VOLUME 27 | ISSUE 5

Inside the World of Senior Care Mergers, Acquisitions and Finance Since 1948

Occupancy Trends In Seniors Housing MAY 2015 Is It Getting Better Or Hitting A Wall ? ll eyes were on (NYSE: BKD) when they announced fourth quarter 2014 earnings results, which were hurt not When Brookdale Senior Living announced Aonly by an unexpectedly large drop in occupancy from its recent drops in occupancy in the fourth quarter, Emeritus acquisition, but also by some declines at its own legacy properties. everyone thought it was a problem specific to All eyes have been on Brookdale for other reasons as well (see other lead Brookdale and its acquisition of Emeritus. story below), but here we are going to focus on what has been happening That may be the case, but with public with occupancy trends and what we may be in for during the rest of the year. companies about to report, and one REIT already disclosing first quarter occupancy The data that came out from NIC MAP was slightly disturbing but not surpris- results for its seniors housing portfolio, the ing. Seniors housing occupancy dropped by 20 basis points since the fourth news appears to be a bit grim. Blame has quarter of 2014, to 90.2%, with independent living staying the same at 91.2% been cast on the flu season and snow in the but plunging 60 basis points sequentially. Yes, the flu shots winter months, but there may be more to it. . this year were not nearly as effective as in most years, and the heavy snow See article at right in the Northeast most likely resulted in some delayed move-ins, but these factors should have impacted the independent living occupancy trends simi- larly (at least in theory). But in theory, assisted living is needs-based, with The Ventas Spin-Off continued on page 12 The announcement by Ventas that it will be spinning out most of its skilled nursing assets into a new REIT caught the market by surprise. The Tea Leaves Of The Ventas Spin-Off While we believe it was a brilliant move, it may The Move May Portend Other REIT Sector Developments also usher in a new period of “REIT think,” where the Big Three review their portfolios We don’t know anyone who wasn’t a bit surprised by the Ventas (NYSE: and make some major moves. VTR) announcement that it will be spinning out the majority of its leased See article at right skilled nursing portfolio to a new entity, to be called Care Capital Properties (CCP), that will be listed on the New York Stock Exchange. Seniors Housing Acquisitions...... Page 3 We have already opined that we think it is a brilliant move, and a great move for Ray Lewis, who will become the CEO. After all, he is just six years Skilled Nursing Acquisitions...... Page 8 younger than Ventas CEO Debbie Cafaro, and the time was right to be on REIT Transactions...... Page 16 his own. The market was right as well, which doesn’t hurt things.

Financing News...... Page 22 But why was everyone so surprised? It was an extremely logical move, and it was announced at the same time as a $1.2 billion acquisition of a hospital People on the Move...... Page 27 company, so the spin-off will not be too much of a net reduction in assets in VTR’s portfolio. It will remain to be seen whether the sum of the parts when Visit us Online: the spin-off is complete will be greater than the current whole, especially as www.seniorcareinvestor.com REIT stocks have been slipping the past several weeks with a small uptick in interest rates compounded by the always present fear of larger increases. SeniorCare_Inv All things equal, however, we believe that sum of the “future” parts will be continued on page 2 The SeniorCare Investor continued from page 1 greater because CCP will be able to grow its skilled nursing According to the American Health Care Association, pub- portfolio, something that Ventas was reluctant to do. And, it licly traded REITs own only 14.3% of the 15,600 skilled will have one primary competitor in Omega Healthcare nursing facilities in the country, so CCP will own just over Investors (NYSE: OHI) among the REITs, and with the 43 10% of the total REIT ownership. That means there is a lot regional and local private operators already in the portfolio, of opportunity for a growth-oriented REIT that wants to focus there is a large base of built-in customers. on the SNF market. Starting out, CCP will own 325 skilled nursing facilities, 18 specialty hospitals and 10 seniors Speaking of growth, it was also announced that CCP would housing properties located in 37 states with more than be buying, with $11.0 million of its stock when it is issued, 38,000 beds or units. One problem is that about one-third a national valuation firm with many industry contacts across of the SNFs were built in the 1960s, but that could be a the spectrum. Although this is pure speculation, by process growth opportunity if CCP wants to finance renovations that of elimination we assume that it may be Florida-based may not have been done to keep them up to snuff. HealthTrust, which could do a lot of due diligence and valu- Regardless, this new REIT will have plenty of capital to com- ation work for CCP with its vast experience across the pete in the acquisition market, and it will be interesting to country. Even though this is not something ever done by a see if, in a few years, another REIT takes a run at it. There health care REIT before, depending on the structure of the is a lot of fluid movement in the health care REIT space right acquisition, it appears that it could solve a human resources now, and anything, in theory, is up for grabs to the highest problem of having to hire the staff to do these functions, bidder. and it could be a growing business as well. One example is the just announced sale by Health Care REIT (NYSE: HCN) of its 49% interest in seven life science buildings in MIT’s Technology University Park outside of Inside the World of Senior Care Mergers, Acquisitions and Finance Since 1948 Boston for a whopping $573.5 million. This represents an ISSN#: 1075-9107 unlevered annual return of 15% on the original total invest- Published Monthly by: ment of $327 million in 2010 (inclusive of debt). The sale Irving Levin Associates, Inc. 268-½ Main Avenue Norwalk, CT 06851 also represents a 5% cap rate on forward 12 months net Phone: 203-846-6800 Fax: 203-846-8300 operating income. The sale was to the 51% partner, Forest [email protected] City Enterprises, and we have to believe HCN would do that www.seniorcareinvestor.com trade all day long. Health care REITs in general don’t sell Publisher: Eleanor B. Meredith their assets very often, but given their rapid growth over the Editor: Stephen M. Monroe past 10 years, especially the Big Three, it is likely we will see Analyst: Benjamin Swett more movement as they realign their portfolios to deal with Advertising: Jeanne Aloi changing priorities and opportunities in the market. The Single subscription rate: $697 Ventas spin-off may be just the start. Multiple subscription rate: $1,997 The big rumor in the market right now is that Ventas and ©2015 Irving Levin Associates, Inc. All rights reserved. Reproduction or quotation in whole or part without HCP, Inc. (NYSE: HCP) might be teaming up to make a joint permission is forbidden. bid for Brookdale Senior Living (NYSE: BKD). Whether this is to buy the company and split out the assets they don’t This publication is not a complete analysis of every material fact regarding any company, industry or security. Opinions expressed already own, or just buy out the remaining assets that are subject to change without notice. Statements of fact have Brookdale still owns, which is a few billion dollars worth, been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. would be anyone’s guess. Although we hear the talk, we POSTMASTER: Please send address changes to The SeniorCare really can’t see two very competitive REITs working together Investor, 268-1/2 Main Avenue, Norwalk, CT 06851. in this manner. The one caveat is that, with Brookdale’s two new board members and the obvious pressure on BKD

