SeniorCare - Irving Levin Associates, Inc.

Transcription

THE
SeniorCare
INVESTOR
Volume 24, Issue 3
March 2012
Inside The World of Senior Care Mergers, Acquisitions and Finance Since 1948
IN THIS ISSUE
It had been pretty clear during the year
that seniors housing prices had been rising, but both assisted living and independent living communities jumped in price
to near record levels, with assisted living
scoring the largest percentage increase
in price. Skilled nursing prices tumbled
from 2010’s record average price per bed,
but that was expected for many reasons.
See page 1
...
Health Care REIT Pounces
The giant REIT just got bigger, closing
last year with several acquisitions and
starting 2012 with the largest deal of the
new year, so far.
See page 1
...
Skilled Nursing Sales
See page 8
...
Assisted and Independent
Living Sales
See page 10
...
Assisted Living Prices Soar
SNF Prices Fall From 2010’s Record, M&A Market Strong
A
fter three years of suffering through distressed
sale after distressed sale,
not to mention skittish lenders, the
seniors housing market certainly
came alive in 2011. In most bull
markets, it is quality that drives the
buying interest, and that pushes the
average values up. So because of
three years spent working through
troubled and non-stabilized properties and portfolios, much of which
was focused on one company, when
the better properties became available for sale, the buyers lined up at
the bidding gate.
prices paid, for the overall seniors housing market as well as for the separate
assisted living and independent living
markets, were unprecedented, both on
a dollar basis and on a percentage basis.
In a different environment, that would
be cause for concern and represent a potential over-heating of the acquisition
market. But because the market was
so starved for quality for three years,
the surge in average prices across the
board (except skilled nursing) really
represented pent-up demand fed by the
pent-up supply of potential sellers who
were waiting on the sidelines. In addition, though the per-unit pricing may
seem like it became overly aggressive,
The increases in the average
...continued on page 2
Ends 2011 With A Bang, Starts 2012 With Major Acquisition
Acquisition Updates
See page 12
...
Financing News
See page 12
...
On The Move
See page 18
...
Fourth Quarter Earnings
See page 18
J
ust when we thought that maybe the health care REITs would
wait out the election year uncertainties and continue digesting
their huge acquisition volume of
2011, the largest transaction of the
year (so far) was announced in midFebruary. It is important to keep in
mind that the five health care REITs
that tapped the capital markets last
year raised a total of $8.1 billion,
with one-third of that new equity
and two-thirds debt (excluding expanded lines of credit). This is an
www.seniorcareinvestor.com
extraordinary amount of capital in one
year, but it was an unusual amount of
acquisition volume as well.
While most of that new capital
was used to fund last year’s acquisition
activity and pay down revolvers, their
capacity to raise more capital is almost
unlimited. A case in point is Health
Care REIT (NYSE: HCN), which at
the end of February sold 20.7 million
shares of common stock at $53.50 per
share to raise more than $1.1 billion. At
...continued on page 5
Page 2
The SeniorCare Investor
continued from page 1...
when the market is broken down further, it did not compare with the froth of the 2006 to 2007 period. While all
the relevant statistics (including new ones) will be in our
annual Senior Care Acquisition Report, coming out later
this month, we will delve into a few of them so you can
get a sense of what happened.
When looking at the overall seniors housing market
(IL and AL combined), the average price per unit in 2011
increased by 44% over 2010’s level to $162,400 per unit.
Although not a record, it was very close to the $164,500
per unit record in 2007. When breaking out the two components of the seniors housing market, both sub-sectors
obviously rose by significant amounts. The average price
per unit for assisted living communities soared by nearly
52% in 2011 to $156,900 per unit. This too was just below the record set in 2007 of $159,100 per unit. It must
be remembered, however, that the average price per unit
in 2010 was the lowest since 2004, so as a benchmark it
may not be the best point in time for comparison purposes.
As readers know, throughout 2011 we reported on a fairly
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regarding any company, industry or security. Opinions expressed
are subject to change without notice. Statements of fact have been
obtained from sources considered reliable but no representation is
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SeniorCare Investor, 268-1/2 Main Avenue, Norwalk, CT 06851.
March 2012
continuous stream of higher-end properties and small portfolios which often attracted up to a dozen qualified bidders
for each sale. This obviously did not go unnoticed in the
market, especially at a time when most everyone was touting the need-driven benefits of assisted living compared
with independent living, which in many markets suffered
from greater occupancy weakness than assisted living,
but not everywhere and not with all communities. So as
owners (potential sellers) saw this market change, it made
sense to test the market with their properties.
