seniorcare the volume 26, issue 6 june 2014 · e 2014 e eae e page 3 eae eaee.com the providers...

SeniorCareTHE

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

SeniorCare_Inv www.seniorcareinvestor.com

Volume 26, Issue 6June 2014

IN THIS ISSUEAfter attending the first Aging2.0 Global Innovation Summit in San Francisco last month, it became obvious that there is a lot of new technology being developed that will not only help senior care pro-viders, but the senior population itself. It became equally obvious that this is just the beginning. See page 1

...Ventas To Buy ARC

In a little shake up of the market, Ventas announced it plans to pay $2.6 billion for American Realty Capital Healthcare Trust, as well as $900 million for a port-folio of 29 Canadian communities being sold by Holiday Retirement Corporation. See page 1

...Kindred Wants Gentiva Health See page 4

...Seniors Housing Acquisitions

See page 7

...Upcoming Portfolio Sales

See page 12

...Skilled Nursing Acquisitions

See page 12

...Financing News

See page 20

...People on the Move

See page 23

Technology helping Senior care

Innovators Trying To Meet The Needs Of Senior Care

...continued on page 2

Technological innovations have been around for de-cades, and they have changed

the way we work, play, read, shop and almost anything else you can think of. One day, it will change the way we drive, and think about what it will mean to “drive” without hav-ing to be behind the wheel (literally). Now, just think what that would mean for the elderly population, who first stops driving at night, and then all together when they (or their children) decide it is no longer safe to be on the road (the dreaded taking of the keys).

The self-driving car may be many years off, but the self-parking

car is here, so don’t count it out. The point is that there are so many people trying to think of better, easier or faster ways of doing things, and with the elderly population the fastest growing segment, one would think that new technology for senior care would be growing by leaps and bounds. Unfor-tunately, that has not been happening, but that is about to change. Having spent two days in San Francisco at the inaugural Aging2.0 Global Innovation Summit in May, we got a first-hand look at some new technologies and services that are being developed by young in-novators, with help from the founders of Aging2.0, Katy Fike and Stephen Johnston.

VenTaS To Buy american realTy capiTal

...continued on page 18

Oops. We were expect-ing to be writing about the purchase of Griffin-

American Healthcare REIT II by American Realty Capital Health-care Trust (NYSE: HCT) for $3.7 billion. Sometimes, the best laid rumors just don’t pan out, and while we believe they may have been close to a deal, others were call-ing it a done-deal. Not so fast. We continued to be surprised that HCT became the front-runner, primarily because it was at a cost-of-capital

$2.6 Billion For REIT; $900 Million For Holiday Canada

disadvantage to at least two of the other bidders. That may not matter anymore.

Ventas (NYSE: VTR) has now agreed to pay $11.33 per share for HCT in a stock-for-stock deal valued at $2.6 billion, but up to 10% of the HCT shares can receive the price in cash. The remainder of the consideration is in assumed debt. The price represents a small 14% premium, which prob-ably would not have been accepted by another REIT that had been around for

June 2014The SeniorCare Investor


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The SeniorCare Investor

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continued from page 1...

The goal of Aging2.0 is to bring together the tech innovators who are creating products, software, analyti-cal tools and anything else that will improve the care of seniors at home or in a senior living community, or make their lives easier and more flexible. But they can’t suc-ceed alone with just a good idea or product. So, bringing in the capital providers to finance the companies plus the senior care providers who will use the new tools makes so much sense it is a wonder that no one else thought of the idea. The Summit was invitation-only and limited to 250 attendees, but because of the success of it, the next one may be larger, even though the “graduating class” may be a similar size.

Graduating class? Yes, because for the past six months, Katy and Stephen have been working with a hand-picked group of 11 companies, bringing them in for meetings, mentoring them, helping with their busi-ness plans, introducing them to potential capital partners as well as senior care partners who could test drive their products in their communities (called the Generator com-

panies). From what we heard, Brookdale Senior Living (NYSE: BKD) has been a major participant, and what better company to test ideas and products than the largest one out there, spanning the spectrum of senior care op-tions. Aging2.0’s six-month program is over and while we have not heard who the next group of innovators will be, there were another 30 or so tech companies attending that want to be part of the coming technological revolution in senior care. Formation Capital has committed an initial $1.0 million investment in Generator Ventures to help with initial funding of some companies. Although they are starting small, they have a lot of flexibility to make larger investments depending on the opportunity. We would also expect them to open up some of their businesses to pilot some of the new technologies, which is a win-win for both sides. Is Formation Capital way ahead of the curve on this one, just like it was in the early 2000s when people thought they were crazy to start buying up Florida skilled nursing facilities? Hmmm.

Not everything was high tech, but if it was something that could better the lives of seniors, it didn’t matter. One such low-tech company was called Lift Hero, and you will be forgiven if you think (like we did) that it was a new technology for lifting bedridden seniors. No, this company is the next Uber for the elderly. It just began its roll-out in San Francisco, and the idea is very simple. Private drivers, using their own cars and prescreened, will provide door “through” door service to elderly customers. You don’t need a cell phone to order up a car, you can pre-book it and you can have a daily or weekly pre-scheduled ride (perhaps with the same driver). Very similar to a taxi service of course, but the drivers are senior friendly, can provide companionship and are flexible to do more than just pick up and drop off. Think of it as a friendly taxi ser-vice on steroids, with service and safety as a priority, not to mention a smoother ride than most taxis. The founder got the idea after driving his grandmother to appointments. Simple, but we are sure that local taxi companies will not be very pleased.