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The Providers

Current Stock % Change % Change Price Market Cap from from 52-Week Range Company Ticker 4/30/15 (In Millions) Prior Month 1/1/15 High Low

Skilled Nursing AdCare Health Systems ADK $4.02 $78 -8.2% 0.2% $5.05 3.58 Diversicare Health DVCR 16.12 99 16.4 70.6 17.15 5.97 Ensign Group ENSG 42.11 1,080 -10.1 -5.1 48.00 21.70 Kindred Healthcare KND 22.95 1,920 -3.5 26.2 26.81 16.94 National HealthCare NHC 63.30 893 -0.6 0.7 66.00 52.01 Genesis HealthCare(1) GEN 6.91 1,060 -2.9 -19.4 9.32 4.82

Assisted/Independent Living Brookdale Senior Living BKD 36.23 6,650 -4.1 -1.2 39.89 29.50 Capital Senior Living CSU 26.17 772 0.9 5.1 27.75 20.33 Five Star Quality Care FVE 4.25 208 -4.3 2.4 5.33 3.23

(1) Skilled Healthcare Group completed a reverse merger with Genesis HealthCare on February 2. The combined company has taken the Genesis name and the new ticker symbol “GEN.”

management to execute some sort of capital event to get to estate group, for $8.65 million, or $120,100 per unit. Built that mythical $45 per share value that some investors in 1994 as a 26-unit independent living community, with 46 believe is attainable in the short term, anything is possible assisted living units added in 2000, the property also fea- in this market. With the rent re-set involving HCP’s largest tured three hospice beds included in the AL license. Based tenant, HCR ManorCare, still not completely solving the on the estimated 2014 budget, which assumed a 20% lease coverage ratio problems, one could say HCP may still margin, the property had about $525,000 in EBITDA (result- have some issues to work out before taking on Brookdale. ing in a 6.3% cap rate), but that margin should increase to On the other hand, it could be the right distraction and 25%. David Rothschild and Mary Christian of CBRE repre- diversification. But with most of the health care REIT stocks sented the seller, a local investor group, in the tanking a bit since the end of the first quarter, combined transaction. with the nudging up of interest rates, it may not be the best of times for something this complicated. But waiting in the The CBRE team also closed on the sale of a 46-unit assisted wings may be NorthStar Healthcare Income and even New living community that is licensed for 72 beds. Located in Senior Investment Group (NYSE: SNR). The point is that the Las Vegas, the community is 100% memory care and was smaller REITs are very hungry for growth right now. Who built in 1999. The sales price was $6.55 million, or knows, maybe the new Care Capital Properties will take a $142,400 per unit. Based on licensed beds, occupancy has hard look at the 50 or so HCR ManorCare SNFs that HCP ranged between 83% and 95% over the past 18 months, will be divesting this summer. Oops, there we go again. increasing up to that 95% level, and it has a 30% census. Based on 95% occupancy and a 20% operating SENIORS HOUSING ACQUISITIONS margin, estimated revenues and EBITDA are $2.95 million and $590,000, respectively, representing a 9% cap rate. A senior living community in Sacramento, California which The EBITDA on a trailing 12-month basis in 2014 was much saw occupancy fall from 92% in 2013 to 80% by April 2014 lower, so the cap rate was much lower on existing cash flow, sold to Solstar Investments, a San Diego-area private real and we do not know whether the buyer plans to keep the

