Senior Living (June 2006)

Another mega deal – and a push for more

AMERICAN RETIREMENT SELLS; CAPITAL SENIOR LIVING IS URGED TO DO THE SAME

By Murray W. Wolf

Mergers and acquisitions activity in the healthcare services sector topped $4.4 billion during the first quarter, and Q2 activity has been strong so far. However, Q3 M&A closings already in the pipeline are well on the way to making the first half of this year look downright anemic, and at least one other firm is being pressured to sell its real estate portfolio to cash in on rising demand.

On May 2, Health Care Property Investors Inc. (NYSE: HCP), which is already the nation’s largest healthcare real estate investment trust (REIT), announced that it has reached a definitive agreement to acquire CNL Retirement Properties Inc. for about $5.2 billion. Then, on May 12, Brookdale Senior Living Inc. (NYSE: BKD) announced plans to acquire American Retirement Corp. (NYSE: ACR) for about $1.2 billion, creating the nation’s largest senior living facilities operator.

Closings for both transactions are expected in Q3.

Plus, in light of the CNL and ACR deals and rising valuations for healthcare properties, another major senior living operator, Capital Senior Living Corp. (NYSE: CSU), is facing growing pressure from some of its shareholders to sell its real estate portfolio.

In a May 17 letter to independent board members of Capital Senior Living, one of the biggest shareholders, Mercury Real Estate Advisors LLC, wrote: “As demonstrated by these record transactions, the current appetite for healthcare real estate, and in particular, independent living and assisted living facilities, is at an all-time high. We have no doubt that CSU’s portfolio, if put up for sale, would attract bids at similar valuations to the CNL and ACR transactions, if not higher.”

The advisory firm, an affiliate of Mercury Partners LLC, owns about 9.8 percent of Capital Senior Living.

The urge to merge

During Q1, there were a total of 221 healthcare industry mergers and acquisitions totaling more than $39 billion, according to Irving Levin Associates, a Norwalk, Conn.-based research firm. Admittedly, most of that M&A activity – almost $35 billion – was in the red-hot technology sector, which include pharmaceuticals, medical devices, biotechnology and e-health firms.

But 116 deals totaling $4.43 billion were in the healthcare services sector, and no sub-segment of the market was more active than long-term care, which saw 26 M&A deals totaling $1.73 billion.

Yet, the $1.2 billion merger of Brookdale and American Retirement alone would rival the Q1 total.

The boards of both companies unanimously approved the acquisition. The all-cash price of $33 per share would amount to a premium of about 32 percent over American Retirement’s share price at the close of the financial markets on the day of the announcement.

Brookdale has received a $1.3 billion equity commitment from an affiliate of Fortress Investment Group LLC. Fortress is leading a “roll-up” on U.S. senior living facilities as part of an industry consolidation, according to a trade publication, The Daily Deal.

Brookdale has the option to reduce the amount of equity commitment by as much as $650 million through the proceeds of debt or equity within the six months following the closing of the transaction.

If the deal closes as planned, American Retirement will become a wholly owned subsidiary of Brookdale. The combined company will be the largest operator of senior living facilities in the United States based on total capacity, with 535 facilities in 34 states and the ability to serve more than 50,000 residents. The combined company will operate 73 independent living facilities with more than 13,750 units, 413 assisted living facilities with more than 21,640 beds, and 49 continuing care retirement communities (CCRCs) with more than 14,680 units/beds.

The transaction is subject to customary closing conditions, including the approval by the shareholders of American Retirement Corp. and clearance under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction is targeted to close during the third quarter.

Goldman Sachs & Co. acted as financial advisor and Skadden Arps Slate Meagher & Flom LLP acted as legal advisor to Brookdale. Bear Stearns & Co. Inc. rendered an opinion to a special committee of the Brookdale board with respect to the equity financing for the acquisition. Cohen & Steers Capital Advisors LLC acted as financial advisor and Bass Berry & Sims PLC acted as legal advisor to American Retirement.

