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The SeniorCare Investor |
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August
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Companies Mentioned in this issue: |
Atria Senior Living Lands Deal-- Part of the reason for taking so long was that the transaction was quite complicated, with a few of the properties co-owned by the seller and an outside investor, and with most of them located in New York. As anyone who has tried to close a deal in the Empire State knows, you are at the whim of the Department of Health and the licensing bureaucrats who know how to take their sweet time to approve the license transfer, even if you are a provider in good standing in the state. Forest City is actually selling 12 facilities to Atria, including six on Long Island, one in Forest Hills, Queens, two in Connecticut, and one each in Westchester County, New York, Philadelphia and Florida. In addition, Atria is purchasing a thirteenth facility in Westchester County from the developer who was a co-owner with Forest City on two of the Long Island properties. Before Forest City could close on its deal with Atria, it had to buy out the interests of Hassett Belfer Senior Housing in two of the Long Island properties with a total of 222 independent living units. Allen McMurtry of CLW Health Care Services Group represented Hassett Belfer in that sale, which, based on a 100% interest, was valued at $82.8 million, or $373,000 per unit. From what we have been able to determine from market sources, the approximate purchase price for all 13 facilities is $680 million, or about $383,700 per unit. The value of the New York metro properties is most likely above $400,000 per unit, because the Florida and Philadelphia communities combined may be worth closer to $250,000 per unit using a 6.5% cap rate. Of the 1,772 total units, 486 are assisted living and Alzheimer’s and 1,286 are independent living, with a combined average monthly revenue per unit of about $5,000, which should be closer to $5,500 next year. But the average doesn’t really tell the whole story, as one 158-unit independent living community on Long Island, which just opened on July 3, has studios that start at about $4,500 per month and two-bedroom units going for $11,000 to $12,000 per month. It opened with 80 reservations in place, and about 40 residents moved in during July. With that demand we would not be surprised if it filled by the end of next summer. Overall occupancy for the portfolio is close to 88%, with a few of the facilities that have been open a while not yet stabilized. Atria has several properties in these markets with average occupancy close to 95%, so we’ve got to believe they will be able to stabilize the Sterling Glen portfolio close to Atria’s existing average in these markets over the next 12 to 18 months. If we assume a stabilized occupancy of 94%, annualized revenues for the portfolio should be between $110 million and $120 million, with EBITDA that could reach $45 million or more after a full management fee. Since we all know that up to 50% of a management fee is profit, and that Atria already has the systems and people in place in this market, our guess is that the incremental management cost is closer to 2% of revenues. Looking at it that way would result in a stabilized cap rate range between 7% and 8%, compared with 6% to 7% with a full management fee. These numbers don’t include the benefits that would accrue to Atria with some repositioning of a few of its existing assets in the same markets that would be next to impossible to accomplish without this acquisition. Consequently, it looks like the Sterling Glen portfolio will not only add to Atria’s regional concentration, with 25 facilities now in the New York metro area, but will also strengthen its existing operations, which is why this is an ideal "strategic" acquisition. It is also strategic for what it does for Atria with regard to its future. The company now has more than 120 facilities with 14,700 units, with most of the concentration on the East Coast and California. And 22 of its facilities recently received "Platinum Community Awards" from the National Assisted Living Nurses Association, more than any other assisted living provider and 15% of the total handed out. The company owns about 85% of its facilities, which is at the high end for large providers and something investors currently favor because of the financial flexibility real estate ownership provides. We have estimated that revenues in 2008 will be somewhere between $600 million and $650 million, with an attractive operating margin producing EBITDARM between $225 million and $275 million. By increasing revenues and EBITDARM by 20% and 25%, respectively, not to mention the enhanced geographic concentration, the Sterling Glen acquisition puts Atria in a much stronger position to go public, if that is the road it chooses next year. It also makes the company a more attractive acquisition target with its larger size, strong margins, good locations and real estate ownership. We hear that the Lazard funds that control Atria will be putting about $250 million of equity into the Sterling Glen deal, representing the final portion of the capital these funds allocated to Atria. Not that Atria would have any problem raising more equity, but we assume that sometime next year, as the remaining properties stabilize, some decisions will have to be made. Fortunately for their investors, the options will be plentiful. |
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