Lift Hero comes under the category of enhanced services for the elderly, but we came across a few new technologies that are in the development stage. One com-pany, Pixie Scientific, is developing patches that will be on the outside of adult diapers. Before discarding the soiled diaper, a caregiver can scan the patch, which will upload the information to the cloud about a few health conditions. Chief among them are the looming possibility of a urinary tract infection as well as indications of potential dehydra-

June 2014 The SeniorCare Investor


The Providers currenT adjuSTed % change % change price p/e from from 52-Week rangecompany Ticker 5/30/14 raTio(1) prior monTh 1/1/14 high loW

Skilled Nursing

AdCare Health Systems ADK $4.11 13.6 0% -4% $4.98 $3.62Diversicare Healthcare DVCR 6.56 9.9 -6 41 7.38 4.45 Ensign Group ENSG 46.90 8.7 10 6 47.72 34.74Kindred Healthcare KND 24.82 8.6 -1 26 26.72 12.50National HealthCare NHC 54.00 7.2 -1 0 58.15 45.30Skilled Healthcare Group SKH 6.61 10.1 28 37 7.51 4.08

Assisted/Independent Living

Brookdale Senior Living BKD 33.26 13.2 4 22 34.80 24.42Capital Senior Living CSU 23.74 15.0 -4 -1 26.89 19.87Emeritus Corporation ESC 31.28 13.8 5 45 32.57 18.15Five Star Quality Care(3) FVE 5.28 NA 9 -4 6.20 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%. (3) Five Star has not reported first quarter 2014 financial data.

tion, both of which are common among the elderly. It is an effortless procedure, and if a caregiver can identify a problem before it needs major medical attention, two goals are accomplished. First, it can prevent costly hospital stays and treatments. And if the senior is in a skilled nursing or assisted living setting, preventive care can help maintain census. It is the proverbial win-win.

In a similar vein, a company called Life2 is work-ing with predictive analytics, which it has succeeded in with other industries. Simply put, its goal is to establish a database which looks at a multitude of factors to try to predict which patient in a nursing facility, as an example, is very likely to develop a respiratory condition, or any other common health issue, which could easily result in hospitalization. The staff would be on notice to take certain precautions or proactive measures to make sure the condi-tion does not develop or is contained. Once again, this is a win-win, as the health system saves money by preventing the hospitalization, and the skilled nursing facility does not lose a patient to the hospital, or worse. For the patient/resident and the family, it would be incredible. For the trucking industry, they were able to predict which drivers would be most likely to have an accident in the next two to three months, and the trucking company could take action to minimize that and the costs and disruptions associated with the accidents.

And what about robotics? We have seen on the news and in infomercials the “rolling” robot, or really a mobile Skype on wheels, which is used remotely to let doctors simulate visiting patients in hospitals. The CEO of one company, Scott Hassan of Suitable Technologies, was one of the last speakers at the Summit, and from his company offices, he rolled the six-foot tall device down the aisle, turned it around and spoke about what they were doing. When the meeting adjourned, he “walked” out of the auditorium and joined everyone at the reception, mov-ing from group to group. It was no different than being there physically. Now, think if one of these devices was in a retirement community, and you could control it from your own living room (which is possible now), walking down the hall with your mother or father to the dining room, joining with his or her friends around the dining table and engaging in conversation as large as life. You can swivel, look up or down, and eat your own meal if you want to, and they would see you eating. Then, when dinner is over, you walk with your parent back to their apartment unit, blow them a kiss goodnight and power down. This isn’t futuristic, this can happen now, it’s just expensive. But if a retirement community had one or two of these to be shared by the residents and their families, think about the psychological well-being for all involved.

And a professor from MIT, on leave with a start-up company called Jibo Inc., is developing emotional



robotics that can react with “human” emotions when stimulated. Although this technology is a bit further out there in terms of full implementation, just think about the possibilities with a lonely senior at home or in a senior liv-ing environment with their own personal robot they could talk to, do a crossword puzzle with, or other things way off in the future. While human contact is ideal (usually), it is the concept of engaging an elderly person who might otherwise sit alone. Admittedly, this could get creepy, but a friendly, non-nagging robot could be nicer to wake up to than an empty apartment.

So what does all of this have to do with senior care investment and finance? A lot, if it drives demand, oc-cupancy and ultimately cash flow and value. Remember when piped oxygen in a skilled nursing facility was so important in terms of going into high-acuity subacute care? It still is, but today instead of asking whether a retirement community is wireless, potential residents and their family members are going to be asking a lot more questions about technology, both for safety as well as for interactivity. And as the baby boomers age, they are going to be asking all the right questions, and it won’t be about electronic health records. As they say, we are not in Kansas anymore (sorry, Tim), and those who do not adapt will fall behind the competition. Yes, pretty buildings with nice

amenities will always attract customers, but as consumers become smarter and looks beyond the physical attributes, providers will need to be ready. With the sudden pick-up in development, which looks as if it will continue for at least several years, differentiation will matter. The problem is that technology will be constantly evolving, and presum-ably getting better and more useful, which means it will be difficult to keep up with. It also means the founders of Aging2.0 will be busy for several years to come, and more senior living people will become involved.

kindred Trying To Buy genTiVa healTh

The stand-alone home health and hospice business has seen its ups and downs over the past 10 to 15 years. Per-haps more than any other sector, it has the highest “stroke of the pen” risk since the vast majority of revenues come from Medicare. Of the two services, the fastest growing has been hospice care, which saw Medicare payments soar from just $3.0 billion in 2000 to $13 billion just 10 years later.