Brookdale also recently acquired five senior living properties from AEW Capital Management for $179.5 million. The portfolio includes independent living, assisted living and continuing care retirement communities (CCRCs) with a total of 813 units/beds in California, Ohio and Washington.

Brookdale expects to close on one more facility during Q2 2006 and to close on an outstanding skilled nursing building, part of the CCRC campus in Bakersfield, Calif., upon regulatory approval during Q3 2006. Both buildings were previously included in the initial announcement regarding the AEW portfolio definitive agreement.

Since its IPO in November 2005, Brookdale has purchased or announced commitments to purchase $727 million in senior housing assets representing 8,885 units/beds. If all transactions were to close, Brookdale would invest approximately $307 million in equity in these transactions.

The Mercury is rising

Meanwhile, Greenwich, Conn.-based Mercury Real Estate Advisors has ratcheted up the pressure on Capital Senior Living to sell its portfolio.

In the May 17 letter, which was signed by David R. Jarvis, CEO, and Malcolm F. MacLean IV, president, Mercury stated: “In our previous letters to both you and management, we have firmly stated our view that the most value for CSU shareholders would be created through a liquidation or sale of the company. Further, we have called for an end to the excessive executive pay that plagues the company and significantly contributes to its inability to earn an operating profit.

“These concerns, however, have not been addressed by you whatsoever and indeed seem to have been hastily dismissed. In fact, instead of addressing our concerns, you have brashly proceeded to increase executive pay to record levels in the face of operating losses and allowed management to pursue an inappropriately timed and ill-fated strategy to grow the company through acquisitions and development in one of the most overheated markets for healthcare real estate we have seen in years.

“While you have chosen to conveniently ignore our concerns thus far, the recent sale of two of the largest healthcare real estate companies – companies with significantly greater asset bases and more efficient cost structures as compared to CSU – should undoubtedly force you to reconsider. The sale of these companies serves to further legitimize our view that CSU would create the most value for shareholders by conducting a liquidation or sale, instead of trying to irresponsibly execute an extremely risky growth strategy.”

In the letter, Mercury stated that a larger operator would be able to operate CSU’s portfolio with greater efficiency, and to move more aggressively into ancillary services.

“Given the current demand in the marketplace for high-quality healthcare real estate and also these potential synergies, we believe a larger owner and operator would be willing to pay a significant premium relative to today’s share price to acquire CSU,” Mercury’s letter continued. The letter stated that CSU could fetch $13 per share – a substantial premium over its current stock price.

“As you should now recognize, management’s current proposed strategy of growing the company through acquisitions and development at the top of the healthcare real estate market is fraught with a high degree of risk,” the letter said, calling it “a hopeless growth strategy.”

At least publicly, the management of Capital Senior Living did not respond directly to the letter. But, the firm’s subsequent actions suggest that it has no intention of changing its strategy of acquisitions.

On May 18, the day after the Mercury letter was written, CSU announced a $38.2 million agreement to acquire three senior housing communities in Indiana from a third party through a newly-formed joint venture. And, on May 31 it announced that it had closed on a $54 million sale/leaseback transaction involving three independent and assisted living communities in California, Florida and Missouri.

Canadian REIT is

snapping up U.S.

senior living properties

MISSISSAUGA, Ontario – Chartwell Seniors Housing Real Estate Investment Trust, a Canadian REIT, continues to snap up U.S. senior living properties.

On May 15, Chartwell announced that it had completed the previously announced acquisitions of 50 percent interests in two portfolios of U.S. senior living communities from Houston-based Cypress Senior Living and Denver-based Aspen Retirement Communities. The other 50 percent interests were purchased by Chartwell’s joint venture financial partner, ING Real Estate Australia. The properties will be managed by Horizon Bay Chartwell, the REIT’s joint venture property management company in the United States.

All of the properties are 100 percent private pay independent living facilities with no reliance on government funding, according to Chartwell.

The Cypress Senior Living portfolio includes 818 independent living suites in four facilities in Michigan, Tennessee, Alabama and Oklahoma. The properties were opened in 2001 and 2002. The purchase price for 100 percent of the portfolio was $128.2 million, financed with $92 million in new 10-year mortgages with an average interest rate of about 6.265 percent. (All figures are in U.S. dollars.)

