The SeniorCare Investor: Unprecedented Supply, Surpassed Only By Demand

After describing a market environment last month that included four assisted/independent living portfolios worth more than $1.0 billion and nine skilled nursing portfolios worth nearly $1.0 billion available for sale, it would have been logical to think that the market supply was getting way ahead of demand (kind of like the development market five years ago), leading to a bottleneck in getting deals done. Think again.

It is now fair to say that acquisition demand is stronger than it has ever been before, even stronger than the go-go 1990s. Admittedly, this market strength is mostly for the higher quality properties, even though there is plenty of demand for the weaker facilities available for sale. Financing is plentiful for most quality levels.

In the past, one or two back-up offers within 5% of the winning bid were considered to be indicative of a healthy market. Now, especially with some of the higher quality portfolios, there have been as many as five or six back-up offers, some of which have been "pennies" lower than the accepted bid. And, from what we have heard, some losing bidders have not been very happy about the outcome. In particular, we heard that one back-up bidder hung up on the seller’s representative upon hearing of the outcome. The good news is that some of those who did not win the contests have been more willing to open up about some of the deal particulars.

In one of the biggest transactions of the month, on June 30 nine assisted living facilities, operated by Benchmark Assisted Living and majority owned by BayNorth Capital and its affiliates, were sold to a Boston-based real estate investor in partnership with Benchmark, which will retain management of the facilities. This is obviously good news for Benchmark, because these facilities represented an important part of the company’s New England strategy, and losing them to another operator would have been unfortunate, to say the least.

The parties involved in the transaction have kept quiet about most of the details, but digging into some history and speaking with other bidders, we have been able to piece together some estimates. First of all, Benchmark and Charlesbank Capital Partners (the real estate group split off last year to form BayNorth) purchased eight of the nine properties in 2001, known as the Crossings facilities, for approximately $57.2 million. At the time, revenues and EBITDA were about $19.3 million and $6.2 million, respectively, with occupancy above 95%. In May of 2003 the ninth, and largest facility with 123 units in Ridgefield, Connecticut, was purchased by Benchmark for $10.25 million from Bank of America after the lender foreclosed on the property. This facility opened in 1999 and had difficulties from the start, not helped by the financial deterioration of its original operator, CareMatrix, with occupancy in 2001 of only 35%. Occupancy averaged just over 50% for 2004 and was the real wild card in the portfolio that was just sold. Under Benchmark’s management, however, we heard that occupancy rose to about 80% by the beginning of this year.

We believe that the final purchase price for the nine-facility portfolio was close to $225,000 per unit, or somewhere above $150 million and double the original investment. The oldest property in the portfolio opened in 1997, and the average age for the group is about five years. There are 672 units, for an average of 69 units each for the eight Crossings facilities plus the larger one in Connecticut. Seven of the eight Crossings facilities are in Massachusetts, with one in New Hampshire. More than 50% of the units are studios, with the remainder one-bedrooms and a smattering of two-bedroom units. Excluding the Connecticut facility, the rest of the portfolio had an average occupancy close to 95%, with several of the facilities consistently operating at 96%. We assume that the Connecticut facility will stabilize later this year, when it should become the most profitable property in the portfolio.

Trying to determine a cap rate on the deal is difficult because the Connecticut facility was far from stabilized last year, so anything based on historical numbers is relatively meaningless. Although we haven’t seen the numbers, our best estimate (from what we hear) is that the cap rate would be close to 7.5% on 2005 projections, and between 8.0% and 8.5% on 2006 earnings when the full cash flow from Connecticut kicks in. This was a deal that Benchmark had to do, and the company was fortunate to team up with a newcomer to the seniors housing field to edge out the competitors. People may say they paid too much, but if so, there were many others willing to pay about the same amount. Lisa Widmier of CB Richard Ellis represented the seller in the transaction.

In the largest deal of the month, but one where the other bidders were much less talkative, Prudential Real Estate Investors finally closed on the sale of nine retirement communities in one of its funds that had been managed by Renaissance Senior Living. The communities are all in California and have a mix of independent and assisted living units totaling 1,261. Eight of the nine properties have closed, with the last one waiting for license transfer. Although we have been unable to confirm the final price, we believe it is just over $220,000 per unit, or between $280 million and $285 million, and the buyer was an affiliate of Fortress Investment Group who will hire Brookdale Living Communities to manage the communities. With these and the former NBA communities under management, Brookdale continues to edge closer to having the critical mass for a potential IPO. Dave Rothschild of CB Richard Ellis represented the seller.

Companies Mentioned in this issue:
July 2005
A
Aegis Assisted Living p7
AEW Capital Management p8
Affinity Health Services p8
Alliance Senior Services p4
Alterra Healthcare p7
Apax Partners p8
Arcapita, Inc. p6
Assisted Living Concepts p4
B
Bank of America p2
BayNorth Capital p2
Benchmark Assisted Living p2
Beverly Enterprises p6
Brandywine Senior Care p6
Brookdale Living Communities p3
C
Capital Senior Living p5
CapitalSource p5
CareMatrix p2
CB Richard Ellis p2
CGI Management, Inc. p5
Charlesbank Capital Partners p2
Chartwell Seniors Housing Real Estate Investment T p8
CLW Health Care Services Group p5
Community Medical Centers p5
Cordia Senior Living p10
CPAC (Care) Holdings Inc. p8
E
ElderCare New Zealand p8
Elimcare Communities p5
Emeritus Assisted Living p7
F
First Islamic Investment Bank p6
Five Star Quality Care p6
Formation Capital p6
Fortress Investment Group p3
Fremont Realty Capital p8
G
GE Commercial Finance p10
Gordon Health Ventures p6
H
Health Care Property Investors p4
Healthcare Business Credit Corp. p10
Hearthstone Assisted Living p8
Heartland Bank p10
Herbert J. Sims & Company p10
Houlihan Lokey p7
HSH Nordbank AG p6
K
Kindred Healthcare p11
L
Landmark Realty Capital Corp. p10
Lehman Brothers p7
Leisure Care p3
Leisureworld p8
Love Funding Corporation p10
M
Macquarie p8
Macquarie Bank Limited p8
Manor Care p7
Meridian Retirement Communities p7
Merrill Lynch & Co. p11
Merrill Lynch Capital Healthcare Finance p10
N
NBA p3
O
Oakmont Senior Living p7
P
Provident Senior Living Trust p11
Prudential Real Estate Investors p2
Pulliam Investment Company p5
R
Renaissance Senior Living p3
S
Senior Housing Investment Advisors p4
Senior Housing Properties Trust p6
Senior Living Investment Brokerage p5
Smith/Packett Med-Com p4
STCH, LLC p3
Steven D. Bell & Company p5
Summerville Senior Living p4
Sunrise Senior Living p6
Sunrise Senior Living REIT p11
Superior Residences p10
T
The Covenant Group of Texas p5
The Fountains p6
V
Ventas p7