The theory is that hospice care saves the health care economy money in the long run, especially when it avoids extremely costly end-of-life care in a hospital. To qualify for hospice coverage, a doctor must certify life expec-



tancy of six months or less. But as we all know, that is not an exact science. So are people gaming the system to take advantage of Medicare coverage? Some have, but as the health care economy evolves, the concept of gaming the system will have less meaning. We assume Kindred Healthcare (NYSE: KND) believes that will eventually be the case, because they have made a substantial invest-ment in the future of Accountable Care Organizations (ACOs), and if not technically ACOs, then coordinated care where all providers in a network are rewarded from high quality and low lengths of stays, not to mention re-duced re-hospitalizations. Yes, the utopian world of health care, but if it doesn’t evolve into this, we will all suffer financially, if not from a health and longevity perspective.

Kindred’s first down payment came in 2011 with its $1.35 billion purchase of RehabCare Group, which pro-vides rehab care in outpatient and inpatient settings. Sub-sequent to the deal closing, there were some grumblings that KND overpaid for the company, but at the time the price was 1.03x revenues and 9.2x EBITDA, unadjusted for synergies and cost savings. The second down payment may be coming later this year, with Kindred’s recent un-solicited attempt to purchase Gentiva Health Services (NASDAQ: GTIV), one of the largest providers of home health and hospice services in the country.

Gentiva operates across the country and overlaps in nearly all of Kindred’s 22 Integrated Care Markets. Its late 2013 acquisition of Harden Healthcare with significnt Texas operations will overlap nicely. It has annualized revenues and adjusted EBITDA of $1.95 billion and $155.9 million, respectively, and obtains about 76% of its revenues from Medicare compared with 40% for Kindred. With the current offer of $14 per share, the transaction value comes to about $1.6 billion when assumed debt is factored in. That results in a relatively hefty 10.2x multiple of current EBITDA. But immediate savings are expected to boost EBITDA by $40 million in year one, which would lower the purchase multiple to a more reasonable 8.2x.

Kindred may be no stranger to home health and hospice acquisitions, but this is by far its most significant. In late 2013 it purchased Senior Home Care for $95 mil-lion and in 2012 IntegraCare Holdings for $71 million. Obviously, Gentiva dwarfs these smaller deals, and it solidifies Kindred as the “go-to” post-acute provider in its markets, as long as it walks the walk. The problem is that Gentiva categorically turned down the offer and instead adopted a poison pill, which will make it more difficult



for Kindred to consummate the deal. Given that the stock premium offered was 64% above GTIV’s previous price and 40% higher than the average one-year price forecast by the analyst community, either Gentiva’s board is pretty confident it can extract a higher price from Kindred, or management really wants to hold onto their jobs. An extra dollar a share would not kill the financial merits of the deal, but there are few people who think it was not a fair offer. Consequently, there will be strong investor pressure on Gentiva to eventually take the offer.

If successful, the acquisition will certainly transform Kindred’s home health and hospice business, which is small but growing, and transform the company as a whole. This business segment, called the Care Management Di-vision, currently has annualized revenues of about $350 million, thanks to the previous acquisitions. So if KND can consummate the Gentiva acquisition, this segment will grow more than six-fold to $2.3 billion of revenues, or more than double the skilled nursing division as well as double the rehab division. The hospital division will still be the largest at $2.6 billion of revenues and growing. Obviously, there would be real integration risk with tak-ing over something this big where its assets (staff) could just walk out the door. But if it does succeed, we would imagine that they would like to be part of what could be a

game-changing company that can change how post-acute care is delivered and perceived in the marketplace. It may even get Paul Diaz so excited he will want to stay on a few extra years. But probably not.

Although no one in the seniors housing and care market has tried to do such a large acquisition in the home health and hospice sector, Brookdale Senior Living (NYSE: BKD) has closed many small acquisitions over the years, Emeritus (NYSE: ESC) completed its largest one last year ($102 million price), The Ensign Group (NASDAQ: ENSG) closed five acquisitions in the past two years, and HCR ManorCare is one of the largest home health and hospice providers in the country, but since it is private the company no longer provides details. However, seven years ago revenues were close to $550 million. The point is that as seniors housing and care pro-viders evolve into “post-acute” care providers, they can’t ignore home health and hospice. First of all, that is what many customers will want, and second, that is where the payments will be flowing as long as payers believe it is a lower cost than anything else. Acquisition interest in bricks and mortar will not go away, as we can see below, but the evolution into a full-service-centric business is just in its infancy. And don’t forget how technology will change things.



SeniorS houSing acquiSiTionS

The portfolios are coming, or so we have heard, but we may have to wait a month or two for some of the larger juicy ones. In the meantime, there was a definite mix of sales in May, with a few high-priced sales and several well below $100,000 per unit. To start it off, Five Star Quality Care (NYSE: FVE) purchased a solid-performing senior living community in Dothan, Alabama that has been aver-aging an occupancy rate of 95% and higher. It has a nice mix of 68 independent living units, 32 assisted living units and 16 memory care units. The purchase price was $19.9 million, or $171,700 per unit. We believe the price would have been higher but there was $14 million of assumable debt with an above-market interest rate but a stiff prepay-ment penalty, which was not worth prepaying.

The community was built in 2000 and 2002 on 20 acres, which will offer FVE the opportunity to expand, which they might do given the very strong occupancy. Revenues and EBITDA were $4.64 million and $1.725 million, respectively, which resulted in a cap rate of 8.6%, high for the property because of the assumed debt. Bradley Clousing and Jeff Binder of Senior Living Investment Brokerage handled the transaction.