On the independent living side of the business, the
market also strengthened, but it had never fallen to the
depths of the assisted living market so it did not have as far
to rise. Prior to 2011, there were just so many distressed assisted living properties on the market that it overwhelmed
the market psyche. In contrast, there are always fewer
independent living communities on the market, and while
there are always underperforming properties sold, they
don’t usually dominate a market like assisted living did for
three years. The average price per unit for IL communities in 2011 was $171,000, representing a 23% increase
over 2010 and like assisted living, just under the record
of $174,500 per unit set in 2007. The dollar volume of
independent living sales in 2011 almost matched the $1.1
billion in sales that occurred in 2007, so there were many
similarities between the two years, including cap rate
(more on that later). It was a little surprising that this sector of the market performed so well in 2011 given all the
negative commentary that it wasn’t need driven, but just
like assisted living, the quality of what was sold improved
and it is likely that buyers believed that they had seen the
worst of the market in terms of census and rate increases
and that both had nowhere to go but up, especially in attractive markets.
Moving on to cap rates, for the overall seniors housing market (AL and IL combined), the average cap rate
declined in 2011 by 60 basis points to 8.8%. Yes, that
still seems high, especially for a bull market, but it is 100
basis points below the near-term high of 9.8% in 2009.
And keep in mind that from 1997 to 2004 the average was
above 10.0% every year when there were some difficult
market times and interest rates in general were higher. In
addition, in the last market peak the average cap rate was
8.3%, the lowest on record. When separating out just assisted living communities, the average cap rate dropped
by 60 basis points to 9.0% in 2011, which compares to the
all-time low of 8.3% in 2007 for assisted living. While
many market participants view the “market” cap rate for
assisted living to be somewhere above 8.0% but below
March 2012
Page 3
The Providers
Company
Ticker
CurrentAdjusted % Change % Change
Price
P/E
from
from
52-Week Range
2/29/12Ratio(1) Prior Month 1/1/12High
Low
Skilled Nursing
AdCare Health Systems
Advocat
Ensign Group
Kindred Healthcare
National HealthCare
Skilled Healthcare Group
Sun Healthcare ADK
AVCA
ENSG
KND
NHC
SKH
SUNH
$4.46 6.24 27.41 10.29 44.82 6.53 4.46 12.9
10.2
7.4
8.1
6.5
7.2
8.5
-7%
8
4
-16
1
6
-2
10%
12
12
-13
8
20
15
$6.69
7.60 34.85
28.99
53.08
15.93
14.99
$3.75
5.10
19.61
7.67
29.97
3.30
2.06
ALC
BKD
CSU
ESC
FVE
SRZ
16.05
18.64
8.57
18.46
3.54
7.74
7.7
11.6
10.6
13.6
9.6
13.3
2
6
6
6
-2
9
8
7
8
5
18
19
19.61
28.30
10.91
26.35
8.95
12.44
11.16
10.98
5.44
13.36
2.28
3.68
Assisted/Independent Living
Assisted Living Concepts(2)
Brookdale Senior Living
Capital Senior Living
Emeritus Corporation
Five Star Quality Care
Sunrise Senior Living
(1)
Adjusted P/E = (market cap + total debt + capitalized leases - cash)/annualized EBITDAR based on the most recent quarter. The rate used to
capitalize the leases was changed from 12.5% to 10.0% effective 1/31/06. (2) Effective June 15, 2011, ALC completed a 2:1 stock split.
8.75%, it all depends on the type of property that is being
considered, its age, location, census, rates and profitability. An institutional “A” quality property would certainly
command a cap rate below 8.5% in today’s market, and
depending on the quality and location, it can certainly go
below 8.0%, especially with today’s cost of debt.
It was in the much smaller independent living
market that we saw the most movement in cap rates,
but again, it had everything to do with quality. Because
buyers were not very interested in independent living
communities during the worst of the housing crisis, the
average IL cap rate had peaked at 9.4% in 2010, mostly
because of the lower quality of what was sold. In the
largest one-year drop on record, the average IL cap rate
dropped by 150 basis points to 7.9% in 2011. That put
the spread between assisted living and independent living
at 110 basis points in 2011, the widest since 2006 when
it was 120 basis points. Whether that is a statement on
the future of independent living communities or merely a
one-time reflection of what was sold in 2011, our guess is
that we will see a higher average cap rate in 2012, unless
the quality on the market keeps on improving.
