Seniors Housing Business

AUG-SEP 2015

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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60 Seniors Housing Business n August-September 2015 n Company profle AdCare's bold strategic shift Owner/operator moves toward becoming a skilled nursing REIT adept at small transactions. By Jef Shaw The skilled nursing sector is going through plenty of changes right now. As the U.S. population ages amid longer life expectancies, third-party payors (particularly Medicaid and Medicare) now strongly encourage treatment of short-stay, high-acuity patients in skilled nursing facilities. Many owners and opera- tors have shifted their focus to short-stay patients to maximize their reimbursement. Some of the largest owner/ operators, meanwhile, are spinning off their skilled nursing portfolios into separate companies in order to operate more effciently — a recent example being Ensign Group's recent creation of Care Trust. AdCare Health Systems (NYSE MKT: ADK), which owns 37 skilled nursing facilities and two assisted living facilities largely concen- trated in the Southeast, elected to take a different approach. Rather than create a new com- pany for its operations, AdCare decided to simply lease out its facilities to quality local operators who know each market — transi- tioning from an owner/operator of healthcare properties to a health- care real estate holding and leasing company. Essentially, AdCare is reorga- nizing itself as a real estate invest- ment trust (REIT), though the com- pany doesn't expect to elect offcial REIT status until at least next year when it meets the qualifcations. "Given the size of the company at 39 facilities, and the company's somewhat limited access to capital as an operating company, being able to grow signifcantly as an operator was just not feasible," says William McBride, chairman and CEO of AdCare. "At that size, the board of directors felt it was too small to operate inde- pendently. The best avenue was to lease out our properties and convert to a REIT." The company considered a wide range of alternatives, includ- ing selling to a REIT rather than forming its own, but executives were not satisfed with the propos- als received. The interested REITs did not want to undergo the effort of transitioning to new operators. "We're doing the hard work of bringing in new operators, so that in a few months we're just collect- ing rents," says Allan Rimland, the company's CFO and president. Big changes in a short timespan The decision to lease out all properties won shareholder approval last year after a four- year acquisition spree during which the com- pany honed its focus on skilled nursing. From 2010 to 2014, AdCare pur- chased 23 skilled nursing facilities while divesting fve of its seven assisted living communities. The company also moved from Ohio to Atlanta during that period, incorporating in Geor- gia in 2013. The company was drawn to a wider hiring pool in Atlanta and proximity to most of the company's portfolio, which is currently spread across Georgia, North Carolina, South Carolina, Alabama, Arkansas, Oklahoma and Ohio. AdCare hired McBride in Octo- ber of 2014 to lead the company through its transition and beneft from his experience as co-founder of public healthcare REIT LTC Properties Inc. (NYSE: LTC). He in turn recruited Rimland, a former colleague with extensive experi- ence in healthcare REIT fnance and M&A, in April. "I've worked with Allan for over 20 years; he was involved in LTC Properties" says McBride. "He has lots of banking back- ground. I brought him on to help me run and grow the company." David Tenwick, who founded the company in 1991 with the acquisition of Passport Retirement Inc., will continue as a director at the company. Because his experi- ence stems more from the opera- tions part of the business, Tenwick decided to act more as an advisor than take an active role in com- pany changes. "He's a valuable resource for me and the board," says McBride about Tenwick. "Dave's been doing this a long time and he was ready to take a step back with his role in the company." The plan for converting to a real estate holding company is well underway. In July, the company leased out its last three facilities, and 34 of the 39 facilities have already transferred to their new "The strategy on the fnancing side is a mix of HUD fnancing, senior secured mortgage fnancing with commercial banks, convertible debt and other methods," says Allan Rimland, CFO, AdCare Health Systems. West Markham Subacute & Rehabilitation Center is a 154-bed skilled nursing facility in Little Rock, Ark. AdCare Health Systems purchased the property in 2012 and subsequently leased it to Aria Health, which also operates seven other AdCare facilities in the state.

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