seniorare the volume 26, issue 3 march 2014 · volume 26, issue 3 march 2014 ... other than the...

SeniorCareTHE

INVESTORInsIde The World of senIor Care Mergers, aCquIsITIons and fInanCe sInCe 1948

SeniorCare_Inv www.seniorcareinvestor.com

Volume 26, Issue 3March 2014

IN THIS ISSUEAfter rumors had been swirling for months, dating back to the NIC Confer-ence in October, Brookdale Senior Liv-ing finally announced a deal to acquire Emeritus Senior Living in a transaction valued at $2.8 billion. See page 1

...SNFs Set Record Price

The average price per bed for skilled nursing facilities shattered the previous record, and independent living commu-nities also set a record average price per unit in 2003. The full details will be pub-lished later this month in the 19th Edition of The Senior Care Acquisition Report. See page 1

...Platinum Healthcare Scores

See page 4

...Seniors Housing Acquisitions

See page 10

...Skilled Nursing Acquisitions

See page 16

...Financing News

See page 20

...REITs

See page 22

...People On The Move

See page 23

Marriage of Brookdale and eMeritus

Creating The Largest Seniors Housing Company Ever

...continued on page 2

We have been talking about the rumors of a merger between Brookdale Se-

nior Living (NYSE: BKD) and Emeritus Senior Living (NYSE: ESC) for a few months, including on the front page of this newsletter back in November. In that story, we mentioned three rumored suitors, and we got two of them right. But all along, we truly thought they were rumors because it just didn’t make sense for the buyers.

Brookdale was the eventual “winner,” paying a 32% premium to Emeritus shareholders in the $2.8 billion transaction where Emeri-tus shareholders will receive 0.95

shares of Brookdale for each of their shares, and Brookdale will assume about $1.4 billion in mortgage debt. Brookdale will also assume a boatload of lease obligations, but more on that later. The valuation of the purchase is complicated by the different kinds of leases from a GAAP accounting per-spective. After capitalizing the leases with an 8% cap rate (which we believe is low), we derive a price per unit of about $165,000 and a cap rate just above 7%. Admittedly rough, but it is the question that is always asked. This also does not take into account cost and revenue synergies and simply looks at the fourth quarter results for Emeri-tus. The CEO of Emeritus, Granger

snfs set record average Price

...continued on page 19

Even with the 100 basis point increase in interest rates in the second quarter of 2013

(as measured by the 10-year Trea-sury rate), there was no let-up in demand for seniors housing assets, especially the higher-end proper-ties in good locations. During the summer, there was a pause in the market as buyers tried to determine what the ultimate impact of the in-terest rate rise would be, but there seemed to be little impact on cap rates. The reality is that changes

Independent Living Also Hits A New High In Bull Market

in interest rates always have a lagging impact on cap rates, and with the buyers in the market using a higher proportion of equity than in the past, combined with floating rates (LIBOR) still at his-toric lows, the buying binge continued unabated.

The big news for 2013 was that a new price-per-bed record was set in the skilled nursing acquisition market, shattering the record set in 2010 when the average price hit $62,500 per bed.

March 2014The SeniorCare Investor


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continued from page 1...

Cobb, will retire from his executive positions and join the Brookdale board, Andy Smith will remain as CEO and Mark Ohlendorf will remain as president and CFO, although those two functions should be split up. It is not known how many of ESC’s senior operating people will join Brookdale, but we would imagine some of them will be floating their resumes in the market.

As we stated when the transaction was announced, this is a great deal for Emeritus shareholders, and it wasn’t a secret that founder Dan Baty had been looking for an exit strategy. Before any cleansing divestitures, the com-bined entity will have 1,161 communities with 112,694 units, of which 49% are leased, 34% are owned and 17% managed. By care segment, 52% are assisted living, 26% are independent living, 12% are Alzheimer’s care, 5% are entrance-fee independent living and 5% are skilled nursing. The number of leased buildings is expected to decline, as management has stated they are planning to exercise purchase options for more than $2.0 billion of properties across both portfolios. We agree that real estate

ownership provides financial flexibility and reduces the cash flow impact of the lease escalators down the road, but financial flexibility will not be the problem.

Across all of health care, from senior care to hos-pitals to home health care and even the pharmaceutical sector, bigger is not always better. In fact, it rarely is after reaching a certain size. There is, of course, no definition of what that size is. Many people we have spoken to over the years thought that 500 properties was the maximum for seniors housing and care, with many not comprehending how they would manage 200 to 300. At more than 1,100 properties, we have to believe dis-economies of scale would be kicking in.