SeniorCare_Inv 3 The SeniorCare Investor

Medicaid business. The buyer was a private real estate construction costs, you are saddled with the burden of fill-up. investment company based in California. But Capitol Seniors Housing (CSH) is up for the challenge, having recently purchased, along with its joint venture part- In a third transaction, and one that was off the beaten path, ner Harvard Management Company, a 92-unit/109-bed David Rothschild and Mary Christian sold a property for assisted living/memory care community in Tampa, Florida. Icahn Enterprises in Vero Beach, Florida that may become more seniors housing oriented. The sale included a 42,000 The newly opened community was developed by a joint square foot clubhouse, a nine-hole golf course and a 24-unit venture between Walt Chancey and Rookis Development assisted living building (24,000 square feet) that can be Company and presold to CSH prior to breaking ground for expanded to 48 units. In addition, there is extra land for an agreed price of $20 million, or $217,400 per unit. CSH development, and everything is located within an age- has brought in The Arbor Company (a manager it has been restricted community that itself is located within a working closely with) to operate the community, which fea- 1,000-acre master-planned community. The existing cam- tures 52 assisted living units, 26 memory care units and 14 pus that was sold was producing about $7.45 million in transitional memory care units (called “Bridges”) for those revenues and about $800,000 in EBITDA, but the EBITDA residents in need of a few more services. About a third of would increase sharply with an expansion of the assisted the licensed beds have already been preleased, and resi- living plus an addition for memory care. The purchase price dents have just started moving in. was just over $8.9 million, and the buyer was Dylan Investments. Assuming a two-year stabilization period (a conservative length of time), we estimate the community could generate There is always a certain amount of risk when purchasing approximately $4.9 million in 2017 revenues and $1.6 mil- a seniors housing community at Certificate of Occupancy. lion in EBITDA. If it fills faster than projected, these numbers While you avoid the risks associated with development and will move up as rate increases will be easier to come by.

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Given the existing product in the area, this new development 129-unit assisted living community in Baytown, Texas (which should stand out as one of the better properties in its market, includes 9 IL units) from a Prudential Real Estate Investors which should lessen CSH’s fill-up risk. fund. Built in 1997, expanded in 2008 and renovated in 2014, the community was 95% occupied and is located A private investor is taking an opportunity to turn around an across the street from Houston Methodist San Jacinto independent living community in Medford, , purchas- Hospital. Ryan Maconachy and Chad Lavender of HFF led ing the 88-unit property (one of the first built by Holiday the way in arranging the transaction for the seller. Retirement Corporation) for $5.6 million, or $63,600 per unit. The previous owner lived three hours away, but man- Taking advantage of these heady times, an independent aged it himself, living in one of the units during the week. owner is exiting the market with the sale of her 22-unit The building had previously been full, but it dropped to 67%, assisted living community in Wheatridge, Colorado to an in an area which averages 92% occupancy. Plus, rents are undisclosed buyer for $3.95 million, or $179,500 per unit, believed to be 20% below the local market. The buyer, who with a 9.5% cap rate. The census was made up of about is based in the region, should be able to increase EBITDA, 40% Medicaid and the rest private pay, with occupancy and there is an additional 1.75 acres available for develop- averaging 96% (but full at the time of the sale). Pyms Capital ment. Dan Mahoney and Tony Cassie of Marcus & Millichap Resources represented the seller in the transaction. represented the seller in the transaction. Mr. Mahoney and Mr. Cassie also handled the sale of a 127-unit independent A portfolio of four assisted living communities developed in living community in Vancouver, for $24.3 mil- the last few years by Stroud Development, the development lion, or $191,300 per unit, to an undisclosed buyer. arm of Stroud Companies, was purchased by ROC Seniors Housing Fund Manager, part of Bridge Investment Group For $29.6 million, or $222,500 per unit, Dallas-based Advisors. Each community has 75 units serving 57 assisted Capital Senior Living Corporation (NYSE: CSU) acquired a living and 40 memory care residents, and are still in fill-up.

SeniorCare_Inv 5 The SeniorCare Investor

ROC assumed HUD 232 construction loans totaling approxi- of capex to renovate and reposition it in the market. mately $74 million with a remaining term in excess of 35 years. ROC is keeping Meridian Senior Living in as The Ensign Group (NASDAQ: ENSG) added three more manager. assisted living/memory care communities to its growing portfolio of skilled nursing and assisted living properties in ROC also purchased a 432-unit entrance fee CCRC in western states. These three (one in Boise, Idaho, two in Twin Wheaton, Illinois, with 211 IL units, 65 AL units, 130 skilled Falls, Idaho), consisted of 267 units with an average occu- nursing beds and 26 cottage homes. The seller was Life pancy of about 70%. The seller is a local owner who will exit Care Services, which purchased the property in 2010 for the business with this sale. Ensign paid $11.28 million, or approximately $45 million and a cap rate of about 11.1%. $42,200 per unit, for the portfolio, and plans to use its The price was not disclosed for this month’s sale, which was existing Idaho presence and economies of scale to improve arranged by the Cushman & Wakefield Senior Housing both occupancy and margin. Ryan Saul and Jason Punzel Capital Markets team of Richard Swartz, Jay Wagner, Aaron of Senior Living Investment Brokerage handled the Rosenzweig and Stuart Kim. C&W also arranged non- transaction. recourse financing withBank of America with a three-year term. The real estate private equity arm of Kayne Anderson Capital Advisors, Kayne Anderson Real Estate Advisors, Mike Garbers of Greystone Real Estate Advisors handled acquired a 180-unit age-restricted housing development in the sale of an 86-unit assisted living/memory care com- Allen, Texas, which it plans on converting into full-service munity in Roseville, California to DiNapoli Capital Partners, independent living. Owned by Cadence Capital Partners, a private real estate investment firm based in Walnut Creek, the community already has a host of amenities, including a California, for $16.55 million, or about $192,400 per unit. business center, pool, spa, movie theater and outside din- The property marks the fourth seniors housing acquisition ing. There is also available land adjacent to the property, by DiNapoli, which plans on investing a substantial amount leaving room for Kayne Anderson to add an assisted living