With the per-unit pricing increasing so much in
2011, combined with relatively large one-year declines
in average cap rates, it would be easy to think that the
market was approaching the frothy levels of 2006 and
2007. Despite these improvements, however, there still
seems to be a fair amount of discipline in the market. The
reason we say this is that, when looking at the average
seniors housing cap rate relative to the average 10-year
Treasury note rate each year, an investor can get a sense
of the relative risk levels in the market each year. Coincidence or not (we think not), the spread between the
average cap rate and the average 10-year Treasury rate
remained exactly the same from 2010 to 2011 at 620 basis
points. This does make sense, since interest rates dropped
and you would expect cap rates to follow, especially with
the higher quality in the market. But at the market peak
in 2007, the spread between the two was just 370 basis
points (and 410 basis points in 2006), which implies that
five years ago buyers were making riskier bets than today
and had a much smaller investment premium above the
so-called risk-free rate. While we call this “market discipline,” another obvious reason could be the higher levels
of equity required today than five years ago, which itself
means a higher level of return required over a risk-free
rate. Another way to look at it is that perhaps there is more
room for cap rate compression in 2012 and 2013. While
this is certainly possible, and maybe likely to a degree,
loan-to-value percentages are creeping up, but they are
still much lower than five years ago and the last time we
checked, required equity returns were higher than debt
Page 4
costs. That said, with debt costs so low today, required
equity returns would seem to be declining as well, which
would allow for a bit more cap rate compression. Out of
all the statistics we produce every year in our Report, this
spread relationship may be the most important to watch
and have the most meaning.
Skilled Nursing Market. Unlike the seniors housing market, the skilled nursing market did not have quite
as good a year in 2011, but given all the reimbursement
uncertainty and gyrations in the public equity markets,
it could have been much worse. After setting a record
average price per bed in 2010 at $62,500, the average
price per bed dropped to $51,100 in 2011, representing an
18% decline. Despite what appears to be such a significant decline, it was the fourth highest average price per
bed in the past 20 years. And it is important to keep in
mind that these acquisition market pricing statistics only
include arm’s-length sales of the real estate and business
and exclude sale/leaseback financings between an existing
operator and a REIT. Therefore, sale/leasebacks such as
the ones between Genesis Healthcare and Health Care
REIT (NYSE: HCN) and HCR ManorCare and HCP,
Inc. (NYSE: HCP), both at over $130,000 per bed, are
excluded because the sellers remained as the tenants.
Some people believe that the 32% increase in the
March 2012
average price per bed in 2010 was in anticipation of the
higher RUGs-IV Medicare rates that went into effect on
October 1, 2010. While the sophisticated providers had
figured out that it would definitely benefit them, we are not
sure many people had figured out to what extent it would
benefit them during the first six months of 2010, let alone
pay higher prices for that expected benefit. The reality
was that the average quality and cash flow of the skilled
nursing facilities sold in 2010 was higher than average,
while the quality and cash flow of those facilities sold in
2011 declined. It is just that simple.
What is not so simple to explain is why the average
skilled nursing cap rate increased to 13.1% in 2010 when
the average price per bed soared, and then the average cap
rate declined by 50 basis points to 12.6% in 2011 when
per-bed prices declined. The reality is that the skilled nursing average cap rate has pretty much been between 12.5%
and 13.5% for each of the past nine years, with 2007 the
exception at the record low average of 12.1%, so 2011 is
certainly in that range. Just like for seniors housing, it is
important to see what happened to the spread between the
average 10-year Treasury note rate and the average skilled
nursing cap rate. This spread increased by just 10 basis
points from 990 basis points in 2010 to 1000 basis points
in 2011. The average spread over the past 10 years is about
915 basis points, with the range between 750 basis points
March 2012
Page 5
(2007, or course) and 1020 basis points (2002).
The skilled nursing sector has had a difficult past 12
to 18 months because of the Medicare uncertainty on top
of pressures at the state level to reel in Medicaid costs,
with many governors wanting Medicaid block grants so
they can allocate federal Medicaid funds as they deem best
to do, which most people believe would mean lower payments to nursing facilities. That said, there are still many
buyers in the market willing to take the risk, specifically
with underperforming facilities that have a low Medicare
census in a market where it should be higher. At the other
end of the spectrum, investors are still paying $75,000 per
bed, and at times more than $100,000 per bed (and much
higher) for those skilled nursing facilities that look and
act more like inpatient rehab hospitals or LTACs. They
also have reimbursement risk, but they will also attract
other payer types beyond Medicare that will pay premium
prices for quality care because the alternative is even more
expensive. While we can’t predict what will happen in
2012 with average skilled nursing prices, it is safe to say
that cap rates will remain within the range of the past
10 years regardless of what happens to reimbursement.
The key, of course, is the low financing costs, especially
with HUD, and anytime you can obtain sub-5% debt for
a skilled nursing facility, cap rates are unlikely to rise.
continued from page 1...
the same time, the REIT sold $287.5 million of new preferred stock, increased from the originally planned $100
million. The only real limitation these REITs have today
is being able to find enough acquisitions, especially ones
with sufficient size to make a difference. There are still
some potential candidates, but to start the year off, Health
Care REIT went north of the border to snag the first big
one of the year, at least 50% of it.
