THE Volume 26, Issue 3 SeniorCare March 2014 INVESTOR Inside The World of Senior Care Mergers, Acquisitions and Finance Since 1948

IN THIS ISSUE Marriage of Brookdale And Emeritus After rumors had been swirling for months, dating back to the NIC Confer- Creating The Largest Seniors Housing Company Ever ence in October, Brookdale Senior Liv- ing finally announced a deal to acquire Emeritus Senior Living in a transaction e have been talking about shares of Brookdale for each of their valued at $2.8 billion. the rumors of a merger shares, and Brookdale will assume

between Brookdale Se- about $1.4 billion in mortgage debt. See page 1 W nior Living (NYSE: BKD) and Brookdale will also assume a boatload Emeritus Senior Living (NYSE: of lease obligations, but more on that ... ESC) for a few months, including later. The valuation of the purchase is SNFs Set Record Price on the front page of this newsletter complicated by the different kinds of The average price per bed for skilled nursing facilities shattered the previous back in November. In that story, we leases from a GAAP accounting per- record, and independent living commu- mentioned three rumored suitors, spective. After capitalizing the leases nities also set a record average price per and we got two of them right. But with an 8% cap rate (which we believe unit in 2003. The full details will be pub- lished later this month in the 19th Edition all along, we truly thought they were is low), we derive a price per unit of of The Senior Care Acquisition Report. rumors because it just didn’t make about $165,000 and a cap rate just See page 1 sense for the buyers. above 7%. Admittedly rough, but it is the question that is always asked. This ... Brookdale was the eventual also does not take into account cost and Platinum Healthcare Scores “winner,” paying a 32% premium revenue synergies and simply looks at See page 4 to Emeritus shareholders in the $2.8 the fourth quarter results for Emeri- billion transaction where Emeri- tus. The CEO of Emeritus, Granger ... tus shareholders will receive 0.95 ...continued on page 2 Seniors Housing Acquisitions See page 10 SNFs Set Record Average Price ... Independent Living Also Hits A New High In Bull Market Skilled Nursing Acquisitions See page 16 ven with the 100 basis point in interest rates always have a lagging increase in interest rates in impact on cap rates, and with the buyers ... the second quarter of 2013 in the market using a higher proportion Financing News E (as measured by the 10-year Trea- of equity than in the past, combined See page 20 sury rate), there was no let-up in with floating rates (LIBOR) still at his- demand for seniors housing assets, toric lows, the buying binge continued ... especially the higher-end proper- unabated. REITs ties in good locations. During the See page 22 summer, there was a pause in the The big news for 2013 was that market as buyers tried to determine a new price-per-bed record was set in ... what the ultimate impact of the in- the skilled nursing acquisition market, People On The Move terest rate rise would be, but there shattering the record set in 2010 when seemed to be little impact on cap the average price hit $62,500 per bed. See page 23 rates. The reality is that changes ...continued on page 19

SeniorCare_Inv www.seniorcareinvestor.com Page 2 The SeniorCare Investor March 2014 continued from page 1... Cobb, will retire from his executive positions and join the Brookdale board, Andy Smith will remain as CEO and Mark Ohlendorf will remain as president and CFO, although those two functions should be split up. It is not known how many of ESC’s senior operating people will join Brookdale, but we would imagine some of them will be floating their resumes in the market.

As we stated when the transaction was announced, this is a great deal for Emeritus shareholders, and it wasn’t a secret that founder Dan Baty had been looking for an exit strategy. Before any cleansing divestitures, the com- bined entity will have 1,161 communities with 112,694 units, of which 49% are leased, 34% are owned and 17% managed. By care segment, 52% are , 26% are independent living, 12% are Alzheimer’s care, 5% are entrance-fee independent living and 5% are skilled nursing. The number of leased buildings is expected to decline, as management has stated they are planning to exercise purchase options for more than $2.0 billion of properties across both portfolios. We agree that real estate

The SeniorCare Investor ownership provides financial flexibility and reduces the cash flow impact of the lease escalators down the road, ISSN#: 1075-9107 but financial flexibility will not be the problem. Published Monthly by: Irving Levin Associates, Inc. 268-1/2 Main Avenue Across all of health care, from senior care to hos- Norwalk, CT 06851 pitals to home health care and even the pharmaceutical (203) 846-6800 Fax (203) 846-8300 [email protected] sector, bigger is not always better. In fact, it rarely is after www.seniorcareinvestor.com reaching a certain size. There is, of course, no definition of what that size is. Many people we have spoken to over Publisher: Eleanor B. Meredith the years thought that 500 properties was the maximum for Editor: Stephen M. Monroe seniors housing and care, with many not comprehending Advertising: Jeanne Aloi how they would manage 200 to 300. At more than 1,100 properties, we have to believe dis-economies of scale Single Subscription Rate: $697 Multiple Subscription Rate: $1,997 would be kicking in.

