Beyond The Acquisition Market Peak€¦ · investment by HCP, Inc. (NYSE: HCP) in the HCR ManorCare portfolio (HCRMC) six years ago for $6.1 bil-lion. HCP paid a very high price for

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

VOLUME 28 | ISSUE 6

Healthcare REITs may be entering a new era. Including the current divestiture from HCP, Inc. that was announced in May, there will be two multi-billion dollar spin-offs from REITs in the past 12 months. In addition, while they are still very active in the acquisition market, the deal sizes are smaller than in the past. This could mean a different way of looking at the market for the future. See article at right

Beyond The Market Peak After record prices in 2014 and 2015, the acquisition market seems to have lost its legs as we head to the mid-point of 2016. Not that there will be a major drop in values, but with market conditions near perfect for the past two years, it is difficult to imagine a better environment in the next several years. And don’t forget, this is the longest bull market ever in seniors housing. See article at right

Skilled Nursing Acquisitions ............ Page 6

Seniors Housing Acquisitions ........Page 12

Financing News ................................Page 20

REIT Transactions ............................Page 26

JUNE 2016

There is no doubt that over the long term, healthcare REITs have been great investments with price growth and annual dividend increases for almost all of them. They helped finance the seniors housing and

care sector from childhood through adolescence and into adulthood. They have been efficient buyers, and while mistakes have been made over the years, they have largely been smart buyers. And as long-term investors, with the longest time horizon of any investors in the sector, some issues do arise. The three major ones include the aging of their investments, despite being pretty good at providing capital for updates (with some notable lapses), changing markets around their investments, and the financial impact of those 2.5% to 3.0% annual rent escalators. The third one has been mitigated somewhat by an increase in RIDEA acquisitions, but even these are subject to problems one and two. The most obvious example of these problems facing a REIT has been the

Health Care REITs: A New Era After Years Of Growth, Some REITs Pause To Recalibrate

As readers know, many records were set in 2015 in the acquisition market, most of which will be broken at some point, but not in the near future. Inflation, assuming it rears its ugly head again in future

years, will push values higher as long as it doesn’t come with higher inter-est rates. Last year was an incredible market, with plentiful capital, strong investment demand, and enough sellers willing to bet that the market was at or near its peak, convincing them that it was time to cash in. Just because the market hit a peak, however, does not mean that a sig-nificant drop in value will follow. Currently, there are very few reasons for any kind of decline that matters, but there are many reasons why the market should be static at best with some small declines in the foresee-able future. First and foremost, interest rates have bottomed, and while they may not rise with all the mixed economic signals, there seems to be little room for downward movement, which means that cap rates will not

Beyond The Acquisition Market PeakDespite Long-Term Demographics, We Are Past The Value Peak

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SeniorCare_Inv

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The SeniorCare Investor

2 www.seniorcareinvestor.com

investment by HCP, Inc. (NYSE: HCP) in the HCR ManorCare portfolio (HCRMC) six years ago for $6.1 bil-lion. HCP paid a very high price for a portfolio that has, in some regards, been living off its past reputation as the gold standard in the skilled nursing sector. Some proper-ties have not received the needed capex, others have not adjusted to new competition in their markets, and there was just a feeling in the market that management and its corporate owner (The Carlyle Group) had cashed out and did not have the incentive to work the portfolio. Also, in the ever-changing skilled nursing sector, hard work is required every day. Just ask George Hager. As readers know, the HCRMC portfolio had negative lease coverage at the property level (below 0.90x) but positive coverage at the corporate level when the cash flow of other businesses was included. But even that coverage was skinny. HCP management saw the writing on the wall

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

ISSN#: 1075-9107Published Monthly by:

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and knew it was an untenable financial situation for HCRMC, resulting in not one but two restructurings of the leases and an agreement to divest 50 of the more than 300 properties. They are well on their way with those sales, which is good, but maybe more should have been targeted for sale. Although the May announcement that HCP was going to spin off the HCRMC portfolio into a new publicly traded company (SpinCo) was a surprise, it shouldn’t have been. It was a bold move because it was an admission that HCP no longer wanted what represented more than 25% of its revenue, but it was also a smart move for the long term. It was also an admission that HCP management was not confident that HCRMC management could turn things around enough to warrant keeping the assets. And, it was an admission that HCP wanted to exit the skilled nursing business and its government-based reimbursement. Finally, HCP probably did not want to wait around to see what happened with the DOJ investigation into HCRMC and any penalties that may be forthcoming. Better to make a break. The question was, why now after two rent renegotiations, and not after the first one? Did they finally conclude that with reimbursement and length-of-stay pressure from Medicare Advantage plans that even with the looser rent terms it was just not going to work? Or did they realize that rent escalators were still going to cause problems down the road? An obvious primary reason was that inves-tors were skeptical of a turnaround at HCRMC and whispers of not being able to maintain the dividend started spreading. In addition, management had to believe that SpinCo would have a lot more flexibility to deal with the problem than HCP itself would have, and it would have been painful for HCP if the saga were to drag on further. Perhaps the stroke of genius was to bring in Mark Ordan to take over as CEO of SpinCo once the split has been finalized. He successfully turned around Sunrise Senior Living and negotiated its sale when its stock price had plunged to less than 50 cents a share. He knows how to deal and he knows how to be tough. In the coming days HCP will be filing a Form 10 with the SEC which will include more details of the actual spin-off, which is expected to be completed in the second half of

continued from page 1

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The Providers

Current Stock % Change % ChangePrice Market Cap from from 52-Week Range

Company Ticker 5/31/16 (In Millions) Prior Month 1/1/16 High Low

Skilled NursingAdCare Health Systems ADK $1.96 $39 -10.9% -21.3% $4.00 $1.85

Diversicare Health DVCR 8.10 52 -4.4 -0.6 14.10 6.45

Ensign Group(1) ENSG 18.85 1,030 -16.4 -16.8 27.04 17.60

Kindred Healthcare KND 11.87 1,010 -19.6 -0.3 23.36 7.96

National HealthCare NHC 61.93 946 -3.9 0.4 69.40 57.16

Genesis HealthCare(2) GEN 1.89 290 -25.0 -45.5 8.06 1.42

Assisted/Independent LivingBrookdale Senior Living BKD 17.94 3,330 -2.8 -2.5 38.08 11.28