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building in the future. Greystone Real Estate Advisors han- Mario Wilson of Blueprint Health Care Real Estate Advisors dled the transaction, which did not have a revealed price. represented a private owner/operator in its sale of a 50-unit assisted living/memory care community in Burlington, Also for an undisclosed price, American House Senior Wisconsin for $8.55 million, or $171,000 per unit. The buyer Living Communities and AEW Senior Housing Investors II was a non-traded REIT based in New York who will then lease acquired a 178-unit independent living community in the community to Meridian Senior Living. Plainfield, Illinois, marking American House’s entry into the state. The property was developed by a not-for-profit in 2006 Connor Doherty, who joined the company last year, closed for $33 million, but the entity later defaulted, and a bond his debut transaction with Blueprint with the sale of a 97-unit fund purchased the debt, hired Life Care Services to operate assisted and independent living community in Covington, it and brought occupancy up to 70%. Melio and Company Kentucky. The seller was a faith-based not-for-profit that handled the transaction for the seller, and the buyer will wanted to refocus its core mission by recouping capital for convert one of the two buildings to assisted living and bring a new development. The community was built in 1972 with the number of units down to 178. significant renovations in 2012. Occupancy was just 75%, but the buyer will roll out a new branding campaign, com- Columbia Pacific Advisors sold another senior care com- bined with some physical plant updates, that is expected to munity to its development partner, South Bay Partners, swing occupancy above 90%. Jacob Gehl of Blueprint also which helped build the community in 2013. The Kingswood, was a lead advisor on the transaction, which closed at the Texas property features 117 beds of assisted living, memory end of April, while Kentucky Select Properties was retained care and skilled nursing, and has been operated by by the seller. Brookdale Senior Living (NYSE: BKD) since its opening. Last December, Columbia Pacific also sold to South Bay a Bradley Clousing and Patrick Byrne of Senior Living memory care community in Peoria, Illinois that it built with… Investment Brokerage handled the sale of a 64-unit South Bay. assisted living and memory care community in Bradenton,

SeniorCare_Inv 7 The SeniorCare Investor

Florida for $3.85 million, or about $60,200 per unit. The changing hands to a private group of investors all experi- community was just 65% occupied and was operating near enced in the long-term care industry. The building, which breakeven, so there was no cap rate. The seller is a Fort features 100 skilled nursing beds and 20 assisted living Lauderdale-based investor who will focus on operations in beds, was originally built for members of the International the Broward and Miami-Dade markets. The buyer, a private Typographical Union, but in the last 15 years, the number investment group, is entering the Florida market with this of union members has dwindled to just a handful. That transaction, having previously operated and sold a portfolio prompted the sale, which came at a price of $4.25 million, of assets in the Midwest. or $35,400 per bed, with a 4.6% cap rate. The buyer will make some physical plant improvements, increase the Mr. Clousing, with Toby Siefert of Senior Living Investment census, and manage expenses by eliminating Brokerage, also facilitated the sale of a 165-unit assisted agency staffing. Nick Cacciabando and Ryan Saul ofSenior living/memory care/independent living community in Living Investment Brokerage handled the transaction. Chester, Pennsylvania for $4.51 million, or $27,300 per unit. The 13-story building is 85% occupied and in need of sig- Another not-for-profit exited the market, with a national not- nificant capital improvements, which the affordable housing for-profit organization’s sale of its last two skilled nursing developer owner wasn’t able to afford. The community was facilities: a 111-bed facility in Inverness, Florida and a 240- losing money, so there was no cap rate. The buyer is a bed facility in Memphis, Tennessee. The combined purchase Michigan-based private equity group which will keep the price was $23 million, or approximately $65,500 per bed. existing manager. The combined EBITDA of both properties was $870,000, which we suspect the buyer plans to increase. The buyer SKILLED NURSING ACQUISITIONS was a national owner/operator of skilled nursing facilities. Ben Firestone and Trent Gherardini of Blueprint Healthcare A not-for-profit skilled nursing facility built in 1892 is Real Estate Advisors handled the transaction.

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SeniorCare_Inv 9 The SeniorCare Investor

It won’t be business as usual for a not-for-profit skilled nurs- ing facility in Yonkers, New York that is being purchased by a private ownership group for $22.7 million, or $189,200 per bed. The facility, built in 2001 by St. John’s Riverside Hospital and operated by the not-for-profitRiverside Health Care System, sits on a hill overlooking the Hudson River. For years, it relied solely on patients discharged from St. John’s, and its occupancy fell from 96% in 2012 to 93% in October 2014.

