Executive Decisions with Raymond J. Lewis

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Market conditions could spur mergers and acquisitions in the nursing home sector this year, according to Raymond J. Lewis, Senior Vice President and Chief Investment Officer, Ventas Healthcare Properties. Lewis recently talked about how 2004 is shaping up.

Q Do you see the year ahead as being bullish or bearish for nursing homes?

A I think 2004 will be neutral for nursing homes. The Center for Medicare & Medicaid Services is probably not going to increase reimbursements, given the 2003 increases and the restoration of the cliffs.  State budgets remain tight, but Medicare is generally holding and should be aided by the economic recovery. Tort reform, workers comp and wage inflation are the swing factors for the industry in 2004.
This may well be a good year for nursing home mergers and acquisitions. Multiples have started to move up as the reimbursement and tort environments have stabilized.
There is more capital available than in recent years, and the rates are at all-time lows. Owners looking for an exit should take advantage of these factors before interest rates creep back up and multiples contract.

Q Real Estate Investment Trust (REIT) financing appears to be a growing option for operators seeking capital. Why is that?

A Real estate investment trusts provide an attractive total cost of capital in a one-stop solution. With 100% financing at rates around 10%, REITs are an attractive alternative to conventional debt and equity sources.
Many operators use REIT capital to cash out their equity in stabilized properties and redeploy it for growth.  This is a good alternative to dilutive private equity.

Q What advice would you give to operators trying to thrive in this market?

A Be relentless about quality. Quality leads to customer satisfaction, drives operational efficiency and mitigates risk. Nursing operators run on razor-thin margins and have no pricing power. They cannot afford to have any problems in their operations.