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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Page 60 of 87 61 August-September 2015 n Seniors Housing Business ARCH A R C H C O N S U LT A N T S L T D G U I D I N G T H E B U I L D I N G P R O C E S S F R O M V I S I O N T O O C C U PA N C Y When you create the right senior environment, success comes naturally. Rely on our national experience and industry insight to ensure your success. Contact ARCH today about our consulting services. • Master planning • Development management • Facility assessments • Construction monitoring To learn more, call Frank R. Muraca, President and Senior Planner, at 888.692.4925 or visit The Springs at Monarch Landing Senior Care Development operators as of press time. AdCare facilities — all of which are triple-net leased — vary in size from 52 to 154 skilled nursing beds, with 100 beds being the aver- age. Several of the company's facil- ities are fnanced through HUD, which requires a lengthy approval process to change operators. "The strategy on the fnancing side is a mix of HUD fnancing, senior secured mortgage fnancing with commercial banks, convert- ible debt and other methods," says Rimland. "That mix of fnancing gives us fexibility in the market." The average age of an AdCare facility is approximately 15 to 20 years, adds Rimland. "We don't like the risk-reward on new builds. There are a lot of develop- ment deals going around, but we shy away from those." Better risk-reward tradeof AdCare decided to hang its hat on the skilled nursing sector for two reasons. For one, it was already the company's specialty. Secondly, skilled nursing assets feature a higher capitalization rate — or rate of return based on the purchase price of an asset and its cash fow — than other sectors of seniors housing. Skilled nursing cap rates are generally around 10 to 12 percent, while assisted living averages closer to 8 or 9 percent, says Rim- land. "Skilled nursing continues to have a favorable risk-reward balance." The company also likes the fact that many of the skilled nursing facilities already have certifcates of need, which is a barrier to entry for new competition, says Rimland. However, the risks are real for skilled nursing, Rimland is quick to add. With a larger healthcare services component, operators in skilled nursing must deal with heavy government regulations and navigate complicated pro- cedures to receive government reimbursement for services. "Skilled nursing facilities are more diffcult to operate because of the healthcare component," says Rimland. "But we assess the risks, evaluate them, look at them relative to assisted living, and feel we're in a better part of the senior care continuum." The basis of the company's success in the sector also depends on fnding quality, local opera- tors to manage each facility, says McBride. "Local operators are hungrier; they're more effcient; they live and die by the local referral pat- tern. They really get it." When the conversion to a real estate holding company is com- plete, AdCare will work with six to eight different companies to oper- ate the 39 facilities. Currently, the company's largest partner is Bir- mingham, Ala.-based Aria Health Group, to which AdCare leases eight of its Arkansas facilities. "The experience they have in the industry, and in particular in the state of Arkansas, has made Aria a good partner for us," says McBride. The wide variety of operating partners, along with geographic diversity, is how AdCare keeps its portfolio diverse — a trend the company plans to continue as it expands by purchasing and improving more properties. Entering acquisitions mode In June, AdCare completed a preferred stock offering that resulted in $14.1 million in net proceeds. That money will come in handy as AdCare shifts its focus away from leasing its current facil- ities to acquiring new facilities. "As we continue to fnish up our operational transfers, we start to think about new investment opportunities," says Rimland. "We basically raised capital to refnance debt and provide capital for growth." The company chose to offer preferred stock instead of com- mon stock because the company had success in previous preferred offerings, and the attractive fea- tures of the instrument, according to Rimland. The growth spurred by the newly available cash will include upgrading existing properties in the portfolio and acquiring new facilities. "The frst focus will be some reinvestment renovations of our existing 39 facilities," says McBride. "Then we will look to make selective acquisitions, pri- marily in states that would help diversify us both geographically and with our operator base." AdCare has no plans to build its own facilities, so the company is looking for small portfolios to acquire — groups of skilled nursing facilities that large REITs might overlook. "We are not one of the mega- REITs in the industry. We posi- tioned ourselves to do smaller transactions in the marketplace that are a little overlooked," says McBride. "Given our size, portfo- lios of two to fve facilities or so has a real impact on shareholder value creation." Another advantage is AdCare's focus on skilled nursing, where there is less competition because larger REITs tend to focus on assisted living, adds McBride. Now that AdCare is primed to put its full effort into acquisitions and becoming a REIT, McBride says the future is bright for the company. "We have the management resources and capability to really grow this thing as a stand-alone healthcare REIT," says McBride. "My goal is to position the com- pany to be one of the fastest grow- ing healthcare REITs focused on skilled nursing facilities." n Glenvue Health and Rehabilitation is a 134-bed skilled nursing facility in in Glennville, Ga., about 60 miles west of Savannah. AdCare Health Systems acquired the facility in 2012 as part of a four-year acquisition streak during which the company purchased 23 skilled nursing facilities.

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