The purchase price was $10.5 million,
or $47,900 per unit. If the buyer can get occupancy up to the 92% to 94%
range, we estimate revenues could get to $5.4 million with EBITDA
approaching $1 million, even though that would be a relatively low
operating margin. The problem is that until the average rents of $1,700 in
the IL part of the community can be increased, it will be difficult to
maximize the profitability. The first step is census enhancement, with
increased rates following. Bruce Gibson of CB Richard Ellis
represented the seller. Mr. Gibson also just finished the first round of
bids on a portfolio of eight assisted living facilities in the Southeast
that may command a price of $200,000 per unit or more.
Assisted Living Market
In the largest assisted living
transaction this month, Carlyle Senior Living purchased an 80%
interest in seven assisted living facilities that were owned and operated
by Chelsea Senior Living in New Jersey. Carlyle formed a joint
venture with Chelsea, which will retain the other 20% interest. Merrill
Lynch Capital Healthcare Finance provided a total of $91.5 million in
financing, which includes the assumption by the joint venture of $23.5
million of existing debt on the portfolio and $68.0 million of new debt.
The total value placed on the portfolio of seven properties was
approximately $140 million, or $222,500 per unit.
There are a total of 629 units, most
of which are traditional assisted living plus more than 100 Alzheimer’s
units; one facility has a 31-unit independent living wing. In addition to
these seven facilities, Chelsea manages a 195-unit community for a third
party. The buildings are basically new, having been built in the past 10
years, and the occupancy of the portfolio is about 90%. Although we do not
know the financial performance for 2006, in 2007 the portfolio is expected
to have revenues and EBITDA of about $32 million and $10 million,
respectively, for an implied cap rate of just over 7%.
There were several other interested
parties in the Chelsea transaction, but Chelsea went with Carlyle to form
a long-lasting partnership to help grow the company in New Jersey and
perhaps beyond. Carlyle is looking to forge additional relationships with
regional companies seeking to recapitalize their portfolios and to grow.
Carlyle is in the second round of
bidding for a portfolio of 12 assisted living facilities that it thought
would sell as a group. But in this case, because of the distinct
geographic regions, with an East Coast and West Coast group, this may be a
case of the sum of the parts being worth more than the whole, so the
assets will most likely be split up for the highest regional bidders.
Canyon Creek Development
is at it again, buying a 57-unit assisted and independent living facility
in Jackson Hole, Wyoming from a private company based in St. Louis,
Missouri. The property was built in 2005 but has struggled to get anywhere
near stabilized occupancy. At 46% occupancy, revenues were just under $1.0
million with an operating loss, but pro forma revenues and EBITDA are $2.0
million and $650,000, respectively, with an assumed 32.5% margin. There
are studios, one- and two-bedroom units, with assisted living rates
ranging from $2,900 to $4,250 per month and independent living rates of
$2,100 to $3,800 per month. The purchase price was $8.2 million, or
$143,900 per unit, so the manager, Sunwest Management, will need to
fill it very quickly to prevent the loss from expanding with its new
capital costs adding to the existing negative cash flow. Mark Myers of
Marcus & Millichap represented the seller.
Mr. Myers and Krone Weidler also sold
a 61-unit assisted living facility outside of Pensacola, Florida that is
licensed for 70 beds. Built in 1999, the one-story facility is fully
stabilized, with about 70% of the residents private pay at an average rate
of $2,670 per month and the remaining 30% under the state’s Medicaid
waiver program at an average rate of about $1,600 per month. Current
revenues and EBITDA are about $1.55 million and $500,000, respectively.
The buyer, Selah SeniorCare, paid $4.8 million, or $78,700 per unit, which
results in a 10.4% cap rate.
A little further down the Gulf Coast,
in the Davis Islands/Old Hyde Park area of Tampa, an operator out of
Pennsylvania purchased a 53-unit assisted living facility that was
originally constructed in 1925 but had major renovations in 1990 and 2004.
This was the only seniors housing asset of the seller, who was a
multifamily and condominium developer, so it was a strategic disposition.
Occupancy was just 80%, perhaps because it was a sideline business of the
seller, so revenues were just over $1.1 million with minimum profits. The
buyer intends to reposition rents, aggressively market the facility and
target veterans. Current average rents are about $2,200 per month. The
purchase price was $3.8 million, or $71,700 per unit. Bradley Clousing,
Michael Brundage and Ryan Saul of Senior Living Investment Brokerage
handled the sale.
