Senior Living News Wire

Health Care REIT (NYSE:HCN) is bullish on the upside potential of its senior housing RIDEA portfolio based on its location in primary markets despite occupancy challenges that could accompany above-market rents. 

The market has been applying a “do no wrong” mentality to HCN’s stock in terms of valuation, which is up about 23% from the beginning of January, said an analyst during the Toledo, Ohio-based REIT’s first quarter earnings call. 

There’s no question HCN and its peers—fellow “big three” REITs HCP, Inc. (NYSE:HCP) and Ventas, Inc. (NYSE:VTR)—have done a “very good job,” said Richard Anderson of BMO Capital Markets U.S., citing revenue per available room (RevPAR) about 40% higher than average in Health Care REIT’s RIDEA portfolio. 

Same-store net operating income in HCN’s senior housing RIDEA portfolio rose 5.6% in the first quarter from the previous year, compared to a 2.8% NOI growth in the REIT’s triple-net senior housing portfolio.

While Scott Brinker, HCN’s executive vice president of investments, characterized the RIDEA portfolio as “firmly positioned for internal growth,” Anderson questioned whether those expectations are sustainable in the long-term. 

“With some unknowns and a lack of a long operating history, what gives you comfort that you didn’t build your RIDEA portfolio right at the peak growth conditions and that the 8% last year goes to 4 to 5[%] this year and then to 2% or less in further years, particularly after capturing all your occupancy upside?” Anderson asked HCN execs. “How do we know that that’s not going to be the trajectory that will be coming down the path?”

The portfolio’s RevPAR has ties to the markets in which properties are located, said George Chapman, CEO and president of HCN. 

“We have purposely gone out to invest in the top markets in the country with the top communities as well,” he told Anderson. “So if you look at our RIDEA portfolio, 93% of it are in the top markets in the country. Everything fits, household incomes, housing values, et cetera.”

The excess against the national average is “definitely” being driven by the locations as much as the quality of the services that are being provided, said Brinker.

“The key difference with senior housing, you don’t just have an apartment residence, you also have sort of need-based hospital and health care services, and we tend to get premium pricing on those,” he said. “We actually do think that this is a sector that can provide growth in excess of what most other asset classes can deliver and they can do it on a more resilient and consistent basis.”

Brinker also addressed whether the REIT began investing in its RIDEA portfolio at a high point of the industry cycle.

“We started to feel it’s the opposite. We closed most of these transactions two and three years ago. We’re sort of the trough of the senior housing operating performance,” he said.

Senior housing occupancy has risen steadily post-downturn, Brinker continued.

“REITs have been positive and there’s still room to grow relative to the historical averages,” he said. “So we feel long-term that this is actually a pretty good portfolio to own, in general, because we like senior housing, but more particularly, the quality of these particular assets and operators.” 

Written by Alyssa Gerace

To RIDEA or not to RIDEA? That was one of the questions addressed by executives of healthcare Real Estate Investment Trusts (REITs) during the Assisted Living Federation of America’s annual expo and conference in Charlotte, N.C. last week.

RIDEA, which stands for the REIT Investment Diversification and Empowerment Act, was adopted in 2008 and allows REITs and operators to share in the risk of the property or portfolio, while also sharing in the profits from operations via rental income.

Ventas (NYSE:VTR) and Health Care REIT (NYSE:HCN) have been the most active in using the RIDEA structure, with Ventas having acquired Atria Senior Living Group for $3.1 billion in 2010 and HCN completing a string of RIDEA transactions including partnerships with Merrill Gardens for $817 million and others with Benchmark Senior Living, Senior Star Living, and Silverado Senior Living.

Despite all the buzz around these types of deals, don’t expect them to take over the marketplace, the panelists said. According to John Cobb, chief investment officer of Ventas, the company would like to see about 25% of its portfolio being RIDEA.

“Every REIT has a different spin on it—where they see the best risk and reward,” he said. 

Over time, Health Care REIT might like to see 30% to 40% of its portfolio be RIDEA-based, but Chuck Herman, executive vice president and chief investment officer admits it really depends on what the market brings.

“When we signed up to do these transactions, it was with those folks who we think are the best,” Herman said. “There are management incentives on the contracts in place, and ways for the operator to do better if they hit certain metrics.”

Smaller REITs like National Health Investors (NYSE: NHI) have also done RIDEA transactions, but on a much smaller level. Initially NHI wasn’t all that interested in doing a RIDEA transaction, but that changed when it found the perfect partner in Bickford Senior Living, according to Justin Hutchens, chief executive officer of NHI. 

Announced last year, the deal included 10 properties made comprising assisted living and memory care, with NHI owning 85% of the joint venture, and Bickford owning the rest.

“[Bickford] has the track record, management experience, and sophistication to go public down the road,” said Hutchens. “Rather than take that route, they went public through us when we wrote them a check.”

In order to do a RIDEA deal, operators need to be have accounting systems to make sure they are Sarbanes-Oxley compliant. Not all operators have the level of sophistication needed by the REITs to do these types of deals. For those that do, Ventas is looking for assets in great markets with great operators. 

“It doesn’t mean it has to be the biggest operators, but for us its private pay senior housing,” said Cobb. “We are bullish on [RIDEA] , but disciplined on how we use it.”

Written by John Yedinak

Health Care REIT, Inc. (NYSE:HCN) announced on Wednesday it will be partnering with Revera Inc. to own 47 high-quality senior housing communities with approximately 5,000 units located in major Canadian metropolitan markets.

