Industry Pulse (September 2008)

NEW YORK – There seem to be fewer large medical office building (MOB) portfolios on the market these days, the prices of the assets that are available are relatively high, and the challenging capital environment seems to have put a bit of damper on some MOB new developments. So it’s probably not surprising that some MOB developers and investors seem to be paying more attention to the senior living market. For example, there were quite a few notable MOB developers and investors on hand earlier this month at the National Investment Center for Seniors Housing & Care Industry (NIC) Conference in Chicago. And several of them confided in Healthcare Real Estate Insights™ that they might establish or expand their presence in the senior living sector. That’s anecdotal evidence, of course. But, during a time when commercial property sales have slowed significantly, major senior living deals are still getting done. For example, Care Investment Trust Inc. (NYSE: CRE) of New York recently closed on the acquisition of a 12-property, multi-state assisted living portfolio. CIT, which is managed by CIT Healthcare and is a subsidiary of CIT Group Inc., paid $100.8 million for the properties, which have a total of 569 units in four states. CIT acquired the portfolio from Olathe, Kan.-based Eby Realty Group, which operates the buildings through a subsidiary, Bickford Senior Living. Five of the properties are located in Illinois, another five are in Iowa and the remaining two are in Indiana and Nebraska. Bickford will continue to operate the facilities under 15-year sale leaseback agreements. All of the properties were developed by Bickford within the last 11 years. The average occupancy is above 90 percent. According to CIT officials the cap rate was 8.2 percent, and the transaction was funded with cash and a $74.6 million Fannie Mae at 6.85 percent. In a statement, Scott Kellman, Care’s president and CEO, said the terms of the sale are favorable for his company and should limit the volatility of the return even if the seniors housing market performs poorly. The mortgage was arranged by Columbus, Ohio-based Red Mortgage Capital. Despite a recent slowdown of commercial building sales, the Bickford portfolio attracted multiple bidders, according to a statement from Joe Eby, COO of Bickford. He added: “We got a good price.” Also, Bickford can achieve an earn-out of $7.2 million if the property meets certain performance thresholds in the first two years. The Eby family started Bickford Senior Living in 1991 and the company currently owns 13 properties and operates 23 facilities under long-term leases. Care, which was formed in 2007 to invest in healthcare facilities and mortgage debt, plans to continue acquiring medical facilities, according to Mr. Kellman says. “We would love to have relationships with other quality operators,” he said in a statement. As of June 30, Care owned 93 facilities in 13 states, including nine MOBs, according to a recent presentation to securities analysts. When investing in senior living, Mr. Kellman said he prefers assisted living over independent living and skilled nursing.