© 2014 Irving Levin Associates, Inc. Much has been made of the cost savings and cost All rights reserved. Reproduction or quotation in whole or synergies from this transaction as well as the overlay of part without permission is forbidden. services, increasing the base for ancillary services across both portfolios and the 100,000 residents who spend $4.5 This publication is not a complete analysis of every material fact regarding any company, industry or security. Opinions expressed billion each year on health care, and capturing 1% of that, are subject to change without notice. Statements of fact have been or $45 million. That number could be larger or smaller, but obtained from sources considered reliable but no representation is that is revenues and not incremental cash flow. And it is made as to their completeness or accuracy. This Firm or persons a maybe. Orchestrating those cost savings and synergies, associated with it may at any time be long or short any securities mentioned in the publication and may from time to time sell or other than the easy part of duplicative corporate office buy such securities. POSTMASTER: Send address changes to The expenses, is going to be difficult, to say the least. While SeniorCare Investor, 268-1/2 Main Avenue, Norwalk, CT 06851. we don’t know how many executive directors leave their

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The Providers Current adjusted % Change % Change Price P/E from from 52-Week Range Company Ticker 2/28/14 ratio(1) Prior Month 1/1/14 high Low

Skilled Nursing

AdCare Health Systems ADK $4.34 12.4 7% 1% $6.26 $3.62 Diversicare Healthcare(2) DVCR 5.49 14.0 5 18 5.75 4.45 Ensign Group ENSG 39.60 7.4 -6 -11 46.39 30.85 Kindred Healthcare KND 21.66 10.0 14 10 22.09 9.75 National HealthCare NHC 51.50 6.3 -1 -4 56.69 44.68 Skilled Healthcare Group SKH 4.81 10.0 5 0 7.51 4.08

Assisted/Independent Living

Brookdale Senior Living BKD 33.54 13.2 22 23 33.69 24.42 Capital Senior Living CSU 25.42 16.1 13 6 27.90 19.87 Emeritus Corporation ESC 31.53 13.4 43 46 31.93 18.15 Five Star Quality Care(3) FVE 5.79 9.7 7 5 6.87 4.41

(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 is 10.0%. (2) The company changed its name from Advocat in March 2013. (3) The P/E ratio is based on partial Q:3 data. jobs each year, we would guess that a five-year stay would munity to community. Now you add in the 500 Emeritus be on the high side. That means replacing more than 200 properties, and you are going to have a brand? Perhaps in of these key employees each year, and the same goes for name, but they were built or bought from a wide variety other staff members who probably have a higher turnover of developers and sellers, with an equally wide variety of rate. The point is that the financial engineering discussed quality. Besides, one stays in a Marriott hotel many times, as part of the rationale for the transaction only goes so while one makes a decision about seniors housing once or far, and if all the employees are not walking the walk, twice (yourself and/or a parent), if at all. In other words, there are going to be mistakes, problems, and Frontline unlike a Marriott, you don’t have much repeat business. knocking on the door, which would be very unfortunate, and not just for Brookdale. The other problem we have is that we believe Brook- dale is the better company, meaning that its properties The other aspect of the deal that has been touted on average are better than the Emeritus properties, and is a national branding campaign under the Brookdale Brookdale was gaining more traction since the recession banner with more than 1,100 communities and 6.5 mil- than Emeritus. They both have great properties, and they lion 80-plus year olds within 10 miles of at least one of both have some not-so-great properties, but Brookdale those communities. As some of you know, we have never has always seemed a notch above, and that was before believed in the benefit of “national” branding for seniors Emeritus took over the Sunwest Management portfolio. housing. Much to their dismay, we relayed that opinion Let’s take a look at some of the numbers. Over a two-year to the buyers of the management period and on a same-community basis for 319 Emeritus company, as that was part of their expansion plan. That communities, occupancy grew from 86.9% to 87.2% for may be abandoned with the recently announced sale of the a 30 basis point increase since the first quarter 2012. This management company by KKR (NYSE: KKR). Marriott same group of communities had an operating margin of thought they could parlay their brand to seniors housing, 33.2% in the first quarter of 2012, which had declined to and that didn’t work. When you walk into a Marriott 33.0% by the fourth quarter of 2013. Perhaps Brookdale hotel, you know exactly what you are going to get, and has some secret sauce to move the needle on these prop- it does not vary from city to city. That does not happen erties, but paying a 32% premium for the right to do so? when you walk into any Brookdale community, as they are And speaking of that Sunwest portfolio, the lease with quite different in design and service amenities from com- HCP, Inc. (NYSE: HCP) is now in the second year, with a

SeniorCare_Inv www.seniorcareinvestor.com Page 4 The SeniorCare Investor March 2014 recent 4.4% increase in the rent, which will then bump up it was surprising that Brookdale’s shares initially jumped another 3.8% in year three and 3.6% in year four. Without by more than 7% early the first day before settling for a significant improvement in cash flow, that may hurt. one-day gain of just 1.5%. But the bulls for Brookdale continued two days later taking the shares up to $33.16, While we certainly hope that the Brookdale manage- representing a 10% increase from the pre-announcement ment team is successful with the acquisition, there are just price. They show no concern about the size problem, and too many things that can go wrong with such a behemoth, instead are focusing on market muscle and the intrinsic principally among them taking their eye off the ball, which value of real estate ownership with the purchase options. in this case is the residents and employees. This is a people And then we learned that Fortress Investment Group business, and a local business, and when those at the top (NYSE: FIG), a major Brookdale shareholder, had in- become too far removed from those in the communities, creased its holdings since the end of last year from 17.59 that is when “slippage” happens, and as we said, across million shares to 20.29 million shares, representing 16.3% all of health care, being the biggest has never worked out of the common stock. And we thought FIG was trying all that well. The smaller competition is gearing up for the to reduce its holdings. But if we are so wrong about our marketplace battles, and they would rather be nimble and analysis, why do so many people seem to agree with us, quick, and not get stuck on the candle stick. And don’t be off the record, of course? fooled by some of the valuation estimates of the combined company using 5.5% to 6.0% cap rates. Very, very few Platinum Healthcare Scores sales are at 5.5% cap rates, and that’s in today’s still-low interest rate environment. And the vast majority of both For more than 25 years, we have been writing about companies’ properties would not sell with a 5.5% cap rate, the ins and outs of seniors housing acquisitions, the great even to a hungry REIT. successes as well as the abject failures. There have been those Class A property sales where the occupancy was It should be noted that investors appear to disagree 97% with high operating margins and very high prices, and with our take on the situation. Obviously, shares of Emeri- there have been those bow-wows, with low occupancy, tus jumped to the full premium, and then surpassed it, but little to no cash flow and sometimes built 25 to 30 years