One of our mantras over the years, and proven by the statistics in our annual Senior Care Acquisition Report, is that newer properties sell at higher price points. For ex-ample, in 2013 those seniors housing properties that were less than six years old sold for an average of $266,900 per unit, while those older than 15 years sold for an average price of $80,400 per unit. There are, however, exceptions to every rule. A case in point is the recent sale of a small portfolio of small assisted living communities located in New Hampshire. Two of the properties were originally built in the 1770s, which is a first for us, even though they both had updates and additions in the past 20 years, including one addition in 2011. The third property was built in 1999, but they all had 40 or fewer units, with the licensed beds ranging from 33 to 80.

They performed at a 32% EBITDA margin despite having a decent Medicaid census (with rates of $3,500 per month). The portfolio includes 108 units with 175 licensed beds, and based on units the occupancy was 74%, which is quite low for that operating margin. The private rates range from $4,000 to $8,000, which helps explains why the three properties performed so well. The local, hands-on ownership didn’t hurt either. The purchase price was $22.0 million, or $203,700 per unit, which certainly sets a record by age, and the cap rate was 8.6%, fitting for the



age and small size of the buildings, even though they were very well maintained. They are also within a one hour driv-ing distance from each other, which makes management easier. Evans Senior Investments represented the seller, Fortis Healthcare, LLC.

Orlando, Florida-based ROC Seniors Housing Fund Manager, LLC made its first sector investment, buying two assisted living and memory care communities in Tennessee. One property in Franklin has 40 assisted liv-ing units and the other in Mt. Julie has 51 assisted living/memory care units. They were built in 2010 and 2011, and the sellers who developed them decided to concentrate on their restaurant chain business. The purchase price was ap-proximately $17.5 million, or $168,300 per unit. ROC is part of Utah-based Bridge Investment Group Advisors, and Phil Anderson is the new Chief Investment Officer of ROC, and we know he prefers to be on the buy side of things after a two-year stint at Cushman & Wakefield.

A local owner/operator in California, primarily in the skilled nursing business, purchased a 70-unit assisted liv-ing and memory care community in Woodland, California for $4.25 million, or $60,700 per unit. Of the total units, 21 are located in a secure memory care wing, and all the

units are studios. Occupancy based on units was 80% in 2012, and dipped to 68% in 2013, but double occupancy represents about 15% to 20% of the units. Taking the av-erage financial performance of 2012 and 2013, revenues and EBITDA were about $2.8 million and $410,000, re-spectively, which results in a cap rate of 9.6%. Obviously, there is some upside for the buyer. Rob Reis of Marcus & Millichap represented the seller in the transaction.

Unlike the sale above, a primarily skilled nursing facility operator wanted to focus on the SNF business and sold a 58-unit assisted living community in Tampa, Florida. Built in 1984 and 1986, the property has 40 units with a shared bath and 18 units with a private bath, which certainly impacted the value. Occupancy was just over 80% with a mix of private pay and Medicaid. Revenues and EBITDA were $1.9 million and $388,000, respectively. With a purchase price of $3.175 million, or $54,700 per unit, that results in a cap rate of 12.2%. Bradley Clousing of Senior Living Investment Brokerage handled the transaction.

A little to the north just outside Richmond, Virginia, Meridian Senior Living, in a joint venture with a private equity group, purchased a 48-unit assisted living com-



munity for $3.2 million, or $66,660 per unit. The seller had struggled with occupancy, which is currently 80%, and had not been able to make a profit for several years. Revenues are about $1.275 million, and the buyer plans to invest up to $1.0 million to renovate the building and convert it to 100% memory care. It is only 15 years old, so we presume the building is in decent shape. Toby Siefert and Patrick Burke of Senior Living Investment Brokerage handled the transaction.

Senior Living Management Corporation (SLM) closed on the purchase of a 56-unit senior living com-munity in Camilla, Georgia. Built in 1986 with 36 personal care units, the campus was increased by eight independent living apartments in 1996 and 12 villas in four buildings between 2003 and 2006, which were sold with entrance fees. Occupancy was about 80% and it was operating just above breakeven. We believe that at 90% occupancy revenues and EBITDA could be about $1.365 million and $225,000, respectively, before SLM makes any operational changes. Included in the purchase price of approximately $2.4 million was about $900,000 to fund reserves for entrance-fee refunds. Mike Pardoll of Marcus & Millichap represented the seller.

Albuquerque, New Mexico-based Red Rock Group, LLC made its first venture into seniors housing with the purchase of a 35-unit assisted living facility in Albuquerque that is licensed for 45 beds. It was built in 2008 and occupancy at the time of sale was 28 residents. The purchase price was $3.3 million, or $73,300 per unit, and about 30% of the census was funded by Medicaid. The seller was represented by Tim Lopez of the Tim Lo-pez Group at Keller Williams Realty in Albuquerque. Separately, a not-for-profit hospice in Chesterfield, South Carolina purchased a 22-unit assisted living facility in neighboring Pageland that was built in 2000 by the sellers, who are retiring from the business. No further financial information was available.

