After a four-year hiatus, CNL Financial Group is back in the seniors housing business. One of the Group’s companies, CNL Lifestyle Properties, has formed a $630 million joint venture with Sunrise Senior Living to purchase 29 assisted living properties. CNL Lifestyle Properties owns 60% of the venture, while Sunrise has 40%. Sunrise will continue to operate the buildings.

CNL Lifestyle Properties is based in Orlando and is a non-traded REIT. Non-traded REITs are registered with the Securities and Exchange Commission (SEC) as public companies, but sales of their shares are managed by registered financial advisors rather than stock exchanges. Typically investors in the sector have a net worth of at least $150,000 and prefer a long-term investment strategy of up to seven years.

“We were eager to get back into seniors housing,” says Byron Carlock Jr., CEO at CNL Lifestyle Properties. The previous CNL venture in seniors housing, CNL Retirement Properties, was sold for $5.3 billion in October 2006 to Health Care Property Investors. A non-compete agreement under the terms of that sale expired last October allowing CNL to re-enter the market.

Demographics drive investments

In addition to 29 newly acquired seniors housing properties, CNL Lifestyle Properties owns more than 120 properties in a portfolio that includes ski resorts, golf courses, marinas and amusement parks.

The company is focused on lifestyle and demographic trends related to real estate, says Carlock. “If you think about demographically driven real estate, there’s probably no clearer story than that related to seniors housing.”

In the past, CNL has focused on private-pay assisted living properties. “We have to be creative to care for a growing demographic that needs housing,” notes Carlock.

The 29 assisted living communities in the new venture include a total of 2,082 units with an average occupancy rate of about 87.5%. The total average daily room rate is $170.37. The new venture will spend about $15 million to refresh the communities.

The communities are located in 12 states. About 60% of the 2010 income of the portfolio comes from 17 communities located in the major markets of Chicago, New York and Los Angeles.

The new venture bought the buildings from an affiliate of Arcapita, which was Sunrise’s joint-venture partner. Arcaptia sold its 90% interest for $262 million to the new joint venture. Sunrise contributed its interest in the previous joint venture for 40% ownership interest in the new venture. The 40% interest is valued at $90 million. Sunrise also contributed some cash to the deal, but a spokesperson for the company declined to say how much.

CNL Lifestyle Properties contributed $134.3 million in equity. The new venture obtained $435 million in mortgage financing from Goldman Sachs Lending Partners. The three-year loan has a fixed interest rate of 6.76%.“We see a moderate return of debt lending to the market,” notes Carlock. But, he adds, mortgage money is only available for deals that aren’t overleveraged.

Under the terms of the deal, CNL will receive a preferred annual return for six years starting at 11.5% based on the net cash flow. Sunrise has the option to purchase CNL’s interest in the properties.

Sunrise turnaround

Sunrise declined to comment on the transaction, but Sunrise CEO Mark Ordan said in a press release that the option to purchase the properties is a major step toward the company’s announced goal to maximize its real estate ownership. Sunrise also says that while the portfolio’s net opering income (NOI) declined in 2009, it is now rebounding. NOI in November 2010 was up 3.1% over November 2009 levels.

Virginia-based Sunrise has been gradually putting its house back in order after several rocky years. When the economy tanked, the company found itself with mounting debts and almost faced bankruptcy. Under the leadership of Ordan, a turnaround artist, Sunrise has cut expenses and sold assets. Last October, Sunrise sold its minority interest in 58 properties for $42 million to Ventas, the giant health care REIT.

Sunrise’s stock price has more than doubled in the last year. Sunrise (NYSE:SRZ) stock closed at $7.09 on Jan. 20, 2011. A year earlier it closed at $3.11.

Looking ahead, Carlock of CNL says the company’s current public offering expires in April. A new investment fund is being registered with the SEC and should be available to investors this spring. Carlock expects to buy more seniors housing. Acute care hospitals and other medical properties are on Carlock’s shopping list, too.

“The changes in care delivery are intriguing,” says Carlock, “and real estate is necessary to deliver care to the aging population. ”