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SeniorCare_Inv www.seniorcareinvestor.com Page 6 The SeniorCare Investor March 2014 ago. Although many buyers of the former type of property The other issue is size. It just seems that the smaller would never buy the latter type, it is those lowly orphans companies have a bit more of an entrepreneurial spirit, that just can’t seem to get it right that often offer the high- with the owners much more on top of operations and the est returns. The hard part is trying to figure out why the line staff than a company with 200 to 500 properties (did seller can’t turn it around, but the buyer can. we say 1,100 buildings?). If the owner knows the name of the executive director (as well as the names of the spouse They are both dealing with the same location, physi- and children), that goes a long way. And without layers cal plant and market dynamics, but somehow end up with of management, if a correction is needed, or a purchase vastly different results. Not always, but enough times to of something will enhance operations, it can be done im- make us wonder what is it about these buyers that enable mediately with one phone call. them to turn the proverbial lemon into lemonade. We have written about the success of Kandu Capital in a We will turn our attention to a mid-sized company few of their acquisitions, usually buying underperforming based in Illinois that often frequented these pages but has assisted living and memory care communities that were been quiet for a year or two, that is, until now. Platinum previously owned by much larger companies and in what Healthcare is different from most providers in this space. we call “outlier markets” for those companies. Then there Not only does it have a balanced platform of skilled nurs- is the “Dutchie from Kentucky” who flies under the radar, ing facilities (18) under the Platinum name and assisted turns around properties that others failed at turning around, living communities (12) under the “Lamplight Inn” ban- and then sells them at a tidy seven-figure profit. We hear his ner, but it also has ventured into the substance abuse and secret is to incentivize the staff when he takes over opera- eating disorder business with four acquisitions last year. tions in ways that the large companies most likely either It also has not been afraid to enter the affordable seniors can’t do or don’t want to do. And who can forget Legend housing market in those states that have decent reimburse- Senior Living, with its 98%+ corporate occupancy rate, ment programs. And because of its success, led by Ben all with new development. In this case, it is management Klein and Paresh Vipani, the company has many banking plus location and beautiful physical plants. sources for its transactions and had no trouble during the credit crunch of 2008 to 2010.

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Working backwards with the most recent transac- increasing occupancy, we are not sure what else can be tions, on February 1 the company closed on the acquisi- done to improve the financial performance. Assuming the tion of two assisted living communities from Emeritus Fort Myers property can be turned around and the census at (NYSE: ESC) located in Sarasota and Fort Myers, Florida, Sarasota can be increased, we expect these properties will for $6.3 million, or $37,300 per unit. That is obviously at be worth between $10 and $12 million by the end of 2015, the very low end of assisted living prices, and reflects the which is just $65,000 per unit, but a nice return. Financing age of the buildings (both over 30 years old), but also some for these two acquisitions was provided by Bank Leumi, financial performance issues at the Fort Myers property. which included a fixed rate mortgage, a line of credit for In 2013, Fort Myers was operating near breakeven after capex, and a working capital line of credit. a management fee on revenues just under $2.3 million, despite occupancy of 93% at the 74-unit property. About In another purchase from Emeritus, which closed 15% of the census is , and the rates appear to in early January, Platinum Healthcare bought a 119-unit be on the low side. A few years earlier it operated with assisted living community in Baltimore, Maryland that a 12% margin, so Platinum knows that it can be cash suffered from low 53% occupancy last year. The purchase flow positive. It is expecting to make EBITDA of at least price was $4.25 million, or $35,700 per unit. There are 84 $225,000 this year, and perhaps $315,000 in 2015. Of the studios and 36 one-bedroom units, and since it was built total, 16 units are currently for memory care, and they in 1999 it should be somewhat modern in design, even may expand that. though it needs about $320,000 in renovations. In 2013, the community was operating just below breakeven, but The Sarasota community, a market where we have the buyer’s pro forma EBITDA at 90% occupancy, with seen a few new assisted living properties built (and be- 82% private pay and 18% Medicaid, is forecasted to be ing built), the 95-unit community (rebranded Lamplight about $880,000, representing a 21% operating margin. We Inn at Sarasota) has a lower occupancy of 80%, but is are not sure how long it will take to get there, but that will reasonably cash flow positive at just over $500,000 in represent a $10 million value. The property was appraised 2013, representing a 20% operating margin. Like the Fort at $6.2 million “as is” and $8.9 million when stabilized. Myers property, it has a 15% Medicaid census. Other than Capital Funding arranged the mortgage financing.