Capital Senior Living CSU 18.29 548 -8.8 -12.3 26.43 14.58

Five Star Quality Care FVE 2.01 99 -17.6 -36.8 5.07 1.92

(1) The Ensign Group completed a 2:1 stock split effective December 23, 2015. (2) Skilled Healthcare Group completed a reverse merger with Genesis

HealthCare on February 2, 2015. The combined company has taken the Genesis name and the new ticker symbol “GEN.”

the year. But one thing is certain, as a separate entity, Mr. Ordan will have a lot more flexibility to restructure the leases for a more permanent solution than HCP would have, and without a resultant penalty. That penalty will already be embedded in whatever value investors give SpinCo after the spin, which we assume will decline as HCP investors dump the new shares and perhaps reinvest back in HCP. The problem is that if SpinCo remains as a REIT, having basically a single tenant with SNFs and a DOJ investigation hanging over its head, that is not the description of a REIT that many investors want today, even with new lease terms and a better coverage ratio. In theory, they could merge SpinCo with another SNF-oriented REIT, but that is unlikely until the leases are re-structured and the DOJ issue is resolved. And, the value would have to be sufficiently low enough for REITs such as Omega Healthcare Investors (NYSE: OHI) or Care Capital Properties (NYSE: CCP) to be interested. Since SpinCo will have more flexibility to adjust the rents than HCP has, it is possible that Mr. Ordan could then try to grow SpinCo with diversified acquisitions to limit the HCRMC risk, an option that we believe will be difficult to execute.

It would seem that Mr. Ordan’s best option would be to merge SpinCo with the HRCMC operating company, can-cel the leases and become an operating company with new debt (which will come from the spin-off) and about $525 million of EBITDA and no lease expense. Right now, the lease coverage is between 1.0x and 1.1x, and that is based on all the cash flow from HCRMC. According to our calculations, that leaves less than $50 million of cash flow after rent, and we are not sure if that is before or after capex, but we don’t think capex has been a priority of late. Therefore, we conclude that with the current lease structure, there is little value associated with HCRMC, which puts Mr. Ordan in the driver’s seat. Carlyle has already received its return with positive cash flow during the earlier years as well as the sale of the assets with its original equity paid back, so its investment basis is essen-tially down to zero. In other words, they have nothing to lose and anything they can get out of the investment today is pure gravy. And if operations do not improve, SpinCo, at least in theory, could throw HCRMC into default at some point if either covenants are broken or they can’t pay the rent. It would seem to be in everyone’s interest to combine the two entities, something that HCP could not have done, nor would it want to do.



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Now, given that most of the value currently resides in the real estate, we assume SpinCo would not want to assume any potential liability with the DOJ investigation into HCRMC. Consequently, Mr. Ordan would want to wait for a resolution with that before putting his real estate assets at risk for any financial penalties that may or may not be coming. In fact, a settlement could be part of an agree-ment, or condition, to merge.

Then the question becomes, what next? Public equity investors have not been too enthralled with the skilled nursing sector of late, so we are not sure if full value would be achieved as a public entity. There is HCRMC’s home health and hospice business, which at one time was one of the top five largest home health companies in the country. We assume it is still large, and where most of the excess corporate cash flow is coming from, so selling it could certainly raise a lot of capital. As more details are disclosed this month we will be in a better position to read the tea leaves. In conjunction with the decision to spin out the HCRMC assets, HCP also decided to sell half of its 80% interest

in one of its RIDEA joint ventures with Brookdale Senior Living (NYSE: BKD) at a stated cap rate of 6.5%. Why do something like this? First of all, it raised $740 million of capital for HCP, which was needed as the situation dete-riorated at HCRMC. Second, with HCRMC leaving the stable of assets, Brookdale suddenly became HCP’s largest tenant/operator, increasing from 23% of reve-nues to 30% post spin. Given Brookdale’s noted struggles since the Emeritus acquisition, that was considered to be too high a concentration, even with some improve-ments at Brookdale. Selling that 40% stake to Columbia Pacific Advisors (aka Dan Baty) was a smart, conserva-tive move in the short term, but one that may have been necessary given all the other moving parts. It didn’t help that Brookdale’s lease coverage on its triple-net leases with HCP were at 1.04x before capex. What does all this mean for the rest of the healthcare REITs? Well, not to start rumors, but it certainly would make it easier for Ventas (NYSE: VTR) to buy or merge with HCP. That would be a tough sell to the new manage-ment at HCP, which now includes Kai Hsiao (former CEO of Holiday Retirement Corporation), who has become