The Aspen Retirement Communities portfolio was purchased from an affiliate of Denver-based Broe Cos. Inc., and consists of 1,365 independent living and assisted living suites in eight facilities in Florida, Virginia, Colorado and Ohio. The Virginia residence has the potential to expand by 95 suits. The purchase price for 100 percent of the portfolio was about $180 million, financed with $130.2 million in new 10-year mortgages with an average interest rate of about 6.34 percent.

“We are very pleased to be increasing our U.S. portfolio in markets that continue to demonstrate strong demand and excellent fundamentals,” Stephen Suske, Chartwell’s vice chair and president said in a prepared statement.

Nordberg to head

new NorthStar,

Chain Bridge JV

NEW YORK – Former Medical Office Properties Inc. chief executive Edward P. Nordberg Jr. will head a new joint venture aimed at acquiring, financing and investing in senior housing and healthcare-related properties.

NorthStar Realty Finance Corp. (NYSE: NRF) announced May 9 that it has entered into a definitive agreement with Chain Bridge Capital LLC to form a joint venture called Wakefield Capital LLC. As part of the deal, Wakefield will acquire substantially all of Chain Bridge’s assets.

Chain Bridge Capital LLC is a private real estate and finance company that is focused primarily on the acquisition, development and financing of healthcare-related real estate assets, with an emphasis on senior housing properties such as independent and assisted living, skilled nursing and CCRCs.

The initial portfolio to be acquired from Chain Bridge is valued at about $64 million and will consist of thirteen net leased properties, primarily assisted living facilities, and several loans receivable, most of which are secured by first mortgages on senior housing assets.

Chain Bridge, based in Chevy Chase, Md., was founded by its chairman and CEO, Edward P. Nordberg Jr. Mr. Nordberg is the former CEO of Medical Office Properties Inc., which sold its 22-building medical office building (MOB) portfolio to CNL Retirement Properties Inc. for $256 million in 2004. (Please see “One deal, two strategies” in the June 2004 edition of Healthcare Real Estate Insights™.)

Mr. Nordberg was also a co-founder and the former CFO of HealthCare Financial Partners Inc., which was a publicly-traded company under the ticker HCF until sold in 1999 to Heller Financial. Mr. Nordberg will continue to oversee the asset management of the properties acquired by Wakefield Capital LLC.

NorthStar is an internally managed REIT that originates and invests in commercial real estate debt, real estate securities and net lease properties.

In a news release, NorthStar stated: “The new venture will take advantage of the attractive yields and favorable demographics in the senior housing sector of the net lease market.”

Wakefield expects to invest significant capital, funded by NorthStar, in building a nationwide portfolio of assisted living, skilled nursing and other senior living and healthcare-related assets which will be managed and net leased to experienced, independent operators of such facilities. Wakefield will be majority owned and controlled by NorthStar and will be managed by a company owned by the principals of Chain Bridge, which has entered into an exclusivity arrangement with Wakefield.

“We hope to put significant equity to work in this sector of the commercial net lease market which is underserved and significantly less competitive as a result of the specialized expertise and experience necessary to successfully invest in this asset class,” David Hamamoto, NorthStar president and CEO of NorthStar stated in the news release.

CalSTRS enters into

$83.3 million JV with

senior housing firm

NEWPORT BEACH, Calif. – The California State Teachers’ Retirement System (CalSTRS), the nation’s second largest public pension fund, and Vintage Senior Advisors LLC, an affiliate of Vintage Senior Housing LLC, a developer of assisted living communities throughout California, have entered into an $83.3 million joint venture.

The JV partners plan to finance the acquisition, development and management of senior housing properties in California and elsewhere in the western United States. Sources say that the joint venture marks the first time that CalSTRS has formed a partnership to focus solely on senior housing.

The new entity, dubbed VinCal LLC, is to receive $75 million in equity from CalSTRS and $8.33 million from Vintage. Vintage is to be responsible for managing the venture on a day-to-day basis, including investments and operations.

