The SeniorCare Investor: The Merger and Acquisition Market Has Come Alive

After months of little activity, the merger and acquisition market has come alive, with deals in the assisted and independent living market as well as the skilled nursing sector. Not surprisingly, all of the buyers are private companies, and the increase in activity is directly related to more realistic pricing. In our recently published The Senior Care Acquisition Report, Sixth Edition, readers were surprised to find that the average price to revenue multiple for nursing home acquisitions, which for 10 years had averaged between 1.0x and 1.1x, had declined to 0.85x in 2000. In the nursing home transactions described below, this multiple ranged between 0.60x and 0.94x, confirming the change in this ratio. But first, the assisted living market is alive and well in New England.

In one of the largest transactions of the year (so far), Benchmark Assisted Living has closed on the purchase of eight assisted living facilities, becoming the largest assisted living provider in New England. The seller, SK Properties, is a developer based in New Hampshire that built these properties over the past four years but hired an outside manager. What is unique about these facilities is that all eight of them have occupancy rates greater than 97%. Either they have been well managed and well positioned, or the developer happened to find the only underserved markets in the country (or perhaps a little of both).

The acquisition is quite a coup for Benchmark, especially since the properties had been on the market for more than a year, with one contract falling by the wayside before Benchmark stepped in. Since its formation, the company’s CEO, Tom Grape, has had the goal of becoming the largest assisted living provider in the region, and this transaction brings his total to 23 communities, 1,500 units and a revenue run rate of $65 million.

The purchase price was approximately $60 million, or $114,000 per unit. Even though this is 40% above the average price paid per unit last year in the assisted living market, it is very reasonable for new construction in the Northeast, especially when the properties’ occupancy rates are above 97%. With about $20 million in revenues, the revenue multiple of 3.0x is just below the 3.2x average of 2000. We also understand that the cap rate was above 10% after a management fee, which is attractive for Benchmark given the age and occupancy of the facilities, seven of which are in Massachusetts and one in New Hampshire. Benchmark financed four of the facilities with Freddie Mac, two with Sovereign Bank and assumed the debt on the last two properties.

The equity for the acquisition came from Charlesbank Capital Partners, which invested $22.5 million in a structure that is similar to what Benchmark did with AEW Capital Management in 1997. The properties in the current deal were purchased by Benchmark Investment II, with Charlesbank owning a controlling interest in the newly formed entity and, we assume, a small interest in the management company. In this market, closing a $60 million deal is a milestone achievement for a private company, but raising the necessary equity capital is remarkable as well. Since part of the $22.5 million of new funds will be available for future acquisitions or development, Benchmark is on solid footing in a market where "growth" has not been a benign word lately.

With the publicly traded companies spending most of their time on debt restructuring negotiations and divestitures, the acquisition market continues to be dominated by private companies, especially those with access to capital. A case in point is Aspen Retirement Corporation, a Denver, Colorado-based operator that now has six communities with 1,100 units in Florida, Ohio and Virginia. The company’s latest acquisition is the 278-unit Willowwood Retirement Community in Fort Lauderdale, Florida.

The campus includes one building with 201 independent living units and 37 assisted living units that was built in 1987, and a free standing assisted living facility with 40 units that was built in 1995. There are a total of 55 studios, 156 one-bedroom and 67 two-bedroom apartments. The assisted living units rent for between $2,800 and $3,500 per month, while the independent units range from $2,100 to $3,400 per month, depending on the square footage. Occupancy at the time of the sale was about 93%.

The purchase price was approximately $22 million, or $79,000 per unit and $73 per square foot, which is a good deal for the buyer given the age of the property and occupancy levels. There is expected to be some upside as well, as the community had been under-managed. Estimated revenues before any improvements are put in place are about $8 million, putting the price to revenue multiple at 2.75x, which is considerably lower than the 3.3x average in 2000 for the combined assisted and independent living market. This property will be a stable asset for Aspen, which was represented by Bruce Gibson of CB Richard EllisSenior Housing Services Group.

Aspen, which is a subsidiary of The Broe Companies, is now looking to acquire between $300 million and $400 million of properties (or companies) over the next two years. Equity for the company’s deals comes from the parent company and leverage will vary from deal to deal. Although the target areas are major metropolitan markets, the primary states of interest include California, Florida, Ohio and Virginia. The major problem for Aspen will be finding enough candidates.

On behalf of an institutional investor client, Boston-based Lend Lease Real Estate Investments purchased from the Dermot Company a 139-unit age-restricted senior living property called The Patrician in San Diego, California. Although the community currently provides no services, the buyer plans to convert the building into a full-service congregate care community. This will result in a sharp increase in the monthly rates, which currently range from $700 to $1,200. Built in 1986 with renovations in 1998, The Patrician has 126,500 square feet on a 2.11-acre parcel. The purchase price was approximately $14.2 million, or $102,000 per unit, and occupancy at the time of sale was close to 95%. David Rothschild of CB Richard Ellis negotiated the transaction.

The Arbor Group, a privately held company based in Georgia, purchased a 65-unit assisted living facility in Decatur, Georgia. The property was built in 1990 by Arbor and is 100% occupied. Arbor now operates nine assisted living facilities in Florida, Georgia, North Carolina and Tennessee and is looking for more. Allen McMurtry of CLW Health Care Services Group represented Prudential Real Estate Investors in the sale, but no financial terms were revealed.