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the EVP of Seniors Housing Asset Management, Tom Herzog, who has just returned as CFO, having left five years ago, and Justin Hutchens moving up to Chief Investment Officer. But the moves at HCP, combined with the SNF spin-off at Ventas last year, means that we may see a lot shuffling of the assets among the REITs, but more specifically, among the Big Three. The third big REIT, Welltower (NYSE: HCN), has its own potential problem with Genesis Healthcare (NYSE: GEN), which has been selling assets to pay down its debt with Welltower, and has not been turning in the best results recently as it too struggles with changes in reimbursement and pressure from the Medicare Advantage plans. Genesis represents 13.4% of Welltower’s revenues and is its number two tenant/operator. While the facility level lease coverage, at 1.27x EBITDAR in 2015, is much healthier than HCRMC, Genesis is the largest SNF operator in the coun-try and is facing increased competition for the high-paying subacute business. Publicly, Welltower has full confidence in Genesis and its management team, but the skilled nursing business is not getting any easier. And GEN’s management had too

many negative adjectives to describe the environment in their first quarter earnings announcement (“despite pres-sure....expected weaker demand....greater than anticipated headwinds....confront a challenging environ-ment”) to make investors comfortable. If the projected turnaround by year end does not materialize, who knows what will happen. GEN’s share price has been trading between $1.50 and $2.00 for a few months, so investors are not showing much confidence right now, resulting in a market cap of just $300 million.

The odd thing is that GEN’s rehab business operates in more than 1,600 sites, of which 62% are non-affiliated, with total revenues of about $1.1 billion. Using an esti-mated 8% operating margin and a 10x multiple of estimated EBITDA, we derive a theoretical value of almost $900 million for that segment alone. U.S. Physical Therapy (NYSE: USPH) trades at 13x EBITDA and Kindred Healthcare (NYSE: KND) paid 9.2x EBITDA for RehabCare Group in 2011. Is there a disconnect with investors, or does nobody think they would ever sell that business? If the controlling investors took GEN private, they might think about it.



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In today’s market of smaller deals, it would seem that the smaller REITs have somewhat of an advantage because they don’t need the big transactions to move the needle, and it definitely has become a small transaction market. We mentioned in the other lead story that half of May’s announced transactions involved REITs as buyers, but the eight largest ranged from $30 million to $169 million. That does not move the needle on a $15 billion dollar REIT. The key for REITs will be increasing their dividends, so they live or die by cash flow growth. Diversification can help that growth, as will smart development financing. But value growth may be harder to come by in the next few years, and while the population continues to age, so do the existing properties owned by REITs, especially those 40-year old SNFs. SKILLED NURSING ACQUISITIONS Skilled nursing acquisitions were light in number this month, especially when compared to seniors housing. But there was at least one expensive sale. Valued over $100,000 per bed, a 117-bed skilled nursing facility in Daphne, Alabama (Mobile MSA) sold to an in-state

not-for-profit for $12.25 million. Constructed in stages in the 1980s, 2001 and 2004, the facility was 86% occu-pied and operated at just a 5% margin under the previous owner, TL Management, which acquired it in 2011 for $9.55 million, or $67,254 per unit. TL originally had plans to expand in the state, however, buying opportunities did not materialize, and this was its only facility in Alabama. The property includes a free-standing medical office building, more than half of which was recently leased to a national tenant and will provide revenue for the buyer going forward. Bradley Clousing and Ryan Saul of Senior Living Investment Brokerage handled the transaction. Moving a little southeast, a local not-for-profit hospital is acquiring a 213-bed skilled nursing facility in Augusta, Georgia as part of its strategy to provide a continuum of care. The facility had a checkered past, having a one-star rating as recently as last year, but it has since improved to two stars. It was sold in a bankruptcy auction for $3.7 million, or $17,371 per bed. The hospital plans to transfer 20 beds to its existing Kentwood nursing facility. Marcus & Millichap sent a veritable army into Norwood,

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Ohio to arrange the sale of two skilled nursing facilities. Mark Myers, Joshua Jandris and Charles Hilding, plus Stan Folk, Joel Dumes and Steve Anevski out of M&M’s Cincinnati office and Peyton Stanforth out of the Chicago O’Hare office, represented the seller, a private family investment group, in the transaction. The lease was end-ing for the tenant operator, which was interested in building new facilities.

So, Messrs. Myers, Jandris, Hilding and Stanforth pro-cured the buyer, a real estate investment trust with a large presence in the region that leased the facilities to a new third-party tenant. Built 25 years ago, one of the facilities contained a mix of 90 skilled nursing beds and 68 assisted living beds, while the other facility was built in 1965 and expanded in 1989 to feature 55 skilled nursing beds. Both properties combined sold for $14.5 million, or $68,075 per bed. Then, working between a faith-based not-for-profit and a private equity fund, Messrs. Myers, Jandris and Hilding, with Ryan Fleming and Kelsie Vogds, arranged the sale of a 158-bed senior care facility in Dallas, Texas. Built in 2000, the not-for-profit facility features 113 skilled nursing and 45 assisted living beds.

A private equity fund was the buyer.

Avalon Health Care Group, a Utah-based senior living company with a large presence in the West, entered the Oregon market in a big way, acquiring Pinnacle Healthcare and its 10 skilled nursing facilities in the state. Located in Corvallis, Eugene, Grants Pass, Medford, Roseburg and Woodburn, the portfolio consists of 1,108 beds and will increase Avalon’s footprint to 49 centers with 5,532 beds across seven Western states. The trans-action details were not disclosed, but Avalon plans to transfer the lease agreements and begin operating the facilities in early 2017.

Staying on the West Coast, a Los Angeles-based real estate investment company, Reliant Management Group, acquired a locally-owned 130-bed skilled nursing facility in Lynwood, California for $6.75 million, or $51,923 per bed, with an approximate 13% cap rate. Built in 1964, the facility was 90% occupied, and featured an 88% Medi-Cal census, with just 2% Medicare. Capital Funding LLC helped finance the acquisition, and Shep Roylance of The JCH Group handled the transaction.