It what we believe to be the first of its kind, Health
Care REIT partnered with Canada-based Chartwell
Seniors Housing REIT (TSX: CSH.UN) to purchase a
portfolio of 42 retirement communities in Canada with
8,187 units (or suites, as they are referred to in Canada).
According to Chartwell, the purchase price is C$931 million, while HCN reported a price of U.S.$925.2 million,
or $113,000 per unit. With overall occupancy of 88%,
there appears to be some upside beyond just normal rate
growth. About 45% of the properties are in Quebec, 45%
in Ontario and the remainder in British Columbia and Alberta. Although REIT tax laws are not the same in Canada,
this is equivalent to a RIDEA structure since Chartwell
Page 6
will actually become the manager of the properties, and
when it closes they will become the largest seniors housing
operator in Canada.
The joint venture is not completely as straightforward as a 50-50 partnership, as 39 of the properties will
be co-owned on a 50-50 basis and three will be 100%
owned by Health Care REIT, but still managed by Chartwell. Those three communities, with 525 units, will be
purchased separately for $81.4 million, or $155,000 per
unit, which is much higher than the rest of the portfolio.
The average occupancy for these three was just 76%, with
one at just 65%. HCN will be investing $73.2 million of
cash for these three 100%-owned properties and $186.2
million of cash for the other 39 properties, with the rest of
the capital coming from existing and new debt.
Health Care REIT is expecting an NOI yield of 7.4%
after management fee for the first year after the deal closes,
but they expect the portfolio’s NOI to grow by 4% to 5%
annually. That certainly beats a 2.5% lease escalator. We
are not that familiar with transaction multiples in Canada,
partly because it is a much smaller and less liquid market,
but we believe the cap rate for the acquisition was between
7% and 8% depending on who you are talking to and
whether it is current cash flow or pro forma for the first
March 2012
year. That fits in relatively closely with the U.S. market for
a transaction of that size and with the upside that we see.
The good news for the partners in the transaction
is that the weighted average interest rate on the “coobligated” debt is about 4.62%, one of the reasons why
the somewhat low cap rate is acceptable. The bad news
is that 78% of the debt, or $367 million, is due between
now and 2016, with about $75 million due this year. The
shorter term maturities are probably easier to deal with
because rates are still very low and the buyers will have
no problem refinancing the current debt. Going out two
to four years may be another matter with regard to where
interest rates will be, but for HCN, they could probably
refinance with petty cash at this point in their life cycle.
Chartwell will be receiving a management fee equal
to 5% of revenues with incentive fees equal to 10% of
its outperformance of approved annual operating targets,
but a reduction of 10% of underperformance, subject to
caps of 6% and 4% or total revenues. Chartwell can also
be fired if aggregate annual earnings fall below 85% of
the pre-approved budget each year, but this would be unlikely. We have heard that Health Care REIT would like
to expand into other English-speaking countries, and we
would not rule out an outright acquisition of Chartwell
March 2012
Page 7
down the road. But a deal of this size as the first one may
also be indicative of the lack of supply of similar-sized
portfolios in the U.S. RBC Capital Markets advised
Chartwell, BofA Merrill Lynch was the exclusive financial advisor to Health Care REIT, and Matthew Whitlock,
John O’Bryan and Mathew Burnett of CB Richard Ellis
represented the seller, Canadian-based Maestro Family
of Funds.
Ventas (NYSE: VTR). Kindred indicated that the major
reason it decided not to renew these leases next year was
because these properties do not fit in with its “clustering”
strategy to have market share dominance in various regions. These facilities generate a combined total of $790
million of revenue, and if they were a stand-alone entity
they would rank as one of the 15 to 20 largest skilled nursing and rehab companies in the country.
And by the way, Health Care REIT completed gross
new investments of $1.2 billion in the fourth quarter alone.
This included $415 million in joint venture investments
with Merrill Gardens, expanding that relationship, at
$327,300 per unit, $120 million with Brandywine Senior Living, or $265,500 per unit, and $185 million with
Belmont Village Senior Living, or $572,700 per unit
(not a typo). The Belmont Village properties are about
two years old and are expected to generate NOI growth
of about 4% to 5% annually. Obviously, these are in top
markets in California.
The current rent for these 64 properties is about $77
million, and for the trailing 12-month period ended September 30, 2011, which includes the full year of the higher
RUGs-IV Medicare reimbursement, cash flow before an
implied management fee (EBITDARM) was approximately $162 million. That results in a 2.1x EBITDARM
coverage ratio, or 1.6x assuming a full 5% management
fee. Depending on the Medicare census and its acuity
level at the skilled nursing facilities, and the extent of the
reimbursement shortfall effective October 1, the coverage
ratio could drop to 1.4x after the full Medicare cuts are
taken into account. While a bit low for SNFs and LTACs,
the portfolio is obviously still attractive for other potential
tenants, especially for certain management teams that are
looking for a platform portfolio to get back into business
(hint, hint). The problem is that the portfolio is so large,
the working capital requirements would be too large, so
Ventas Seeking Tenant. Meanwhile Kindred
Healthcare (NYSE: KND) reported worse than expected
earnings for the fourth quarter 2011, but perhaps more
importantly, it announced that it would not be renewing
leases for 54 skilled nursing facilities and 10 LTACs with
Page 8
we assume it will be broken up into a few pieces.