Much has been made of the cost savings and cost synergies from this transaction as well as the overlay of services, increasing the base for ancillary services across both portfolios and the 100,000 residents who spend $4.5 billion each year on health care, and capturing 1% of that, or $45 million. That number could be larger or smaller, but that is revenues and not incremental cash flow. And it is a maybe. Orchestrating those cost savings and synergies, other than the easy part of duplicative corporate office expenses, is going to be difficult, to say the least. While we don’t know how many executive directors leave their

March 2014 The SeniorCare Investor


The Providers current adjusted % change % change Price P/e froM froM 52-Week rangecoMPany ticker 2/28/14 ratio(1) Prior Month 1/1/14 high loW

Skilled Nursing

AdCare Health Systems ADK $4.34 12.4 7% 1% $6.26 $3.62Diversicare Healthcare(2) DVCR 5.49 14.0 5 18 5.75 4.45 Ensign Group ENSG 39.60 7.4 -6 -11 46.39 30.85Kindred Healthcare KND 21.66 10.0 14 10 22.09 9.75National HealthCare NHC 51.50 6.3 -1 -4 56.69 44.68Skilled Healthcare Group SKH 4.81 10.0 5 0 7.51 4.08

Assisted/Independent Living

Brookdale Senior Living BKD 33.54 13.2 22 23 33.69 24.42Capital Senior Living CSU 25.42 16.1 13 6 27.90 19.87Emeritus Corporation ESC 31.53 13.4 43 46 31.93 18.15Five Star Quality Care(3) FVE 5.79 9.7 7 5 6.87 4.41

(1) Adjusted P/E = (market cap + total debt + capitalized leases - cash)/annualized EBITDAR based on the most recent quarter. The rate used to capitalize the leases is 10.0%. (2) The company changed its name from Advocat in March 2013. (3) The P/E ratio is based on partial Q:3 data.

jobs each year, we would guess that a five-year stay would be on the high side. That means replacing more than 200 of these key employees each year, and the same goes for other staff members who probably have a higher turnover rate. The point is that the financial engineering discussed as part of the rationale for the transaction only goes so far, and if all the employees are not walking the walk, there are going to be mistakes, problems, and Frontline knocking on the door, which would be very unfortunate, and not just for Brookdale.

The other aspect of the deal that has been touted is a national branding campaign under the Brookdale banner with more than 1,100 communities and 6.5 mil-lion 80-plus year olds within 10 miles of at least one of those communities. As some of you know, we have never believed in the benefit of “national” branding for seniors housing. Much to their dismay, we relayed that opinion to the buyers of the Sunrise Senior Living management company, as that was part of their expansion plan. That may be abandoned with the recently announced sale of the management company by KKR (NYSE: KKR). Marriott thought they could parlay their brand to seniors housing, and that didn’t work. When you walk into a Marriott hotel, you know exactly what you are going to get, and it does not vary from city to city. That does not happen when you walk into any Brookdale community, as they are quite different in design and service amenities from com-

munity to community. Now you add in the 500 Emeritus properties, and you are going to have a brand? Perhaps in name, but they were built or bought from a wide variety of developers and sellers, with an equally wide variety of quality. Besides, one stays in a Marriott hotel many times, while one makes a decision about seniors housing once or twice (yourself and/or a parent), if at all. In other words, unlike a Marriott, you don’t have much repeat business.

The other problem we have is that we believe Brook-dale is the better company, meaning that its properties on average are better than the Emeritus properties, and Brookdale was gaining more traction since the recession than Emeritus. They both have great properties, and they both have some not-so-great properties, but Brookdale has always seemed a notch above, and that was before Emeritus took over the Sunwest Management portfolio. Let’s take a look at some of the numbers. Over a two-year period and on a same-community basis for 319 Emeritus communities, occupancy grew from 86.9% to 87.2% for a 30 basis point increase since the first quarter 2012. This same group of communities had an operating margin of 33.2% in the first quarter of 2012, which had declined to 33.0% by the fourth quarter of 2013. Perhaps Brookdale has some secret sauce to move the needle on these prop-erties, but paying a 32% premium for the right to do so? And speaking of that Sunwest portfolio, the lease with HCP, Inc. (NYSE: HCP) is now in the second year, with a



recent 4.4% increase in the rent, which will then bump up another 3.8% in year three and 3.6% in year four. Without significant improvement in cash flow, that may hurt.

While we certainly hope that the Brookdale manage-ment team is successful with the acquisition, there are just too many things that can go wrong with such a behemoth, principally among them taking their eye off the ball, which in this case is the residents and employees. This is a people business, and a local business, and when those at the top become too far removed from those in the communities, that is when “slippage” happens, and as we said, across all of health care, being the biggest has never worked out all that well. The smaller competition is gearing up for the marketplace battles, and they would rather be nimble and quick, and not get stuck on the candle stick. And don’t be fooled by some of the valuation estimates of the combined company using 5.5% to 6.0% cap rates. Very, very few sales are at 5.5% cap rates, and that’s in today’s still-low interest rate environment. And the vast majority of both companies’ properties would not sell with a 5.5% cap rate, even to a hungry REIT.

It should be noted that investors appear to disagree with our take on the situation. Obviously, shares of Emeri-tus jumped to the full premium, and then surpassed it, but

it was surprising that Brookdale’s shares initially jumped by more than 7% early the first day before settling for a one-day gain of just 1.5%. But the bulls for Brookdale continued two days later taking the shares up to $33.16, representing a 10% increase from the pre-announcement price. They show no concern about the size problem, and instead are focusing on market muscle and the intrinsic value of real estate ownership with the purchase options. And then we learned that Fortress Investment Group (NYSE: FIG), a major Brookdale shareholder, had in-creased its holdings since the end of last year from 17.59 million shares to 20.29 million shares, representing 16.3% of the common stock. And we thought FIG was trying to reduce its holdings. But if we are so wrong about our analysis, why do so many people seem to agree with us, off the record, of course?