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BEYOND THE MARKET PEAKcontinued from page 1

get a beneficial push from lower rates. And there seems to be little else that will push cap rates down any further. Second, we are exactly seven years from the end of the official last recession (the Great one), and statistically, that means that another recession (but much smaller) should be around the corner, according to economic cycles theory. In addition, we are exactly six years from the start of the recent bull market in seniors housing and care acquisitions, which we first pegged as beginning in June 2010 with a few market-changing transactions. This has been the longest bull market for seniors housing and care ever, and while that alone does not mean it should come to an end, it does mean that the legs are getting tired. They may not buckle, but the sprint is over, at least for now. The longest bull market may come some time after 2026. Third, the prices that have been paid, at least on the high

end, may be unsustainable in all but a few cases. Properties going for $400,000 to $700,000 per unit, while “best-in-class” and usually in high barrier-to-entry markets, may not escape competition since that barrier was already broken with the new expensive communities, and who is to say someone else won’t do the same thing? When we get into nose-bleed territory, there is not much room for value creation other than the ability to steadily increase monthly rates, and with cap rates bottoming out, not to mention interest rates, the odds of a re-trade at a higher price begin to diminish. In the skilled nursing mar-ket, the $125,000 to more than $200,000 per-bed prices that have become common in the past two years will come under pressure, even for the newly built facilities as Medicare reimbursement is not going to improve too much and, as the case has been lately, may be getting worse as lengths of stay and payment rates have come under attack by Medicare Advantage plans. The 35-year old facility that just sold for $150,000 per bed may have some troubles down the road keeping up with its capital costs. And that 35-year old facility with a lease and esca-lators based on that high price may succumb to the “HCR ManorCare effect.”

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Fourth, healthcare REITs were certainly important drivers of the recent bull market. Their low-cost capital, unique ability to invest at high prices, an equally unique ability to compete for one-off transactions as well as the billion-dollar deals, their stable of operators, and their unmatched access to as much capital as was needed all made them the toughest competitors in the buying mar-ket. Not that they still aren’t tough, but their appetite has changed. In less than 12 months, we have seen two multi-billion dollar divestitures from REITs (one still in process), and many smaller ones as some of the REITs, for a variety of reasons, have decided to “rationalize” their portfolios, or at least position their balance sheets for the next phase in the market. But let us be clear, they have not abandoned the acquisition market at all. In May, they were the buyers in 19 of the 37 announced transactions we have tracked so far. The difference is that the eight largest deals by these REITs ranged from $30.0 million to $169.0 million, and only two were above $100.0 mil-lion. We wrote about this phenomenon last month. Fifth, the equity markets have seemed to lose faith in both the few seniors housing and care companies still traded as well as the healthcare REITs, where every upward spike in interest rates sends those shares down in an exaggerated tumble. One of the many troubling signs that is keeping investors away is the continued develop-ment threat to existing properties, despite many providers claiming it is having minimal impact. That impact, how-ever, will be felt more keenly from late this year through 2018, and if not, then the sector may have dodged a bullet. We hear rumblings that construction lenders are beginning to slow down for fear of what may happen in the next recession, and this is not seniors housing spe-cific. The lack of public equity investors may be a transitory phenomenon, but it is not a positive one for a healthy M&A market. Exit strategies for buyers as the market was peaking included selling to a REIT, selling to a private equity firm, or selling to a strategic buyer, with the publics usually the buyers for portfolios of any size. Those exits do not look as promising as they did 12 or 18 months ago. Sixth, it is almost a given that the cost of labor will be increasing more rapidly than general inflation, and in many markets, at a faster rate than monthly rates can be



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increased. While not many employees in the sector are paid the federal minimum wage of $7.25 per hour ($15,000 per year), there are still a lot of employees paid $10 per hour (or less), and the pressure to increase the minimum wage to $12 or $15 per hour not only pushes up the salaries of the lowest paid employees, but the ones right above them will in turn demand a raise, as will the ones above them. Labor is the largest cost for any pro-vider, and when that increases legislatively as opposed to a result in changes in market conditions, problems will occur.

This will put even more pressure on the increasing dispar-ity between the haves and the have-nots in the retirement market, as fewer elderly will be able to afford the higher rates that must be charged as wages rise above inflation. In addition, for those providers who operate in markets where rates can’t be raised as easily, or who rely on a certain percentage of Medicaid residents and their even lower rates, their cash flow will get squeezed and for some, it may mean going out of business. The wage pres-sure will be a serious problem for the rest of the decade, even if there is another recession, which in theory would

only increase the potential supply of labor. But tell that to the 458,000 workers who dropped out of the labor force in May alone. Finally, one has to consider what will happen to demand for seniors housing in the next 10 years and beyond. Surveys and studies continue to show an overwhelming number of baby boomers who claim they want to remain in their homes. Anecdotally, and personally, those boom-ers whose parents had a successful stay in a senior living community, and usually a CCRC or multi-level of care community, are more apt to be thinking of a move into a similar community when they hit their eighties. While there has not been a proven cause and effect, the push by government agencies as well as elderly advocacy groups for more home and community-based supports and services, both for their funding and availability, is certainly not helping the case for seniors housing, as misguided as some of the reasons for the push may be (lower cost). The problem is that while most people do not want to leave their homes, there is a growing majority who will not be able to afford to leave their homes, without government subsidies.

