Capital is pouring into assisted living, a $15 billion industry responsible for the biggest wave of excitement on Wall Street since subacute care.
The aging of America is creating huge market opportunities for assisted living. With nursing homes nearing full capacity and expanding into the subacute business, assisted-living services fill a real need in the market.
Last November, Portland, Ore.-based Assisted Living Concepts, the first "pure play" in the field, went public with 2 million common shares at $9.25 per share. The deal netted $18.5 million for the fledgling company, which was founded just four months earlier. It reported 1994 revenues of $2.1 million.
The nation's largest assisted-living provider, Sunrise Assisted Living, received $32 million in venture capital this January. The Sprout Group and Allstate Venture Capital led the investor group that helped capitalize the Fairfax, Va.-based company. Sunrise, which reported revenues of $62 million in 1994, plans to go public, perhaps within two to three years.
According to a survey by Newark, Del.-based Capital Research Group, the average total construction cost of an assisted-living project is $5.9 million, or $65,635 per bed. The average number of beds is 90.
Hungry for capital.
Over the next five years, billions of dollars will be required to satisfy the assisted-living industry's capital demands, said Peter Sidoti, a vice president and healthcare analyst with NatWest Securities in New York.
NatWest is staking out a position as a lead underwriter in the field. More than 200 institutional investors were expected to attend the investment banking firm's first conference on assisted living last week. It featured presentations by two private and eight public companies, including several large nursing home and retirement housing chains that operate assisted-living units.
Pursuing the Medicaid market.
While the assisted-living facility's prime customer has been the private-paying resident, more states are seeking to experiment with assisted living for Medicaid enrollees. So far, 14 states have received waivers from HCFA, and many more have applied for waivers or are exploring the option.
At one-third to two-thirds the cost of a nursing home, assisted living promises to save states big bucks and create even greater opportunities in the industry.
Oregon, which operates the granddaddy of the waiver programs, has set its Medicaid reimbursement rates for assisted living at 80% of what it would have spent on nursing home care. The state licenses 37 assisted-living facilities with 1,670 units. Another 30 new residences are under development. About 30% of assisted-living residents are subsidized by the state under its Medicaid waiver.
New Jersey is seeking a federal waiver to test several assisted-living models. The program is intended to provide alternatives to nursing home care for Medicaid recipients and reduce program costs. An estimate of anticipated savings wasn't available.
"In our opinion, assisted living is really going to be one of the next big waves in healthcare," said Jim Baker, a senior vice president at Nashville, Tenn.-based Equitable Securities Corp. By the year 2000, assisted living will grow to more than $25 billion in revenues, he predicted.
The Assisted Living Facilities Association of America in Fairfax, Va., represents 1,500 members with 8,000 facilities nationwide. The total number of assisted-living providers ranges from 30,000 to 40,000, according to industry estimates. However, many of them are small "board-and-care" facilities, including rest homes and adult congregate-living facilities, that don't stress the assisted-living "philosophy" of enabling people to live independently and with dignity, industry experts said.
The assisted-living industry is composed of an eclectic mix of operators, including nursing homes, continuing-care retirement communities, real estate developers and hospitals.
Nursing home alternative.
Assisted living provides housing and support services for people who need help with one or more of the "activities of daily living," including bathing, using the toilet, dressing, eating and walking. These are people who need help caring for themselves but don't require 24-hour skilled-nursing care.
Far too frequently, these individuals land in nursing homes because other options haven't been available. Estimates of the number of nursing home residents who could be more appropriately and less expensively cared for in an assisted-living facility range as high as 80%.
Typically, the son or daughter of an elderly parent makes the difficult decision about where to place mom or dad. They usually arrive at the door of an assisted-living residence in a crisis situation. One parent may have died, leaving the other without a caregiver, or the patient's physician may have determined that, without assistance, it would be a health risk for the parent to live alone.
"They see assisted living as the answer," said Cassie Triplett, executive administrator of Sunrise at Kensington Park (Md.), a retirement community with two 70-unit assisted-living facilities.
A few hospitals have become involved in assisted living through joint venture arrangements, and many more are inquiring about the feasibility of entering the business as part of their mission to the community.