The JV has already reportedly closed on its first acquisition: the 147-unit Avalon at Cerritos (Calif.) assisted living community. Terms were not disclosed.

Ventas seeks

$111 million rent

hike from Kindred

LOUISVILLE, Ky. – Now that a final ruling has been issued for Medicare reimbursement rates for long-term acute-care hospitals (LTACs), Ventas Inc. (NYSE: VTR), a healthcare REIT is seeking an annual rent increase of $111 million from Kindred Healthcare Inc. (NYSE: KND).

On May 2, the federal Centers for Medicare & Medicaid Services (CMS) issued a final rule regarding 2007 Medicare payments for LTACs. On May 8, Kindred issued a news release stating that it expected the new rule to cut its revenues from LTAC hospital Medicare reimbursements by about $46 million per year.

“We view reductions in payment as a shortsighted method to address perceived issues with LTAC hospitals,” Paul J. Diaz, Kindred president and CEO said in the news release.

On May 9, Ventas announced that it had served notice to Kindred to initiate the reset right process included in four CCRC master lease agreements that the two firms had struck on April 20, 2001, when Kindred restructured its finances under a bankruptcy court-approved Chapter 11 reorganization plan.

Ventas says that the lease language gives it a one-time option to increase the aggregate annual rent on the 225 facilities it leases to Kindred to “fair market rental” levels, using a predetermined process described in the master leases.

Ventas has proposed that the fair market rental for the 186 skilled nursing facilities and 39 long-term acute care hospital (LTAC) facilities it leases to Kindred would increase to an annualized cash base rental of about $317 million, beginning July 19. The current annual cash base rental is $205.9 million. The reset notices also propose that the annual rent escalations under the master leases will be reset to 3 percent, rather than the current 3.5 percent, starting May 1, 2007.

Ventas chairman, president and CEO Debra A. Cafaro stated in a news release: “Ventas has commenced the reset right process contained in the master leases now that the reimbursement environment for our facilities is clear.” The firms had until June 8 to reach an agreement of fair market value. If they did not reach such an agreement, the two will go to arbitration.

“This process provides a period for Kindred and Ventas to mutually agree on fair market rental for Ventas’s facilities and then for a determination of Fair Market Rental by a qualified healthcare appraiser in the absence of an agreement between the companies,” Ms. Cafaro stated. “We are open to both methods of resolution,” she said. “We remain willing, as we always have, to engage in creative and constructive discussions with Kindred to arrive at a mutually agreeable and fair outcome.”

 “Over the next 30 days, we will work with Ventas in good faith in an attempt to reach a compromise related to the rent reset and are hopeful to have a frank exchange to understand the basis for Ventas’s position,” Mr. Diaz of Ventas said in a May 9 news release.

“We have previously indicated that we had a significant difference of opinion with Ventas regarding the value of the potential rent reset when Ventas was suggesting that the reset was at least $35 million,” he continued. “The facts and analyses that have been made available to us since that time, including the approximately 12.9 percent or $125 million to $130 million reduction in reimbursement to our long-term acute care hospitals associated with changes in Medicare rules in the last twelve months, have moved our positions farther apart.”

Ms. Cafaro said that Ventas shareholders made financial sacrifices in 2001 to help Kindred emerge from Chapter 11.

“Now it is time for our shareholders to receive the fair and equitable benefits of that agreement,” she said. “Since 2001, our facilities have increased significantly in value and the healthcare and real estate markets have enjoyed tremendous strength. As a result, we believe that other LTAC and nursing home operators in today’s market would pay substantially more annual cash base rent than Kindred currently pays.”