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This may be the growing crisis for seniors housing. A com-mon statistic that is tossed about is that a 1% increase in the penetration rate for seniors housing, commonly thought to be about 10% right now, would fill all the empty units. That would be great, and would certainly solve any threat from overbuilding, now or in the future. What no one is asking is, what would happen if there was a 0.5% decline in the penetration rate, combined with the influx of new developments? Despite increased efforts by the industry to “get the word out” about seniors housing and its merits, the word is being countered by the stay-at-home crowd, many of whom do not want to think of a retirement community as “home.” What they don’t realize is that the notion of a retirement community and what it entails is evolving and will continue to evolve. Still, it is the problem of affordability and the interplay between affordability and changing penetration rates. In our recent webinar on assisted living and Medicaid, over 70% of the attendees believe that Medicaid will have a growing presence in assisted living. That surprised us, as so many people think of it, and want it to be, a bastion of private pay living.

So, where does all this leave us? The good news is that the communities that are being built today do show well, so that when the fence sitters visit, they will be impressed. The sheer numbers of the aging population starting in 2026 that will be the actual customers should be enough to get any investor excited, but we still don’t know about that penetration rate and the affordability question. Technology enhancements will both allow some people to stay in their homes longer, and will also help senior living providers do a better job, so that could almost be a wash and is too early to tell. What this tells us is that the age of entry into senior living will continue to increase, with an ever increasing “need-based” customer, unless the industry does a better job explaining why an 80-year old couple should “want” to move into their community. Or unless it makes changes to the environment, physical and social, so the customer feels less like they are moving into a building filled with old people, a common complaint. Urban locations will be best at solving this problem. We started by claiming we are past the market peak (at least this one), but investors are still buying and lenders are still lending. If values do not rise much in the next few



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years, why bother investing? Our belief is that value-add acquisitions is the place to be right now. Sure, you can protect yourself with that best-in-class property as a defensive acquisition, but the real returns will be found in under-managed properties that have either not received sufficient capital expenditures or where man-agement (usually corporate HQ) has not spent the time and effort. As we have entered into this pricing plateau, we are already seeing the large owners shedding more properties than in the past, and this will most likely con-tinue, especially since it is still a good time to sell.

If cap rates have bottomed out, and if labor costs rise, what is the risk to that exit value five to seven years from now? Most people assume a 100 basis point spread between annual increases in costs (2%) and annual increases in revenues (3%). But what happens if those numbers reverse themselves? The value-add property will perform better financially because it will be focusing on increasing occupancy, rationalizing the expenses and improving its market perception, which means higher rates. Obviously, no one can predict what will happen, but after six years of a rising market, acquisition strategies

should probably change and be based on your perception of what the next phase will look like and how you want to be positioned for it. SENIORS HOUSING ACQUISITIONS The Memorial Day weekend must have rejuvenated some in the senior care industry, as this relatively quiet month jumped into another gear in the closing days. Greystone Real Estate Advisors certainly ended May with a bang, closing the largest transaction of the month at a value of $210 million, or $202,100 per unit. Involving seven senior living communities in Texas and one in Oklahoma City, the portfolio was owned by Harrison Street Real Estate Capital and Bridgewood Property Company. Built between 1989 and 2000, it included 1,039 total units, with two independent living communities, three independent/assisted living communities and three that included independent living, assisted living and memory care services. Texas-based Cardinal Bay was the buyer, which will retain Retirement Center Management as operator. Cody Tremper of Greystone led the way in the sale.

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Also following Memorial Day, Kayne Anderson bought a 135-unit senior living community in Melbourne, Florida for $45.5 million, or $337,037 per unit, which is the third-highest priced seniors housing transaction in Florida’s history, according to our database. Built in 2012, the community has 47 independent living, 54 assisted living and 34 memory care units on 12.24 acres. It was well occupied at 97%. Kayne Anderson bought it free and clear of existing debt, and Holliday Fenoglio Fowler (HFF) represented the seller in the transaction. Then Jason Punzel of Senior Living Investment Brokerage closed a pair of deals at the end of the month. In Oroville, California, Mr. Punzel sold a 36-unit memory care community that was built in 2002 and underwent a renovation/expansion in 2008 for $5.95 million, or $165,278 per unit, with a 9.0% cap rate. There is an additional 2.5 acres available for expansion, but the local seller was retiring from the business. Another local owner/operator, with two other facilities in the area, stepped in as the buyer. Mr. Punzel also sold two assisted living communities in South Dakota for $1.978 million, or just $20,000 per unit. The communities were built in

the mid-1990s, but were just 53% occupied and losing money. A Southern California-based private equity group was the buyer, and brought in Northstar Senior Living to manage. So ended an active end to the month. Earlier in May, Brad Clousing of Senior Living Investment Brokerage sold a slew of communities in the Southeast, with two in Georgia and one in Alabama (which you can read about in the Skilled Nursing section). First, with the help of Mr. Clousing, Sabal Financial sold its 41-unit assisted living community in Cumming, Georgia. Previously, Sabal had purchased the note on the non-performing property in a large portfolio sale from Synovus Bank, but has subsequently foreclosed on the asset. The community was built in 1997 and managed by Oaks Senior Living, which is owned by the Salabarria family. Under Oaks management, the community actually was performing well, with a 23% operating margin and 80% occupancy, despite the ownership change and bank-ruptcy. The purchase price came to $3.3 million, or $80,488 per unit, with an 8% cap rate. The buyer, a Midwest-based regional operator, plans to cosmetically renovate the community and has already increased the

