Assisted-Living Sector: Not Just Real Estate Anymore

Bankers need to rethink their approach to financing the rapidly growing assisted-living business, according to an industry consultant.

Assisted-living dwellings provide elderly tenants help with their day- to-day needs. The sector, which is only about a decade old, is expected to soar over the next three to five years to match the 30-year-old nursing home industry in capacity and revenues.

Many banks cater to assisted-living dwellings through their real estate banking groups. But Daniel M. Gold, president of Virginia-based Assisted Living Ventures, said financing this segment is "much more of a health-care play than a real estate play."

At a conference here this week sponsored by Robert Morris Associates, Mr. Gold said there are many opportunities for bankers to finance businesses related to assisted living, including distributing prescription drugs to residents and contracting with professionals such as rehabilitation therapists and dentists to set up shop on-site.

For now, construction is still the heart of an industry that was started by enterprising property developers in the early 1990s. But to take advantage of the opportunities, bankers must view the business as an offshoot of the health-care industry rather than as a sector of real estate, Mr. Gold said.

Mr. Gold, previously a vice president with Sunrise Assisted Living, the nation's largest assisted living company, said some banks are starting to appoint specialists to cover the industry.

The percentage of bankers who said they analyzed both long-term-care and senior-living projects primarily as business rather than real estate ventures jumped from 38.5% in 1994 to 55.1% in 1997, according to an annual survey by the National Investment Conference conducted for the senior- living and long-term-care industries.

Mr. Gold said the 45% who still think of assisted living as equally or principally real estate must realize it is an operating business "and judge it by the quality of its management."

William J. Umscheid, a vice president at U.S. Bank, Minneapolis, and a conference attendee, said one or two of his clients had expressed interest in obtaining financing for assisted-living facilities. The bank had been financing the industry through its real estate group, but now handles it out of its Midwest banking group, which focuses on middle-market lending.

"These are highly profitable transactions for us," he said.

Assisted-living care is believed to be more cost-effective than home health care, though most people still prefer to remain at home as long as possible.

Some anticipate that the $13 billion assisted-living industry will grow to $22 billion to $33 billion in five years. Others are even more optimistic, predicting that the business will skyrocket to $75 billion in revenues during the same time frame.

Only 16 assisted-living companies are publicly traded, representing a $3.5 billion market capitalization. But Mr. Gold said he thinks the future will belong to the larger companies that can grow into regional or national chains.

For the time being, this will probably be done through building rather than consolidation, because there are not very many sizable properties to buy, he added.

And though this segment is hot, it has its risks, according to Mr. Gold. For one thing, the aging of residents means facilities are having to provide more and more care. He said he thought this would lead to increased regulation of the industry, which is mostly funded by private fees.

Though the facilities contract out for many services, a lot of assisted- living providers are naive about their legal liabilities, he said.

Also, some businesses will have a hard time raising fees if a newer facility opens nearby, forcing them to change their cost projections, he predicted. Finally, it could be difficult filling the many low-paying jobs in a period of continuing high employment.

But assisted-living occupancy rates above 90% nationally, according to Coopers & Lybrand, and new facilities are going up fast.

The aging of the population and Americans' preference to remain semi- independent as long as possible is driving demand, combined with the pressure on costlier medical facilities to discharge their patients sooner, according to Mr. Gold.

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