For the record

GMAC Commercial Mortgage Corp. (GMACCM) recently provided $83 million in floating-rate construction financing for a Denver senior housing property. Wind Crest Retirement Community is to be built in three phases with total project costs expected to be $530 million. Based upon market demand, the CCRC could potentially contain three neighborhoods on one campus location. The project is an entrance-fee based CCRC. GMACCM vice president Catherine Hilbush, of the firm’s Maryland healthcare origination office, worked with GMACCM’s construction lending unit in arranging the transaction. Erickson Retirement Communities LLC received the funding. Wind Crest Inc., a not-for-profit corporation, is the operator and sponsor… Red Capital Group recently arranged a $36.32 million financing package for a senior housing development in San Diego. City Heights Square Apartments is slated to include 71 studio and 79 one-bedroom units in one five-story building. The financing includes Red Capital Markets’ syndication of $20.72 million of LIHTC (low-income housing tax credit) equity, a $13.5 million construction loan and a $2.1 million Fannie Mae DUS forward commitment from Red Mortgage Capital. Chelsea Investment Corp. is the developer. Construction is scheduled for completion by September 2007… Red Capital also provided $31.6 million in debt and equity for Senior Management Concepts to acquire and renovate four assisted living/independent living properties in the Salt Lake City area. They include the 88-unit The Coventry at Cottonwood Heights, the 52-unit Wentworth at Cottonwood Heights, the 43-unit Wentworth at East Mill Creek and the 53-unit Wentworth at Willow Creek. Red Mortgage Capital provided $25 million in Fannie Mae DUS financing, and Red Capital Advisors structured and arranged $6.6 million in preferred equity… Advocat Inc. (Nasdaq: AVCA) of Brentwood, Tenn., closed last month on the sale of 11 assisted living facilities in North Carolina for about $11 million. The seller was not disclosed. The net proceeds will be used to reduce debt… Greystone Servicing Corp. of Bethesda, Md., and Warrenton, Va., provided a $9.97 million loan to Waltonwood LDHA LP for the refinancing of Waltonwood at University in Rochester Hills, Mich., a two-story, 120-unit independent living facility. The borrower was able to fix the rate under the Fannie Mae DUS program… KeyBank Real Estate Capital provided a $9.5 million construction and permanent loan for the 196-unit Midcrown Senior Pavilion Apartments senior housing rental community in San Antonio, Texas… Regional Land of Carlsbad, Calif., has purchased the Parkside Gardens assisted living facility in Hemet, Calif., from Parkside Gardens LP of Palm Springs, Calif., for $5.6 million. The property consists of two care buildings totaling 102 units, plus an administrative building on a total of 1.4 acres. Michael Kassinger and Cameron Hall of Sperry Van Ness in Palm Desert, Calif., represented the seller, and Michael Bozir of Emax Realty International represented the buyer. The deal also included an acre of land for the possible future development of a 100-bed facility… Cambridge Realty Capital Cos. recently provided an $8.8 million FHA-insured HUD loan to fund the purchase of Parkway Manor, a skilled care nursing and assisted living property in Marion, Ill. The fully amortized 35-year loan was underwritten by Cambridge Realty Capital Ltd. of Illinois for the property’s owner, an Illinois limited liability company. Parkway Manor has 119 skilled and 21 assisted living beds. To fund the purchase, Cambridge utilized the HUD Section 232 pursuant to Section 223(f) program. The interest rate for the loan was not disclosed… Cambridge also provided a $1.99 million FHA-insured HUD loan to refinance Chelmsford Apartments, a 50-unit board & care senior housing facility in Toledo, Ohio. The fully-amortized, 40-year term loan was underwritten by Cambridge Realty Capital, for the property’s owner, an Ohio corporation. The loan was arranged utilizing HUD’s Section 223(a)(7) program for properties with an existing HUD mortgage. The interest rate was not disclosed… Cambridge has also underwritten a $2.08 million conventional first-mortgage loan to refinance Twin Oaks, a 60-bed assisted living facility in Charleston, S.C. The 5-year commercial loan was arranged for the property’s owner, Twin Oaks Villa LLC of Charleston, by Cambridge correspondent Chris Scott of Medalist Capital. The loan, amortized over 25 years, has a 7.5 percent interest rate… Cambridge reported that its 129 first quarter loan origination requests more than doubled the total number of requests reviewed by the company during the same three-month period last year. After three months, the dollar volume of origination requests reviewed topped $796.6 million, compared with $611.5 million for the same period in 2005. q

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