The SeniorCare Investor: CNL Retirement Properties And The Role Of Capital

The senior care market is emerging from its worst financial period ever, with stock prices soaring, new capital coming into the market, occupancy rates increasing and acquisition prices, at least in some corners of the market, reaching heights that just 18 months ago would have been inconceivable. In describing the current atmosphere, we have heard comments ranging from "lunacy" to "here we go again," referring to the heated acquisition and development markets of the 1990s, with their loose financing that subsequently led to a meltdown in just about everything related to senior care.

The fear is that with the lowest interest rates in 40 years, combined with equity coming back into the senior care market and balance sheets cleaned up, memories will be short-lived and the cycle will begin all over again. Because it is dominating the market for large transactions, CNL Retirement Properties (CNL) has been the target of choice when acquisition pricing has come under attack in recent months. Is it sour grapes, lack of knowledge of the details or an investment market that may be going through some fundamental changes? As you may have suspected, it is a little bit of all three, but the prices are certainly in nose-bleed territory.

CNL first raised money for investing in the senior care market in 1998, and has raised more than $1.4 billion to date, invested more than $1.0 billion in 2003 alone, and is expected to raise another $1.0 billion this year and buy $1.5 billion to $2.5 billion in additional senior care assets in 2004. The money is coming in $10,000 increments from retail investors looking for yield at a pace of $5.0 million per day.

Everything appears to be tied to the original 1998 offering, which essentially has a 10-year expiration. What this means is that those original investors can’t redeem their funds until CNL provides an exit by either converting their interests into publicly traded securities (an IPO), where the value is determined by the market, or liquidating the fund, one of which must occur by 2008. Unless, of course, CNL asks for more time, which is another out if the capital markets are not cooperating.

The follow-on offerings since 1998 have been tied to the original one, so new investors have the same 2008 end date, and consequently have a shorter time horizon (four to five years today). But CNL does not provide a guaranteed rate of return or the full return of principal; new investors simply see that the current dividend translates into a 7.1% current cash return, and that is what they are after. Unlike institutional equity (pension funds or venture capital), there "is no teeth to the CNL equity," as one industry player commented, which is positive for CNL.

CNL is in an incredibly enviable position, having more equity to invest than it may have opportunities for (from investors who are promised little), and having the luxury of a longer investment horizon than other buyers currently in the market (call it "patient capital"). So what could be wrong with that? For the naysayers, it means irresponsible pricing, resulting in a new valuation standard that most buyers, and certainly not the operator/buyer, are both unable and unwilling to meet. This alone may be having an impact on the acquisition market in general, which we will get to later. For now, grab a cup of coffee (or glass of wine, your choice), sit back and we will try to explain what has happened based on some new information filed with the SEC.