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It would be easy to assume that talk is cheap, that all higher occupancy than the assisted living units. Manage- buyers think they can turn properties around. But Platinum ment expects to reach pro forma occupancy of 83% in Healthcare recently walked the walk with the sale of a year two with revenues and EBITDA of $2.6 million and 114-unit property in Dayton, Ohio. They purchased the $625,000, respectively. That would put the value at over community in mid-2010 from Emeritus for $4.0 million, $7.0 million, or $61,000 per unit, which is still considered or $35,000 per unit, when revenues and EBITDA were relatively cheap in the market. Cole Taylor Bank pro- approximately $3.3 million and $375,000, respectively, vided mortgage financing for this acquisition. based on occupancy of 70%. It was built in 1994 and has a mix of private pay and Medicaid. In early January, There was another purchase from Emeritus, com- Platinum closed on the sale of this property to Fortress pleted last September, of a 118-unit community in West Investment Group (NYSE: FIG), which we believe will Allis, Wisconsin for $1.9 million, or $16,100 per unit. This have Corporation manage it. The property was built in 1963 as a seven-story hotel and came purchase price was $11.0 million, or $96,500 per unit. to Emeritus with the large portfolio of former Sunwest EBITDA had jumped to $900,000 on occupancy of 86%, Management properties (thank you, Jon Harder). It has representing a 20% operating margin, and the cap rate was an 87% Medicaid census, something that Emeritus is not 8.2%. We don’t know what capital improvements went fond of, and it was losing money with 70% occupancy. By into the building in the past three and one-half years, but decreasing the number of licensed beds a few years ago, a $7 million change in value is impressive. they were able to increase the Medicaid rate by $500 per month. Occupancy in February reached 80% and manage- In December last year, Platinum Healthcare pur- ment expects to hit 90% by the fourth quarter 2014, at chased a 114-unit assisted living and memory care com- which time annualized EBITDA should be approaching munity built in 1985 in Peoria, Arizona for $2.2 million, $500,000. Using a higher cap rate than traditional assisted or $19,300 per unit, from Quilted Care, Ltd. Occupancy living results in a value near $5.0 million. Bank Leumi was just 64%, so it was operating at breakeven on just provided financing for this acquisition. under $1.8 million or revenues. The memory care units were about one third of the total and came with a slightly By no means do we want to imply that we are bash-

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SeniorCare_Inv www.seniorcareinvestor.com Page 10 The SeniorCare Investor March 2014 ing Emeritus; to the contrary, it made sense for ESC to las of Hollybrook, these four have 185 units and sold for exit from these buildings as they really don’t fit in with approximately $135,000 per unit. Because they are new, their future plans. In fact, they should be applauded for a few are still filling up but occupancy is approaching doing this and not wasting resources trying to turn around 90%. Based on trailing EBITDA, the cap rate was close properties that they may not understand as well as a Plati- to 5.0%, but it rises to 7.8% based on pro forma cash flow num Health. It is doubtful that once stabilized, which should happen soon. There are (NYSE: BKD), Sunrise Senior Living or Atria Senior two additional communities in the portfolio of a similar Living, to name a few, would have done any better than size and price that are expected to close in the next few Emeritus. In this case, it is all about Platinum and not months. ARC is expected to hire Meridian Senior Liv- Emeritus. In the skilled nursing side of the business, they ing to manage the communities. Mark Myers of Marcus also bought a 120-bed facility in St. Joseph, Missouri last & Millichap represented the seller, while Blueprint summer from Five Star Quality Care (NYSE: FVE), a Healthcare Real Estate Advisors represented the buyer. company that has been exiting the SNF business to focus on seniors housing. The price was just over $21,000 per Nothing compares with the acquisition of Emeritus bed and the facility was losing money on 53% occupancy. in terms of size, but a large two-property sale recently Today, occupancy is 64% and it is close to breakeven. closed in California. It looks like MBK Senior Living Management’s year two pro forma projects EBITDA of has done it again, selling the mini-portfolio for $104.5 $1.4 million. You do the math, and we can cry together. million, or $356,650 per unit. Both communities were built in 2001, and the one that is just northeast of San Seniors Housing Acquisitions Francisco has five buildings with 64 assisted living units, 24 memory care units and 71 independent living units. American Realty Capital Healthcare Trust (ARC) The second campus is just outside Los Angeles and has is back in the market with a portfolio acquisition. An two buildings with 96 assisted living units and 38 memory Illinois-based multifamily and commercial real estate care units. Both had occupancy above 98% (there he goes developer has sold four assisted living communities in again, but how does he continue to do it?). The operating Illinois that they very recently built. Known as the Vil- margin was a very healthy 40%, and the cap rate was close

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SeniorCare_Inv www.seniorcareinvestor.com Page 12 The SeniorCare Investor March 2014 to 6.0%. This will be a nice portfolio for the buyer, which will retain MBK as the manager. We suppose that ARC expects occupancy to stabilize at 100% with a waiting list (there we go again). Dave Rothschild, Matthew Whitlock and Mary Christian of CBRE’s National Senior Housing Group represented the seller.

Not-for-profit provider Bethesda Senior Living, based in Colorado, has purchased a recently constructed 113-unit assisted living and memory care community lo- cated in Thornton, Colorado. The Park Regency Thornton, which will be re-branded Premier Senior Living Thornton, opened last November and about 20 residents have moved in. The purchase price was $14.3 million, or $126,500 per unit and $168 per square foot. The seller is a local devel- oper, and while selling another community in Colorado, Bethesda basically indicated it wanted both even though the Thornton property was not stabilized. The second sale should close in the next few months. Bethesda operates 18 communities in six states, with the highest concentrations in Missouri (6) and Colorado (5). Pam Pyms of Pyms Capital Resources represented the seller, and George Swintz of Bonaventure, LLC represented Bethesda in the transaction.

