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Morningside House Strikes Private Equity Deal for $200 Million

Morningside House Strikes Private Equity Deal for $200 Million

One way to finance an expansion in a capital-starved environment is to find an equity partner. That’s the approach recently taken by Morningside House Senior Living, which entered into a $200 million joint-venture agreement with Harrison Street Real Estate Capital of Chicago.

In the deal, Harrison Street recapitalized six Morningside House properties in the Washington, D.C. area. The initial $100 million investment in the joint venture gives Harrison Street a 90% ownership interest in the properties. Harrison Street investors include pension funds, insurance companies, foundations and other capital sources.

Morningside House will own 10% of the buildings and also will continue as the property manager. Another $100 million will be used over the next three years to acquire, redevelop, or build assisted living and dementia care facilities in the mid-Atlantic area.

“This deal gives us the opportunity to expand the Morningside brand,” says Kelly Mason, president and CEO at the Leesburg, Va.-based company.

The recapitalized buildings include Morningside House of Ellicott City, Ellicott City, Md.; Morningside House of Friendship, Hanover, Md.; Morningside House of Laurel, Laurel, Md.; Morningside House of Satyr Hill, Parkville, Md.; Morningside House of St. Charles, Waldorf, Md.; and Morningside House of Leesburg, Leesburg, Va.

In 2009, the six buildings were refinanced through the HUD Lean program with a 35-year mortgage at a fixed rate of 4.75%. Capital Health Group was the lender. The new joint-venture structure with Harrison Street required HUD approval, a process that took several months, according to Mason. “It was a pretty complicated deal.”

Mid-Atlantic expansion

Morningside House owns and operates nine assisted living/dementia care buildings with a total of 740 units. Eight of the buildings are in the mid-Atlantic area. The other facility is in Florida. The company targets affluent markets. Monthly rents average about $5,500. The buildings average about 85 units. Occupancy portfolio-wide currently stands at 93.5%.

Harrison Street views its investment strategy as a defensive play, according to Michael Gordon, vice president at the firm. Assisted living and dementia care facilities are somewhat resistant to occupancy declines during an economic downturn since the residents require help with the activities of daily living provided by the facility. “We like need-driven projects,” says Gordon.

Harrison Street owns about 200 properties, primarily seniors and student housing, storage facilities, and medical office buildings. The firm has about 4,500 units of seniors housing, and likes to invest with proven operators. Its seniors housing partner companies include the Northbridge Cos., based in Burlington, Mass., and American House Senior Living Communities, headquartered in Bloomfield Hills, Mich.

Harrison Street had been seeking an operating partner in the mid-Atlantic area for several years. “Morningside House has a great operating platform,” says Gordon. The Morningside House brand will expand in the mid-Atlantic states and possibly as far south as the Carolinas, he adds.

Memory care presents opportunity

For now, Morningside House is seeking buildings to buy or develop in New York, New Jersey, Delaware, Pennsylvania and Virginia. “We like affluent markets,” says Mason, explaining that Morningside House offers high-end care for those who need assistance, or who have memory loss. “There are endless opportunities for us.”

A lot of poorly run and distressed properties are for sale, Mason says, though it’s still hard to find prime investment opportunities. “Property prices are all over the map.”

Morningside has three other deals in the works with its other equity partner, Capital Health Group. Last July, Morningside House purchased a distressed property in New Port Richey, Fla. The Villas at Sunset Bay is being completely renovated as a high-end dementia care facility. It is set to open in January.

Another new project, the Arbors at Buck Run near Media, Pa., opens in February. A building in Bala Cynwyd, a western suburb along Philadelphia’s main rail line, is under way and should open in September 2011. Rents at the upscale building will average about $7,000 a month.

Though Morningside House concentrates on operations, the company plans to maintain an ownership position in all of the buildings it manages. “We have skin in the game,” notes Mason. “Our equity partners like that model, and it makes us committed to run a successful project.”

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