The $77 million in rent represents 5.5% of VTR’s
current annualized net operating income, and for illustrative purposes Ventas indicated that should the annualized
rent increase or decrease by 10%, the REIT’s normalized
Funds from Operations would be impacted by $0.03 per
share, up or down. While not what Ventas would like to
see (on the down side), it is certainly manageable and
something that a large acquisition would smooth over.
Senior Housing Properties Trust (NYSE: SNH)
has acquired or has agreements to acquire just over $723
million of properties since October 1, 2011, some of which
includes medical office buildings. The REIT will most
likely be expanding its RIDEA investments over the next
few years which, like the other REITs, still accounts for a
very small percentage of investments. The acquisition of
the former Vi retirement communities will jump-start that
effort, and if it goes according to plan, it will help feed the
dividend increases.
Finally, Sabra Health Care REIT (NASDAQ:
SBRA) announced it expanded its secured revolving
credit facility from $100 million to $200 million, which
can be expanded further to $350 million and comes with
March 2012
an interest rate of LIBOR plus 300 to 400 basis points depending on its leverage. This will certainly help it expand
with acquisitions, and before long the stock price may be
high enough to warrant an equity raise. It looks like it
could be another banner year for the REITs.
Skilled Nursing Sales
A portfolio of six properties, two of which are small
stand-alone nursing facilities and one a 20-unit assisted
living facility, was recently sold to a private REIT. The
other three properties are small campuses with both skilled
nursing and assisted living. Five of the six are located in
Iowa while the largest, with 71 nursing beds and 49 assisted living units, is in Nebraska. The portfolio includes
293 nursing beds and 127 assisted living units, and the total
purchase price was $12 million, or just under $28,600 per
bed/unit. The average age of the properties is about 35
years, which is one of the reason for the low price. The
other reason is that overall occupancy was just 74% and
two of the properties operated at close to breakeven. The
good news for the buyer is that there is plenty of upside.
The bad news is that we are not sure how competitive
these properties will be in 10 to 15 years.
In 2010, the portfolio produced EBITDA of about
Page 10
March 2012
facility with a cost basis of just $44,000 per bed, and our
bet is that cash flow would be at least 50% higher, but probably double the current level. Just some ideas to improve
the situation. In addition to the fee simple properties that
were sold, the buyer leased a third facility, also in Texas,
and a third party leased a fourth nursing facility, both of
which were owned by the same group that sold the first
two properties. Matthew Alley and Jeff Binder of Senior
Living Investment Brokerage handled the sale.
Assisted and Independent Living Sales
Quality is still the name of the game, and in February
a 107-unit assisted living and memory care community in
Florida was sold to AEW Senior Housing Investors, L.P.
for $24.0 million, or $224,300 per unit. Built in 2008, the
community has 70 assisted living units and 37 memory
care units and it has an “extended congregate care” (ECC)
license which allows it to provide a higher level of care.
Occupancy at the time of sale was 95%, which is well
above market, especially for a community that opened as
the recession was going into high gear. AEW has hired
Blake Management Group to operate it, and they were
the original developer so they know the property well.
Ryan Maconachy and Chad Lavender of ARA Seniors
Housing represented the seller, Twin Palms, LLC.
In another high-end sale, a REIT and one of its
operating partners purchased a senior living community
in Colorado that has a total of 120 assisted living, Alzheimer’s and independent living units. The community
was built in 2009 and is not quite stabilized. That said,
its trailing 12-months EBITDA was about $1.6 million,
and when stabilized it should be between $2.3 million
and $2.4 million. With a purchase price of $28 million,
or $233,300 per unit, that results in a trailing 12-month
cap rate just below 6% but a stabilized cap rate just above
8%. The entire Evans Senior Investments team worked
on the sale and represented the seller in the transaction.
In mid-February, Brookdale Senior Living (NYSE:
BKD) announced it closed on the acquisition of nine
communities it had been leasing, presumably from one of
the REITs. The purchase price was $121.253 million, or
$93,600 per unit. The communities are located in seven
states and have an overall occupancy of nearly 90%. We
estimate that Brookdale will be saving $2 million to $3
million annually in cash flow with the acquisition and
low-cost financing. The CBRE Senior Housing Services
Group represented the seller in the transaction.
