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February 2004 issue
During 2003, the quasi-private REIT, CNL
Retirement Properties, purchased more than $1.0 billion of senior care
assets, often at prices that raised eyebrows among many market
participants. New information filed with the SEC allows us to take a
closer look at the four largest deals, and try to figure out what CNL is
up to, and whether the capital market for seniors housing communities is
changing.
...
The Horizon Bay Deal
CNL plans to invest at least $1.5 billion this year, and with the recently
announced $562 million acquisition of 20 Horizon Bay properties, it is
one-third the way there. The price was rich, and certainly not based on
recent performance, but CNL is comfortable with its assumptions. See page
5
...
Other Acquisition News
Two skilled nursing facilities in Delaware, that hot-bed of
acquisition activity, get picked up by an out-of-state buyer, and four
SNFs in Connecticut formerly operated by Olympus Healthcare finally get
auctioned off at low prices. In the ALF market, Salem Equity does another
deal. See page 8
...
Financing Market
Capital Senior Living opens the public equity market, and Smith/Packett
raises more than $25 million from several venture funds. See page 10
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Steve's BLOG on Senior Care |
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.
Go to page 2 of this article
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