Assisted living's rise hits bumps

The industry aggressively expanded to capitalize on an aging demographic. Now the market's saturated.

©New York Times

© St. Petersburg Times, published June 1, 2000

Fueled by favorable demographic trends, strong consumer demand and a robust economy, the assisted-living industry was supposed to be mounting record profits this year while expanding rapidly and reaching new stock market peaks. That, at least, is what analysts were predicting three years ago.

It has not worked out that way. One publicly traded company, Grand Court Lifestyles Inc. in Boca Raton, filed for bankruptcy protection in March. Several others are under financial strain, and all have seen their shares recently plunge to record lows.

New construction has virtually stopped. Alterra Healthcare Corp. of Milwaukee, the nation's largest assisted-living operator that has 63 facilities in Florida and five in the bay area, has abandoned plans to build 100 new homes. Last year, the industry's publicly traded companies, which account for 10 percent of the homes, lost 68 percent of their value, according to Philip J. Martin, a First Union Securities analyst.

How could this happen?

The answer is a binge of overinvestment and overbuilding, with too many companies and people trying to seize a trend. The elderly, after all, are the fastest-growing segment of the population; the number of Americans who are 85 or older is expected to increase by one-third in the next decade, to about 6-million.

Most of the elderly dread the prospect of being confined to the hospital-like setting of a nursing home. Privately paid assisted living is viewed as an appealing alternative for people who need help but do not require skilled nursing. Residents have their own apartments. Public areas are designed to evoke the atmosphere of a comfortable hotel rather than an institution.

Experts in senior housing say the industry's poor financial performance has not discredited assisted living any more than the slide in dot-com stocks has undermined the Internet. They blame the gold-rush fever that led several companies to grow too fast and to use creative, though perfectly legal, accounting methods to hide their losses.

The concept of assisted living has existed for about two decades, but as recently as 1994, the industry had only two publicly traded companies. As capital became widely available, about 20 more public offerings followed, including some for companies operating both nursing homes and assisted-living apartments. That resulted in pressure to produce quick increases in earnings.

In contrast to nursing homes, assisted-living homes had few regulatory barriers. That also contributed to new residences going up hastily. But many companies did not anticipate how long it would take to fill their buildings with people. The costs are beyond many people's means, with monthly fees starting at about $3,000, with medical care usually extra. Also, many elderly people are reluctant to give up their independence.

"There wasn't a lot of discipline on the part of the companies," said Christos Kuliopoulos, a senior consultant at Ernst & Young who specializes in senior housing. "They weren't doing their due diligence."

So, the building boom has tapered off. The 164 homes now under construction are just a third as many as were completed in 1998. There are about 7,000 professionally run homes nationwide, with about 520,000 units, according to the American Seniors Housing Association in Fairfax, Va.

Only 15 facilities are under construction in Florida, with five in the bay area. That is down dramatically from 52 statewide and a dozen local projects a year ago.

Confidence in the industry also was shaken when many companies chose to engage in so-called off-balance-sheet financing. Abraham Gosman, the chairman of the CareMatrix Corp., a publicly traded company in Needham, Mass., used a private but wholly owned company, the Chancellor Senior Housing Group, to buy property and absorb start-up losses. Chancellor paid CareMatrix a fee for developing the homes and running them in the early stages. As the homes filled up, CareMatrix would either lease them or buy them back.

"They were moving money from one pocket to another pocket," said James J. Kumpel, an analyst at Raymond James & Associates, who called attention to this financing arrangement at several companies. "It was a cynical financing vehicle to promote hypergrowth in what is generally not a hypergrowth industry."

However, Louise T. Major, director of investor relations for CareMatrix, said this type of financing has been standard in the hotel industry for many years.

As the industry faltered, even the better-managed companies saw their shares drop precipitously. These included Sunrise Assisted Living, Brookdale Living Communities and the American Retirement Corp.

Companies like these own their real estate, choose their locations carefully, usually in densely populated areas, and focus on their operations, said Kathryn A. Sweeney, a vice president at AEW Capital Management, a Boston company that invests in privately held assisted-living companies.

"Those firms that succeed as good operators will live in this business," she said. "Those that entered the business as real estate developers -- for opportunistic reasons -- will not."

For these reasons, a shakeout could benefit consumers in the long run. It would force companies to shift their attention from development to management, said Don Redfoot, a senior policy adviser to the AARP.

But for now, families may want to exercise an extra measure of caution when choosing a home.

"The intense pressure to show profit margins created enormous pressures to keep staffing to a minimum," Redfoot said. "You want to make sure that the place is adequately staffed."

Times staff writer Kris Hundley contributed to this report.

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