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facility’s bed capacity to 50. And second, Mr. Clousing, together with Jeffrey Binder, arranged the sale of a 38-unit assisted living community down the road in Acworth, Georgia. Just built in 2014, the community leased up quickly to 95% and was operat-ing at a 30% margin. The partnership seller was looking to redeploy funds to new development opportunities, prompting the sale to a REIT, which will lease the com-munity to an affiliate company. The purchase price came to $8.4 million, or $221,053 per unit, with a 7.75% cap rate. Then, Mr. Binder along with Matthew Alley and Jason Punzel sold a 110-unit independent living community in Boise, Idaho on behalf of a national operator looking to divest the non-performing asset. Built in 1972, the com-munity had an aging physical plant and was just 74% occupied. A real estate owner headquartered in Canada purchased the property for $3.9 million, or $35,455 per unit, and will bring in a national operator to manage. We first announced the sale of a 402-unit/bed

entrance-fee CCRC in Denville, New Jersey in the March issue of The SeniorCare Investor. Now, with the help of a team from Cushman & Wakefield, including Allen McMurtry, Megan Fetter and David Kliewer, the transac-tion just closed. The C&W team represented the seller, Catholic Health Initiatives. Also, Rob Black and Sean McNee of Cushman & Wakefield facilitated the sale of a 54-unit assisted living/memory care community in San Francisco to a joint venture between Auctus Capital Partners and Och-Ziff Capital Management. Located on an irreplaceable site, the build-ing was originally built in 1923 as a hospital but was purchased by a Mom & Pop in the 1990s who then con-verted it to senior care. It has some underutilized “dead space” that the JV will convert to add significantly more assisted living and memory care units. Plus, Auctus and Och-Ziff will make some cosmetic improvements to help drive operations, which lagged slightly under the Mom & Pop. Integral Senior Living was recently brought on to operate and will remain in place. Occupancy currently rests in the mid-80s on a per-bed basis, and in the 90s on a unit basis. To finance the acquisition, Aron Will of

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CBRE arranged a $17.12 million Fannie Mae loan, with a 10-year fixed rate term and 60 months of interest only. This is the fifth acquisition for Auctus since its 2014 founding, which includes two communities in Washington and three in California. For an undisclosed price, Jason Dopoulos and Chad Elliot of Lancaster Pollard facilitated the sale of two recently-built Arizona assisted living communities to private investment firm Madison Realty Companies. Following the transaction, the seller, American Orchards Senior Living, will focus on its latest development in Gilbert, Arizona and its long-term growth. Monarch Healthcare Management, a private Minnesota-based owner of seven in-state assisted living and rehabilitation facilities, recently purchased five Minnesota senior care facilities from the not-for-profit Ecumen for an undisclosed. The purchase included four assisted liv-ing communities in New Richland, Le Center, Lake Crystal and Mapletown, as well as one skilled nursing facility in Litchfield. Monarch will retain the roughly 200 Ecumen employees at the facilities.

A couple of regional owner/operators in the Northeast further expanded their portfolios this month. Senior Health Care Solutions, which owns and operates three skilled nursing facilities and two personal care communi-ties in Pennsylvania, bought a 60-bed personal care community for $2.4 million, or $40,000 per bed. The seller, Salveo Healthcare Solutions, had renovated the community in 2013 but lacked the capital to optimize operations.

Then, New York City-based Post Acute Partners, which has been prodigiously expanding in upstate New York since acquiring ElderWood Senior Care in 2013 for $141.5 million, purchased two more senior care facilities in the area (Ticonderoga, to be specific) for an undis-closed price. The facilities, including an 84-bed skilled nursing facility and a 23-bed assisted living community, were owned by Inter-Lakes Health, part of the University of Vermont Health Network, and Elizabethtown Community Hospital. Inter-Lakes will continue to operate until the deal closes, which is expected to take at least a year.

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Agency Deals. With HUD announcing its recent changes to the LEAN program, which received a fair amount of attention in the seniors housing industry, we were curious when we’d see a spike in transaction activity from the agency. Clearly, it was not immediate, with just a couple of announced HUD closings in May.

A 96-unit assisted living community in Glen Cove, New York undergoing an expansion to add a dedicated mem-ory care wing also refinanced with HUD at the same time. The community, built in 1992 and owned by the not-for-profit National Healthplex, Inc., sought to repay existing municipal bonds, as well as to fund the conversion/rehabilitation project. Josh Hausfeld of Pillar originated a $32.5 million HUD loan, with a 40-year term. The financ-ing was more complicated than usual, with a ground lease on the project land, a payment in-lieu of taxes (PILOT) agreement, and the existing tax-exempt bonds issued by Glen Cove Industrial Development Agency. Following the expansion, the community will total 132 units.

Up next, Cambridge Realty Capital Companies closed

nearly $25 million in HUD refinancings for two senior care properties in the Chicago area. Both were Alden Management Services facilities, two of 46 owned by the senior care provider mainly around Chicago and a couple in Wisconsin. A 121-bed assisted living commu-nity in Aurora received a $13.58 million loan with a 35-year term. In Chicago, a 300-bed skilled nursing facil-ity refinanced with a 35-year, $11.3 million loan. Showing off its wide array of services, Capital One announced three transactions across two health care sectors. First, in seniors housing, Allison Holland originated a 12-year $11 million Fannie Mae loan to refinance a 72-unit assisted living community in Homosassa, Florida (about 60 miles north of Tampa). The community was built in 2009 and features a choice of studio, one- or two-bedroom units. Then, in the home health care market, Capital One served as administrative agent and lead bookrunner for a $65 million senior secured credit facility to finance the acquisition of National Home Health Care Corporation by Blue Wolf Capital. Finally, Capital One provided a $20.9 mil-lion HUD loan to refinance a 318-bed skilled nursing

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facility in Chicago. Joshua Rosen led the way on the transaction, which featured a 35-year term. The facility was over 40 years old and offered on-site dialysis and memory care services. As always, Capital Funding Group closed a number of transactions. First, Craig Casagrande originated a $13.7 million loan secured by the cash flow of seven skilled nursing facilities operated by CommuniCare Family of Companies. The loan will be used for general corporate purposes to help strategically position itself for future opportunities. Next, Patrick McGovern originated two-part financing to facilitate the acquisition of two central Michigan skilled nursing facilities, with 210 beds, affili-ated with the not-for-profit University of Michigan Health System. The Peplinski Group was the buyer, receiving a bridge-to-HUD acquisition loan arranged by Capital Funding, LLC, while the related operator received a $3 million working capital loan from Capital Finance, LLC to fund the operations. Capital Funding Group served as agent and senior lender. Finally, Jeffrey Stein of Capital Finance, LLC originated a $7 million revolving line of credit for an Illinois operator to provide working capital for a

HUD-insured skilled nursing portfolio.

