The SeniorCare Investor: Chartwell Does It Again--

 

The Canadian REIT Continues To Expand In The U.S.

A few months ago, we heard a rumor that Chartwell Seniors Housing REIT (TSX: CSH.UN) was negotiating to purchase Merrill Gardens, a highly respected owner, operator and developer of seniors housing communities based in Seattle, Washington. While we are sure that Chartwell wouldn’t mind buying the whole company, and we are not ruling out a larger transaction in the distant future, it turns out that in the middle of last year Merrill Gardens decided to divest what is called its "southern portfolio," which includes 26 communities stretching from Florida (nine properties) to Arizona (two), with Georgia (two), Alabama (three), Texas (seven) and three other states with one property each in between.
Of the total, 24 are owned and two of the Florida properties are leased, and they include 1,431 independent living, 771 assisted living and 172 Alzheimer’s units.

Chartwell is paying approximately $346.4 million, or nearly $146,000 per unit ($162,000 per unit if the leased properties are removed). While we have not been able to obtain any financial data, our "guestimate" is that annual revenues are close to $75 million, with EBITDA perhaps in the area of $25 million, for a cap rate that may be close to 7%. Transactions of this size and unit mix, in this aggressive market, would usually go for cap rates between 6.5% and 7.5%, but at this point all we can do is guess based on market conditions. We do know, however, that the transaction will be immediately accretive to Chartwell by $0.03 per share in 2007, increasing in 2008. In addition, the portfolio has relatively new properties, with all but four built within the past 10 years, and while the overall occupancy rate is 95%, as of March 16, 11 of the communities had a 100% occupancy rate and only three were below 90%. That is pretty impressive for this large a portfolio, so Merrill Gardens must be doing something right. But we assume they are doing a lot of things right. And this is a great acquisition for Chartwell at what we assume to be a reasonable price, with new and stable properties.

The total cost to Chartwell, however, will be closer to $370 million when closing and mortgage defeasance costs are added in. Financing of the acquisition will be split about one-third from the proceeds of a new unit and convertible debenture offering in Canada and two-thirds from mortgages. Chartwell will now own or manage just over 13,000 units in the U.S., plus an additional 24,790 in Canada. For the Merrill Gardens acquisition, it will use its joint venture entity, Horizon Bay Chartwell (HBC), to manage 23 of the 26 communities, with the three Alabama properties left out. Chartwell recently increased its ownership position in HBC to an effective 74.5% interest. Lisa Widmier, who recently joined Eastdil Secured as a managing director, and Dave Rothschild of CB Richard Ellis acted as financial advisors to Merrill Gardens, while Mel Gamzon of Fort Lauderdale, Florida-based Senior Housing Investment Advisors advised Chartwell on the acquisition.