The SeniorCare Investor: Health Care REITs Stuffed?–

After A Record-Setting Pace, Time To Digest Recent Deals
With all the recent activity and excitement about the billions of dollars of investments announced by the health care REITs in the past several months, everyone seems to be expecting more to come. Who’s the next target? Could Fortress Investment Group (NYSE: FIG) decide to sell its Holiday Retirement portfolio (perhaps) and try to tap the REIT market (not a likely portfolio for the REITs)? On a much smaller scale, there are companies such as Vintage Senior Living, Kisco Senior Living, The Shelter Group and Senior Lifestyle Corporation which own enough properties to be of interest to a REIT. And while we are not trying to start any rumors (these are simply companies on the 2010 ASHA 50 owners list), the point is that you need willing sellers (even at the recent valuations), and since not everyone wants to sell, the market may be more limited than people think. 
In the recent REIT transaction volume, two sellers had been known to want to sell for a while (GPT Group and Warburg Pincus for Benchmark Senior Living and Brandywine Senior Living, respectively), while one selling group (JER Partners and Formation Capital) had been known to want to monetize their investment in Genesis HealthCare, and it was a matter of which path yielded the highest return, and in the recent market that decision was the proverbial no-brainer.  It is apparent that there are not too many $800 million deals left out there, so the reality is that the big REITs will have to dig deeper down in the size category, and for willing sellers, it may also mean digging deeper down in terms of quality, and our guess is that is something they may not want to do.  A case in point is the Holiday Retirement portfolio, which we hear has seen improving occupancy but it has always been a middle market product with little room for rent increases, so the attraction to the REITs, especially for the so-called RIDEA-structured deals, would be minimal.
In addition, it should take some time for “the big three”—Ventas (NYSE: VTR), HCP, Inc. (NYSE: HCP) and Health Care REIT (NYSE: HCN)—to digest their recent acquisitions, some of which have yet to close.  Health Care REIT closed its $2.4 billion sale/leaseback transaction with Genesis on April 1 and its Benchmark acquisition on March 28, so it should be spending the next few months digesting these plus the other three that closed in December and January (see our March issue).  We still can’t believe they got the Genesis deal done so fast (great job, Hedy).  Ventas has yet to close either its recently announced $7.4 billion acquisition of Nationwide Health Properties (NYSE: NHP) or the $3.1 billion Atria Senior Living deal, and we are waiting for the HCR ManorCare sale/leaseback with HCP to close as well.  Absorbing $20 billion of assets is not easy, and it’s never been done before in such a short period of time by three REITs in our sector. 
There was one additional transaction that was announced in March, and this was interesting because it was part sale/leaseback and part RIDEA sale/manageback.  Senior Housing Properties Trust (NYSE: SNH) has entered into an agreement to purchase 20 senior living communities from North Carolina-based Steven D. Bell & Co. for $304 million, or approximately $144,000 per unit.  The portfolio includes 814 independent living units, 939 assisted living units, 311 Alzheimer’s units and 47 skilled nursing beds. 
What is most interesting is that SNH is splitting up the portfolio into two groups: the five communities that have a 97% occupancy rate and, with minimal upside, are going to be structured as a traditional sale/leaseback with Five Star Quality Care (NYSE: FVE), with an initial yield rate of 8.0% on a purchase price of $92.5 million, with rent increases starting in 2013…Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today