In Canada, Regal Lifestyles Communities (TSX: RLC) announced an agreement to purchase seven retire-ment communities with 1,449 units in various cities in Quebec. Most of the properties were built prior to 1990, but four of them have been renovated since then. Occu-pancy ranges from 87.7% to 97.2%, with an average of 94.3%. The property sizes range from 105 units to 418 units. The purchase price is approximately $146.8 mil-lion (C$160 million), and is made up of cash, stock and assumed debt. Estimated EBITDA for 2014 is $11.45



million, which results in a 7.8% cap rate. Brookfield Fi-nancial represented the seller, ELAD Genesis Partner-ship Limited, and the transaction is expected to close in early June. Separately, Brookfield represented Chartwell Retirement Residences (TSX: CSH.UN) in its sale of 14 retirement communities in Canada to Liftimes Limited Partnership in a transaction that closed May 1.

upcoming porTfolio SaleS

Bruce Gibson of Senior Capital Advisors is about to go to market with a portfolio of nine senior living proper-ties with about 600 units of assisted living and memory care (after expansions) in four states. Most of these were built between 2011 and 2013, and have average occupancy of 90%, average revenue per occupied bed of $4,100 and an average profit margin of 30%. When certain expansions are completed, occupancy is projected to be 94% with an operating margin of 40% and revenues per occupied bed of $4,600. Two of the states are CON states. Get in line.

Another portfolio of 12 properties in Iowa with 680 assisted living and memory care units is currently in the market through HFF. The average occupancy is 91% with

an average age of seven years. We hear initial bids were due in late May, and will keep you posted.

Skilled nurSing acquiSiTionS

Another county-owned skilled nursing facility has gone private, in a deal that closed in mid-May in Penn-sylvania. The 220-bed facility, which was originally built in 1963 with an addition in 1982, received a $7 million physical plant upgrade in 2009, which we are sure helped the price. And while this facility in Butler County was losing money, it was a small loss and not the multi-million dollar losses we have seen with other county-owned SNF sales. Occupancy was a strong 96%, of which 75% was Medicaid. The total price, which included some accounts receivable, was $20.5 million, putting it close to $90,000 per bed. With a private owner, revenues and EBITDA are expected to be about $18.75 million and $2.225 million, respectively, compared with $18.1 million and a small loss under county ownership. Bidding was strong with several buyers at similar prices, but a regional partnership won out after county officials toured their facilities. Joshua Jandris and Mark Myers of Marcus & Millichap represented the seller, and Oxford Finance placed the mortgage debt.



Jandris and Myers have another county-owned facility that will be closing in a few months. The purchaser, Au-rora Holdings, will lease the real estate for a few months before closing on the $30 million purchase in Maryland. The property has 170 skilled beds and 75 assisted living units, and the price comes to $122,450 per bed/unit. We will have more details after it closes.

Sometimes when you buy a portfolio, there is a property (or two) that is either an outlier or you had plans for it that maybe didn’t work out as intended. Such was the case five years ago when Trilogy Health Services bought a portfolio of properties in Indiana and Kentucky, two states it already operated in, plus a one-off senior liv-ing property in Illinois. The company had plans to expand in Illinois, but the right opportunities never materialized. Consequently, Trilogy finally decided to divest the com-munity, which includes 110 skilled nursing beds (built in 1989), 34 assisted living units (built in 1999) and 26 memory care units (built in 2009).

Overall occupancy was just over 80%, but the mem-ory care portion was at 95%. The community was very profitable, but it was the right time to sell. The purchase price was $23.0 million, or $135,300 per bed/unit, and the cap rate was 11.2%, an appropriate blend of skilled nursing and assisted living cap rates. Ryan Saul of Senior

Living Investment Brokerage handled the transaction.

Some of you may remember when skilled nursing facilities built in the early 1980s were considered to be relatively new. This was especially true when they were in the market for sale in the 1990s. But it is now 20 years later, and these facilities are 30 to 35 years old. But do not be fooled, there is still strong demand. In a recent sale of three skilled nursing facilities in northwest Indiana, five solid offers were made for the portfolio, and the marketing process took 30 days from start to contract. The three were built in 1977, 1983 and 1984 with a total of 389 beds, of which 16 were assisted living beds in one facility. A large private owner/operator in Illinois was the purchaser, and they paid $17.0 million, or $43,700 per bed and $154 per square foot. With revenues and EBITDA of about $22.3 million and $2.2 million, respectively, the cap rate was a market 13.1%. Chris Hyldahl of Blueprint Healthcare Real Estate Advisors represented the seller.

A smaller portfolio with just two facilities went for a higher price, but that’s the East Coast for you. Evans Senior Investments took the two skilled nursing facilities to market for the private seller who was expecting to exit the industry. But the prices being offered by some REITs



were so compelling that they decided to stay in business and executed a sale/leaseback transaction with a private REIT. The facilities, with a total of 318 beds, are located about nine miles from each other outside of Providence, Rhode Island and have occupancy rates of 97% and 92%, with Medicaid representing 72% of the census at both properties. The purchase price was $26.0 million, or $81,700 per bed, and the cap rate was just over 12.0%.

The location certainly matters, but so can age and design. Such was the case with a newly built property in Kokomo, Indiana that was developed by Mainstreet Property Group and sold to HealthLease Properties REIT (TSX: HLP.UN) under a pre-existing development agreement. The 100-unit building contains both skilled nursing and assisted living units, and was sold for $17.9 million, or $179,000 per unit. It is now triple-net leased to Life Care Services.

As The Ensign Group (NASDAQ: ENSG) gets ready to split into an operating company and a REIT, it has certainly not put a hold on acquisitions. In all of the following acquisitions, the real estate will stay with the operating company post-split, at least for now. In the first acquisition, ENSG purchased the real estate of a 108-bed skilled nursing facility in Ogden, Utah that is subject to a

ground lease with 40-years remaining with the ability to extend. Ensign had been operating the facility since 2006 under a sub-lease arrangement. The second acquisition was of a 230-bed skilled nursing and rehab facility in Tucson, Arizona that suffers from a low 43% occupancy rate. Because it is an all-cash deal, it will still be accretive to 2014 earnings.