Little known LifeHouse Retirement
Properties (Pink Sheets: LHRP.PK) is beginning to pick up steam, with
the acquisition of six properties so far this year. It still has $11.5
million of its acquisition equity line which can, according to management,
be leveraged into $46 million of additional acquisitions. The company
recently purchased three small assisted living facilities in Michigan for
$5.28 million, or $44,000 per unit. Each of the facilities has 40 units
and they are located in Mt. Pleasant, Clare and Grand Blanc. Revenues for
the three combined are about $2.6 million, and the company now operates 13
assisted living facilities.
Skilled Nursing Market
With the high prices being paid for
large skilled nursing companies and portfolios, we are hearing about more
potential sellers thinking about putting their properties up for sale to
take advantage of the premium pricing environment. This same phenomenon
occurred in the assisted and independent living market a few years ago,
prompting an unprecedented volume of high-end portfolios and properties to
enter the market and drive down cap rates and push per-unit prices up to
levels never before seen. The problem in the skilled nursing market,
however, is that the majority of the existing inventory of facilities is
quite old, and most of them still rely on Medicaid as the primary payor,
with fickle government reimbursement in general accounting for 80% of
their revenues. That tends to put a limit on value, especially when state
Medicaid limits on capital reimbursement are taken into account.
Most of the sales we have found
recently, however, are not the high-end ones we have been hearing about,
and for the most part represent some of the issues facing a part of the
senior care market that is struggling with its future. In the first sale,
a Chicago-based private equity group purchased two skilled nursing
facilities in Indiana from an out-of-state private investor who had leased
the facilities to a local operator who ran into some financial
difficulties. Both facilities are small, with 68 and 72 beds, more than 30
years old and with occupancy close to 75%. The seller had brought in a
local manager to improve operations, which he did, and the buyer then
leased the two facilities to that operator.
The purchase price for the two was
$4.85 million, or about $34,600 per bed, which isn’t too bad for old
Indiana nursing facilities with below-average occupancy. But it must be
remembered that Indiana as a state has about the lowest nursing facility
occupancy rate in the country, so within the state 75% isn’t too bad.
Combined current annualized revenues are almost $5.1 million with EBITDA
approaching $700,000. This results in a cap rate of 14.2% which is higher
than the market average, but should be higher given the age, size and
occupancy levels. Mark Myers and Chris Hyldahl of Marcus & Millichap
represented the seller in the transaction.
Also in the Midwest, the team of Ray
Giannini and Mike Pardoll of Marcus & Millichap sold a large skilled
nursing facility in Milwaukee, Wisconsin that was under severe financial
distress. The 35-year old property is licensed for 191 beds but two of the
three wings were closed, so while actual occupancy was just 35%, effective
occupancy was closer to 90%. Despite closing a majority of the facility,
it posted substantial losses on about $3.7 million of annual revenues. A
publicly traded REIT owned the building and leased it to a not-for-profit,
but they just could not make it work.
The buyer, Extendicare Health
(TSX: EXE.UN), which is now a Canadian REIT, has a plan that makes a lot
of sense. The company, which paid about $2.5 million for the property and
has a lot of experience in Wisconsin, plans to decrease the license of the
existing property to about 90 or 100 beds, converting the 98-room facility
into an all private-room facility and build up the Medicare and, to a
lesser extent, the private pay census. It happens to be very close to two
large hospitals, and while we don’t know why the previous operator did not
take advantage of this proximity, Extendicare plans to. They can then
transfer the CON for the remaining beds to another location in the state
and build a state-of-the-art nursing facility. Unless we are missing
something, this seems like a win-win to us.
In Texas, Tom Vogds and Mark Myers of
Marcus & Millichap represented a publicly traded health care REIT in the
sale of two underperforming nursing facilities that had been acquired in a
larger portfolio. The two have a combined 170 beds, and are more than 40
years old with an average occupancy of about 55%. They are rural
facilities and in some cases the private pay rate was less than the
Medicaid rate. They were operating at a small loss on revenues of $4.3
million. We have no idea what the buyer plans to do with them, but with
the low price of $2.0 million, or just under $12,000 per bed, capital
costs won’t be much of a worry.
Before you start thinking the next
sale will be under $10,000 per bed, some better-quality facilities do come
onto the market. In Cincinnati, Ohio, Episcopal Retirement Homes
sold a 170-bed nursing facility that had a 42-unit assisted living
component, of which 18 units were for dementia patients. The original
nursing part of the facility was built in the early 1960s but the assisted
living addition came in 1998. The average Medicaid rate is just over $200
per day, and assisted living monthly rates average between $5,000 and
$6,000. The occupancy rate is 95%, with 35% private pay, 56% Medicaid and
9% Medicare.