Brookdale invested $28.4 million in cash for the
purchase, obtained $77.9 million of first mortgage financing on seven of the properties and seller financing of $15
million (two years at 7.0%) on two of them. The larger
financing piece is for 10 years and has a 4.21% fixed rate
for 75% of the loan and LIBOR plus 276 basis points for
25% of the loan. Matthew Whitlock of CB Richard Ellis
arranged this financing with Fannie Mae. Brookdale also
refinanced a loan with a 2013 maturity for a single property
with a new $63 million mortgage loan, which is variable
rate at 30-day LIBOR plus 300 basis points.
Not everything in the market can be high end, and
in Ohio a local real estate investor sold his only seniors
housing asset, a 71-unit independent living community
that was built in 1987 and was operating at just under
70% capacity. The purchase price was $3.75 million, or
$52,800 per unit. The community was slightly profitable, but the buyer, NorthStar REIT, plans to convert
it to assisted living, so some of the pricing metrics will
not be relevant. The two-story building has nearly 60,000
square feet, and the units consist of studios, one- and twobedrooms. Jacob Gehl and Michael Segal of Marcus &
Millichap represented the seller, and this is Mr. Segal’s
March 2012
Page 11
Page 12
first transaction in the business.
Acquisition Updates
We were hoping to have some news about the auction
of The Clare at Water Tower in downtown Chicago, but
it’s complicated. We do know that there were seven parties interested in being the stalking horse bidder, and that
this was pared down to four or five by the end of January.
The stalking horse bidder was supposed to be picked by
late February, and it may be named the first week of March.
One market player heard that the process “collapsed,” but
our guess is that it is so complicated, and the financial
stakes so high, and the need to have a very clean process
so strong that everyone is being extremely careful, and that
includes the pricing for the eventual stalking horse bidder.
No word from Houlihan Lokey, which is running the
process, but what’s an extra few weeks when the problems
have been around for so long? It is in everyone’s interest
to get it right this time, and there may be a few surprises
with the upcoming announcements.
Is Assisted Living Concepts (NYSE: ALC) officially on the block? We hear that Citi may be representing
the company, but perhaps they are waiting for the fourth
quarter earnings, to be released on March 8, before really
March 2012
getting aggressive. We still don’t see how a buyer makes
it work, unless they go back to the states with strong
Medicaid waiver programs, hat in hand, and try to get
back into the program in order to fill the units. We are not
exactly talking about Class A properties here, and in some
of their markets they will need all the help they can get to
put heads in the beds. All we can say is, buyer beware, if
there actually is a potential sale, since it could end up as a
recapitalization with a major refinancing at the current attractive rates. An alternative could be a sale to a REIT with
a RIDEA structure, so the REIT could get the occupancy
upside. But that would mean someone believes they can
fill those units. Steven Vick, where are you?
Financing News
We have not heard a lot from GE Health Care Real
Estate Finance in the past year, but that doesn’t mean they
weren’t busy, according to Jim Seymour, Senior Managing
Director. In fact, in 2011 they did a total of $1.6 billion
in health care lending, with about $1.2 billion of that
in seniors housing and care. Of that amount, 90% was
balance sheet lending, something we believe we will be
seeing more of in 2012 and beyond. Normally, between
one-third and one-half of GE’s loan volume is for skilled
nursing facilities, but in 2011 it was closer to the bottom
March 2012
Page 13
Page 14
end of that range. Most of the loans are for three to five
years and most are floating rate, with an average loan size
of $50 million or higher. No forecast was provided for
2012, but given the relatively strong market in 2011 and
the growing need for debt capital, our bet would be that
seniors housing and care would grow to $1.5 billion.
MidCap Financial also had a busy year in 2011,
providing $180 million in balance sheet financing to the
seniors housing and care sector, a number that should
be topped this year since they already have about $140
million signed up. Recent financings include a $7.4
million refinancing of a 163-bed skilled nursing facility
in Pennsylvania. The three-year floater has a 25–year
amortization and with some of the “cash-out” proceeds the
borrower may be developing an assisted living community
next door. The second refinancing was for two skilled
nursing facilities in Florida with a total of 227 beds. The
loan, for $15 million, was also a three-year floater with
a 25-year amortization. The loan-to-value was close to
70%, and the loan it refinanced was just $5 million. Eric
Kammerer of MidCap arranged both financings.
Moving to the assisted living side of the business,
Jason McMeen of MidCap arranged the refinancing of two
turnaround assisted living and memory care communities
March 2012
in Arizona and Washington that were purchased within
the past two years. The total loan amount was about $16
million, or $77,300 per unit, and they had been purchased
for more than $19 million all cash. The three-year floater
has the first 24 months interest only. The loan-to-value
today is close to 65%, but when fully stabilized it will
be closer to 55%. We assume the owner will do a HUD
takeout in a few years. And in a smaller deal, MidCap
refinanced a 55-unit assisted living and Alzheimer’s facility in Montana with a $3.8 million three-year floater with
a 20-year amortization. The loan-to-value on this one
was close to 75%.
