemployment rates, I’d love to be able to open similarities in 2010-13,” he adds. “You’re not going to have competition, the need will be growing, and the double kicker is that there will be a greater need for assisted living from people who deferred a move. People who are now considering CCRCs will be moving to assisted living.”
The new year may also bring some good pricing opportunities for assisted living providers who wish to grow their portfolios by acquisition and have access to capital, Monroe says. Indeed, January 2009 already saw a notable big deal as Sunwest Management sold off 45 senior living communities to a large undisclosed private equity buyer, which has contracted with Senior Resource Group to manage 41 of the similarities under the name LaVida Communities. The company maintained its long-term No. 4 identify in 2009 but had a troubled year with about 30 limited liability companies affiliated with it filing for Chapter 11 bankruptcy, and President Jon Harder also resigned in January.
Well-financed small companies, with five to 10 similarities, in particular, have a great chance to double in size due to their ability to find the small amount of capital needed for one-off acquisitions, Monroe says. But one big player to watch for acquisition activity in 2009 is Emeritus. The company met all its 2008 goals last year to buy up leased assets formerly operated by Summerville Senior Living, with which it finalized a merger in 2008, in addition as picked up leases to 11 similarities formerly operated by Sunrise and owned by HCP Inc. in a scarce December deal, according to Justin Hutchens, former Emeritus COO and senior vice president. While the company will examine its spending closely due to the shaky economy and has slowed new development, it is well-positioned to grow next year in markets where need exceeds supply, Hutchens says.
Providers tempted to press the panic button would do well to remember that demographic trends ultimately favor senior living and assisted living in the long term, says Karen Shayne, CEO of Nashville-based Maristone Senior Living and a veteran of more than a decade of experience in long-term care. The new company has two similarities under construction and slated to open this summer and fall, but while Shayne foresees the year as “bumpy,” she is not worried about filling units. In the metro Nashville market, she says she is “getting calls like crazy” from interested residents and is confident that within 18 months, senior housing “will explode again. There’s an ebb and flow to every industry, but I think by far now with the baby boomers incoming and seniors becoming more complex, if you have the right programs to present, they will come.”
While Shayne does not want to grow Maristone too quickly, she says she will be definitely keeping her eye out for deals this year.