The last Ensign acquisition (for now) involved the purchase of a 143-unit senior living community in Rosemead, California that includes 12 independent liv-ing and 20 memory care units in addition to the assisted living units. Base rates range from $2,500 to $3,500, and higher for memory care. Occupancy has been a little low, averaging close to 80%, and we assume that Ensign has a plan for that.

The purchase price for the ALF was approximately $111,000 per unit. Ensign has been leasing and operating a 59-bed nursing facility on the campus since 2005, so they are very familiar with the market and are now purchasing the underlying real estate of the SNF, but a price has not been disclosed. Matthew Whitlock, Dave Rothschild and Mary Christian of the CBRE Senior Housing Group rep-resented the seller in the sale of the senior living property.



longer. As we have written previously, we were surprised that when HCT was in registration to become publicly traded someone like Ventas did not buy it. We know ev-eryone was looking, but we do find the timing interesting, to say the least. The timing is also interesting because Ventas may have been the number two bidder for Griffin-American behind HCT, and we hear that HCT may have been $250 million higher.

Obviously, Ventas is a much stronger and more di-versified REIT than HCT, but HCT shareholders will be giving up more than 200 basis points in dividend yield when exchanging their shares. That higher yield is one of the reasons they originally purchased HCT in small lots over the past few years. American Realty Capital was one of the more aggressive non-traded REITs in the acquisi-tion market, buying single properties and small portfolios at a healthy clip. Selling out was always an exit strategy, and the food chain is really quite fascinating as the large REITs let the smaller ones do the little deals, which would be too time-consuming for them, let alone not meaningful for their growth. And when these non-traded REITs get big enough, and become meaningful growth acquisitions, the

large REITs snap them up with their lower cost of capital. Ventas has been the most active buyer of health care REITs, with at least three now that we know of, and that will not be the end of it. So now the question is, who will buy Griffin-American Healthcare REIT II? We assume Ventas will walk away, so that will leave Health Care REIT (NYSE: HCN) and NorthStar Realty Finance (NYSE: NRF), with perhaps HCP, Inc. (NYSE: HCP) joining the fray. Our money would be on Jay Flaherty and NorthStar, primarily because of hunger. So let the games begin.

The other part of the Ventas announcement is that they are buying 29 independent living communities in Canada from Holiday Retirement Corporation for $900 million, or $268,300 per unit. Unlike its acquisition last year of a U.S. portfolio from Holiday, which was triple-net leased back to Holiday, Ventas will be turning manage-ment of these 29 properties over to its portfolio company, Atria Senior Living. The Holiday portfolio has a 90% occupancy rate, average revenue per occupied room of about $2,940 and an operating margin close to 50%. The average age of the portfolio is almost 15 years, so these were mostly (if not all) built before the sale of Holiday seven years ago. Given these numbers, the cap would have to be near or just above 6.0%, which is aggressive even for a large portfolio. Despite the premium on the

Ventas Buying ARC Healthcare Trust continued from page 1...



American Realty Capital deal and this low cap rate, the combined transactions will be immediately accretive to Ventas in 2014 by at least 10 cents a share (the closings are expected to occur later this year). Investors didn’t care, sending VTR’s shares down nearly 3% after the announc-ment, while HCT jumped 10%. Despite the diversity of assets that the HCT acquisition brings to Ventas, we think investors may be questioning whether size is really all it’s cracked up to be when it comes to REIT acquisitions.

Other REIT News. Meanwhile, by the time you read this The Ensign Group (NASDAQ: ENSG) should be split into an operating company, which will retain its same ticker symbol, and a new REIT under the name of Care-Trust REIT, which will have the ticker “CTRE.” Ensign shareholders will be receiving one new share of the REIT for each Ensign share, which should be effective June 1. On a when-issued basis, CareTrust has been trading between $17 and $18 per share, putting its value at about $350 million, making it the smallest publicly traded REIT in our universe. Post-split Ensign is being valued at just over $525 million. Although Greg Stapley will have a lot of fun running the REIT (just ask Rick Matros), it is un-clear how competitive it will be in the acquisition market, other than buying some of Ensign’s properties that are still being turned around. But CareTrust will need some diver-

sification away from Ensign in order to get any serious institutional investor interest. Look for CareTrust’s share price to dip post-split as Ensign’s non-REIT investors sell their shares. That will be the time to buy.

Senior Resource Group (SRG) completed a mini-recapitalization, with Health Care REIT purchasing a 46.8% interest in a joint venture of 10 properties that are located in California, Arizona and Oregon. The bottom line is that the REIT took out a Canadian pension fund’s interest in the J/V for $386.44 million, or $411,000 per unit on a grossed up basis. The other partner in the joint venture is another Canadian pension fund, and while they have a great relationship with SRG, at some point they may want to redeploy their capital. This was a somewhat unique transaction for HCN because it usually does not buy a minority interest in a portfolio. We would suspect that HCN would be a very willing buyer down the road to purchase the other investor’s interest, although there is probably nothing in writing at this point. The benefit for SRG is that it gets a new capital partner, both for acquisi-tions and possibly new development, both stand-alone development and some possible add-ons to existing com-munities. SRG operates 18 communities in four states, but that may be expanding when the right opportunities arise. Macquarie Capital represented SRG in the transaction.



