Dave Rothschild and Mary Christian of Cushman & Wakefield recently closed on the sale of three senior living communities in southern California. The communities were owned by Diversified Healthcare Trust (NYSE: DHC) and were operated by Five Star Senior Living. They total 322 independent living units, 198 assisted living units, 45 memory care beds and 54 skilled beds. When the portfolio went to market last year, overall occupancy was 78%, but we don’t know how it has performed since then. They are all located within 80 miles of each other, so it makes for a nice cluster. The largest community, with 386 units/beds, was built in 1975, and the two others in 1986 and 1988.
Diversified disclosed a sales price of $47 million, or $76,000 per unit, and late last fall we came across a copy of the offering memorandum. The largest of the three communities has had about $20 million of renovations completed since 2014, which the buyer should like, but was operating at just a 17% margin because of low occupancy. One of the other communities was just above breakeven.
On a combined basis, total revenues last year were probably close to $23 million with an operating margin of about 16%. If the larger community can significantly improve its operations, total revenues could grow up to $30 million (maybe more) with, hopefully, a 25% to 30% operating margin. That would be a win for the California-based buyer. Based on the price of $47 million, and estimated 2019 cash flow around $3.7 million, it looks like the buyer paid for in-place cash flow at an 8% cap rate and did not pay for any of the upside, something they should be compensated for if they can get there. We do not know if any of the communities had been impacted by the COVID-19 pandemic prior to closing, but kudos to all to getting it done.