Just on the heels of their acquisition of a senior liv- joint venture partner NorthStar Healthcare Income, Inc. ing community in Colorado, The Freshwater Group and have purchased a 202-unit community in an upscale sub- urb of Dallas, Texas. The community opened in 2008, and as a result, in order to fill it, the developer had to charge below-market rents. Occupancy today is above 91%, but it is believed that rents today are still close to 25% below the local market, so there is a lot of room to maneuver. The building is large, with nearly 300,000 square feet and 60% of the units are two-bedrooms with the remainder one-bedrooms. Financial details have not been disclosed, but we have estimated in-place revenues to be approaching $7.0 million with EBITDA perhaps topping $2.0 million. Our guess is that the purchase price was between $160,000 and $180,000 per unit, but our guess is, that is not how the buyer is looking at it.

First of all, with more experienced management in place, we expect revenues to increase to at least $8.0 to $8.5 million within two years. That assumes at least a 15% increase in rates and occupancy approaching 95%. The operating margin would be at least 35%, and using a 7.0% cap rate, the value would be in the $200,000 to $210,000 per unit range. But it gets better. The buyers purchased adjacent land and in six months they plan to build an 82- unit assisted living and Alzheimer’s community at a cost of about $175,000 per unit. Not only will that be valuable,

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SeniorCare_Inv www.seniorcareinvestor.com Page 14 The SeniorCare Investor March 2014 but it will enhance the marketability of the original 202- announcement of the sale of its 80% equity interest in Sun- unit community. Aron Will of the CBRE Senior Housing rise Senior Living sent a few ripples through the market Debt & Structured Finance Group arranged $20 million in February. KKR spent a few years looking for a large in seven-year floating rate debt with Freddie Mac, with platform to build a seniors housing business, and it wanted interest only for the first three years. Mike Girard and Ed to start big with a major presence. It tried to buy Erickson La France of TSG represented the seller, and Carl Mit- Retirement Communities out of bankruptcy but came tendorff of The Freshwater Group worked the transaction up short competing against another private equity firm. for the buyer. Then, when Health Care REIT (NYSE: HCN) startled the market with its purchase of Sunrise, followed by the There seemed to be an unusual number of non- sale of just the management side of Sunrise (80%, that is) traditional owners of senior care assets selling in February, to KKR and its co-investors, well, we thought KKR had and such was the case in Texas, where a local real estate finally found its place in the sector. That came to an end company that specializes in shopping centers and other with the announced sale to Canadian giant Revera Inc. properties sold its 87-unit assisted living community, which is licensed for 115 beds. Occupancy was 78% at KKR and its partners paid approximately $104 mil- the property, which was built in 2000, and the operating lion a year ago for their 80% interest in Sunrise without margin was just below 7% on revenues of $2.15 million. any real estate interests, while Health Care REIT kept But the Brookdale community across the street was 100% 20%. Although the current price has not been disclosed, full with a waiting list. The private equity buyer from the rumor is that KKR received an offer they could not New York saw an opportunity and paid $4.75 million, or refuse, or about three times their original investment, $54,600 per unit. The buyer has leased it to a Texas-based which would be close to $300 million. Private equity skilled nursing operator, who hopefully knows how to firms are all about making money for their investors, so manage assisted living. Evans Senior Investments rep- that kind of return in a year is certainly not something to resented the seller in the transaction. walk away from. As part of the transaction, Health Care REIT bumped its ownership stake in Sunrise up to 24%, To say the market was a bit surprised is an under- for reasons unknown. Revera is already in a joint venture statement, but Kohlberg Kravis Roberts’ (NYSE: KKR) with Health Care REIT that owns 47 senior living prop-

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SeniorCare_Inv www.seniorcareinvestor.com Page 16 The SeniorCare Investor March 2014 erties in Canada, and Revera has stated it wants to have as expenses are reduced, resulting in projected EBITDA a major presence in the important U.S. and U.K. senior approaching $900,000 within two years. Comprehensive living markets, which Sunrise provides them very quickly Healthcare is also purchasing an additional 142-bed and with scale. The CEO of Sunrise, Penny McIntyre, was skilled nursing facility in upstate New York from Buffalo- hired by KKR less than three months ago, so we are not based Catholic Health, as well as two adult homes with sure how the sale will change her plans, if at all. a total of 157 beds. These three facilities were estimated to have a combined loss of $3 million in 2013. Skilled Nursing Acquisitions Myers and Jandris also just closed on the sale of two As we have seen, skilled nursing per-bed prices set skilled nursing campuses in Iowa that have a combined a record in 2013, but the sales this month are not going 175 skilled nursing beds and 36 independent living units to help any new records for 2014. In another sale of a (18 units on each campus). Despite a somewhat low oc- county nursing facility, Mark Myers and Joshua Jandris cupancy rate just below 80%, these appear to be well-run of Marcus & Millichap represented the Orleans County campuses that operated with a 15% margin. It appears that Health Facilities Corporation in New York in the sale revenues and EBITDA in 2013 were close to $10.5 million of their 120-bed facility in Albion. Although originally and $1.6 million, respectively. Based on a sales price of constructed in 1960, about $10.6 million was spent on $13.5 million, or $64,000 per bed/unit, the resulting cap renovations in 1995 and 2008. Despite being in good rate is about 11.8%, which is almost a perfect weighted condition and with occupancy of 92%, it lost nearly blend of an average skilled nursing and independent liv- $300,000 on revenues of $10.75 million in 2012, and that ing cap rate. Marcus & Millichap represented the seller, was before debt service of $900,000. The buyer, New Traditions Senior Management, and the buyer, Aviv York-based Comprehensive Healthcare Management REIT (NYSE: AVIV) will lease the properties to Lake- Services, will be paying $7.8 million, or $65,000 per bed, wood Ranch, Florida-based Trillium Healthcare Group. when the transaction closes late in 2014 after approvals are obtained from New York. Currently, the Medicaid census A large skilled nursing facility in Glendale, Arizona is 79%, but we assume the quality mix will increase a bit with low occupancy was recently sold to a large nursing