Although the non-traded REITs are getting much of the press these days, the smaller publicly traded REITs are ready to deal. Aviv REIT (NYSE: AVIV) made this clear with a new $600 million credit facility which has an accordion feature which will allow the REIT to increase it to $800 million. That can fund a lot of acquisitions. This new unsecured revolving credit facility refinanced an existing $400 million “secured” facility, which provides Aviv with added flexibility. The new credit facility comes with a rate that ranges from 170 to 225 basis points over LIBOR depending on the company’s leverage, and a ma-turity date of May 2018, and that can be extended for an additional year as well. We can expect a very active Aviv in the acquisition market. In other capital raises during May, Health Care REIT sold 14 million shares at $62.35 per share, increased from 12 million shares, Sabra Health Care REIT (NASDAQ: SBRA) sold 7 million shares at $28.35 per share, and Senior Housing Properties Trust (NYSE: SNH) closed a $350 million unsecured term loan at LIBOR plus 140 basis points that matures in January 2020.

financing neWS

MidCap Financial just closed on a $14.45 million financing for an 87-unit independent and assisted living

community in Klamath Falls, Oregon, that was purchased at the end of 2011 for $11.35 million. Of the total units, 20 are in independent living cottages and the remaining 67 in a three-story building. The new loan proceeds will be used to pay off the existing debt and to build a new memory care facility with 36 units adjacent to the existing building. Since there are 16 acres, there is plenty of room. Adding memory care units is a smart decision by Living Care Lifestyles, and they have probably been following another Klamath Falls property that has 64 assisted liv-ing and 48 memory care units with 95% plus occupancy that sold last year for $187,000 per unit. The new debt will only be $117,000 per unit, and we assume the future value will be well over $160,000 per unit. Stuart Oswald of Nothmarq Capital arranged the financing with MidCap.

LCB Senior Living continues to expand in the Northeast. It just closed on the acquisition of an 86-unit assisted living community in Massachusetts that is housed within a converted school that is on the National Registry of historic buildings. It was converted to its present use in 1997. To close the acquisition, Cushman & Wakefield Equity, Debt & Structured Finance arranged both the debt and equity. The mortgage financing of $13.5 million was provided by M&T Bank, while Virtus Real Estate Capital put up about $6.1 million of equity. The total



capital raised exceeds the approximate purchase price of just over $190,000 per unit because LCB plans to convert a portion of the units on the first floor to memory care, as well as complete interior upgrades and a repositioning of the entrance from the back of the building to the front where it was originally located when the school was built in 1927. We suspect that the licensed capacity will be increased once the changes have been made, and with the memory care addition, occupancy should jump from the high 80% area to 95% or higher.

Walker & Dunlop (W&D) recently closed on a $14.5 million bridge loan to refinance a 120-unit assisted living and memory community located in Monroe Town-ship, New Jersey. The property was purchased in Febru-ary 2013 for $7.1 million by a joint venture consisting of Focus Healthcare Partners, Artemis Real Estate Partners and Chelsea Senior Living, which took over the operations. At the time of the purchase, there were just 72 residents and the debt on the building was in default. Well, things have changed dramatically in 14 months. Occupancy is now at 85% with 120 residents (there is some double occupancy), and the cash flow has grown significantly. They invested about $1.0 million in capex, so the change has really come from operations. Doubling your purchase price in 14 months is unusual, even in this

market, and our estimate is that the property is now worth between $18 million and $20 million depending on your cap rate assumptions. The W&D loan is nonrecourse, floating rate and interest only for the three-year term.

Contemporary Healthcare Capital (CHC) pro-vided $8.9 million in bridge financing to an affiliate of Century Care Management to acquire and complete some capital improvements on a 127-bed skilled nursing facility in Elkin, North Carolina. The facility has 99 skilled beds and 28 assisted living and memory care beds. Once the improvements are finished and the occupancy is stabi-lized, they will seek to refinance the loan with HUD. Joel Mendes of Oak Grove Capital represented the borrower and was the lead banker on the financing. In a separate transaction, CHC provided $4.75 million of preferred equity to the developers of an assisted living community they will build in Greer, South Carolina. The property will have 64 assisted living units and 25 memory care units.

Lancaster Pollard refinanced an 83-unit senior living community in Houghton, Michigan for Arcadia Communities, a Kentucky-based provider. Using HUD, Lancaster obtained a $7.43 million loan with an inter-est rate just above 4% for 35 years. The property has 17 independent living cottage units and 66 board and care



units. The financing was led by Chris Blanda. Lancaster also arranged $8.5 million in HUD financing related to four affordable seniors housing facilities in California owned by Rural Communities Housing Development Corporation. The primary objective of the refinancing was to raise the funds needed for renovations, which will be $1.9 million of the proceeds. In addition, about $533,000 went into a replacement reserve fund and there was nearly $969,000 in developer fees taken out. Jason Dopoulos was the lead banker. Finally, Steve Kennedy led a $4.3 million refinancing of a 68-unit supportive living facility in Charleston, Illinois that was developed in 2011 by Yost Management Company and managed by BMA Management. The original financing was done through the USDA Section 538 program together with 9% low-income housing tax credits, which they were able to do because of the rural location and the Medicaid census. Lancaster Pollard purchased the outstanding loan from the existing USDA lender and then refinanced through the sale of a GNMA security. The result was an interest rate reduction of more than 150 basis points and a 13-year extension of the maturity plus some debt service savings.

