The SeniorCare Investor: Blackstone Wins Big On Sunwest Deal –

HCP Muscles Back Into M&A Market With $1.7 B Deals
 
Back in early 2010 when Blackstone Real Estate Partners VI was duking it out with AEW Capital for the remaining Sunwest Management portfolio, AEW’s last-minute involvement forced Blackstone to up the ante and pay a higher price than what they had offered, and to include an option for the Sunwest TIC investors to participate in the upside if they didn’t want to cash out.  Individual properties were removed or added to the portfolio, for a variety of reasons, and when the dust settled, Blackstone and its partners, Emeritus Corporation (NYSE: ESC) and Columbia Pacific Advisors, agreed to buy a portfolio of 144 mostly assisted living and memory care properties with 11,769 units for $1.294 billion, or $110,00 per unit. 
Based on “fresh-start” accounting, the pro forma revenues and EBITDA were about $349.9 million and $100.7 million, respectively, resulting in a pro forma cap rate of 7.8% and an operating margin of 28.8%.  Occupancy for the portfolio at the time was just over 79%, and there was some concern that Emeritus, which was growing at a rapid pace, would have some difficulty with this portfolio because of its size, need for significant capital expenditures, the poor reputation in some of the local markets because of the previous Sunwest management and a cost structure at the local level that was assumed to be too low.  You could just hear the sigh of the market: “poor Granger.”
The transaction finally closed in August 2010, and by 2011 initial reports were that operating performance and occupancy were better than originally forecasted.  The joint venture has invested about $42 million, or $4,100 per unit, in capital improvements during the past two years, and this may have helped occupancy increase to 86.8% year-to-date in 2012, and a reported 88% or so currently. 
For disclosure purposes, the purchaser of the portfolio this time around, HCP, Inc. (NYSE: HCP), has divided the portfolio of 133 communities it is purchasing into the “stabilized” group of 99 properties with 91.5% occupancy and the 34 “lease-up” group with 74.0% occupancy.  This is important when it comes to the lease terms between HCP and Emeritus.  But first, let’s take a look at some of the details of the new transaction, which closed in record time on October 31.
Of the original transaction two years ago with 144 properties, it looks like two of them may have been sold, leaving 142 communities with 10,350 units.  HCP is buying 133 of these for $1.728 billion, or $166,950 per unit.  The price allocated to the stabilized portfolio is $1.326 billion, or $175,250 per unit and a 6.8% cap rate, and the price for the lease-up portfolio is $402 million, or $144,400 per unit and a 5.7% cap rate, for a blended in-place cap rate of 6.6%.  These are obviously aggressive cap rates for what is not an “A” quality portfolio, even though there are some A- properties in there and a good share of B+, from what we hear.  It would be nice to know how much of the occupancy improvement came from the stabilized portion versus the lease-up, and what each group was two years ago……….Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today