A tight financing climate hasn't slowed Emeritus Corp., as the third largest operator of assisted living facilities nationally continues to rack up acquisitions. The Seattle-based company recently closed on a $305 million
"The good news is that the properties were of such high quality that they qualified for financing," says Eric Mendelsohn, senior vice president of corporate development at publicly traded Emeritus (AMEX:ESC). "These are newer buildings with high occupancies. It's a fantastic portfolio."
Emeritus financed the acquisition with mortgage debt of about $242 million originated by Capmark Finance through a Fannie Mae credit facility. "We were lucky the properties qualified through Fannie Mae," says Mendelsohn. The seller also financed $30 million and agreed to a 12-month extension on existing debt of $21.4 million. The portfolio traded at cap rate, or initial rate of return based on the purchase price, of 7.9%. "There was no discount on this deal," says Mendelsohn.
Industry-wide, however, property prices have been falling, brokers say. Financing for seniors housing projects has been tight ever since the capital squeeze hit last August. Debt is generally available for newer, highly occupied buildings. Lesser- quality buildings and new buildings still in the lease-up phase are hard to finance.
"Creative structures are necessary in certain cases to make deals happen," says Meredith Oppenheim, senior vice president at New York-based real estate investment bank Savills Granite. Buyers are being asked to put down more equity. And some sellers are financing part of the deal. "Sellers need to be committed to make the sale happen," she says.
Even so, Emeritus has been on a buying spree of late. Last August, the company merged with Summerville Senior Living Inc., making Emeritus one of the biggest players in assisted living. Emeritus now operates 289 communities in 37 states with 24,822 units. Building rents average $3,200 a month. Average building occupancy is 86.2%.
Emeritus has also been buying the buildings it operates. With its most recent acquisition, the company now owns 131 buildings, or 51.2% of its portfolio. "Our goal is to own 100% of the buildings," says Mendelsohn. "More is better."
Why? Emeritus officials believe that ownership enables the company to reign in expenses on the facilities that it operates while simultaneously helping to boost the company's stock price. Lease agreements for buildings operated but not owned by Emeritus typically include a 3% annual rent increase. "If we can get out from under those escalators, that is wonderful," says Mendelsohn.
The strategy also embraces the concept that investors will put a higher value on companies that own the real estate they operate than companies that just lease. "Real estate appreciates and the owner can monetize that appreciation," says Mendelsohn.
That part of the strategy hasn't panned out yet. Emeritus' stock currently trades at about $24, almost $10 lower than a year ago. "We have been painted with the same brush as every real estate company," says Mendelsohn.
Indeed, competitors such as Brookdale Senior Living (NYSE:BKD) and Sunrise Assisted Living (NYSE:SRZ) have both seen their stock prices cut almost in half over the last year.
But Emeritus plans to buy more buildings. "My orders are to expand the company through acquisition," says Mendelsohn. The company also will develop new buildings. Projects are already under way in Ohio and Iowa. Another five buildings are in the pipeline.
Going forward, financing shouldn't be an obstacle for several reasons, Mendelsohn says. A move to an assisted living building is usually not by choice, but necessity, a fact that should keep buildings full amid a quickly aging population. Also, new assisted living buildings are difficult to develop because of high barriers to entry, including the need for an operating license from the state, according to Mendelsohn. "Lenders recognize [assisted living] is a different profile."