In another refinancing of a supportive living facility in Illinois, Joshua Rosen of Beech Street Capital arranged $20.7 million in HUD financing for a 185-bed facility that was completely renovated in 2008. Occupancy is now at 85%, and the new loan amount was $111,900 per bed.

Prudential Mortgage Capital closed on three HUD loans to refinance three existing HUD loans secured by three skilled nursing facilities in Massachusetts. They included $5.56 million for a 53-bed facility in Uxbridge, $3.16 million for a 49-bed facility in Weymouth and $6.34 million for a 40-bed facility in Holliston. The total comes to $106,100 per bed, which is not high for Massachusetts, but these small facilities apparently cater to a higher acu-ity population. Casey Moore of Prudential was the lead on the financing.

Wells Fargo Multifamily Capital recently closed two financings totaling $24.6 million with Fannie Mae on behalf of the Hawthorn Group. The independent living communities are located in North Carolina with 118 units and occupancy of 97%, and in South Carolina with 124 units and occupancy of 90%. Cathy Voreyer was the lead banker on the financing.

In other news, Capital One Bank was the lead lender and administrative agent for a $104 million secured term loan in a transaction involving seven skilled nursing fa-



currenT

price currenT diVidend 2014 52-Week range

company Ticker 5/30/14 yield STaTuS(1) % change high loW

American Realty Capital(2) HCT $9.95 6.8% Beg. Jan-14 -1% $10.98 $9.44 Aviv REIT AVIV 27.75 5.2 Beg. Jun-13 17 28.07 21.31 HCP, Inc. HCP 41.75 5.2 Inc. Feb-14 15 48.41 35.50 Health Care REIT HCN 63.23 5.0 Inc. Feb-14 18 69.74 52.43

Healthcare Realty Trust HR 24.93 4.8 Dec. Mar-10 17 27.37 20.85 LTC Properties LTC 39.74 5.1 Inc. Oct-13 12 42.89 34.30 National Health Investors NHI 62.72 4.7 Inc. Jun-13 12 65.94 53.01 Newcastle Investment Corp.(3) NCT 4.82 8.3 Dec. Sept-13 -16 5.02 3.95

Omega Healthcare Investors OHI 36.89 5.4 Inc. April-14 24 37.01 27.37 Sabra Health Care REIT SBRA 29.28 4.9 Inc. Feb-14 12 31.17 21.55Senior Housing Properties Tr. SNH 23.98 6.5 Inc. Oct-12 8 27.42 20.70 Universal Health Realty UHT 43.29 5.8 Inc. Jun-13 8 47.63 38.36 Ventas VTR 66.80 4.3 Inc. Dec-13 17 73.41 54.89 (1) As of ex-dividend date. (2) ARC-Healthcare Trust started trading effective April 7, 2014. (3) NCT prices and dividend rate were adjusted for the spin-off of New Residential Investment Corp. effective May 2013.

REITs

cilities and one assisted living community located in Ohio and Kentucky. Wells Fargo was the only other lender. Separately, Ziegler closed a $3.1 million refinancing of a 42-unit not-for-profit assisted living community in Cor-vallis, Oregon that is managed by Mennonite Services Northwest. Ziegler recommended HUD to their client which had $2.4 million in bank debt with a looming 2015 balloon payment due. The new 35-year loan will be pro-viding about $240,000 for renovations on the 12-year old building. In other HUD deals, Housing & Healthcare Finance closed three financings worth $27.99 million. Two refinanced existing HUD loans in Florida and Illinois, and the third refinanced a conventional loan for a 198-bed skilled nursing facility with memory care in Florida.

Capital Funding Group (CFG) had a big month. It closed $18.656 million in HUD financing that refinanced bridge loans on five assisted living and two skilled nurs-ing facilities in Nebraska, Montana, Iowa and South Dakota. CFG also completed mortgage modifications on three separate HUD loans that resulted in $118,000 in annual debt service savings. On the bridge loan front, they completed two financings for $4.93 million and one $1.5 million A/R line of credit for the acquisition of two skilled nursing facilities in Ohio, plus a $6.92 million loan to refinance a SNF in Kentucky, a $24.0 million loan to refinance a SNF in New York, and a $2.75 million loan used to acquire a SNF in California.

people on The moVe

Boyd Gentry has resigned as president, CEO and board member of AdCare Health Systems (NYSE: ADK) effective June 1. He will be replaced on an interim basis by David Tenwick, current board chair and former CEO and founder of the company....Ziegler has hired a few new people to beef up its senior living finance busi-ness. Tom Brewer, most recently with BB&T Capital Markets, has joined as a Managing Director with over 25 years of senior living and health care experience. Join-ing Brewer, also from BB&T, are Brandon Powell and Adam Garcia, and all three will be located in Ziegler’s Richmond, Virginia office….Greystone has brought on Keith Hires as a Managing Director in its portfolio lending group. Based in their Atlanta office, he will focus primar-ily on bridge and mezzanine financing…. Red Capital Group has hired Todd Rodenberg as its Chief Credit Officer, responsible for coordinating all loan, underwrit-ing, processing and closing activities. He will be based in Dallas, Texas….JLL Capital Markets has beefed up its health care team with the addition of Steven Leathers as a Senior Vice President in the New York City office. Previ-ously with American Realty Capital Healthcare Trust (NYE: HCT), he will focus on valuations and sales….Alex Fenigstein, who joined Capital Funding, LLC last July, will head the lender’s new satellite office in Los Angeles, which opened May 15.

seniorcare the volume 26, issue 6 june 2014 · e 2014 e eae e page 3 eae eaee.com the providers...

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