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SeniorCare_Inv www.seniorcareinvestor.com Page 18 The SeniorCare Investor March 2014 facility operator that has a presence in Arizona. The target In the second transaction, the REIT purchased a large property has 196 beds with occupancy of 51%, of which community in Tulsa, Oklahoma with 106 skilled beds, 84 69% is Medicaid, 10% is and the rest private pay independent living units and 32 assisted living beds (in and insurance. It had an operating margin below 2% on three separate buildings). The kicker is that the purchase revenues of $9.0 million, so the buyer is looking for some price was just $2.0 million, or $9,000 per bed/unit and $19 improvements. The seller, a local real estate company, per square foot. There are reasons. First, the community had leased the property to a large out-of-state provider was built in the late 1960s. Second, the assisted living part that specialized more in the high-end seniors housing side of the building has been closed for 15 years. Third, late in of the business. The purchase price was $9.1 million, or the marketing, and when the buyer had already agreed to $46,400 per bed, which is pretty good given the cash flow the purchase (at a higher price), apparently the executive and occupancy and may reflect the relatively young age director decided to close the independent living part of of the building (15 years). Evans Senior Investments the building and transferred the residents to other com- represented the seller in the transaction. munities. So the buyer was left with 106 nursing beds with occupancy above 85% and an IL/AL component with no Global Healthcare REIT (OTCQB: GBCS) is residents and in need of repairs. The purchase also was just certainly not wasting any time. In February it closed on of the real estate, and the license is still with the operator. its third and fourth acquisitions in its young life. The first For how long is anyone’s guess. But if Global Healthcare purchase was of a 99-bed skilled nursing facility in Scotts- invests the necessary capital to reopen the other parts of burg, Indiana in which the REIT bought a 67.5% interest the community, the sky’s the limit on what the community in the LLC that owns the facility. The price was $3.41 mil- could be worth, at least with proper management, and lion, or $34,500 per bed, but that may be for the majority that would be the first priority. The REIT obtained a $1.5 interest. The REIT assumed $2.9 million of senior debt million first mortgage fromFirst Commercial Bank and and received a $500,000 note from Scottsburg Investors, used $500,000 of its cash to consummate the purchase, LLC. So, zero money down? The facility will be leased to which was also subject to the assumption of an operat- a regional multi-facility skilled nursing operator. ing lease with an existing skilled nursing operator. Doug O’Toole of Marcus & Millichap represented the seller,

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Ventas (NYSE: VTR), which inherited the property with SNFs AND IL Set Records its previous purchase of Nationwide Health Properties. continued from page 1... Hospitals have been in more of a selling mood, or at With a dozen transactions priced over $100,000 per bed, least partnering with local providers, than buying skilled plus several portfolios between $75,000 and $100,000 per nursing facilities outright. But what doesn’t work for one bed, the average price in 2013 was $73,300 per bed, or may work for the other. Such was the case in Indiana, with 21% above the average in 2012 and 17% higher than the Riverview Hospital selling its 225-bed nursing facility in previous record set in 2010 at $62,500 per bed. This may Munster, known as Munster Med-Inn, to Major Hospital be a record that stays for several years given the significant in Shelbyville, Indiana. Terms have not been disclosed, jump that occurred. In past years, there have been sale/ but Major Hospital has a separate department that has a leaseback sales of companies or portfolios between REITs primary focus devoted to relationships with skilled nurs- and the operator at prices above $125,000 per bed that ing facilities in the area. would have significantly impacted the statistics in those years, but we consider those not to be arm’s length trans- Have you ever wondered what a CON in Virginia is action, but financing transactions between two parties. worth? In this unusual transaction, there were two adjacent nursing facilities on the border between Virginia and Ten- In 2013, the combination of newer buildings, loca- nessee, but the state line went through the middle of both tions such as , and high Medicare and facilities, located in Bristol, Virginia and Bristol, Tennes- subacute-focused facilities drove the average price per see. The 120-bed facility in Virginia was closed and its bed to this new record. Many buyers are getting more CON was sold to a skilled nursing developer for $1.393 sophisticated in looking at potential acquisition targets in million, or $11,600 per bed, who will relocate the beds to terms of their subacute potential if the facilities do not al- another county in the state and build a new facility. It is ready have a high Medicare census. According to analysis not known what will happen to the empty building. Ryan that we did during 2013, buyers will pay the equivalent Saul and Patrick Burke of Senior Living Investment of $200,000 per bed or higher for Medicare beds, and Brokerage handled the transaction. perhaps $30,000 to $50,000 per bed for Medicaid beds

