Unprecedented Supply, Surpassed Only By Demand

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.