Finance Feature: Re-raising the roof

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Facilities are aging along with their residents, prompting operators to fund remodeling aimed at restoring their youth.

Don't look now, but senior living residents aren't the only ones who are feeling the ravages of old age.
Though they are young by comparison, the average ages of skilled nursing (30) and assisted living facilities (13) show a housing stock that, by modern industry standards, is getting a bit long in the tooth. With competition for residents steadily becoming fiercer, the need to market a newer, shinier facility is becoming ever more paramount, industry analysts contend.
"Going forward, replacing this aging stock will be a big issue," said Michael Hargrave of the Annapolis, MD-based National Investment Center for the Seniors Housing & Care Industries.
Hargrave, director of sales and marketing for NIC's Market Area Profiles subscription-based data and analysis service, tracks construction activity in the nation's top 30 metropolitan statistical areas each quarter. The organization's construction report lists all projects of 25 or more beds that have broken ground and are currently under construction within the top 30 MSAs.
To date, NIC hasn't differentiated whether new buildings are part of new construction or renovations to existing facilities, but Hargrave said those distinctions will be made starting this year.
"We noticed an increase in renovations and expansion of existing properties going on in CCRCs (Continuing Care Retirement Communities), and that's why we decided to start breaking them out," he said.
Short of actual figures that physically show an increase in specific renovation activity, representatives from various financial firms anecdotally speak of heightened interest from skilled nursing, CCRC and assisted living operators. John Cobb, senior managing director for Chicago-based GE Healthcare Financial Services, is among those who have noticed a sudden surge.
"We've seen a lot in the past two months – a lot of people want to refinance their buildings and expand from, say 100 to 120 units," he said. "It just seems like if you have a 100-unit building, it's easier to add 20 units to the existing structure, and that's what they're doing."
A "definite upward trend" in loans for remodeling or facility upgrades is seen by Jim Thompson, senior vice president of GMAC Commercial Mortgage Corporation's healthcare division, Horsham, PA.
"We expect this trend to increase in 2006 and beyond," he said. "It is being influenced by a combination of aging nursing home stock, the need for facilities to compete for quality mix, and Medicaid capital reimbursement that is generally inadequate to support large scale facility replacement."
Customized plans
Mark Unangst, senior vice president with St. Louis-based Gershman Mortgage, says no distinct pattern has emerged regarding how the numerous new renovations are being done.
"We've seen a little of everything," he said. "Some are expanding, some are adding Alzheimer's wings, some are SNFs that are adding assisted living. They are doing whatever they can to be more competitive."
A 23-year veteran of long-term care financing, Unangst said he's seen rehab demand grow incrementally over the past five years, mainly with assisted living and independent senior living facilities. Much of the activity is centered in metropolitan areas because that's where the key demographics – adult children of potential residents – live, he said.
"The children of elderly parents are much more involved in selecting a facility and that is driving the renovation need," he said. "They want their folks to be in a nice place and close by. Most children live in big cities, not small towns, and they're bringing their parents to them."
The first fix-up money usually goes to major mechanical issues, such as heating, plumbing and air-conditioning, said Steve Gilleland, director of the healthcare real estate division for Capital Source, Atlanta. But then, he added, the emphasis goes to things "people can see: paint, design patterns, entranceways – those are key," he said.
He said his firm has experienced a bit of the remodeling push, but not in "significant numbers."
Geographically, the most active markets are principally in the western and southern United States, said Steve Graham, senior vice president for Dallas-based GMAC-RFC Health Capital.
"Within those areas, it is [concentrated in] markets which clearly demonstrate a service need and a population with available financial resources," Graham said. "The nursing segment is much more localized on a larger national scale, although growing urban centers would still be the primary areas of activity."
To determine the funding issues behind a client's renovation plans, Cobb says he finds out as much as possible about the main impetus for the request.
"Operators are learning that putting capital into buildings is to their benefit," he said. "They all provide quality care. A new building provides an extra edge. By investing in buildings, they feel they are providing better service and that translates into more revenue."
Spend money, make money
Erecting therapy units for Alzheimer's, dementia and physical rehabilitation also can enhance revenues, adds Mike Monticello, senior vice president for Chicago-based LaSalle Bank. "Many of the requests we've had have been in this area because it drives Medicare post-acute services. This helps them differentiate their facilities."
How operators go about renovation plans doesn't seem to follow any single template, according to financiers in the industry.
"Each case is unique. If the owners have a mission, they can work with a development team to find out the best option for them. Some will tear down and rebuild because it's impractical and too expensive to modernize an outdated building," Unangst said.
Others may scale back a project in order to focus on improving the framework of an existing building, Monticello added.
"Tearing down one building and building from scratch is a massive undertaking," he said.
From a lending aspect, it's easier to secure capital for updating a standing structure because the building has equity and there is no occupancy rate-fill risk.
An operator's track record is also a key criterion for securing the necessary capital, Cobb said.
"We deal with the same clients repeatedly, so if a favorite client wants to expand, we listen carefully to them when they explain what they want to do," he said. "It's not unusual for me to do multiple loans with the same client."

Signs of old age

Statistics from the NIC MAP service underscore a strong aging trend among long-term care facilities. For the third quarter of 2005, skilled nursing facilities in the top 30 metropolitan areas report the following data:

Number of skilled nursing beds 576,255
Number of skilled nursing beds under construction 3,465*
Average skilled nursing facility age 30 years
Percentage of SNFs age 25 years or older 59.7%
Percentage of SNFs 10 to 25 years old 27.7%
Percentage SNFs 2 to 10 years old 11.6%

∑ Includes renovation activity

Raze rather than re-raise
Smith/Packett's business strategy was founded on a collection of folksy bromides. One in particular applies to the Roanoke, VA-based long-term care chain's approach to building renovations:
"You can put a new collar on an old dog and it ain't going to live no longer."
That may explain why the 22-year-old firm, which specializes in redeveloping assets, focuses on tearing down aging facilities and replacing them with new structures.
"We prefer redevelopment rather than refurbishment," said President James "Pete" Pietrzak. "With the average facility being 30 years old, you're looking at a fleet that typically has no air conditioning or sprinklers. By and large, we want to do something more substantive than a cosmetic facelift, and that requires starting from bare ground."
Smith/Packett is one of the largest senior housing and care development companies in the country, managing more than $40 million new healthcare-related projects annually. These projects include nursing homes, assisted living facilities, medical office buildings, continuing care retirement communities and mixed-use facilities. Since 1986, the company has developed or acquired more than 130 long-term care and senior housing facilities throughout the Southeastern United States.
Facilities ripe for redevelopment are usually located in areas where there is a service void – "a SNF with no Alzheimer's care, no assisted living or affordable independent living," Pietrzak said. "Those are the types of assets we want to enhance."
There's no shortage of facilities in need of improvement, so Smith/Packett is "very active" with new construction and replacement projects across the country, Pietrzak said.
The process isn't without its challenges, however. On the East Coast, the struggle is getting certificates of need, and on the West Coast, it's site costs.
Overall, though, the company has solidified a special niche that when successful, provides communities with modern facilities for its elderly population, Pietrzak said.