We can’t go long without seeing another Aron Will (of CBRE) transaction, or three. First, to finance the Auctus Capital and Och-Ziff Capital Management acquisition of a 54-unit assisted living/memory care com-munity in San Francisco (detailed on pages 16 and 18), Mr. Will arranged a $17.12 million Fannie Mae loan, with a 10-year fixed rate term and 60 months of interest only. Bank Loans. In addition to his agency deal, Mr. Will arranged a $19.65 million non-recourse floating rate loan on behalf of a joint venture between three Denver-based companies, including MorningStar Senior Living, to acquire a newly built assisted living/memory care com-munity in Glendale, Arizona. The loan came with a three-year term, 36 months of interest only and a sub-3% all-in rate, and was provided by a national bank. MorningStar actually developed the $18 million property together with Real Capital Solutions (opening it in September 2015), and will contribute a substantial por-tion of equity into the JV buyer to remain as the operating partner. Its other JV partners include Oakwood Real

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Estate Partners, a commercial real estate private equity firm with over $1 billion in real estate investments since 2005, and Confluent, also a private equity firm focused on real estate investment and development since 2008. Finally, through a national bank, Mr. Will secured a $38.9 million five-year bridge loan, with three years of interest only and a sub-200 basis point spread over 30-day LIBOR, for an institutional client. The financing went towards funding the acquisition of The Arbor Terrace Portfolio, which includes two 101-unit assisted living/memory care communities (each with 71 AL and 30 MC units) in the Atlanta, Georgia market. Both communities opened in the fourth quarter of 2015 and are leasing well. The Arbor Company manages the portfolio. Construction Loans. Construction lending appears to still be very active, with a large number of projects break-ing ground so far in 2016 (we have tracked well over 100 just this year). A well operating CCRC in Buffalo, New York looking to expand needed quick financing to take advan-tage of building a new independent living campus on the site of a former acute care hospital in downtown Buffalo.

Built in 1999 by Episcopal Church Home & Affiliates, the CCRC features 243 IL units and patio homes, as well as enriched housing and skilled nursing beds. Over the years, it has consistently enjoyed high occupancy across all levels of care under its not-for-profit management. HJ Sims has had a relationship with the CCRC since provid-ing seed capital for its initial development in 1996, and so was a natural fit to finance this new expansion project. After site demolition and remediation, the community purchased the site and just broke ground on what will be a six-story, 58-unit independent living/enriched housing building. To finance the $41 million (or $707,000 per unit) development, HJ Sims arranged a $32 million con-struction loan through a local bank, with a nine-year term and initial variable rate of just over 2.00%. The project is expected to be completed in fall 2017. To fund the construction of the first seniors housing co-op in Kansas City, National Cooperative Bank, which offers finance services to cooperatives across the country, pro-vided a $7.3 million construction loan. The developer, Minnesota-based Real Estate Equities Development, opened the three-story 53-unit community in 2015, and

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has three more openings planned in the coming year in Iowa, Missouri and another in Kansas. A new assisted living/memory care community is going up in Dallas, Texas (we’ve heard that a lot recently) with the help of a $42.9 million construction loan secured by HFF. Jim Curtin, with Ryan Maconachy, Chad Lavender and Sarah Baccich, arranged the four-year, floating-rate loan, provided by Texas Capital Bank and Guaranty Bank & Trust. With 105 assisted living and 29 memory care units, the community is being built by a joint venture between Silverstone Healthcare Company and L&B Realty Advisors. Harbor Retirement Associates will man-age the property, expected to open in 2017. Tax-Exempt Market. Omega Communities worked with HJ Sims to finance the construction of a 134-unit assisted living/memory care community in Fort Myers, Florida. With 96 AL units and 38 MC units, this will be the fourth senior living community for the for-profit company that partners with well-established sponsoring churches. All of its previous developments (in North Port and Sarasota, Florida and Hoover, Alabama) were also financed by HJ

Sims. For the current project, Sims placed senior tax-exempt bonds issued on a draw-down basis with an institutional investor. The savings from the draw-down feature and the smaller debt service reserve fund pro-vided increased the debt capacity, allowing Sims to structure $3 million of preferred equity in the form of subordinated taxable bonds sold to Sims’ accredited retail investors. Other News. To finance its recent acquisition of Spectrum Professional Services, an investor group led by health-care private equity investor Beecken Petty O’Keefe and Company recently received a $110.5 million senior secured credit facility arranged by Capital One Healthcare, which served as administrative agent and lead book-runner. Spectrum is a rehabilitative therapy management consulting business catering its services to post-acute care, skilled nursing and assisted/indepen-dent living providers. It was acquired in December 2015 by a joint venture headed by Beecken Petty O’Keefe and including Sunrise Senior Living plus existing investors at Spectrum. Cain Brothers served as Spectrum’s exclu-sive financial adviser in the transaction.