PlatinuM healthcare scores

For more than 25 years, we have been writing about the ins and outs of seniors housing acquisitions, the great successes as well as the abject failures. There have been those Class A property sales where the occupancy was 97% with high operating margins and very high prices, and there have been those bow-wows, with low occupancy, little to no cash flow and sometimes built 25 to 30 years



ago. Although many buyers of the former type of property would never buy the latter type, it is those lowly orphans that just can’t seem to get it right that often offer the high-est returns. The hard part is trying to figure out why the seller can’t turn it around, but the buyer can.

They are both dealing with the same location, physi-cal plant and market dynamics, but somehow end up with vastly different results. Not always, but enough times to make us wonder what is it about these buyers that enable them to turn the proverbial lemon into lemonade. We have written about the success of Kandu Capital in a few of their acquisitions, usually buying underperforming assisted living and memory care communities that were previously owned by much larger companies and in what we call “outlier markets” for those companies. Then there is the “Dutchie from Kentucky” who flies under the radar, turns around properties that others failed at turning around, and then sells them at a tidy seven-figure profit. We hear his secret is to incentivize the staff when he takes over opera-tions in ways that the large companies most likely either can’t do or don’t want to do. And who can forget Legend Senior Living, with its 98%+ corporate occupancy rate, all with new development. In this case, it is management plus location and beautiful physical plants.

The other issue is size. It just seems that the smaller companies have a bit more of an entrepreneurial spirit, with the owners much more on top of operations and the line staff than a company with 200 to 500 properties (did we say 1,100 buildings?). If the owner knows the name of the executive director (as well as the names of the spouse and children), that goes a long way. And without layers of management, if a correction is needed, or a purchase of something will enhance operations, it can be done im-mediately with one phone call.

We will turn our attention to a mid-sized company based in Illinois that often frequented these pages but has been quiet for a year or two, that is, until now. Platinum Healthcare is different from most providers in this space. Not only does it have a balanced platform of skilled nurs-ing facilities (18) under the Platinum name and assisted living communities (12) under the “Lamplight Inn” ban-ner, but it also has ventured into the substance abuse and eating disorder business with four acquisitions last year. It also has not been afraid to enter the affordable seniors housing market in those states that have decent reimburse-ment programs. And because of its success, led by Ben Klein and Paresh Vipani, the company has many banking sources for its transactions and had no trouble during the credit crunch of 2008 to 2010.



Working backwards with the most recent transac-tions, on February 1 the company closed on the acquisi-tion of two assisted living communities from Emeritus (NYSE: ESC) located in Sarasota and Fort Myers, Florida, for $6.3 million, or $37,300 per unit. That is obviously at the very low end of assisted living prices, and reflects the age of the buildings (both over 30 years old), but also some financial performance issues at the Fort Myers property. In 2013, Fort Myers was operating near breakeven after a management fee on revenues just under $2.3 million, despite occupancy of 93% at the 74-unit property. About 15% of the census is Medicaid, and the rates appear to be on the low side. A few years earlier it operated with a 12% margin, so Platinum knows that it can be cash flow positive. It is expecting to make EBITDA of at least $225,000 this year, and perhaps $315,000 in 2015. Of the total, 16 units are currently for memory care, and they may expand that.

The Sarasota community, a market where we have seen a few new assisted living properties built (and be-ing built), the 95-unit community (rebranded Lamplight Inn at Sarasota) has a lower occupancy of 80%, but is reasonably cash flow positive at just over $500,000 in 2013, representing a 20% operating margin. Like the Fort Myers property, it has a 15% Medicaid census. Other than

increasing occupancy, we are not sure what else can be done to improve the financial performance. Assuming the Fort Myers property can be turned around and the census at Sarasota can be increased, we expect these properties will be worth between $10 and $12 million by the end of 2015, which is just $65,000 per unit, but a nice return. Financing for these two acquisitions was provided by Bank Leumi, which included a fixed rate mortgage, a line of credit for capex, and a working capital line of credit.

In another purchase from Emeritus, which closed in early January, Platinum Healthcare bought a 119-unit assisted living community in Baltimore, Maryland that suffered from low 53% occupancy last year. The purchase price was $4.25 million, or $35,700 per unit. There are 84 studios and 36 one-bedroom units, and since it was built in 1999 it should be somewhat modern in design, even though it needs about $320,000 in renovations. In 2013, the community was operating just below breakeven, but the buyer’s pro forma EBITDA at 90% occupancy, with 82% private pay and 18% Medicaid, is forecasted to be about $880,000, representing a 21% operating margin. We are not sure how long it will take to get there, but that will represent a $10 million value. The property was appraised at $6.2 million “as is” and $8.9 million when stabilized. Capital Funding arranged the mortgage financing.



It would be easy to assume that talk is cheap, that all buyers think they can turn properties around. But Platinum Healthcare recently walked the walk with the sale of a 114-unit property in Dayton, Ohio. They purchased the community in mid-2010 from Emeritus for $4.0 million, or $35,000 per unit, when revenues and EBITDA were approximately $3.3 million and $375,000, respectively, based on occupancy of 70%. It was built in 1994 and has a mix of private pay and Medicaid. In early January, Platinum closed on the sale of this property to Fortress Investment Group (NYSE: FIG), which we believe will have Holiday Retirement Corporation manage it. The purchase price was $11.0 million, or $96,500 per unit. EBITDA had jumped to $900,000 on occupancy of 86%, representing a 20% operating margin, and the cap rate was 8.2%. We don’t know what capital improvements went into the building in the past three and one-half years, but a $7 million change in value is impressive.

