The enviable financial market for assisted living

Nursing Homes, April, 1999 by Joseph T. Resor, III

I'm not saying that the relatively mature skilled nursing home industry should be green with envy because assisted living, its rapidly growing sister industry, still has plenty of room for growth - at least, I'm not saying that exactly. Nor am I saying that operators of skilled nursing facilities should be jealous because their assisted living counterparts are unlikely to face those monumental regulatory challenges that can erode profit margins. But in my position - managing healthcare financing for KeyBank - I can say that we consider assisted living a growth industry, and support it just as fully as we support the skilled nursing home arena.

True, there was another recent stock market flutter affecting publicly traded assisted living companies - this one relating to the investment community's concern about a pending report from the federal government's General Accounting Office (GAO). An analyst from BancBoston Robertson Stephens suspended her coverage of four companies because their stock prices might fluctuate until, and possibly after, the report is made public. Indeed, stock prices did drop after she issued her statement in February. But the analyst also said she continues to believe that, for the long term, assisted living is a growth industry. Ultimately, she reinstated ratings.

The Assisted Living Federation of America (ALFA) and the industry it represents are doing all they can to ensure that free market competition - not government regulation - determines industry standards. I agree that it is critical for this sector to keep regulation in check and keep the private-pay model in the forefront. I'd like to reiterate a question posed by William Lasky of Alternative Living Services. Bill often asks, "Which challenge would I rather face: the regulatory and reimbursement risk, or the competition that develops in an industry that has few barriers to entry?" He chooses the latter. For my part, I once believed it was a strong plus to have certificate-of-need (CON) regulation and reasonable government reimbursement, but since the Balanced Budget Amendment of 1997, I think both have risk as well as opportunity.

Getting back to that "flutter," stock market fluctuations have minimal effect on the Key Healthcare Finance view of the overall assisted living sector, and here's why. Most of our clients in this sector are regional companies that are privately held and, as such, are not buffeted like those companies whose stocks are traded on Wall Street.

Also, with the well-documented "graying" of America, with people living longer, and with so many needing some daily living help but not necessarily nursing home care, assisted living offers a welcome option where, not that long ago, seniors had only two choices: their own homes or nursing homes.

Moreover, assisted living continues to give the financial industry attractive projects to back.

Certainly, there are concerns about the financial environment for all types of long-term care, including assisted living. Acknowledging this, here are a few of the questions I expect to address in my upcoming speech, "By the Numbers: Financing in a Turbulent Credit Market," during the ALFA Spring '99 National Conference & Expo in Dallas later this month (April), as well as brief summaries of the answers I plan to elaborate upon:

Q: Is the industry overbuilding? Will projects currently under way take us beyond the saturation level and give us too many assisted living facilities?

A: We don't see evidence of this yet. The projects in the Key Healthcare Finance portfolio - those facilities that we have backed financially - are attracting residents and filling up as projected

Q: What about creditworthiness? It's tougher to get credit than it used to be.

A: We have seen a credit crunch in the last six months, as investors have become more selective. That "flight to quality" in the financial markets has affected all industries, not only healthcare. It means investors want higher-quality, lower-risk investments. But we at Key Healthcare Finance see that as a positive. We believe that such an environment actually helps squeeze out the marginal deals and enables the good projects - the ones from good sponsors with sound business plans - to move forward.

Q: So how can I raise capital?

A: Raising capital and raising equity become harder when credit is tight. It means that the companies developing new projects must be internally focused in terms of financing, and must be prepared to use their own cash flow. It means that, if you do go to outside sources for equity financing, you'll pay more dearly.

Q: How long will the credit crunch continue?

A: I foresee the current credit environment remaining stable for the next couple of years.

That's not necessarily bad news, by the way. The trend toward tighter, wiser credit helps us, as lenders, to focus. I like to think it improves our "blocking and tackling" - or, to use a more elegant sports metaphor, helps us pick only the thoroughbreds.

That doesn't mean there will be fewer players in the industry, although it may mean fewer large, publicly held players. But, as I mentioned, most of the projects in the Key Healthcare Finance portfolio are with regional, privately held companies, reflecting the fact that such companies control roughly 75% of the assisted living sector.