The SeniorCare Investor: Is Liquidity Returning To A Recently Spurned Market?

The fact that two large transactions were completed in early January, the sale of assets by Beverly Enterprises (NYSE: BEV) for $165 million and Crestline Capital Corporation (NYSE: CLJ) for $600 million, demonstrates that even in today’s market environment, large transactions can still get done, and in the case of the former deal, with a little blood, sweat and perseverance.

The Beverly deal was more significant (despite the smaller size) because of the uncertainty of the Florida nursing home market and because there were so many doubters, including naysayers who hoped to get an invitation back to the bidding party. If the sale to FC Properties had failed, with its high visibility in the industry as well as on Wall Street, and the difficulty in closing the deal, a logical conclusion would have been to blame the collapse on a lack of liquidity in the market, a market still fragile after two years of trauma.

While these two transactions were closing, two publicly traded corporations were negotiating new joint venture agreements with equity investors for the purchase of senior housing assets. In the first agreement, disclosed on January 4, Capital Senior Living Corporation (NYSE: CSU) and Blackstone Real Estate Advisors, an affiliate of The Blackstone Group, announced the formation of a joint venture to be owned 90% by Blackstone and 10% by CSU. Initially, the venture, to be known as BRE/CSL LLC, will be positioned to buy more than $200 million of assets over the next two to three years, with CSU earning management fees under long-term contracts and possibly some additional incentive payments.

The venture will focus on independent living communities, together with those that also offer assisted living services, so the assets will mirror what CSU is already operating. They will look at assets anywhere in the country, and acquisitions are expected to be leveraged up to 75%. On December 31, 2001, the venture closed on its first acquisition, paying approximately $20 million for a 271-unit retirement community in New York, or $73,800 per unit, that was owned by NHP Retirement Housing Properties I and managed by CSU. The terms included $18 million cash, a $1 million note and a $1 million earnout.

Mark Myers of Marcus & Millichap began marketing the community in the first quarter last year, identifying 145 prospective buyers, five of which submitted formal offers ranging in price from $16.3 million to $20 million. Last July, an agreement was signed for $20 million with American Opportunity for Housing, a Texas-based nonprofit that had little experience in seniors housing. Financing became a problem for the buyer; that deal was terminated in December and BRE/CSL stepped up to the plate.

The facility is the largest independent living community in New York and was built in 1989 on 23 acres. Occupancy has averaged about 90%, and revenues in 2001 were $5.3 million based on results for the nine months ended September 30, 2001 annualized. Annualized EBITDA was close to $1.9 million, resulting in a cap rate of 10% before the $1 million earnout. Although cash was paid to get the deal done before year-end, the joint venture will obtain permanent financing this year.

The New York acquisition represents a good start for the joint venture, but the relationship between the two firms began a few months ago when another Blackstone entity, BRE/Independent Living, LLC, agreed to purchase the remaining assets of ILM II Senior Living, Inc. for $45.5 million, keeping CSU as the management company (see our December 2001 issue). The purchase price was about $64,700 per unit for the five communities, and we assumed it was a "done deal" since little additional due diligence was required because CSU was already operating the communities and Blackstone would not have any difficulty financing the acquisition.

As they say, it ain’t over ‘til the fat lady sings, and on January 23 Five Star Quality Care (AMEX: FVE) made the surprise announcement that it also entered into an agreement to purchase the five properties for…$45.5 million. There is no reason for ILM to accept an offer for the same price from another buyer unless, of course, BRE tried to scratch out a few concessions at the last minute and ILM had a back-up offer in hand. Five Star’s offer is not subject to a financing contingency, and will most likely arrange financing from Senior Housing Properties Trust (NYSE: SNH), the REIT from which it was spun out this past December 31. But we have not heard any public declarations that the original deal has been terminated.

It is also an unusual acquisition for FVE because the company currently operates skilled nursing facilities with just a smattering of retirement housing units, so the fit is less than clear. The company does lease $600 million of retirement communities from SNH as a result of the Crestline Capital deal, but these are all managed by Marriott Senior Living Services (NYSE: MAR). This story may not be over, and although CSU cannot be happy at the prospect of losing the management contracts if FVE ultimately prevails, the good news is that there is increased competition and when that happens, values stabilize and begin to rise.