Financing & Investment Briefs (April 2006)

New REIT structure spurs CapitalSource



By Murray W. Wolf

Moving to a real estate investment trust (REIT) structure is helping CapitalSource Inc. (NYSE: CSE) to accelerate its growth, particularly in the area of healthcare real estate, company official say.

CapitalSource, a Chevy Chase, Md.-based commercial finance firm, announced in September 2005 that the transition would take effect Jan. 1. The newly minted REIT wasted little time, announcing later in January that it had completed the purchase of 37 skilled nursing facilities and one assisted living facility for $211 million from Senior Health Management LLC, a St. Petersburg, Fla.-based long-term care management and consulting firm. The transaction was the company’s first structured as a “down-REIT.”

“The REIT election that we made has enhanced our competitive positions with respect to those loans that are tied to real estate, which include our healthcare and commercial real estate lending businesses,” John Delaney, chairman and CEO, said during the firm’s Feb. 22 fourth quarter 2005 earnings conference call.

Although the Senior Health Management transaction didn’t close until the first quarter of this year, Mr. Delaney specifically pointed to that deal as an example of how the REIT structure is opening new opportunities for CapitalSource.

“This transaction we would never have been able to complete prior to our REIT election because, while we view this as a very stable asset and a long-term asset, the returns were not attractive as a taxpayer,” he explained. “With the tax benefits associated with the REIT, this transaction meets our return thresholds.”

The deal involved paying a significant portion of the purchase price in the form of interests in a newly formed limited liability company (LLC) called CSE SNF Holdings LLC. Those interests could then be exchanged for shares of CapitalSource’s common stock. This “down-REIT” deal structure enabled the property owners to cash out as much equity as desired or defer taxes on capital gains by retaining their interests in CapitalSource’s new LLC.

“Some of the owners wanted to extract a larger percentage of equity, while others were more interested in continuing their investment,” Bart Wyatt, president and chief financial officer of Senior Health said in a prepared statement. “This structure accommodated the individual needs of our principals and let us decide when converting our LLC interests into common stock what would be most beneficial.”

“We are pleased to close our first down-REIT transaction with such a long-standing and valued client so soon after deciding to become a REIT,” said James Pieczynski, co-president of healthcare and specialty finance for CapitalSource.

CapitalSource is the managing member and majority owner of CSE SNF Holdings LLC. The operating tenants of the 38 properties will pay rent to this limited partnership under 10-year, triple-net leasing contracts with an initial annual rent payment equal to about 10 percent of the investment amount.

The 38 facilities had been owned by five companies, which had leased their operations to not-for-profit entities. All properties are still managed by Senior Health.

Two days after announcing its first deal as a REIT, CapitalSource disclosed that it had provided $172 million in loans as part of a $202 million senior living acquisition by entities created by Formation Capital Health Care LLC.

The acquisition included 26 senior living facilities and an institutional pharmacy owned and operated by Westerville, Ohio-based Laurel Health Care Management. CapitalSource also will provide a $12.5 million revolving credit facility to Laurel’s specially created entity, LHCC properties, to lease the 21 skilled nursing facilities, four assisted living facilities, one independent living facility and the pharmacy.

That transaction featured senior and mezzanine term loans for the senior living facilities, as well as an enterprise term loan and revolving credit facility for Laurel Health Care’s institutional pharmacy. In addition, Formation Capital and its related entities made an equity investment of about $30 million to acquire the portfolio, which totaled more than 2,800 beds/units in Indiana, Michigan, North Carolina and Virginia.

The Formation Capital entities received the financing in the form of a three-part package consisting of a $144-million senior real estate loan, a $16-million subordinated real estate loan and a $12 million loan secured by the pharmacy business. Separately, in another facet of the transaction, CapitalSource provided a $12.5 million revolving credit facility for LHCC Properties, a division of Laurel Heath Care.

During the past few years, Alpharetta, Ga.-based Formation Capital and its partners have acquired more than $800 million in long-term care properties. The firm has received financing from CapitalSource on several of these transactions, including its acquisition of nursing homes formerly owned by Centennial HealthCare Corp.


total $126 million for

Capital Senior Living

DALLAS – Capital Senior Living Corp. (NYSE:CSU) recently announced three sale/leaseback deals worth a combined $126 million.

On March 13, Capital Senior Living revealed that it has entered into a sale/leaseback transaction valued at about $43 million for six senior living communities in Texas. That transaction followed a March 8 announcement of a $54 million sale/leaseback deal for properties in California, Florida and Missouri. And that deal followed a Feb.1 announcement that it had entered into an agreement with an affiliate of Ventas Inc. (NYSE: VTR) for a single community sale/leaseback transaction valued at about $29 million.