"Twenty (percent) to 30% of our work now is with hospitals that want to build that continuum of care," said Al Holbrook, president of Atlanta-based ServiceMaster Senior Living Services, which provides development and management services to owners and operators of senior-living facilities.
One Atlanta-based hospital system that's expanding its commitment to assisted living is Promina Health System. Promina operates a 208-unit retirement center called Atherton Place that has offered assisted living since 1988. Now it plans to target higher-acuity residents through the addition of assisted-living units designed for the physically frail and dementia sufferers.
"There's just a lot of diversity in the industry right now," said Carol Fraser Fisk, executive director of the ALFAA.
An equally diverse array of financing vehicles is being used to capitalize the assisted-living boom. With growing consumer demand and increased publicity for assisted living as a long-term-care alternative, financing options, from venture capital firms to real estate investment trusts, are expanding.
And under a rule published late last year, the U.S. Department of Housing and Urban Development is accepting applications from assisted-living facilities for its Section 232 mortgage insurance program. The program provides credit enhancement through the Federal Housing Administration.
A 1994 survey of lenders and investors by the National Investment Conference for the Senior Living and Long Term Care Industries found that 47% of respondents would be willing to finance freestanding assisted-living projects.
Historically, financing for assisted living has been difficult to obtain without credit enhancement or an agency rating. According to an October 1993 industry overview by the ALFAA and Coopers & Lybrand, the difficulties stem from existing financial and operational failures, limited understanding of the needs of potential residents and increasing scrutiny of loans considered to be backed by real estate.
Most lenders have avoided assisted-living projects because they involve a complex mixture of the real estate, hospitality and healthcare industries; the buildings are viewed as difficult to convert to other uses; and a foreclosure could result in negative publicity, the report said.
Most investment bankers are just beginning to understand the industry, ServiceMaster's Holbrook said.
With the first initial public offering of an assisted-living company in 1992-by Standish Care Co. in Boston-and increased publicity about the industry, more potential funding sources began to express interest, according to the report.
However, the industry's rapid development is causing some providers to suffer growing pains. For the year ended Dec. 31, 1994, Standish Care posted a $4.2 million net loss, or $1.88 per share, compared with a year-ago loss of $1.1 million, or 95 cents per share. The 1994 loss included a $1.4 million write-off taken to clean up the balance sheet, the company said. It included development projects the company decided not to pursue as well as accounts receivable.
"I think it's typical of rapidly growing companies," said Michael J. Doyle, Standish Care's chairman, president and chief executive officer. The company is the nation's fourth-largest assisted-living provider, with 1,740 owned and managed beds.
On a positive note, 1994 revenues jumped 288% to $6.7 million from $1.7 million in the previous year. Doyle attributed the sharp rise to an increase in the number of assisted-living beds owned by the company-474 vs. 270-improved occupancy rates and better management.
Despite Standish Care's woes, analysts expect to see more public offerings and private placements in the next few years.
The industry leader, Sunrise, which owns 26 facilities and manages 16 in 10 states, plans to build at least two dozen new communities in the next two years and projects 1995 revenues of $82 million, a 32% increase. It generally serves an upscale population, although the company sets aside 10% of its units for low-income and Medicaid residents.
By contrast, Assisted Living Concepts seeks to serve the low-end of the private-pay market as well as Medicaid enrollees. It has six facilities in Oregon with 176 units. The company is building four more in Oregon, 10 in Texas and three in Washington for a total of 554 units. It plans to expand in areas where Medicaid pays for assisted living or waivers are pending.
The idea is to allow residents to "age in place" so that residents who spend down to Medicaid eligibility may remain at its facilities. The company intends to keep costs "sufficiently low so the residences are able to operate profitably if all their revenues are derived through Medicaid reimbursements," according to Assisted Living Concepts' prospectus.
"We want to be in a position to offer our services to all members of the community," said Keren Brown Wilson, the company's president and CEO.
Medicaid's foray into assisted living isn't expected to change the quality of care, just the frills.
"You may have lower-value projects being built," said Chris Urban, director of research for Capital Research Group.
NatWest's Sidoti sees the growing number of Medicaid waivers as a big boon to the assisted-living industry. If providers break even on Medicaid, they can make a profit on private-pay patients.