THE WOODLANDS, TX-Hearthstone Assisted Living leaves the real estate investment business in a $431-million sale-leaseback deal with Nationwide Health Properties Inc. The transaction involves 32 Hearthstone and Carestone assisted living centers in 10 states.

The Woodlands-headquartered Hearthstone plans to deploy the capital into operations and property expansions. The Newport Beach, CA-based REIT invested $419 million for acquisition and another $12 million to cover defeasance and closing costs. Included in the transaction is a future capital infusion of $15 million, which will be used to help fund property expansions. The senior housing REIT also will have the exclusive right to provide Hearthstone with the next $300 million to develop and acquire more properties.

As part of the transaction, Nationwide Health Properties will receive rent on its total investment at an initial rate of 8.06%, with increases bringing the yield to 8.66% during the 15-year master lease term. The new owner also will get CPI-based annual rent increases of up to 2% and revenue-based rent equal to a specified percentage of Hearthstone’s annual gross revenue, starting at 0.54% in the first year and increasing to 2.63% during the initial term of the lease. At the beginning of the eighth year, the minimum rent will be set for the remainder of the lease at whichever is greater–the fair market rent or 110% of the prior year’s total rent.

The sale-leaseback coincides with a management buyout of the company by Hearthstone CEO Tim Hekker, CFO James Wang and COO Laurence Daspit from the local partners who had launched the senior assisted living company in 1993. Going forward, the parent company’s new name is Hearthstone Senior Services.

“Nationwide Health will grow its FFO and add a high-quality portfolio of like-kind, purpose-built, assisted-living properties to its asset base,” Wang says in a statement for “Hearthstone existing shareholders are receiving a very attractive return on their investment and Hearthstone, a proven successful operating platform, will now have the resources to grow.”

The asset disposition means Hearthstone can focus on its core competencies. “Our thing is the provider of senior housing and care. Not real estate investment, but operations and management,” says Hearthstone’s Lori Alford. “Getting out of the real estate business right now for us is strategically the right thing to do at the right time.” She tells that the average age of the portfolio is six years, with average occupancy at a stable 90%.

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