Health Care Real Estate Mega Deals Show Rebound in Seniors Care Property Sector

Blockbuster transactions this week for seniors housing, skilled nursing and other post-acute care assets by Ventas Inc. and Healthcare REIT Inc. underscore the expansion and growth potential of health-care REITs. The deals also demonstrate that investment in the seniors care subsector has picked up as public companies deploy hundreds of millions in equity capital raised over the last 12-18 months.

Senior care facilities suffered more pain than other health-care properties during the recession as older Americans postponed decisions to move into retirement housing. The sector also endured uncertainty in 2008 and 2009 over the future of government health care legislation and reduced Medicare and Medicaid reimbursements. As baby boomers begin to enter retirement and the population of 85+ -year-old Americans grows, cash-flush real estate investment trusts have scrambled to acquire a diminishing supply of available seniors housing, assisted-living and post-acute facilities.

These factors, combined with a change in REIT tax law that allows health care REITs to own third-party operators to manage and collect income from their facilities similar to hotels, have helped fuel a number of large transactions in recent months, including the two huge deals announced on Monday. As CoStar Group reported last week, . industry executives predict more mergers and acquisitions between both public and private companies.

"These large transactions are a very good sign for the senior housing industry," said Chris Macke, senior real estate strategist for CoStar Group. "It shows that the market, and specifically, health care REITs, is both confident in and capable of transactions that 18 months ago would have been unthinkable. The M&A activity we're seeing is due both to the strong performance of REIT stocks, which provides advantageous capital to acquirers, and the lack of available direct property acquisition opportunities."

Ventas (NYSE: VTN) announced an agreement to acquire Nationwide Health Properties (NYSE:NHP) for $5.8 billion in stock and $1.6 billion in assumed debt, a deal scheduled to close in the third quarter that would make Ventas -- already the largest owner of seniors care property -- the largest health care REIT, with a pro forma value of $17 billion. It's the second massive transaction in the last few months for Chicago-based Ventas, which agreed in October to acquire operator Atria Senior Living Group in a deal valued at $3.1 billion.

"The combination of Ventas and NHP increases the scale and diversification of the combined company, the strength and flexibility of the company's balance sheet and the quality and geography of the assets," said Ventas chairman and CEO Debra A. Cafaro. "With Ventas's successful track record of value-creating transactions and NHP's longstanding history of regional, asset-level acquisitions, taken together with one of the strongest balance sheets in the REIT industry, the combined company will have a unique opportunity for continued external growth."

In the second major deal Monday, privately owned JER Partners and Formation Capital LLC agreed to sell the real estate of Genesis Healthcare, a Kennett Square, PA-based provider of short-term post-acute, rehabilitation, assisted living and long-term care services, to Healthcare REIT Inc. (NYSE: HCN). In the $2.4 billion deal, HCN will acquire 147 facilities in 11 North Atlantic and Northeast states from Genesis, which will continue to operate the senior living facilities through a triple-net lease. In its fourth-quarter 2010 earnings call, HCN announced $2.2 billion of new investments in senior housing assets, on top of $600 million in investment in 19 senior housing facilities, which will continue to be operated by Brandywine Senior Living through a triple net lease.

HCN will have the right to acquire certain facilities at a fixed price that Genesis currently leases from third-party landlords, as well as any facilities that Genesis acquires or develops during the initial 15-year term of the lease. HCN further has the option to acquire a 9.9% ownership interest in Genesis for $47 million throughout the initial lease term. The option will enable HCN to share in the future growth of Genesis, HCN said.

The growth spurt also casts light on a law that went into effect in 2008 allowing health care REITs to both receive rents as landlords and profits from operators through partnership arrangements with operators, under tax treatments similar to hotels. HCN is investing another $1.6 billion in 61 senior housing facilities with Benchmark Senior Living, Silverado Senior Living and Senior Star Living structured as taxable subsidiaries under the law, called the REIT Investment Diversification and Empowerment Act (RIDEA).

Healthcare REIT launched the first RIDEA transaction in the seniors housing industry last year when it announced an $817 million partnership with Merrill Gardens to own and operate 38 seniors housing communities totaling about 4,300 units. The four RIDEA partnerships would boost HCN's senior housing portfolio to 22% of its total portfolio investment. The Genesis deal isn't formed under RIDEA, but HCN hasn't ruled out the possibility of converting it at a later date, said George L. Chapman, HCN chairman, CEO and president, in a conference call discussing the Genesis transaction.

While RIDEAs offer increased operating income, they're also exposed to the economy and property operations turn sour, a risk acknowledged by Chapman.
"We looked hard at whether or not there would be too much exposure given the rewards we would get from engaging in our RIDEA structure," he said. "I think there is some caution. But I could see as we get more color, more clarity on just what exposure there is, going back and talking further with the sellers Formation and JER about perhaps converting into a RIDEA structure. So we’re not against it at all. And the closer we can align without undue risk, the better we feel about it."