SeniorCare_Inv www.seniorcareinvestor.com Page 20 The SeniorCare Investor March 2014 depending on the state. But this is for those skilled nursing portfolios that sold above $200,000 per unit, plus single facilities with a very high-end or profitable Medicare and asset sales of high-end communities that topped out over subacute program. These nursing facilities are then sold $400,000 per unit. In addition, many of these properties for a weighted average of the two, which can be between also had an assisted living and memory care component, $75,000 and $125,000 per bed, and sometimes higher. The driving occupancy and demand. The assisted living mar- buyer does not actually use a weighted average, but it is ket did not fare as well in 2013, declining by 4.5% to an the profitable Medicare utilization, and the potential for average of $150,600 per unit. While the assisted living more Medicare patient days, that the buyer is paying for. market had its share of $200,000 per unit and higher sales, The Affordable Care Act, in combination with the drive it also had many more below $100,000 per unit than the to keep the growth rate of health care expenditures within IL market, and in particular, four times as many below reasonable bounds, is expected to result in skilled nursing $75,000 per unit, which brought the overall assisted living facilities playing a more active role in post-acute care. average price per unit down. In the acquisition market, In addition, if Accountable Care Organizations become there has been strong demand for both Class A and B increasingly important in controlling costs and ensuring assisted living properties, but in the independent living higher quality care, those nursing facilities with a solid market, the real demand is for those high quality Class A track record will become increasingly sought after in the communities, with investors still nervous about the older market, and will sell with high per-bed prices. independent living stock unless they are in great markets.

In the private pay side of the business, the average Financing News price per unit for seniors housing (independent and as- sisted living combined) increased by nearly 5% in 2013 If you are a provider and want to grow, now is the to $164,000 per unit, and came very close to matching the time to find a financial partner. And if growth is going to record set in 2007. This increase was driven by the much be by development, a long-term equity partner is often smaller market for predominantly independent living the best way to go. Take the case of Vero Beach, Florida- communities, which set a new record in 2013 at $191,950 based Watercrest Senior Living Group. It has recently per unit, or 38% higher than in 2012. This market had a few signed a $500 million co-development partnership with

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Sweden-based Index International AB which will in- NorthMarq Capital recently closed on the refi- volve developing approximately $100 million of seniors nancing of a 118-unit independent living unit in Elkhorn, housing properties annually for five years. The goal is to Nebraska with a life insurance company, with a total loan open up to six communities a year. Index International was amount of $16.2 million, or $137,300 per unit. It was a established in 1998 and is a global independent investment fixed rate, fully amortizing, 18-year loan, something you company specializing in real estate and equity invest- don’t see too often in the market. The first phase with ments, currently active in Sweden and North America, but 59 units opened in 2007 and quickly filled. The second expanding in North America and Europe. Apparently, the phase, also with 59 units, is attached to the first phase principals of Index met with numerous seniors housing with the clubhouse and opened in late 2011. The entire operators in the U.S., and they liked the operating culture project broke through 90% occupancy last year, and the at Watercrest. The rest will soon be history. operator, Nebraska-based Dial Senior Management, Inc., owns a 64-unit assisted living community down the On the construction side of the market, CNL Health- road. Jason Kinnison of NorthMarq arranged the financ- care Properties, which is known more for acquisition and ing. Separately, Contemporary Healthcare Capital has traditional sale/leaseback financing, has agreed to invest provided a $1.7 million senior mortgage to the buyer of $35.3 million in a new development with 152 units in Tega a 50-bed assisted living and memory care community in Cay, South Carolina, which comes to about $232,000 per Charlotte, North Carolina. The funds will be used for the unit. This will be the REIT’s fifth development project, purchase, working capital and closing costs. however. Red Capital Partners is providing $26.2 mil- lion of balance sheet, non-recourse funding to CNL as part MidCap Financial, LLC provided $30 million in of the financing. Located on 12.5 acres, the community financing to Ohio-based Continuing Healthcare Solu- will have 80 assisted living units, 24 memory care units tions, Inc. (CHS), an owner/operator of mostly skilled and 48 skilled nursing units in six buildings, which will nursing facilities, but also assisted living, memory care include a resident clubhouse and a wellness center. The and adult group homes. The financing includes a $25 property is being developed by North Carolina-based million three-year revolver for working capital as well as Maxwell Group, Inc. a $5 million three-year term loan. The company wants to

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acquire, and the revolver will provide management with the working capital funds to take on the operations of new facilities. CHS was founded in 2011 and already has more than a dozen properties in Ohio, 10 of which are skilled nursing and rehab facilities. Quadriga Partners, LLC, a middle market investment bank that works exclusively in health care, arranged the financing on behalf of CHS.

HUD Market. In a large HUD financing, Beech Street Capital arranged a $23.1 million HUD loan for a 281-bed skilled nursing facility in Chicago, or $82,200 per bed. The owner, Illinois-based ManagCare, purchased the 40-year old facility in 2009 and has invested more than $1.0 million in improvements. Beech Street stated that this was the first HUD loan approved under HUD’s new Intercreditor Agreement that permits deals with accounts receivable financing to close using this new agreement if all parties agree to accept the document as currently drafted. ManagCare operates 10 skilled nursing facilities in Illinois, and Josh Rosen of Beech Street originated the transaction. He also closed a $6.0 million refinancing of a 169-bed skilled nursing facility in Michigan on behalf of Olympia Group, LLC.

