The yearlong drought of big seniors housing deals may be about to end as the private equity giant Blackstone Real Estate Advisors makes a play for the bulk of the struggling Sunwest Management portfolio. Industry sources say the purchase price for about 150 of Sunwest's assisted living buildings could top $1 billion.
The deal could close by the end of the year, sources add, though several sizable hurdles still stand in the way.
“Sunwest is a tale of woe,” says Robert Mains, research analyst at Morgan Keegan in Saratoga Springs, N.Y. But, he adds, Blackstone has a chance to turn the troubled company around. "Blackstone is buying at a time when assisted living [occupancy] is on the upswing."
Blackstone plans to partner with Seattle-based Emeritus Senior Living, one of the country's largest assisted living operators with 309 properties, and Columbia Pacific Management.
Columbia is controlled by Dan Baty, chairman and co-CEO of Emeritus. Emeritus would operate the buildings and would also have the option to invest up to 10% equity in the joint venture. Columbia Pacific is one of Sunwest's secured lenders, and holds loans on some 40 Sunwest properties, sources say.
The specific terms of the deal have not been released, but a number of reports say Blackstone is offering about $270 million in cash and will assume about $1 billion in debt.
The purchase price is about $100,000 per unit, industry sources say. By comparison, Brookdale Senior Living recently announced that it will purchase 21 senior living communities from Sunrise Senior Living for $204 million, about $147,000 a unit. Distressed properties have been selling for about $100,000 a unit, or less.
"Blackstone has an opportunity here to buy at a low price," says Mains, the analyst at Morgan Keegan. It could take some time to turn around the underperforming portfolio, he adds, but Emeritus is one of the better property managers.
A Blackstone spokesperson says the portfolio of properties has an average occupancy rate of 80%, but she declined to confirm the purchase price. Both Emeritus and Columbia Pacific would not comment for this story.
Sunwest had been one of the nation's largest assisted living companies. At its peak, Sunwest managed 275 properties and had annual revenue of $600 million. The Salem, Ore.-based company employed 12,000. But by last year, over 100 Sunwest properties were in foreclosure, receivership or bankruptcy.
The Securities and Exchange Commission (SEC) filed fraud charges against Sunwest and its owners. The suit claims that Sunwest misled about 1,200 investors when it raised about $300 million to buy properties that were sold as tenant-in-common (TIC) investments. A TIC structure is one in which multiple investors have a fractional ownership stake in the real estate asset.
Sunwest has been slowly unwinding its portfolio. Last year, Five Star Quality Care of Newton, Mass., bought seven bankrupt Sunwest properties for $44 million. Institutional investor Lone Star Funds of Dallas purchased 45 buildings for an estimated $364 million in early 2009.
If an agreement is reached with Blackstone, the deal likely will be completed before the end of the first quarter, according to persons close to the situation. The process got a boost in early October when the U.S District Court of Oregon approved Sunwest's reorganization plan.
Michael Grassmueck, a court-appointed receiver for Sunwest, and Hamstreet & Associates, a turnaround firm hired by Sunwest in 2008, jointly created the plan.
The plan consolidates the Sunwest properties into one corporate entity. It also allows Sunwest to file for Chapter 11 bankruptcy, which was done on the same day the reorganization plan was approved, according to Tom Decker at Hamstreet & Associates.
The court also ordered the SEC into mediation with Sunwest stakeholders on October 27. "The goal is to get the business back to where it should be and make investors whole," says Mark Fickes, SEC trial counsel in San Francisco. He adds that no criminal charges are pending.
Some doubt that investors will get all their money back if the Blackstone deal goes through. David Hersh, an attorney in Denver who represents a group of investors, says the impact of the reorganization is uncertain. "How this all fits together is continuing to develop," he says.
Meanwhile, discussions with Blackstone are ongoing, according to Decker at Hamstreet. The court must approve a sale agreement. After that, other qualified bidders have six weeks to submit offers for the properties. Court appointed receiver Grassmueck says another option would be to form a master limited partnership and operate Sunwest as a REIT.
The eventual outcome will depend on negotiations among all the parties, says Grassmueck. "I think these properties have significant value, and our guiding principle will be to maximize returns for those involved."