The buyer, a private Atlanta-based
operator that bought its first facility in Ohio late last year, paid $20.5
million, or $96,700 per bed/unit. With revenues and EBITDA of $18.3
million and nearly $2.0 million, the gross income multiple and cap rate
were 1.1x and 9.7%, respectively. Both acquisition multiples would be
considered aggressive for a nursing facility, but when the assisted living
portion is factored in, they are not. It is unknown what the impact will
be of converting to a for-profit status, other than increased taxes, so
the buyer will have to tread carefully to not ruffle any Episcopalian
feathers in the community. Jacob Gehl and Mark Myers of Marcus & Millichap
represented the seller. These two will also be coming to market very soon
with a similar property, also in Ohio, which will have about 100 skilled
nursing beds and about 100 IL/AL units. The community is full and the
first round of bidding, with sealed bids, will take place in the next four
to six weeks.
Moving westward, a 60-bed nursing
facility in central Missouri was sold at the end of May to a regional
company that plans to increase the census in general, but specifically the
relatively low Medicare census (5%), by enhancing the relationship with
the adjacent hospital, which is the primary acute care facility for the
region. The nursing facility was built in 1982, and overall occupancy is
just 70%, of which 80% is Medicaid.
Annualized revenues and EBITDA for
2007 are expected to be $2.3 million and $281,000, respectively, which
takes into account a $9.02 per day increase in the Medicaid rate effective
next month. The purchase price was $2.8 million, or $46,700 per bed. The
implied 10% cap rate is aggressive for a small facility with its current
census, but if the buyer can execute its Medicare and census strategy, it
may look cheap by this time next year. Jeff Binder of Senior Living
Investment Brokerage handled the sale.
In addition to the Michigan assisted
living purchase mentioned above, LifeHouse Retirement Properties started
the year with the $9.3 million acquisition of a skilled nursing facility
in Sylmar, California. The pro forma EBITDA for the 12 months ended
October 31, 2006 was about $1.7 million, so the implied cap rate was just
above 18%.
At the same time, LifeHouse purchased
the leasehold interest in another nursing facility in Bakersfield,
California, which has a 20-year remaining term. The purchase price was
$2.8 million, and with pro forma EBITDA of $1.0 million for the 12 months
ended last October 31, that yields a 2.8x multiple of cash flow. The two
facilities have a combined 325 beds and $18.1 million of revenues.
The company also purchased another
leasehold interest in San Jacinto, California. The 199-bed nursing
facility had revenues and pro forma EBITDA in 2006 of $12.4 million and
$1.1 million, respectively. The lease has a 20-year remaining term, and
with a price of $3.6 million, the cash flow multiple was 3.3x. Including
some recent assisted living acquisitions, the company operates
approximately 1,340 beds in California and Michigan with annualized
revenues in excess of $50 million.
Updates
As most everyone knows by now,
shareholders of Genesis HealthCare approved the sale of the company
to a joint venture of Formation Capital and JER Partners for
a final price of $69.35 per share, or a total transaction value of about
$1.83 billion. This comes in at close to 10.9x trailing 12-month EBITDA
and almost 10% higher than the original $63.00 per share deal agreed to
last January. In what amounted to a game of chicken, the Formation Capital
joint venture went head-to-head with spurned bidder Fillmore Capital
Partners, whose last bid was $69.25 per share. It was quite a
turbulent six weeks, with bids, counter-bids, shareholder letters,
"ticking premiums," changed break-up fees and threatened legal action. In
the end, shareholders received more than they were expecting, and the
transaction should close in July. For the blow-by-blow detail of what
happened over the past several weeks, we need only refer you to our blog
at
www.seniorcareinvestor.com for our somewhat opinionated
commentary.
In the other major deal in the works,
we have heard that up to 12 bidders, all of which we assume are financial
buyers, made it to the second round for Manor Care. We have also
heard that JPMorgan, which is representing Manor Care, has put on
the table a financing package for the winning bidder that includes up to
$4.5 billion in secured financing for the "Propco" and $600.0 million in
working capital financing for "Opco." At its current price of about $67.70
per share, Manor Care’s market cap is $4.95 billion, and when you throw in
the existing debt, the total value comes to about $5.9 billion, before any
premium is paid. This means that a qualified buyer would have to put up
$1.5 billion of equity, which would not be too difficult in today’s flush
capital market, but it still represents a large number for a company
trading at its peak. A premium over the current price will have to be paid
by the winner, and we hear that the number is getting bigger. While it is
true that in the skilled nursing business it doesn’t get much better than
the portfolio of assets owned by HCR, there appears to be a growing
disconnect between capital and an underlying risk premium that should
apply when most of your profits come from Medicare. But what do we know?