Housing & Healthcare Finance closed two HUD deals in February. The larger one was a $9.926 million loan for a 120-bed nursing facility in Pennsylvania, or $82,700 per bed, and the second one was a $7.085 million loan for a 116-bed nursing facility in New Jersey, or $61,100 per bed. Meanwhile, Capital Funding Group (CFG) closed on a $7.9 million HUD loan for an 80-bed skilled nursing facility in Indiana, or $98,750 per bed, and a $5.78 million loan for a 121-bed facility in Michigan, or $47,800 per bed. CFG also provided $37 million in bridge financing for the acquisition of four SNFs in Massachusetts with 541 beds, or $68,400 per bed. It is anticipated that the bridge loan will be refinanced with HUD.

REITs

After a little pause, Sabra Health Care REIT (: SBRA) was back in the market in February with the purchase of six senior living campuses with 673 units/beds, all within 100 miles of Omaha, Nebraska. They include 292 skilled beds, 213 independent living units and 168 assisted living units. Sabra has leased the properties back to Nye Senior Services with an initial 10-year lease term and four five-year renewal options. The initial cash yield on the $90.0 million purchase price is 7.78%, with annual 3% rent escalators. There will also be an earn-out based on the incremental increase in the portfolio value

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REITs Current Price current dividend 2014 52-Week Range Company Ticker 2/28/14 yield status(1) % Change high Low

Aviv REIT AVIV $25.36 5.7% Beg. Jun-13 7% $31.10 $21.31 HCP, Inc. HCP 38.77 5.6 Inc. Feb-14 7 56.06 35.50 Health Care REIT HCN 58.74 5.4 Inc. Feb-14 10 80.07 52.43 Healthcare Realty Trust HR 23.97 5.0 Dec. Mar-10 12 30.59 20.85

LTC Properties LTC 37.68 5.4 Inc. Oct-13 6 48.69 34.30 National Health Investors NHI 61.70 4.8 Inc. Jun-13 10 72.99 53.01 Omega Healthcare Investors OHI 31.96 6.1 Inc. Jan-14 7 38.41 27.37 Newcastle Investment Corp. NCT 4.90 8.2 Dec. Sept-13 -14 5.04 3.73

Sabra Health Care REIT SBRA 28.47 5.1 Inc. Feb-14 9 32.40 21.55 Senior Housing Properties Tr. SNH 22.30 7.0 Inc. Oct-12 0 29.99 20.07 Universal Health Realty UHT 42.58 5.9 Inc. Jun-13 6 59.09 38.36 Ventas VTR 62.43 4.6 Inc. Dec-13 9 84.11 54.89 (1) As of ex-dividend date. (2) NCT prices and dividend rate were adjusted for the spin-off of New Residential Investment Corp. effective May 2013. created through expansion and conversion projects. Quad- People on the Move riga Partners represented Nye in the transaction. So what does a turnaround artist and ex-CEO of There could be some big news coming from a few Sunrise Senior Living, who sold the company to a REIT, REITs in the next few weeks. NorthStar Realty Finance, do for an encore? He becomes the CEO of a soon-to-be with Jay Flaherty now working the deal market for health spinoff of a REIT from Simon Property Group (NYSE: care transactions, revealed that it is working on a $1.05 SPG). Mark Ordan was just appointed to be the CEO of billion portfolio of assisted living and skilled nursing Washington Prime Group, which will become publicly facilities with more than 8,500 beds. There are not too traded after being spun out from SPG, and it will initially many sellers with that combination, but we will keep you hold SPG’s strip center business and smaller enclosed guessing…. Meanwhile, Newcastle Investment Corp. malls. But does Ordan have the seniors housing bug (NYSE: NCT) disclosed on its earnings call that it would after Sunrise? Doubtful, especially after his experience consider spinning out its seniors housing assets because it in Pennsylvania. But, he may be watching one of his could result in significant shareholder appreciation. And former landlords, HCP, Inc. (NYSE: HCP) former CEO we thought they were just beginning to have some fun. Jay Flaherty, have too much fun in his new position with NorthStar Healthcare Income, Inc. Speaking of REITs, Griffin-American Healthcare REIT III (as in its Jim Pieczynski has rejoined the board of directors of LTC third health care REIT) has filed a registration to sell Properties (NYSE: LTC) effective March 1. Pieczynski $1.9 billion in common stock at $10.00 per share. While served as LTC’s president more than 10 years ago, and is publicly registered with the SEC, the shares would not be currently the CEO of CapitalSource, Inc. (NYSE: CSE). traded, and the REIT will invest in medical office build- ings, seniors housing, skilled nursing and hospitals. And Kindred Healthcare (NYSE: KND) has been mak- not to be left behind, Sumitomo Mitsui Banking Corp. ing some changes in the executive suite. Stephen Farber is seeking to buy about $100 million of seniors housing is joining as CFO and executive vice president, having 20 properties in Japan before taking its health care REIT years of experience in health care. Scott Blanchette has public. Apparently, the country will need as many as 1.8 been appointed chief information officer.Integral Senior million new seniors housing units by 2020. That’s 300,000 Living (ISL) has promoted Collette Valentine to be the a year, which if true, would put our little development CEO and COO. The current CEO, Sue Farrow, will move boom to shame. on to the new role of owner and Managing Director of ISL.

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