The new owners, called L&A Operations and who operate Sprain Brook Manor Rehab in nearby Scarsdale, New York, plan to form new collaborations with other health care ser- vice providers in the area in addition to the one with St. John’s and renovate the building, which should bring occu- pancy up to 97%. To cut down on costs, the group will save about $1 million by outsourcing services like therapy, dietary and laundry, and another $2.35 million in annual employee fringe benefit costs. Another big change is the termination of 226 union employee contracts, which will be renegotiated once the new owners assume operations, expected to be in early July. Going from not-for-profit to for-profit comes with

its challenges, but the new owners have plenty of examples to look to, as this is the fourth not-for-profit skilled nursing facility acquired by a private buyer in the state of New York since October 2014.

Another skilled nursing facility topped the $100,000 per bed mark, this time a 115-bed facility in central New Jersey that sold for approximately $13.0 million, or about $113,000 per bed. It was built in 1998 and has current occupancy of 87% with a 75% Medicaid census. Even though annualized EBITDA in 2014 was just $800,000, which would not justify the price, with occupancy increases and a slightly higher Medicare census, revenues and EBITDA could rise to $10.87 million and $1.5 million, respectively. Mark Myers, Joshua Jandris and Charles Hilding of Marcus & Millichap repre- sented the seller in the transaction.

Matthew Alley of Senior Living Investment Brokerage han- dled the sale of a 54-bed skilled nursing facility in Austin, Texas. The facility was built in 1970 and currently is 93% occupied. However, the facility was losing money, with the private owner/operator seller running into some troubles with the state, and the facility was closed down while the

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SeniorCare_Inv 11 The SeniorCare Investor

transaction was under contract. The buyer, an owner/opera- tor based in South Texas with other facilities in Austin, is Occupancy Trends In Seniors Housing purchasing the real estate and will take possession of the continued from page 1 Medicaid beds, for a price of $1.2 million, or just $22,200 per bed. snow, cold temperatures and the flu not slowing the decision to move if you have to move, while people waiting to move We wrote last month of Capital Lending and Mortgage into independent living can wait out the seasonal problems. providing a $13.1 million bridge-to-HUD loan for ARBA Five years after a cyclical low in occupancy, most people Group to acquire five skilled nursing facilities (with 507 expected (and hoped) that assisted living occupancy would beds) in Texas. Now, we can tell you the details of the acqui- be higher than the 88.7% reported by NIC MAP for the first sition. The portfolio was built in the 1960s and 1970s, with quarter this year. only one property being significantly renovated since then. ARBA purchased the facilities for $15.5 million, or $30,600 Many readers will see this and think, “We are way above per bed, (currently in the mid- to high-80s) and plans to 88.7%, in fact at least 400 basis points above that for our increase the Medicare census (which is between 15% and portfolio of assisted living properties. This is not our prob- 20%), in addition to making some renovations across the lem.” They may be right, so whose problem is it? We assume portfolio. that Brookdale reports its data to NIC MAP, and with about 1,100 communities, its result must dominate, especially on The Ensign Group (NASDAQ: ENSG) purchased five SNFs in the assisted living side of the business, much like Holiday four separate transactions for undisclosed prices: a 60-bed Retirement Corporation would dominate the IL side if they facility (just for the operations) and 130-bed facility in St. also report full data to NIC, which we believe they do. On a George, Utah, a 63-bed facility in Ogden, Utah, a 69-bed consolidated basis in the fourth quarter of 2014, Brookdale’s facility in Bainbridge Island, Washington, and a 149-bed occupancy was 88.3%, and its 838 assisted living communi- facility in Panorama City, California. ties (including the acquired Emeritus properties) were at

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SeniorCare_Inv 13 The SeniorCare Investor

88.2%. This makes total sense, because then the 110 basis point differential in occupancy between the NIC MAP fourth quarter data for assisted living and Brookdale’s occupancy for assisted living means that there are a lot of communities averaging more than 90% in occupancy. We don’t know how big the NIC MAP assisted living universe is, but by its sheer size Brookdale has to represent a significant, and influential portion.

Consequently, with the sequential 60 basis point decline in NIC MAP assisted living occupancy in the first quarter this year, we have to believe this is a preview for what happened with Brookdale’s occupancy so far this year. While we have not heard any rumored or previewed numbers (which will be released on May 7), concern may exist which could help explain why its share price has been somewhat stuck and is below its near-term highs. And this is despite the recent news pacifying the dissident shareholders with the new board members and some governance changes which may result in some sort of capital transaction by the end of the year. We have to assume investors are waiting for those first quarter results to see if it is a continued downward trend from the fourth quarter. After all, if everyone else was nega- tively impacted by the flu and snow, why not Brookdale?

Look no further than to the seniors housing operating port- folios of Ventas (NYSE: VTR), which would be considered higher quality than the Brookdale/Emeritus properties. Ventas is the only company to have reported first quarter results, and while as a whole it had a record quarter and beat expectations, the seniors housing operating portfolio, of which more than 80% are comprised of Atria Senior Living and communities, seemed to show some similarities to the NIC MAP trends in occupancy. The stabilized, same-community properties, on a year-over- year basis, posted a 60 basis point increase in occupancy, but sequentially from the fourth quarter of last year, they had a 90 basis point decline. But, and this is a big but, the overall occupancy rate of these communities was 91.7% in this year’s first quarter, which is 150 basis points over the NIC MAP first quarter occupancy for all seniors housing. The point is that if the culprit was the flu season and heavy snow, if they impacted Atria and Sunrise by 90 basis points, we assume Brookdale was not immune (no pun intended).