Need to get a loan closed quickly for an acquisition?
CapitalSource Bank closed on a $5.3 million, five-year
loan with a 6.00% fixed interest rate in 40 days. And this
was for a turnaround situation involving a 128-bed skilled
nursing facility in Texas for one of their proven clients that
was purchased for $6.25 million, or $48,800 per bed. The
debt service coverage was above 2.0x on a stabilized basis.
And if you need a loan in less than 30 days, CapitalSource
closed one with the same client in 28 days. This $6.375
million loan also has a five-year term, but the fixed interest
rate was a bit lower at 5.82%, probably because it was not
a turnaround situation. The buyer paid $7.5 million, or
$61,500 per bed, for the skilled nursing facility with 122
Page 16
assisted living units and 60 new private nursing “suites.”
They will retain just 49 of the 57 cottages, as well as 110
of the existing nursing beds. So the campus will grow by
a total of 110 units/beds, and the community will be much
better positioned for the future. To pay for all this, BB&T
Capital Markets and Herbert J. Sims & Co. underwrote
$52.55 million of tax-exempt bonds with a blended interest rate of 7.18%, while BB&T secured an $18 million
construction loan with Broadway Bank.
On the agency side of the business, Tim Leonard of
Oak Grove Capital originated a $33 million loan with
Fannie Mae to refinance a 420-unit retirement community in Illinois. The 75% loan-to-value loan has interest
only for the first year and then floats at a spread of 236
basis points over LIBOR. It has a one-year lockout, and
then can either be prepaid with a 1% penalty or converted
to longer-term, fixed-rate financing. Separately, Bill
Kauffman of Oak Grove arranged $17.9 million in HUD
financing to refinance loans for three assisted living communities owned and operated by Emeritus Senior Living
(NYSE: ESC). The properties are located in Texas (144
units), Indiana (54 units) and Washington (60 units). The
loan amount comes to $69,400 per unit.
Herbert J. Sims & Co. has been putting together
March 2012
limited partnerships to invest in seniors housing assets
for several years, with investors usually putting down
between $100,000 and $500,000 in equity. These investors are usually high-net-worth individuals that meet
SEC requirements for investing in partnerships of this
type. Sims recently disclosed that its investors in three
of its partnerships, going back to the 2006 to 2007 period,
have been paid off with some nice returns. In the first
partnership, Sims invested in eight Merrill Gardens
communities, two of which were turnaround situations
and six were new construction, starting in about the worst
time imaginable. So one can imagine what the investors
were thinking about their $40 million investment when
construction started in 2006 and they began to open just as
the economy and housing market were cratering. Not to
worry, as these communities did fill up, were sold in late
2011 to Health Care REIT (NYSE: HCN) and ended up
with an IRR in the high teens. Not too shabby in a dismal
new development market.
In the second investment, also originally made in
2006 and then rolled over in 2007 when The GPT Group
bought the portfolio, $8 million of equity was invested in
a portfolio of Benchmark Senior Living properties that
was sold to Health Care REIT last year, which provided
Sims’ investors with an IRR in the high teens as well. And
Page 18
in the third partnership, this one involving a German real
estate fund that co-invested with the Sims investors, each
group invested $16.5 million of equity in 2007 in a portfolio of 17 primarily older Alzheimer’s facilities operated
by Encore Senior Living. At the end of last year, all the
equity interests were sold to an affiliate of the Pacifica
Companies, yielding an IRR of 13%. While we assume
that the big institutional real estate funds are looking for
higher returns, we also assume that the Sims investors
were surprised that they earned what they did during the
Great Recession.
On The Move
Dan Bernstein has officially taken over for Jerry Doctrow as the lead seniors housing and care equity analyst
at Stifel Nicolaus. Mr. Bernstein had been part of Mr.
Doctrow’s research team for the past five years covering
19 health care REITs, private pay seniors housing and
skilled nursing stocks, so the transition should be seamless. Mr. Doctrow expects to remain at Stifel as a senior
advisor to the firm and its clients.
Chris Foley, formerly with Oreste Realty, has joined
Ohio-based health care developer and brokerage firm Equity, Inc. as a senior vice president of its national seniors
March 2012
housing group. He recently arranged the lease of a familyowned skilled nursing facility in Ohio to Trilogy Health
Services, providing the family with a $10,000 per month
income stream when the facility had been losing money.
Trilogy will build a new campus on the site.
Joe Lupica, formerly president of health care advisory firm Stroudwater Capital, which among other
things advised on mergers and acquisitions and other
growth strategies, has formed Newpoint Healthcare
Advisors, which will also focus exclusively on the health
care industry. Newpoint has three principals and several
senior consultants.