In December last year, Platinum Healthcare pur-chased a 114-unit assisted living and memory care com-munity built in 1985 in Peoria, Arizona for $2.2 million, or $19,300 per unit, from Quilted Care, Ltd. Occupancy was just 64%, so it was operating at breakeven on just under $1.8 million or revenues. The memory care units were about one third of the total and came with a slightly

higher occupancy than the assisted living units. Manage-ment expects to reach pro forma occupancy of 83% in year two with revenues and EBITDA of $2.6 million and $625,000, respectively. That would put the value at over $7.0 million, or $61,000 per unit, which is still considered relatively cheap in the market. Cole Taylor Bank pro-vided mortgage financing for this acquisition.

There was another purchase from Emeritus, com-pleted last September, of a 118-unit community in West Allis, Wisconsin for $1.9 million, or $16,100 per unit. This property was built in 1963 as a seven-story hotel and came to Emeritus with the large portfolio of former Sunwest Management properties (thank you, Jon Harder). It has an 87% Medicaid census, something that Emeritus is not fond of, and it was losing money with 70% occupancy. By decreasing the number of licensed beds a few years ago, they were able to increase the Medicaid rate by $500 per month. Occupancy in February reached 80% and manage-ment expects to hit 90% by the fourth quarter 2014, at which time annualized EBITDA should be approaching $500,000. Using a higher cap rate than traditional assisted living results in a value near $5.0 million. Bank Leumi provided financing for this acquisition.

By no means do we want to imply that we are bash-



ing Emeritus; to the contrary, it made sense for ESC to exit from these buildings as they really don’t fit in with their future plans. In fact, they should be applauded for doing this and not wasting resources trying to turn around properties that they may not understand as well as a Plati-num Health. It is doubtful that Brookdale Senior Living (NYSE: BKD), Sunrise Senior Living or Atria Senior Living, to name a few, would have done any better than Emeritus. In this case, it is all about Platinum and not Emeritus. In the skilled nursing side of the business, they also bought a 120-bed facility in St. Joseph, Missouri last summer from Five Star Quality Care (NYSE: FVE), a company that has been exiting the SNF business to focus on seniors housing. The price was just over $21,000 per bed and the facility was losing money on 53% occupancy. Today, occupancy is 64% and it is close to breakeven. Management’s year two pro forma projects EBITDA of $1.4 million. You do the math, and we can cry together.

seniors housing acquisitions

American Realty Capital Healthcare Trust (ARC) is back in the market with a portfolio acquisition. An Illinois-based multifamily and commercial real estate developer has sold four assisted living communities in Illinois that they very recently built. Known as the Vil-

las of Hollybrook, these four have 185 units and sold for approximately $135,000 per unit. Because they are new, a few are still filling up but occupancy is approaching 90%. Based on trailing EBITDA, the cap rate was close to 5.0%, but it rises to 7.8% based on pro forma cash flow once stabilized, which should happen soon. There are two additional communities in the portfolio of a similar size and price that are expected to close in the next few months. ARC is expected to hire Meridian Senior Liv-ing to manage the communities. Mark Myers of Marcus & Millichap represented the seller, while Blueprint Healthcare Real Estate Advisors represented the buyer.

Nothing compares with the acquisition of Emeritus in terms of size, but a large two-property sale recently closed in California. It looks like MBK Senior Living has done it again, selling the mini-portfolio for $104.5 million, or $356,650 per unit. Both communities were built in 2001, and the one that is just northeast of San Francisco has five buildings with 64 assisted living units, 24 memory care units and 71 independent living units. The second campus is just outside Los Angeles and has two buildings with 96 assisted living units and 38 memory care units. Both had occupancy above 98% (there he goes again, but how does he continue to do it?). The operating margin was a very healthy 40%, and the cap rate was close



to 6.0%. This will be a nice portfolio for the buyer, which will retain MBK as the manager. We suppose that ARC expects occupancy to stabilize at 100% with a waiting list (there we go again). Dave Rothschild, Matthew Whitlock and Mary Christian of CBRE’s National Senior Housing Group represented the seller.

Not-for-profit provider Bethesda Senior Living, based in Colorado, has purchased a recently constructed 113-unit assisted living and memory care community lo-cated in Thornton, Colorado. The Park Regency Thornton, which will be re-branded Premier Senior Living Thornton, opened last November and about 20 residents have moved in. The purchase price was $14.3 million, or $126,500 per unit and $168 per square foot. The seller is a local devel-oper, and while selling another community in Colorado, Bethesda basically indicated it wanted both even though the Thornton property was not stabilized. The second sale should close in the next few months. Bethesda operates 18 communities in six states, with the highest concentrations in Missouri (6) and Colorado (5). Pam Pyms of Pyms Capital Resources represented the seller, and George Swintz of Bonaventure, LLC represented Bethesda in the transaction.