Another interesting stat that came out of VTR’s numbers was that year-over-year with these same-store stabilized

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SeniorCare_Inv 15 The SeniorCare Investor

communities, operating expenses increased by 4.9% com- occupancy issues, it is a few quarters before we thought the pared with a 3.6% increase in revenues. This resulted in an new units would impact the market in any meaningful way, 80 basis point drop in the EBITDA margin of these communi- and perhaps a few years before others were predicting. ties to 32.7%. On a sequential basis, expenses increased by 2.4% while revenues increased 1.8%, resulting in a The funny thing is, the industry remains in very strong finan- smaller EBITDA margin drop of 40 basis points to 33.7% in cial shape, despite some occupancy declines and despite the first quarter of this year. Some of the unusual expense the upcoming development surge. That is why we keep increase can be attributed to higher utility bills, but we also hearing about even more newcomers to the market, with believe it is the continuation of cost creep and the difficulty significant financial backing, because they see the valua- in charging higher fees, especially with declines in tions that have been reached and think demographics will occupancy. be their destiny. But we all know that too much of a good thing never works out in the long run. While it would be great The elephant in the room, however, is new construction and if Brookdale could report some upbeat numbers, given what absorption. According to the NIC MAP data, seniors housing we have seen from NIC MAP and Ventas for the first quarter, absorption during the first quarter was the weakest it had we are not holding our breath. And unfortunately, been in six years. It came in at an annual rate of just 0.4%, Brookdale’s management may be focusing on what it wants and this compares with an average of 2.2% since the first to be when the dust settles on a capital event, and that can’t quarter of 2010. That is a huge change, and this weakened help matters at the local level. Investors should begin to demand is surely part of the lower occupancy story. New understand, it is a local business. development may be at the beginning point of taking its toll, despite a slight decline in inventory growth in the first quar- REIT TRANSACTIONS ter, which may also have been impacted by the cold and snow. If new inventory is, in fact, beginning to cause some NorthStar Healthcare Income, Inc. has started off the year

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SeniorCare_Inv 17 The SeniorCare Investor

with a flurry of large acquisitions totaling more than $1.5 part of the transaction. So, who better to get back into the billion. The non-traded REIT announced its agreement to driver’s seat of a portfolio that was on the verge of crashing purchase 15 CCRCs from Arcapita, Inc. What makes this than the management who knew all the buildings like the transaction interesting is not only did the REIT purchase back of their hands? both rental CCRCs and six entrance fee CCRCs, but the his- tory of these properties. Back in 2005, The Fountains and So in came Freshwater with his “new” management com- its equity partner, George Kaiser of Oklahoma fame, sold pany, Watermark Retirement Communities, to manage the almost the entire portfolio of 18 properties that The portfolio, but with a nice promote to keep all interests Fountains had accumulated over several years to a joint aligned. But who would have thought that Arcapita would venture between Sunrise Senior Living and Arcapita, with run into its own financial problems? Arcapita owning an 80% share and Sunrise a 20% share. The purchase price back then was approximately $483 mil- Fast forward several years, and the portfolio is back to oper- lion, or $102,300 per unit/bed, and 3.0x revenues. ating more like it was before the 2005 sale, but still with Unfortunately, Sunrise was very new to the CCRC market, some upside potential in a few of the properties (there was and from 2005 to 2008 the net operating income of the a little recession to get through, after all). Arcapita had to portfolio dropped by about 50%. Also unfortunately for start shedding assets because of its own problems, so it Sunrise, it had an NOI maintenance agreement with turned to Lisa Widmier (formerly of Vantage Pointe and now Arcapita, and Sunrise itself was beginning to struggle finan- co-head of CBRE National Seniors Housing) and Matt Ryan cially, so Arcapita basically was able to remove them from of Houlihan Lokey, to market the portfolio. While we do not management. Who should replace Sunrise? Well, David know if any private equity firms took a look, we have to Freshwater (the founder of The Fountains), and his brother- believe that HCP, Inc. (NYSE: HCP) took a hard look because in-law, David Barnes, had kept the management entity alive of its CCRC joint venture with Brookdale Senior Living even though most of the staff had gone over to Sunrise as (NYSE: BKD). Ventas (NYSE: VTR) must have been in the mix

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SeniorCare_Inv 19 The SeniorCare Investor

