The SeniorCare Investor: Acquisition Market Heats Up, ALFs Continue To Dominate

For the second quarter in a row, the volume of senior care acquisitions topped all health care services categories with 22 announced transactions in the first quarter of 2003. Admittedly, it was a slow quarter for health care services, with only four hospital deals announced, compared with 15 to 20 in most previous quarters. Some of the slowdown can be attributed to indecision leading up to the war in Iraq. Still, the senior care transaction volume is continuing at the same pace that it ended 2002 with, and the second quarter of 2003 looks to be even busier.
One broker, when hearing of the relatively robust volume and not seeing much of it himself, was surprised at the level of activity. Even though there were three deals in the first quarter valued in excess of $100 million (not seen in a few years), most of the activity involves single-property sales at relatively low (distressed) prices, and the past month is no exception. The low profile of many of these deals is also the result of who the buyers are—mostly small, local operators as well as newcomers to the field. Not everything in the market is financially troubled, and a few facilities sold last month had occupancy rates in excess of 95%. In addition, some buyers may have negotiated some real bargains, taking advantage of the intense need to sell by some providers. They also have been willing to take the risk, and find the financing, for properties that many buyers, and lenders, would not touch.
One of the fully stabilized properties that was sold in April is the sister facility of a community in Sarasota, Florida, that sold last October in a similar transaction. In the current transaction, Sims Capital Management LLC (SCM) purchased Heron House East, a 112-unit facility, for $8.4 million, or $75,000 per unit. The assisted living facility opened in late 1999 and reached stabilized occupancy in 18 months. After the first month lease-up, the facility averaged just over five net move-ins per month until stabilization, which actually hit 100%. Since June 2001, occupancy has remained between 95% and 100%, so there were no one-time gimmicks or rent concessions to give the impression of a successful lease-up.
The facility is relatively small, with the total square footage of the building at just over 400 square feet per unit, so the unit sizes are small, and a few are shared. Management tries to get the residents out of their units early and into the various activities, minimizing what may be considered a drawback. Obviously, it hasn’t hurt the demand, and the average rent of $2,000 per month is affordable in that market. The facility operates at a 35% profit margin after management fee, and was purchased at an 11.25% cap rate and about 3.1x revenues. The seller was Horizon Senior Lifestyles, Ltd, and its affiliated company, Autumn Care Management, Inc., will continue to manage it for SCM. Horizon has the option to purchase the facility back from SCM during a three-year period beginning in 2006 at a minimum price above $8.4 million and based on an 11.25% cap rate. A third Heron House facility may be sold in a similar fashion this summer. SCM, an affiliate of Herbert S. Sims, is taking advantage of inefficiencies in the capital markets and raising equity from retail investors who are looking for yield in a market where double-digit returns have become practically extinct.
In another transaction involving a stabilized and profitable facility, EdenCare Senior Services sold a 48-unit assisted living facility in North Carolina for just under $4.0 million, or $83,200 per unit, to a private investor. The property was built in 1997 and was 95% occupied. Revenues average about $1.9 million, and with an operating margin after management fee equal to just over 23%, the cap rate was 11.1%. EdenCare decided to sell the facility because it wants to concentrate its portfolio on larger communities in larger markets. Cornerstone Commercial Mortgage arranged the financing and Allen McMurtry of CLW Health Care Services represented the seller in the transaction.
Mr. McMurtry also represented the seller in what turned out to be the highest priced sale, on a per-unit basis, of the month. Circle Housing Limited Partnership (an affiliate of Prudential Realty) sold a 112-unit Brighton Gardens to CNL Retirement Properties for $12.75 million, or $113,800 per unit. The property, built five years ago, has 90 assisted living and 22 Alzheimer’s units. Despite being in the high-income market of Saddle River, New Jersey, the facility has struggled with occupancy. Assisted living base rents, which include personal care for one to two ADLs, range from $2,525 to $3,700 per month for studios and from $4,000 to $4,500 for one-bedroom units. The Alzheimer’s units, which had better occupancy rates, average about $4,500 per month. We assume that Sunrise Senior Living (NYSE: SRZ) will be managing the facility and that there will be pressure on them to raise occupancy levels. Although no financial data was revealed, the facility was cash flow positive, and with below-average occupancy the cap rate would be in the single digits. CNL’s price obviously assumes that census, and profits, will rise under new management.