Just on the heels of their acquisition of a senior liv-ing community in Colorado, The Freshwater Group and

joint venture partner NorthStar Healthcare Income, Inc. have purchased a 202-unit community in an upscale sub-urb of Dallas, Texas. The community opened in 2008, and as a result, in order to fill it, the developer had to charge below-market rents. Occupancy today is above 91%, but it is believed that rents today are still close to 25% below the local market, so there is a lot of room to maneuver. The building is large, with nearly 300,000 square feet and 60% of the units are two-bedrooms with the remainder one-bedrooms. Financial details have not been disclosed, but we have estimated in-place revenues to be approaching $7.0 million with EBITDA perhaps topping $2.0 million. Our guess is that the purchase price was between $160,000 and $180,000 per unit, but our guess is, that is not how the buyer is looking at it.

First of all, with more experienced management in place, we expect revenues to increase to at least $8.0 to $8.5 million within two years. That assumes at least a 15% increase in rates and occupancy approaching 95%. The operating margin would be at least 35%, and using a 7.0% cap rate, the value would be in the $200,000 to $210,000 per unit range. But it gets better. The buyers purchased adjacent land and in six months they plan to build an 82-unit assisted living and Alzheimer’s community at a cost of about $175,000 per unit. Not only will that be valuable,



but it will enhance the marketability of the original 202-unit community. Aron Will of the CBRE Senior Housing Debt & Structured Finance Group arranged $20 million in seven-year floating rate debt with Freddie Mac, with interest only for the first three years. Mike Girard and Ed La France of TSG represented the seller, and Carl Mit-tendorff of The Freshwater Group worked the transaction for the buyer.

There seemed to be an unusual number of non-traditional owners of senior care assets selling in February, and such was the case in Texas, where a local real estate company that specializes in shopping centers and other properties sold its 87-unit assisted living community, which is licensed for 115 beds. Occupancy was 78% at the property, which was built in 2000, and the operating margin was just below 7% on revenues of $2.15 million. But the Brookdale community across the street was 100% full with a waiting list. The private equity buyer from New York saw an opportunity and paid $4.75 million, or $54,600 per unit. The buyer has leased it to a Texas-based skilled nursing operator, who hopefully knows how to manage assisted living. Evans Senior Investments rep-resented the seller in the transaction.

To say the market was a bit surprised is an under-statement, but Kohlberg Kravis Roberts’ (NYSE: KKR)

announcement of the sale of its 80% equity interest in Sun-rise Senior Living sent a few ripples through the market in February. KKR spent a few years looking for a large platform to build a seniors housing business, and it wanted to start big with a major presence. It tried to buy Erickson Retirement Communities out of bankruptcy but came up short competing against another private equity firm. Then, when Health Care REIT (NYSE: HCN) startled the market with its purchase of Sunrise, followed by the sale of just the management side of Sunrise (80%, that is) to KKR and its co-investors, well, we thought KKR had finally found its place in the sector. That came to an end with the announced sale to Canadian giant Revera Inc.

KKR and its partners paid approximately $104 mil-lion a year ago for their 80% interest in Sunrise without any real estate interests, while Health Care REIT kept 20%. Although the current price has not been disclosed, the rumor is that KKR received an offer they could not refuse, or about three times their original investment, which would be close to $300 million. Private equity firms are all about making money for their investors, so that kind of return in a year is certainly not something to walk away from. As part of the transaction, Health Care REIT bumped its ownership stake in Sunrise up to 24%, for reasons unknown. Revera is already in a joint venture with Health Care REIT that owns 47 senior living prop-



erties in Canada, and Revera has stated it wants to have a major presence in the important U.S. and U.K. senior living markets, which Sunrise provides them very quickly and with scale. The CEO of Sunrise, Penny McIntyre, was hired by KKR less than three months ago, so we are not sure how the sale will change her plans, if at all.

skilled nursing acquisitions

As we have seen, skilled nursing per-bed prices set a record in 2013, but the sales this month are not going to help any new records for 2014. In another sale of a county nursing facility, Mark Myers and Joshua Jandris of Marcus & Millichap represented the Orleans County Health Facilities Corporation in New York in the sale of their 120-bed facility in Albion. Although originally constructed in 1960, about $10.6 million was spent on renovations in 1995 and 2008. Despite being in good condition and with occupancy of 92%, it lost nearly $300,000 on revenues of $10.75 million in 2012, and that was before debt service of $900,000. The buyer, New York-based Comprehensive Healthcare Management Services, will be paying $7.8 million, or $65,000 per bed, when the transaction closes late in 2014 after approvals are obtained from New York. Currently, the Medicaid census is 79%, but we assume the quality mix will increase a bit

as expenses are reduced, resulting in projected EBITDA approaching $900,000 within two years. Comprehensive Healthcare is also purchasing an additional 142-bed skilled nursing facility in upstate New York from Buffalo-based Catholic Health, as well as two adult homes with a total of 157 beds. These three facilities were estimated to have a combined loss of $3 million in 2013.