Management made a short-lived attempt
to take the company private almost two years ago, but most people have
forgotten that management also tried to buy the company in late 1990 from
the owner at the time, Owens-Illinois (which itself was owned by
KKR). It seemed like they were wrapping up most of the details of the
deal, backed by a Chicago-based private equity firm, at a time when the
investment climate was not very good, the economy had fallen into a
recession and Iraq had invaded Kuwait. But by the time all the details had
been worked out and the buy-out group had arranged $265 million of
financing with Salomon Brothers (can you believe the amount?), the
financial environment had changed dramatically, stock prices were rising
following the defeat of Iraq in Kuwait and the IPO market heated up, with
smaller skilled nursing companies debuting with high market valuations. It
ended up being more profitable for KKR to take the company public, and the
rest is history. Let’s see what happens this time.
In other news, there was a
short-lived proxy battle for control of the board of Advocat
(NASDAQ: AVCA), which ended with more than 80% of the votes cast
supporting the company’s nominees for the board at the annual meeting. A
non-shareholder, Todd Robinson, together with Essel Bailey, tried to stop
Advocat from holding its annual meeting and adjourn to a later date unless
the board first appointed Robinson, Bailey and a third member of the
group, Terry Cash, to the board. Apparently, they believe that management
and the board is not representing the best interests of shareholders, as
evidenced by management’s unwillingness to enter into negotiations to buy
several skilled nursing facilities owned by them and other groups they are
involved with. According to Mr. Robinson, they approached management
several times over the past year, but were rebuffed for a variety of
reasons, one of which was the low price of Advocat’s stock price at the
time. Advocat thought they were trying to gain control of the company be
selling facilities to it for stock at a time when the share price was low,
but the other side has claimed they would have taken cash or stock.
Advocat would not return our call to comment on the situation, so we have
only heard one side.
What is unusual, to say the least, is
that this "proxy group" does not seem to own any shares, so their argument
about doing what is best for shareholders is a little suspect, and perhaps
self-serving. They believe that Advocat can grow much larger, which would
ultimately enhance shareholder value, and this is probably true. Our guess
is that because Advocat has such a small market cap this group would like
to take it over, double its size with some acquisitions of their nursing
facilities, which have a good regional fit, and either continue to grow it
or set it up for a sale. In March, one shareholder with a 4.4% stake,
Bristol Investment Fund, urged the company to set up a special
committee of the board and start an auction of the company. In the first
quarter earnings call, most of the investors seemed to be appeased by
management as to the direction of the company, as well as the fact that
management had a lot of work to complete over the past year with regard to
its capital structure before it could embark on a growth plan. While this
is all true, we do not believe we have heard the end of this little
skirmish.
Financing News
New Jersey has been seeing a lot of
action lately. In addition to the financing by Merrill Lynch of the
Chelsea Senior Living portfolio (mentioned on page 8 of this issue),
PRN Marshall Capital arranged $66.3 million in financing for Spring
Hills Health Care, LLC. Of the total amount, a $61.5 million first
mortgage loan was provided by Capital Trust, Inc. (NYSE: CT) while
a $4.8 million second mortgage was funded by LaSalle Bank. The
loans are secured by the seven-property portfolio which has 675 assisted
living beds in New Jersey. The loan proceeds were used to refinance six of
the facilities, exercise a lease purchase option to acquire the seventh
and provide more than $6.0 million in working capital and marketing
reserves to stabilize the portfolio which had been acquired over the past
five years.
Capital Senior Living
(NYSE: CSU) completed a $30.0 million refinancing of four of its
communities with four new 10-year mortgages with a fixed rate of 5.9%,
which is 170 basis points lower than the previous debt. The annual savings
is expected to be about $500,000. Capmark Finance placed the debt
with Fannie Mae. Separately, CSU formed a joint venture with
Prudential Real Estate Investors to develop a 146-unit retirement
community in Miamisburg, Ohio that is expected to open in the second or
third quarter of 2008. The joint venture will be funded 10% by CSU and 90%
by Prudential.
In two smaller transactions,
Cambridge Realty Capital provided a $7.6 million HUD loan for a
149-bed supportive living facility in the Jackson Park neighborhood of
Chicago, Illinois. Leonard Lucas of Love Funding Corporation
secured a $2.5 million HUD loan for a 65-unit senior housing facility
built in 1986 that had an existing $2.2 million loan balance with a 9.25%
interest rate. With a new interest rate of 5.87%, the annual debt service
will drop by $58,000 for the not-for-profit owner.
