HREI™ forms new Editorial Advisory Board (Febuary 2006)

Sunrise completes $100 million buy

TORONTO-BASED SENIOR LIVING FIRM’S PORTFOLIO NOW TOPS $1 BILLION

By John Mugford

Toronto-based Sunrise Senior Living Real Estate Investment Trust (Toronto Stock Exchange: SZR.UN) recently completed its previously announced acquisition of four assisted living communities in the United States for $85.5 million (U.S. dollars). In addition, the company in January completed the acquisition of a 106-resident assisted living facility in Vancouver, B.C., for $27.8 million (Canadian dollars).

With the acquisitions, the Sunrise REIT’s portfolio now tops $1 billion.

The acquisition of the four U.S. properties was partially funded by new long-term first mortgage financing of $55 million that has a seven-year term and with an interest rate of 6.04 percent. The four assets have a cap rate of 7.8 percent on expected net operating income (NOI).

Two of the communities are located in suburban markets of Washington, D.C. The other properties are located in the suburbs of Boston and San Francisco. The properties, which are between seven and nine years old, were developed by Sunrise Senior Living Inc. (NYSE: SRZ). They were acquired from an unrelated third-party investor. Sunrise will continue to manage the communities as part of long-term management agreements with the REIT.

According to Sunrise officials, the four U.S. facilities have a combined capacity of 342 residents and currently have an occupancy rate of 95 percent. The Vancouver facility is 91 percent occupied.

Kentucky system

changes its mind

about monetizing

LOUISVILLE, Ky. – At a time when the monetizations of non-core assets – especially MOBs – have become almost routine, at least one Kentucky health system has decided to buck the trend.

It was disclosed in October that Norton Healthcare Inc. planned to sell Norton Southwest Hospital, two on-campus MOBs and 14.8 acres of land. But, administrators of the Louisville, Ky.-based system recently disclosed that they have decided not to sell.

Plans were to sell the facilities to an unnamed commercial real estate firm and to lease back the first floor of the hospital. Louisville-based Trilogy Health Services LLC was to lease the second and third floors of the hospital from the real estate firm. Norton also planned to master lease the two MOBs from the firm and sub-lease the space to existing tenants. Sale/leasebacks have become a popular real estate strategy for healthcare providers in recent years.

Norton also planned to keep 14.5 acres at the Southwest campus, and planned to change its service offerings to emergency and urgent care, outpatient services, and diagnostic imaging. The hospital’s intensive care unit (ICU) was to be replaced with a nine-bed inpatient unit to care for admissions from the emergency room (ER).

The real estate transaction was expected to close in November. But, in a recent letter to its employees from Norton South-Central market president Thomas Kmetz, the system disclosed that Norton officials determined during the due diligence process that keeping the buildings would make more sense financially.

Now, Norton plans to directly lease the second and third floors to Trilogy. It will continue to occupy the first floor.

Norton operates 29 campuses in Kentucky, Indiana and Ohio, including five hospitals and five immediate care centers.

MPT acquires

L.A.-area hospital

for $20 million

BIRMINGHAM, Ala. – Medical Properties Trust Inc. (NYSE: MPW), a real estate investment trust (REIT) focusing on healthcare, has announced the recent acquisition of two properties in the Los Angeles suburb of Sherman Oaks. The properties are the153-bed Sherman Oaks Hospital and an adjacent medical office building (MOB).

The initial purchase price for the hospital was $20 million. MPT has also committed, and expects to fund, an additional $5 million in upgrades. The hospital was simultaneously leased to an affiliate of Prime Healthcare Services Inc. of Desert Valley, Calif., the parent company of the operators of two other MPT hospitals in California.

With the acquisition of the Sherman Oaks Hospital, MPT in 2005 completed transactions totaling about $290 million, with about $86 million of the acquisitions taking place in the fourth quarter. For 2006, MPT foresees acquisitions totaling between $200 million and $300 million.

Sherman Oaks Hospital decided to sell the real estate “to avoid the fate of many other regional hospitals that have struggled to survive or ultimately went out of business,” according to a Jan. 11 news release from KGI Capital Partners, which represented the hospital in the transaction.

In the early 1990s, KGI says, Sherman Oaks Hospital raised senior debt through a public bond issue. While this financing provided much needed capital, the leverage and interest load overburdened its capital structure, according to the firm. As a result, SOH could not generate internal cash flow or secure outside financing needed to fund necessary capital improvements, including expanding infrastructure to accommodate patient volume, updating medical equipment and complying with a planned tightening of California’s seismic safety standards.

“The Board of SOH made the difficult decision to seek a buyer that could continue to provide vital healthcare services to the community, while providing value for its debt holders,” KGI says. “As a result of this transaction, SOH now has the necessary liquidity to make the much needed capital investments and better serve its community.”

Prime Healthcare Services says it “continues to aggressively pursue acquisition opportunities.”

For the Record

Kindred Healthcare, Inc. (NYSE: KND) of Louisville, Ky., recently announced that its subsidiaries have entered an agreement with Health Care REIT Inc. and its affiliates (NYSE: HCN) to acquire for about $80 million the real estate associated with four long-term acute-care hospitals. The four assets are to be acquired from Commonwealth Communities Holdings LLC and affiliates… LifePoint Hospitals Inc. (NASDAQ: LPNT) of Brentwood, Tenn., has agreed to sell two of its hospitals and to return another to a public hospital district. LifePoint plans to sell the two hospitals to Saint Catherine Healthcare of Pennsylvania. The hospitals are: 96-bed Medical Center of Southern Indiana in Charlestown, Ind.; and the 123-bed Ashland Regional Medical Center in Ashland, Pa. Also, LifePoint will return Palo Verde Hospital, a 51-bed facility in Blythe, Calif., to the Hospital District of Palo Verde. Terms of the three transactions were not disclosed… Health Management Associates Inc. (NYSE: HMA) of Naples, Fla., has entered an agreement to acquire St. Joseph Hospital in Augusta, Ga. The closing of the purchase agreement is subject to the review and approval of the Georgia Attorney General’s. St. Joseph Hospital is an acute-care hospital with 231 beds… Valley Baptist Health System, a not-for-profit system based in Harlingen, Texas, has agreed to loan $20 million to for-profit Harlingen (Texas) Medical Center, a joint venture between MedCath Corp. (Nasdaq: MDTH) and local physician investors. Harlingen Medical, an 80-bed general acute-care hospital, said it plans to use the money and a new $40 million mortgage loan from a third-party lender to repay a $60 million debt to MedCath. q