Myers and Jandris also just closed on the sale of two skilled nursing campuses in Iowa that have a combined 175 skilled nursing beds and 36 independent living units (18 units on each campus). Despite a somewhat low oc-cupancy rate just below 80%, these appear to be well-run campuses that operated with a 15% margin. It appears that revenues and EBITDA in 2013 were close to $10.5 million and $1.6 million, respectively. Based on a sales price of $13.5 million, or $64,000 per bed/unit, the resulting cap rate is about 11.8%, which is almost a perfect weighted blend of an average skilled nursing and independent liv-ing cap rate. Marcus & Millichap represented the seller, Traditions Senior Management, and the buyer, Aviv REIT (NYSE: AVIV) will lease the properties to Lake-wood Ranch, Florida-based Trillium Healthcare Group.

A large skilled nursing facility in Glendale, Arizona with low occupancy was recently sold to a large nursing



facility operator that has a presence in Arizona. The target property has 196 beds with occupancy of 51%, of which 69% is Medicaid, 10% is Medicare and the rest private pay and insurance. It had an operating margin below 2% on revenues of $9.0 million, so the buyer is looking for some improvements. The seller, a local real estate company, had leased the property to a large out-of-state provider that specialized more in the high-end seniors housing side of the business. The purchase price was $9.1 million, or $46,400 per bed, which is pretty good given the cash flow and occupancy and may reflect the relatively young age of the building (15 years). Evans Senior Investments represented the seller in the transaction.

Global Healthcare REIT (OTCQB: GBCS) is certainly not wasting any time. In February it closed on its third and fourth acquisitions in its young life. The first purchase was of a 99-bed skilled nursing facility in Scotts-burg, Indiana in which the REIT bought a 67.5% interest in the LLC that owns the facility. The price was $3.41 mil-lion, or $34,500 per bed, but that may be for the majority interest. The REIT assumed $2.9 million of senior debt and received a $500,000 note from Scottsburg Investors, LLC. So, zero money down? The facility will be leased to a regional multi-facility skilled nursing operator.

In the second transaction, the REIT purchased a large community in Tulsa, Oklahoma with 106 skilled beds, 84 independent living units and 32 assisted living beds (in three separate buildings). The kicker is that the purchase price was just $2.0 million, or $9,000 per bed/unit and $19 per square foot. There are reasons. First, the community was built in the late 1960s. Second, the assisted living part of the building has been closed for 15 years. Third, late in the marketing, and when the buyer had already agreed to the purchase (at a higher price), apparently the executive director decided to close the independent living part of the building and transferred the residents to other com-munities. So the buyer was left with 106 nursing beds with occupancy above 85% and an IL/AL component with no residents and in need of repairs. The purchase also was just of the real estate, and the license is still with the operator. For how long is anyone’s guess. But if Global Healthcare invests the necessary capital to reopen the other parts of the community, the sky’s the limit on what the community could be worth, at least with proper management, and that would be the first priority. The REIT obtained a $1.5 million first mortgage from First Commercial Bank and used $500,000 of its cash to consummate the purchase, which was also subject to the assumption of an operat-ing lease with an existing skilled nursing operator. Doug O’Toole of Marcus & Millichap represented the seller,



SNFs AND IL Set Records continued from page 1...

Ventas (NYSE: VTR), which inherited the property with its previous purchase of Nationwide Health Properties.

Hospitals have been in more of a selling mood, or at least partnering with local providers, than buying skilled nursing facilities outright. But what doesn’t work for one may work for the other. Such was the case in Indiana, with Riverview Hospital selling its 225-bed nursing facility in Munster, known as Munster Med-Inn, to Major Hospital in Shelbyville, Indiana. Terms have not been disclosed, but Major Hospital has a separate department that has a primary focus devoted to relationships with skilled nurs-ing facilities in the area.

Have you ever wondered what a CON in Virginia is worth? In this unusual transaction, there were two adjacent nursing facilities on the border between Virginia and Ten-nessee, but the state line went through the middle of both facilities, located in Bristol, Virginia and Bristol, Tennes-see. The 120-bed facility in Virginia was closed and its CON was sold to a skilled nursing developer for $1.393 million, or $11,600 per bed, who will relocate the beds to another county in the state and build a new facility. It is not known what will happen to the empty building. Ryan Saul and Patrick Burke of Senior Living Investment Brokerage handled the transaction.

With a dozen transactions priced over $100,000 per bed, plus several portfolios between $75,000 and $100,000 per bed, the average price in 2013 was $73,300 per bed, or 21% above the average in 2012 and 17% higher than the previous record set in 2010 at $62,500 per bed. This may be a record that stays for several years given the significant jump that occurred. In past years, there have been sale/leaseback sales of companies or portfolios between REITs and the operator at prices above $125,000 per bed that would have significantly impacted the statistics in those years, but we consider those not to be arm’s length trans-action, but financing transactions between two parties.

In 2013, the combination of newer buildings, loca-tions such as New York City, and high Medicare and subacute-focused facilities drove the average price per bed to this new record. Many buyers are getting more sophisticated in looking at potential acquisition targets in terms of their subacute potential if the facilities do not al-ready have a high Medicare census. According to analysis that we did during 2013, buyers will pay the equivalent of $200,000 per bed or higher for Medicare beds, and perhaps $30,000 to $50,000 per bed for Medicaid beds



depending on the state. But this is for those skilled nursing facilities with a very high-end or profitable Medicare and subacute program. These nursing facilities are then sold for a weighted average of the two, which can be between $75,000 and $125,000 per bed, and sometimes higher. The buyer does not actually use a weighted average, but it is the profitable Medicare utilization, and the potential for more Medicare patient days, that the buyer is paying for. The Affordable Care Act, in combination with the drive to keep the growth rate of health care expenditures within reasonable bounds, is expected to result in skilled nursing facilities playing a more active role in post-acute care. In addition, if Accountable Care Organizations become increasingly important in controlling costs and ensuring higher quality care, those nursing facilities with a solid track record will become increasingly sought after in the market, and will sell with high per-bed prices.