The March 13 transaction has its roots in Capital Senior Living’s August 2004 acquisition of a Fort Worth, Texas, management firm that operated 16 senior living communities, including seven that it owned. As part of the deal, Capital Senior Living had an option to buy the seven communities. The firm has now exercised that option and plans to immediately sell six of the seven properties as a sale/leaseback when the deal closes.

Two of the properties are independent living communities totaling 232 units; the other four are assisted living communities totaling 270 units. The overall occupancy rate is about 96 percent. Capital Senior Living expects to realize a gain of between $3 million and $4 million on the deal. It is marketing the seventh property.

The March 8 transaction includes the sale/leaseback of Crosswood Oaks in Citrus Heights, Calif.; Veranda Club in Boca Raton, Fla.; and Tesson Heights in St. Louis. The communities total 447 units of independent living and 47 units of assisted living, with an overall occupancy rate of about 91 percent. The company expects to record a gain of about $13 million on the deal.

“This sale/leaseback transaction furthers our 2006 business plan, which is focused on providing significant income and asset growth potential, strengthening our balance sheet and maximizing our return on invested capital,” Capital Senior Living CEO Lawrence A. Cohen said in a prepared statement.

The Feb.1 deal involves the 327-unit Towne Centre community in Merrillville, Ind., the largest community in the firm’s portfolio. The community has 165 independent living residents, 60 assisted living residents and 120 nursing residents for a total resident capacity of 345 seniors. Towne Centre will be added to the firm’s existing master lease with Ventas. The firm expects to record a gain of about $14.5 million on the sale.

In other recent news from Capital Senior Living, the firm announced in January that it had formed a joint venture with GE Healthcare Financial Services to acquire five senior housing communities from a third party for about $46.9 million. The communities total 293 assisted living units and had an overall occupancy rate of 92 percent at the time of the announcement. Under the joint venture agreement, Capital Senior Living will earn management fees and may receive additional incentive distributions.

The Ventas and GE transactions were both expected to close during the first quarter, although no announcements had been made when this edition of Healthcare Real Estate Insights went to press in mid-March.

Brookdale strikes

senior living deals

totaling $333.5 million

CHICAGO – Brookdale Senior Living Inc. (NYSE: BKD) was expected to close before the end of last month on two senior living acquisitions totaling $333.5 million.

Brookdale announced in February that it signed a definitive agreement to acquire six properties from AEW Capital Management for $209.5 million. The portfolio is composed of six independent living, assisted living and continuing care retirement community (CCRC) facilities totaling 1,017 units/beds in California, Ohio and Washington. Currently, the properties are managed by three different operators.

The firm said it intends to fund the acquisition with about $136 million of senior mortgage debt, with the balance of the purchase price, $74 million, to be funded with cash. Following the closing, Brookdale may sell up to 50 percent of its investment to a third-party investor in exchange for increased management fees.

In January, Brookdale announced that it had signed a definitive agreement to purchase 18 owned and leased facilities from American Senior Living LP for $124 million. The portfolio composes 18 independent living, assisted living and CCRC facilities, containing a total of 2,239 units/beds and in Alabama, California, Delaware, Florida, Georgia, Louisiana, Ohio, Tennessee, Virginia and Washington. The portfolio is divided into seven owned and 11 leased properties. Of the leased facilities, Nationwide Health Properties Inc. (NYSE: NHP) owns 10, and Newport Richey Capital LLC owns the remaining facility.

The company said it intends to fund the acquisition with about $68 million of senior mortgage debt against the owned assets, with the balance of the purchase price, $56 million, in equity.

Canadian REIT to

pay $100 million for

New Jersey assets

MISSISSAUGA, Canada – Retirement Residences Real Estate Investment Trust announced March 8 that it has entered into an agreement to acquire from Brandywine Senior Care Inc. a portfolio of seven skilled nursing facilities in New Jersey for about $100 million (U.S.). The communities total 1,169 beds.

Retirement REIT plans to assume mortgages related to these properties of about $62 million bearing a weighted average interest rate of 7.5 percent, arrange a new mortgage on an unencumbered facility for about $11 million and pay the balance in cash. Closing is expected this spring subject to various conditions, including lender and government regulatory approval.

“This transaction exemplifies our strategy of pursuing measured growth through selective acquisitions in attractive markets where we already have local expertise,” Derek Watchorn, the REIT’s president and CEO said in a prepared statement. “We had previously identified New Jersey as a desirable market due to its strong demographics and income levels, favorable funding environment, and controls on building new facilities.” Retirement REIT already owns three skilled nursing facilities in New Jersey.