but Health Care REIT (NYSE: HCN) is staying out of the CCRC Corporation. The acquisition marks another step towards market, at least for now. New Senior Investment Group Holiday’s owner Fortress Investment Group’s (NYSE: FIG) (NYSE: SNR) may have taken a look, but it may have been goal of transforming Holiday into an operating company. In too large a bet on the CCRC sector for them, and NorthStar, fact, since October 2013, Holiday has sold over 200 proper- in its aggressive mode these days, was not going to shy away ties totaling about $5.1 billion. In that time, nearly all of from it. those assets were sold to REITs, such as New Senior Investment Group, Sabra Health Care REIT (NASDAQ: They have agreed to pay $640 million, or just under SBRA), National Health Investors (NYSE: NHI) and Ventas, $176,000 per unit, for the portfolio in a deal that is expected and that is no different in the most-recent transaction. to close in June. Under the terms of the agreement, the entrance-fee communities will be leased to affiliates ofThe NorthStar Realty Finance (NYSE: NRF), together with Freshwater Group, while the nine rental CCRCs will be held NorthStar Healthcare Income, will own 60% and 40%, in a joint venture RIDEA structure with NorthStar owning respectively, of the portfolio, which includes about 3,983 97% and Freshwater owning 3%. Financing of about $410 independent living units in 12 states. The joint venture enti- million has been secured with a locked in fixed rate of 3.92% ties will operate the portfolio as lessees or managers, and over seven years (do we presume that Aron Will of CBRE had they will tap Holiday and its affiliates to manage or sub- something to do with this?). On the negotiating side, kudos manage the properties in the portfolio. To finance the to Carl Mittendorf of Freshwater and Doug Booth of transaction, the joint venture plans to fund between 70% NorthStar for keeping their eye on the ball and bringing a and 75% of the purchase price with 10-year, fixed rate debt. complicated transaction to signing. Under the terms of the agreement, the buyers will have until June 30, 2015 to close the transaction, paying $875 million, In an even larger acquisition, NorthStar will be acquiring 32 or $219,700 per unit. In the other REIT sales of Holiday independent living communities from affiliates of Harvest properties, the price per unit has ranged from $171,600 to Facility Holdings, itself an affiliate of $268,300.

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SeniorCare_Inv 21 The SeniorCare Investor

In a sale-leaseback agreement, Griffin-American FINANCING NEWS Healthcare REIT-III purchased two North Carolina assisted living communities from Carillon Assisted Living. The two With construction heating up in the seniors housing indus- properties opened in 2014 and have a combined licensed try, Wells Fargo is looking to position itself to help fund that capacity of 192 beds. Carillon, which operates 19 assisted growth using its balance sheet, floating rate lending plat- living and memory care communities throughout the state, form. It started about a year ago when Wells Fargo brought will lease the properties for 15 years, plus two 10-year in Mark Cotsakis, who had been with the bank for over 25 renewal options. years, to head the newly formed Senior Housing Finance Group (SHFG), part of the Wells Fargo Commercial Real Revera Inc. decided to expand its joint venture investment Estate Group. agreement with Health Care REIT, adding 23 properties across Alberta, British Columbia, Manitoba and Ontario, Since then, Mark and his team of about 18 have been hard bringing the total investment to 70 properties in Canada. at work, with approximately a half-billion in closings in the Revera will operate the communities, while both partners past year, and they are set to close another quarter-billion will share rights of first opportunity on acquisitions and new in the next two months, totaling some 30 transactions. The developments within defined geographic areas in Canada. closings have ranged from $8 million to develop a stand- Brookfield Financial advised Revera on the transaction.A lso alone memory care community up to $50 or $60 million for in Canada, Chartwell Retirement Residences (TSX: CSH. a large senior living campus that includes independent and UN) has purchased a 94-unit independent living community assisted living and memory care. While they will avoid financ- in Thunder Bay, Ontario for approximately $18.4 million, or ing 55+ age-restricted housing, they will look to do an S195,900 per unit. Chartwell now owns and manages 179 independent living project, so long as an assisted living/ senior living communities in Canada. memory care component is added on at a later date. Geographically, they are spread out, with concentrations in

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SeniorCare_Inv 23 The SeniorCare Investor

California, Florida, the Northeast and the Pacific Northwest, hotel in downtown Fort Myers and convert it to a 323-unit all high-value areas (averaging $222,500 per unit for like- independent living community. communities in those states, according to our data). ACRES Capital, a commercial real estate bridge lender Most of the group’s clients are primarily private, “Top-25” formed late last year by former Arbor Realty Trust people, operators, with some strong regional operators as well. provided the loan after the original lender dropped out of Though most are experienced operators, SHFG will also look the deal. Walker & Dunlop is currently looking for construc- to finance projects by first-time developers as long as they tion debt as well, most likely coming from a regional bank, bring in an experienced and proven operator to third-party and will look to take the loans to agency. MacFarlane has manage. As for the typical loan term, SHFG looks to do an not decided on an operator yet, but they have time since the initial term of about three years, with two one-year exten- conversion is scheduled to take between 12 and 18 months sions, but the loan details will vary from project to project. to complete. And then they would take them to permanent financing, either through agency or elsewhere, through Wells Fargo’s Capital One Multifamily Finance announced that it pro- Multifamily Group. On the acquisition side, the new group vided a $10.9 million fixed-rate HUD loan for an experienced will look to finance those as well, but only for a potential owner/operator of skilled nursing facilities to refinance its reposition or expansion project. 133-bed facility in Northern Illinois. Joshua Rosen, out of Capital One’s Chicago office, originated the loan, which will Daniel Lisser of Walker & Dunlop arranged an $11 million refinance existing debt on the property at a lower, long-term acquisition bridge loan with a rate in the high single digits rate. The facility was built in 1962, expanded in 1985, and and a one-year term of interest-only payments. The bor- substantially renovated between 2005 and 2012. Also, the rower, The MacFarlane Group, a Fort Myers, Florida-based current owners, who purchased the facility in 2012, reno- real estate developer, will use the loan to acquire a vacant vated the residents’ rooms and bathrooms since taking over,