In the private pay side of the business, the average price per unit for seniors housing (independent and as-sisted living combined) increased by nearly 5% in 2013 to $164,000 per unit, and came very close to matching the record set in 2007. This increase was driven by the much smaller market for predominantly independent living communities, which set a new record in 2013 at $191,950 per unit, or 38% higher than in 2012. This market had a few

portfolios that sold above $200,000 per unit, plus single asset sales of high-end communities that topped out over $400,000 per unit. In addition, many of these properties also had an assisted living and memory care component, driving occupancy and demand. The assisted living mar-ket did not fare as well in 2013, declining by 4.5% to an average of $150,600 per unit. While the assisted living market had its share of $200,000 per unit and higher sales, it also had many more below $100,000 per unit than the IL market, and in particular, four times as many below $75,000 per unit, which brought the overall assisted living average price per unit down. In the acquisition market, there has been strong demand for both Class A and B assisted living properties, but in the independent living market, the real demand is for those high quality Class A communities, with investors still nervous about the older independent living stock unless they are in great markets.

financing neWs

If you are a provider and want to grow, now is the time to find a financial partner. And if growth is going to be by development, a long-term equity partner is often the best way to go. Take the case of Vero Beach, Florida-based Watercrest Senior Living Group. It has recently signed a $500 million co-development partnership with



Sweden-based Index International AB which will in-volve developing approximately $100 million of seniors housing properties annually for five years. The goal is to open up to six communities a year. Index International was established in 1998 and is a global independent investment company specializing in real estate and equity invest-ments, currently active in Sweden and North America, but expanding in North America and Europe. Apparently, the principals of Index met with numerous seniors housing operators in the U.S., and they liked the operating culture at Watercrest. The rest will soon be history.

On the construction side of the market, CNL Health-care Properties, which is known more for acquisition and traditional sale/leaseback financing, has agreed to invest $35.3 million in a new development with 152 units in Tega Cay, South Carolina, which comes to about $232,000 per unit. This will be the REIT’s fifth development project, however. Red Capital Partners is providing $26.2 mil-lion of balance sheet, non-recourse funding to CNL as part of the financing. Located on 12.5 acres, the community will have 80 assisted living units, 24 memory care units and 48 skilled nursing units in six buildings, which will include a resident clubhouse and a wellness center. The property is being developed by North Carolina-based Maxwell Group, Inc.

NorthMarq Capital recently closed on the refi-nancing of a 118-unit independent living unit in Elkhorn, Nebraska with a life insurance company, with a total loan amount of $16.2 million, or $137,300 per unit. It was a fixed rate, fully amortizing, 18-year loan, something you don’t see too often in the market. The first phase with 59 units opened in 2007 and quickly filled. The second phase, also with 59 units, is attached to the first phase with the clubhouse and opened in late 2011. The entire project broke through 90% occupancy last year, and the operator, Nebraska-based Dial Senior Management, Inc., owns a 64-unit assisted living community down the road. Jason Kinnison of NorthMarq arranged the financ-ing. Separately, Contemporary Healthcare Capital has provided a $1.7 million senior mortgage to the buyer of a 50-bed assisted living and memory care community in Charlotte, North Carolina. The funds will be used for the purchase, working capital and closing costs.

MidCap Financial, LLC provided $30 million in financing to Ohio-based Continuing Healthcare Solu-tions, Inc. (CHS), an owner/operator of mostly skilled nursing facilities, but also assisted living, memory care and adult group homes. The financing includes a $25 million three-year revolver for working capital as well as a $5 million three-year term loan. The company wants to



acquire, and the revolver will provide management with the working capital funds to take on the operations of new facilities. CHS was founded in 2011 and already has more than a dozen properties in Ohio, 10 of which are skilled nursing and rehab facilities. Quadriga Partners, LLC, a middle market investment bank that works exclusively in health care, arranged the financing on behalf of CHS.

HUD Market. In a large HUD financing, Beech Street Capital arranged a $23.1 million HUD loan for a 281-bed skilled nursing facility in Chicago, or $82,200 per bed. The owner, Illinois-based ManagCare, purchased the 40-year old facility in 2009 and has invested more than $1.0 million in improvements. Beech Street stated that this was the first HUD loan approved under HUD’s new Intercreditor Agreement that permits deals with accounts receivable financing to close using this new agreement if all parties agree to accept the document as currently drafted. ManagCare operates 10 skilled nursing facilities in Illinois, and Josh Rosen of Beech Street originated the transaction. He also closed a $6.0 million refinancing of a 169-bed skilled nursing facility in Michigan on behalf of Olympia Group, LLC.