He added: “This strategic acquisition allows us to expand our existing platform in the northeastern United States and capitalize on our excellent reputation with U.S. regulators.”

Brandywine Senior Care is a regional owner and operator of skilled nursing and assisted living facilities in New Jersey, Pennsylvania  and Delaware.

Montana hospital

receives first

HUD CAH loan

WHITEFISH, Mont. – North Valley Hospital in Whitefish recently obtained the first mortgage insurance commitment issued by the U.S. Dept. of Housing and Urban Development HUD on behalf of a necessary provider critical access hospital (CAH) under the new Federal Housing Authority (FHA) 242 Mortgage Insurance Program. The program is part of new regulations enacted by the Centers for Medicare & Medicaid Services (CMS) in August 2005.

InnoVative Capital LLC of Springfield, Pa., obtained a $29.25 million HUD mortgage insurance commitment for North Valley, which takes the form of a Ginnie Mae collateralized direct loan and guarantees the construction and permanent financing of a replacement for the hospital’s antiquated and landlocked 23-bed facility. As the only hospital in its rural primary service area, North Valley was to be deemed a “necessary provider of healthcare services” due to the fact that more than half of its inpatient days served Medicare/Medicaid patients.

“The new FHA program is an important one for rural hospitals as it provides them with the ability to secure low-cost loans to build much needed replacement facilities,” says Alan Richmond, president and CEO of Innovative Capital.

InnoVative Capital led the team that helped NVH develop and execute the financing plan for its new replacement facility, which commenced site preparation in August 2005. the replacement is expected to be completed in the third quarter of 2007. Other team members include hospital management advisory services company QHR, owner’s representative American Health Facilities Development (a subsidiary of QHR), Johnson Johnson Crabtree Architects and construction manager Swank Enterprises.

GE HFS sees

55 percent volume

increase in 2005

CHICAGO –GE Healthcare Financial Services (HFS) says that its medical properties team has committed more than $426 million to medical office real estate initiatives in 2005, an increase of more than 55 percent in gross volume over 2004.

In part, GE HFS attributes its growth to the continued strength in medical office (MOB) portfolio financing, its entry into MOB construction financing and its expansion into non-MOB healthcare real estate. The team, which historically focused on MOBs, began adding hospitals, ambulatory surgical centers, cancer centers, and tax exempt financing to its client list – a strategy it says will continue in 2006. To expand its MOB capabilities, GE HFS developed a construction finance capability to provide a single-source construction and permanent loan product for the first time.

During 2005, the GE HFS medical properties team financed deals ranging from $7 million to $200 million. In a recent transaction, the team worked with Centex Concord to provide $7 million in financing for a cancer center leased to a major oncology operator. 

In another transaction, GE worked with Cambridge Holdings, Inc. to create an initial $74 million funding for a portfolio of five MOBs under a planned $400 million debt facility.  Cambridge can tap into the debt facility as MOBs come out of construction.

For the Record

Health Management Associates Inc. (NYSE: HMA), which has aggressively acquired rural and non-urban hospitals in recent years, plans to scale back on new purchases. The Naples, Fla.-based hospital operating company announced March 20 that it has adjusted its acquisition objective in 2006 to three to five acquisitions from its previous objective of five to seven. HMA’s new acquisition goal includes three hospitals already identified: Amory, Miss. (acquired in January); St. Cloud, Fla. (a joint venture commenced in February); and Cleveland Clinic Naples (a deal that is to be completed during the second quarter)… In February, LifePoint Hospitals Inc. (Nasdaq: LPNT) announced the signing of a definitive agreement for the sale of Smith County Memorial Hospital in Carthage, Tenn., the fourth hospital sale it has announced this year. The sale of the 63-bed hospital to Sumner Regional Health Systems Inc. was expected to close by the end of March. Terms of the transaction were not disclosed… MedCapital Group of Dallas says it recently provided financing for MOB and ambulatory surgery center (ASC) projects. The firm says it provided $4.5 million in mortgage financing for a 36,650 square foot MOB and ASC in northwest Indiana. The financing terms include a 10-year fixed rate at 135 basis points over the 10-year U.S. Treasury (5.59 percent at the time of rate lock), a 20-year amortization period and $1.6 million cash out to the partners. The firm says it also provided $2.6 million in equipment and tenant improvement financing for a new 11,000 square foot ASC in northern New Jersey for a national surgery center developer… 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


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