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SeniorCare_Inv 25 The SeniorCare Investor

so the facility is relatively modern. It is also well occupied feature for DiNapoli Capital Partners, a real estate invest- and well positioned in its market. In addition to providing ment firm, to acquire an 86-unit assisted living/memory the loan, Mr. Rosen also structured a HUD-approved master care community in Roseville, California. accounts receivable line, provided again by Capital One, giving the borrower more flexibility in its operations. After a strong first quarter of 2015, Mr. Will shows no signs of slowing down. He and Mr. Behrens also originated a Aron Will of CBRE National Senior Housing arranged a tri- $22.62 million 10-year, fixed-rate loan from Fannie Mae on fecta of acquisition financings totaling approximately $50 behalf of TSM Investment Corp. and Westmont Living to million. All three loans were floating rate bridge loans with refinance a 131-unit assisted living/memory care commu- five-year terms and between 24 and 30 months of interest nity in Brentwood, California. only. The first was a $14.5 million loan placed with a regional bank for Capitol Seniors Housing to acquire a brand new Aaron Becker of Lancaster Pollard assisted the owners of 92-unit assisted living/memory care community in Tampa, a 154-bed skilled nursing facility in refinancing its existing Florida. letter of credit debt, with a $6.6 million fixed-rate taxable HUD loan. The refinance, which carried an interest rate of Next, Mr. Will secured a $21 million loan with an “all-in” just over 3.00% and a 30-year term, will also provide over interest rate of approximately 2.35% for a joint venture $1.1 million for renovations and fund a $925,000 capital between Sentio Healthcare Properties and Senior Living reserve fund for future capital investments. Residences to purchase a 122-unit/141-bed rental CCRC in Westfield, Massachusetts. The loan was provided by a Meridian Realty Advisors, a Texas-based real estate invest- regional bank. Finally, working with Andrew Behrens, Vice ment and development company, turned to MidCap Chairman of CBRE Multifamily Institutional Group, Mr. Will Financial to refinance its construction debt for a new 52-unit arranged a $14.5 million loan with a $3.5 million earn-out memory care community in Austin, Texas with a $14.43

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REITs

Current Stock Price Current Market Cap 2015 52-Week Range Company Ticker 4/30/15 Yield (In Millions) % Change High Low

CareTrust REIT(1) CTRE $12.49 5.1% $394 1% $22.35 $11.12 HCP, Inc. HCP 40.29 5.6 20,090 -8 49.61 39.34 Health Care REIT HCN 72.02 4.6 25,210 -5 84.88 61.42 Healthcare Realty Trust HR 25.60 4.7 2,550 -6 31.20 23.41

LTC Properties LTC 43.46 4.7 1,540 1 48.85 36.74 National Health Investors NHI 66.72 5.1 2,510 -5 76.98 56.53 New Senior Investment Group(2) SNR 16.16 5.7 1,070 -2 20.20 16.11 Omega Healthcare Investors OHI 36.09 5.9 6,580 -8 45.46 33.69 Sabra Health Care REIT SBRA 29.88 5.2 1,770 -2 34.44 24.01

Senior Housing Properties Trust SNH 20.47 7.6 4,810 -7 24.60 20.38 Universal Health Realty UHT 49.66 5.1 661 3 57.55 41.15 Ventas VTR 68.90 4.6 22,800 -4 81.93 60.63

(1) CareTrust REIT was spun out from The Ensign Group effective June 1, 2014. (2) New Senior Investment was spun out from Newcastle Investment effective November 6, 2014.

million floating rate loan featuring a maximum term of 42 transactions, which resulted in significant overall interest months. The community, managed by Silverado Senior rate reductions on the loans. Since introducing the program Living, has so far exceeded lease-up expectations. just in January, that is a lot of business.

Doug Harper of Berkeley Point Capital structured an $8.2 PEOPLE ON THE MOVE million HUD loan for a not-for-profit entity to refinance its 127-unit senior living community in Portland, Oregon. The Sharon Yester has joined Bourne Financial Group as its new community, which offers independent living, assisted living Chief Operating Officer. Bourne, formed in 2014, is a senior and memory care, also has some affordable units for rent. housing real estate investment and development company The loan came with a 35-year term and lowered the bor- based in Winter Park, Florida, and it expects to have 10 rower’s interest rate by approximately 50%. senior living properties open or under construction by September 2015 worth about $200 million. Yester was Laura Saull-Smith of Love Funding obtained a $5.76 million previously Chief Healthcare Strategist at CNL Financial HUD loan for Vintage Health Care to both renovate and Group. The founder of Bourne Financial was formerly a vice- expand its 133-bed skilled nursing/assisted living commu- chairman and principal of CNL. nity in Solomons, Maryland. The plans call for an additional 12 private skilled nursing rooms and 23 private assisted HJ Sims has hired Jimmy Rester as a Senior Vice President living rooms to be added. and the lead investment banker covering Texas and the Gulf states. He was previously at Stephens, Inc. and will be work- Meanwhile, HHC Finance closed over $210 million in HUD ing out of the HJ Sims Austin, Texas office. loan modifications in March and April across 26 separate

SeniorCare_Inv 27 The SeniorCare Investor

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