Fourth Quarter Earnings
The earnings results for last year’s fourth quarter for
the skilled nursing companies are mostly in, and it appears
that Kindred Healthcare (NYSE: KND) was the only one
that fared worse than expected. One of the reasons may
be its sheer size, since it is two to three times larger (in
revenue) than the other “large” companies in the skilled
nursing space, making it more difficult to make the necessary changes. The company’s fourth quarter earnings per
share were $0.27 compared with the consensus estimate
of $0.36 per share, representing a big miss. Even though
March 2012
Page 19
Company
Ticker
REITs
Current
Price
CurrentDividend
2/29/12YieldStatus(1)
Care Investment Trust
HCP, Inc.
Health Care REIT Healthcare Realty Trust
CVTR
HCP
HCN
HR
$6.95 39.50 54.44 20.67 7.8%
5.1 5.3 5.8 LTC Properties National Health Investors Omega Healthcare Investors
Sabra Health Care REIT(2)
LTC
NHI
OHI
SBRA
30.86 47.13 20.37 14.34
Senior Housing Properties Tr.
Universal Health Realty Ventas
SNH
UHT
VTR
21.40 37.79 55.92 Res. May-11
Inc. Feb-12
Inc. May-11
Dec. Mar-10
2012
52-Week Range
% ChangeHigh
Low
7%
-5
0
11
$7.50 42.75 57.66 23.73 $5.00
28.76
41.03
13.83
5.6 Inc. Jan-12
5.5 Inc. Dec-11
8.1 Inc. Jan-12
9.2 Inc. Mar-12
0
7
5
19
32.86 51.29 24.46 18.63
20.40
37.90
14.40
7.86
7.1 6.4 4.4 -5
-3
1
24.64 43.99 59.05 19.09
32.00
43.25
Inc. Oct-11
Inc. Dec-11
Inc. Mar-12
(1)
As of ex-dividend date. (2) Sabra Healthcare REIT was spun out of Sun Healthcare Group and holds the property assets that are operated by the
new Sun. Shares started trading on November 16, 2010 and opened at $17.00 per share.
the synergies resulting from the RehabCare acquisition
were going better than expected, the Medicare rate cuts
and therapy reimbursement changes took their toll more
than perhaps even management expected.
At the complete other spectrum, National HealthCare Corporation (NYSE: NHC) reported fourth quarter
earnings of $0.88 per share and far higher than anyone’s
estimates. The third quarter EPS was $0.86 with the higher
reimbursement rates, so it has been difficult to figure out
how the company could have made more money quarter to
quarter with Medicare rates 11.1% lower. NHC discloses
the least amount of information of all the publicly traded
companies (the bare minimum to meet SEC requirements,
we suppose), so there are few details. Sun Healthcare
(NASDAQ: SUNH) and Skilled Healthcare (NYSE:
SKH) both turned in better results than expected, although
not quite what NHC did.
In the case of Sun, the impact of the Medicare rate
cuts was as expected, but the changes in the therapy rules
had a smaller impact than management expected, so
earnings were better than originally forecast. This has
caused Rob Mains at Morgan Keegan to increase his
2012 estimate for Sun and bump up his price target to
$5.00 per share. With Skilled Healthcare, the better than
expected cost mitigation efforts helped it beat earnings
estimates, combined with its home health and hospice
revenues jumping by more than 30% compared with the
year-ago quarter. And Ever-Ready battery Ensign Group
(NASDAQ: ENSG) keeps marching on, beating earnings
estimates and raising earnings guidance for 2012 by about
11%, which is huge. Acquisitions and its diversification
efforts have helped the company’s performance.
In the seniors housing side of the business, half
the companies will be reporting early in March. With
two of the companies that did report, both Brookdale
Senior Living (NYSE: BKD) and Sunrise Senior Living (NYSE: SRZ) reported decent occupancy increases,
which seems to be the metric everyone focuses on as a
harbinger of things to come.
Brookdale reported average occupancy of 87.8% in
the fourth quarter, up 40 basis points from the third quarter
and up 30 basis points from the year-ago quarter. In the
case of Sunrise, its stabilized portfolio (92% of the total
units) had a 40 basis point increase in occupancy to 88.2%
from the third quarter, and its total portfolio increased by
50 basis points from the third quarter. In addition, yearover-year daily revenue per occupied unit increased by 3%
for stabilized properties to $218.92 in the fourth quarter
of 2011. And we thought skilled nursing facilities were
expensive. Sunrise is still not out of the woods with some
debt defaults, but should be by the end of the year. Cash
from the potential sale of 16 properties (currently being
marketed) where they hold a 20% interest could help matters, but they also have debt of $190,000 per unit.

SeniorCare - Irving Levin Associates, Inc.

Transcription

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