With prices at record highs and cap rates at record lows in the seniors housing market, it has been said that almost everything could be available for sale in an environment not really seen before, and one that we may not ever see again (although this bull market still has plenty of steam). There is a certain amount of sentiment in the market that cap rates have further to go on their downward trend, and when this is combined with rumblings that the cost of new construction just does not “pencil out” in several markets because of soaring land and construction costs, we have a situation where existing properties will just continue to increase in value. That just may have been on the minds of the limited number of prospective buyers who were given the opportunity to take a look at the CNL Retirement Properties (CNL) portfolio over the past 45 to 60 days in what was a well-kept secret in the market, at least until now.
CNL was organized as a REIT in December 1997, but was relatively quiet in the market until 2003. At the end of 2001, real estate investment properties totaled just $35.2 million, but jumped to $1.5 billion by the end of 2003 and $3.5 billion by the end of last year. In 2003, just four transactions accounted for more than $700 million of investments, and its largest acquisition to date, the $562 million acquisition of the Horizon Bay Senior Communities portfolio, came in early 2004. As of the end last year, CNL owned 184 senior housing facilities with 21,857 units with an investment of just under $2.9 billion and 73 medical office buildings with an investment of $665 million. In addition, there are more than 258 million shares outstanding with 91,280 shareholders who paid $10 per share, usually in increments of $10,000.
As CNL’s buying spree took off in 2003, there were many people in the market chuckling over the prices that were being paid. Cap rates of 10.2%, 8.4%, 7.8% and 5.4% on annualized operating income for four large deals in 2003 just did not seem to make sense at the time, with CNL’s pricing dependant on occupancy increasing in order for cash flow to catch up with the stated lease rates in some of the deals. In some cases sellers were required to post deposits or guarantees to fund the differential between cash flow and lease rates, leaving the market to shake its collective head at the high level of risk of the deals. Well, shake no more.
According to its corporate structure, CNL had to either go public or dispose of its assets and remit the proceeds to shareholders by the end of 2008. After the disaster of one of its sister REITs under the CNL umbrella a year or two ago in an attempt to go public, the board obviously decided a sale of the entire company would make more sense, especially in this extremely bullish market environment. We also heard there may have been a little difference of opinion between the outside board and the REIT’s “captive” advisor, a relationship that is somewhat of a relic in the health care REIT market.
So we estimate that sometime in early March between seven and 10 prospective buyers were approached, which probably included Ventas (NYSE: VTR), The Blackstone Group, Fortress Investment Group/Brookdale Senior Living (NYSE: BKD) and Health Care Property Investors (NYSE: HCP), among others. To find out what happened, just check out the lead story in the May issue of The SeniorCare Investor, coming out this week.
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Database of health care M&A transactions, including senior care acquisitions
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