Housing & Healthcare Finance closed two HUD deals in February. The larger one was a $9.926 million loan for a 120-bed nursing facility in Pennsylvania, or $82,700 per bed, and the second one was a $7.085 million loan for a 116-bed nursing facility in New Jersey, or $61,100 per bed. Meanwhile, Capital Funding Group (CFG) closed on a $7.9 million HUD loan for an 80-bed skilled nursing facility in Indiana, or $98,750 per bed, and a $5.78 million loan for a 121-bed facility in Michigan, or $47,800 per bed. CFG also provided $37 million in bridge financing for the acquisition of four SNFs in Massachusetts with 541 beds, or $68,400 per bed. It is anticipated that the bridge loan will be refinanced with HUD.

reits

After a little pause, Sabra Health Care REIT (NASDAQ: SBRA) was back in the market in February with the purchase of six senior living campuses with 673 units/beds, all within 100 miles of Omaha, Nebraska. They include 292 skilled beds, 213 independent living units and 168 assisted living units. Sabra has leased the properties back to Nye Senior Services with an initial 10-year lease term and four five-year renewal options. The initial cash yield on the $90.0 million purchase price is 7.78%, with annual 3% rent escalators. There will also be an earn-out based on the incremental increase in the portfolio value



current

Price current dividend 2014 52-Week range

coMPany ticker 2/28/14 yield status(1) % change high loW

Aviv REIT AVIV $25.36 5.7% Beg. Jun-13 7% $31.10 $21.31 HCP, Inc. HCP 38.77 5.6 Inc. Feb-14 7 56.06 35.50 Health Care REIT HCN 58.74 5.4 Inc. Feb-14 10 80.07 52.43 Healthcare Realty Trust HR 23.97 5.0 Dec. Mar-10 12 30.59 20.85

LTC Properties LTC 37.68 5.4 Inc. Oct-13 6 48.69 34.30 National Health Investors NHI 61.70 4.8 Inc. Jun-13 10 72.99 53.01 Omega Healthcare Investors OHI 31.96 6.1 Inc. Jan-14 7 38.41 27.37 Newcastle Investment Corp. NCT 4.90 8.2 Dec. Sept-13 -14 5.04 3.73

Sabra Health Care REIT SBRA 28.47 5.1 Inc. Feb-14 9 32.40 21.55Senior Housing Properties Tr. SNH 22.30 7.0 Inc. Oct-12 0 29.99 20.07 Universal Health Realty UHT 42.58 5.9 Inc. Jun-13 6 59.09 38.36 Ventas VTR 62.43 4.6 Inc. Dec-13 9 84.11 54.89 (1) As of ex-dividend date. (2) NCT prices and dividend rate were adjusted for the spin-off of New Residential Investment Corp. effective May 2013.

REITs

created through expansion and conversion projects. Quad-riga Partners represented Nye in the transaction.

There could be some big news coming from a few REITs in the next few weeks. NorthStar Realty Finance, with Jay Flaherty now working the deal market for health care transactions, revealed that it is working on a $1.05 billion portfolio of assisted living and skilled nursing facilities with more than 8,500 beds. There are not too many sellers with that combination, but we will keep you guessing…. Meanwhile, Newcastle Investment Corp. (NYSE: NCT) disclosed on its earnings call that it would consider spinning out its seniors housing assets because it could result in significant shareholder appreciation. And we thought they were just beginning to have some fun.

Griffin-American Healthcare REIT III (as in its third health care REIT) has filed a registration to sell $1.9 billion in common stock at $10.00 per share. While publicly registered with the SEC, the shares would not be traded, and the REIT will invest in medical office build-ings, seniors housing, skilled nursing and hospitals. And not to be left behind, Sumitomo Mitsui Banking Corp. is seeking to buy about $100 million of seniors housing properties in Japan before taking its health care REIT public. Apparently, the country will need as many as 1.8 million new seniors housing units by 2020. That’s 300,000 a year, which if true, would put our little development boom to shame.

PeoPle on the Move

So what does a turnaround artist and ex-CEO of Sunrise Senior Living, who sold the company to a REIT, do for an encore? He becomes the CEO of a soon-to-be spinoff of a REIT from Simon Property Group (NYSE: SPG). Mark Ordan was just appointed to be the CEO of Washington Prime Group, which will become publicly traded after being spun out from SPG, and it will initially hold SPG’s strip center business and smaller enclosed malls. But does Ordan have the seniors housing bug after Sunrise? Doubtful, especially after his experience in Pennsylvania. But, he may be watching one of his former landlords, HCP, Inc. (NYSE: HCP) former CEO Jay Flaherty, have too much fun in his new position with NorthStar Healthcare Income, Inc. Speaking of REITs, Jim Pieczynski has rejoined the board of directors of LTC Properties (NYSE: LTC) effective March 1. Pieczynski served as LTC’s president more than 10 years ago, and is currently the CEO of CapitalSource, Inc. (NYSE: CSE).

Kindred Healthcare (NYSE: KND) has been mak-ing some changes in the executive suite. Stephen Farber is joining as CFO and executive vice president, having 20 years of experience in health care. Scott Blanchette has been appointed chief information officer. Integral Senior Living (ISL) has promoted Collette Valentine to be the CEO and COO. The current CEO, Sue Farrow, will move on to the new role of owner and Managing Director of ISL.

seniorare the volume 26, issue 3 march 2014 · volume 26, issue 3 march 2014 ... other than the...

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