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National Health Investors (NYSE: NHI) made a large purchase, which included two Connecticut CCRCs for $56.3 million, or $119,787 per unit/bed. Built in 1968 with a 2009 renovation, the 241-unit/bed community in Bridgeport features 186 independent living units, 26 assisted living units, 13 memory care units and 23 skilled nursing beds. The other community, built in 1991 in Southbury, has 155 IL units, 26 AL units, 14 MC units and 34 skilled nursing beds on a 56-acre property. Both properties were owned by funds managed by certain affiliates of East Lake Capital Management, and are sub-leased to affiliates of Watermark Retirement Communities, the current manager. The lease has a term of 15 years, with an initial lease rate on East Lake of 7% and annual escalators of 3.5% in years two through four, and 3% annually thereafter. The communities have a 2.30 EBITDARM average lease coverage ratio based on the initial NHI lease payment for the past two years. About $10 million in capital improvements and potential expan-sion projects are planned for the communities in the next two years, and NHI funded the acquisition with available

cash and borrowings on its revolving credit facility. Dave Rothschild and Mary Christian, now with Cushman & Wakefield, were hired by the sellers when they were at CBRE.

Then, further expanding its relationship with Bickford Senior Living, National Health Investors exercised its purchase option to acquire five assisted living/memory care communities from Bickford for $87.5 million, or $315,884 per unit, with an approximate cap rate of 8.3%. Although the properties are not included in the existing joint venture between the two entities, the companies have been closely linked since 2012 when they announced a 10-property partnership, then followed that with a 36-property development pipeline, plus various other acquisitions. This current deal involves five well performing properties in Iowa (2), Missouri, Illinois and Nebraska with an average combined occupancy of 92% and average age of 12 years. NHI will lease the portfolio to Bickford with an EBITDARM coverage of 1.35x, based on an initial annual lease rate of 7.25%. The lease also has an initial term of 15 years plus two five-year renewal options and annual escalators of 3%. NHI has already

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REITs

Current Stock Price Current Market Cap 2016 52-Week Range

Company Ticker 5/31/16 Yield (In Millions) % Change High Low

Care Capital Properties(1) CCP $25.99 7.2% $2,180 -15% $36.44 $23.65

CareTrust REIT CTRE 13.39 5.1 775 22 13.93 9.12

HCP, Inc. HCP 32.87 7.0 15,350 -14 40.90 25.11

Healthcare Realty Trust HR 31.79 3.8 3,330 12 32.01 22.01

LTC Properties LTC 46.62 4.6 1,770 8 48.76 38.64

National Health Investors NHI 69.83 5.2 2,680 15 71.75 53.64

New Senior Investment Group(2) SNR 10.37 10.0 851 5 16.10 7.78

Omega Healthcare Investors OHI 31.92 7.3 6,010 -9 37.24 26.96

Sabra Health Care REIT SBRA 20.94 8.0 1,370 4 27.66 14.92

Senior Housing Properties Trust SNH 18.68 8.4 4,440 26 20.24 13.53

Universal Health Realty UHT 53.50 4.8 713 7 58.40 42.81

Ventas VTR 66.33 4.4 22,430 18 68.73 46.87

Welltower(3) HCN 68.91 5.0 24,600 1 74.96 52.80

(1) Care Capital Properties was spun out from Ventas effective August 17, 2015. (2) New Senior Investment was spun out from Newcastle Investment effective November 6, 2014. (3) Formerly Health Care REIT.

committed $2.4 million for capital expenditures and expansion projects, the funding of which will be added to the lease base. To fund the acquisition, NHI used avail-able cash and borrowings on its revolving credit facility. Later in the month, an affiliate of Bickford repaid existing loans to NHI with proceeds from the aforementioned sale. A principal balance of $9.213 million from a mezzanine loan (12% annual interest rate) and of $478,000 from a development loan (10% rate) were repaid. CareTrust REIT (NASDAQ: CTRE) entered the Michigan market, acquiring four assisted living/memory care com-munities in the state for $30.8 million, or $163,830 per unit. The assisted living/memory care portfolio includes a 46-unit community in Clarkston, a just-built 40-unit community in Goodrich, a 62-unit community in Burton and a 40-unit community in Lapeer. Overall occupancy was around 88% and the communities were built from 2005 to 2015. Similar to previous transactions this year, CareTrust immediately leased the communities to an existing operating partner, this time the REIT amending

a master lease with Premier Senior Living, which recently announced that it has allocated up $100 million for acquisitions over the next year. The lease will generate approximately $2.7 million in annual rental revenue, but because of the brand-new Goodrich community, CareTrust gave Premier a partial rent concession for the first lease year, resulting in an initial GAAP yield of 8.9%, with CPI-based rent escalators starting after the second year. To fund the acquisition, CareTrust used proceeds from its recent 8.5 million share equity offering. This is the 12th acquisition for the REIT so far in 2016, and it brings its year-to-date property haul to 25 (in 10 different states, no less). The seller was a regional owner/operator looking to take advantage of the aggressive capital mar-kets, and Tom Rusthoven of Senior Living Investment Brokerage handled the transaction. Separately, Omega Healthcare Investors (NYSE: OHI) and Welltower (NYSE: HCN) disclosed a half dozen acquisitions each in their first quarter earnings releases, and HCP, Inc. (NYSE: HCP) has agreed to acquire two portfolios of senior living properties for $285 million.



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Beyond The Acquisition Market Peak€¦ · investment by HCP, Inc. (NYSE: HCP) in the HCR ManorCare portfolio (HCRMC) six years ago for $6.1 bil-lion. HCP paid a very high price for