Once the transaction closes, HCN will own a 75% interest in the approximately $1.35 billion portfolio, with Revera owning the remaining 25%. Revera currently owns 100% of the portfolio, which consists primarily of independent living communities, many of which offer a continuum of care that includes assisted living and/or memory care.

The communities are primarily located in Toronto, Vancouver, and Calgary. The portfolio’s current occupancy rate of 89% has upside as 14 of the communities are in lease-up. 

After the deal is completed, Revera will continue to manage the communities under an incentive-based management contract. The transaction is expected to close in the second quarter of 2013.

“This acquisition solidifies Health Care REIT as a leading capital provider to the private pay seniors housing industry across Canada,” said George L. Chapman, Chairman and CEO of Health Care REIT, in a statement. “We are excited to partner with Revera, a premier seniors housing provider, whose portfolio complements our existing Canadian seniors housing portfolio. In partnership with the two leading operators in Canada, we now own more than 13,000 units of private pay seniors housing in Canada, with a concentration in infill locations in major metropolitan markets.”

Revera is the second-largest senior housing and long-term care operator in Canada and has more than 20,000 units under management. 

“We are excited to enter into this partnership with Health Care REIT, a well-capitalized healthcare real estate investor that specializes in partnership-based investing,”  said Jeff Lozon, President and Chief Executive Officer of Revera. “Moving forward, Health Care REIT will be our strategic capital partner in private pay seniors housing and will help us expand our position as a leader in major Canadian markets.”

HCN projects that its first-year unlevered net operating income yield, after payment of management fees, will be 7.0%. The Toledo, Ohio-based REIT expects that the partnership’s NOI will grow in excess of 5% in the near-term, with longer term 4%-5% growth. 

Revera has already invested about $150 million of capex into the portfolio since 2009 and has agreed to invest the first $50 million of capex into the portfolio after closing, to be spent in the next three years in order to position the portfolio for long-term growth. 

Also on Wednesday, HCN announced its intention to offer 18 million shares of its common stock, with a 30-day option for underwrites to purchase up to an additional 2.7 million shares.

Health Care REIT intends to use the net proceeds from this offering to repay advances under its unsecured lines of credit, repay other outstanding indebtedness, and for general corporate purposes including investing in healthcare real estate and senior housing properties.

UBS Investment Bank, Deutsche Bank Securities, and Wells Fargo Securities will act as joint book-running managers for the offering.

Written by Alyssa Gerace

Health Care REIT, Inc. (NYSE: HCN) today announced a net income of $71.8 million in the first quarter ended March 31, 2013, up 25% from $57.5 million reported one year previously. 

On a per-share basis, HCN earnings for the first quarter rose to $0.21 per diluted share, compared to $0.19 from the same period a year ago. 

HCN attributed much of its performance to expanding the company’s senior housing portfolio.

During the first quarter of 2013, HCN increased same-store cash NOI by 3.5%, including 5.6% growth in the senior housing operating portfolio. Additionally, the company increased its private pay mix to 82% during the quarter, up from 73% reported in the same quarter in 2012.

The company also saw revenues from resident fees and services more than double to $327.3 million in the quarter from one year ago. 

HCN also completed new investments of $2.6 billion during the quarter, including $2.4 billion related to the Sunrise Senior Living acquisition as well as two properties with Brookdale Senior Living for $53 million. 

HCN’s investment in Sunrise properties is currently $3.5 billion, and the company expects that investment to increase to $4.3 billion by July 2013 upon acquiring additional joint venture partner interests.

The $4.3 billion investment is expected to include 120 wholly owned properties and five joint venture properties, where HCN expects the acquisition to generate a 6.5% unlevered initial yield, or 6.1% after capital expenditures.

While HCN has affirmed its 2013 guidance to generate normalized FFO in a range of $3.70 to $3.80 per diluted share, the company has revised its outlook for net income attributable to common stockholders in a range of $0.70 to $0.80 per diluted share. 

“Our business model continues to generate strong same-store NOI growth and asset value appreciation,” commented George L. Chapman, chairman and CEO of Health Care REIT. “We remain confident our investment and capital allocation strategy will continue to generate attractive cash flow growth and total shareholder returns.”

Written by Jason Oliva

The availability of real estate investment trust (REIT) financing for new senior housing projects is highly dependent on not just the REIT’s relationship—future or existing—with the developer, but also both parties’ goals and objectives, builders and capital sources say. 

Most healthcare REITs have some level of involvement in senior housing construction financing, but it’s rare to see aggressive new development programs as most stick to repositioning, replacing, or modernizing assets. 

The REITs who are dipping their toes into development waters from a financing standpoint, says Zeke Turner, chairman and CEO of private development company Mainstreet Property Group, are ”very few and far in between.”

“Of those who are actually doing upfront, new construction, there are probably only two or three,” he says. Of those, “HealthLease is probably the most aggressive.”

HealthLease Properties Real Estate Investment Trust, a Mainstreet-affiliated REIT that went public on the Toronto Stock Exchange in August 2012, has a rare willingness to take full construction risk during the development phase versus supplying a mezzanine loan, according to Turner.

The relatively young REIT currently has somewhere between $500-600 million in new development projects either under construction or in planning stages in several states, Turner says. He believes there’s “tremendous” opportunity for new skilled nursing and assisted living developments. 

Turner estimates that HealthLease’s current investment ratio is about 50/50 between new development and acquisitions, and its affiliated development group Mainstreet is on pace to start a new construction project every two and a half weeks.

The development versus acquisition ratio for most REITs is much different. 

Sabra Health Care REIT’s (NASDAQ:SBRA) involvement in new construction has been fairly consistent—and limited—to about 3% of its balance sheet, which today translates to just under $30 million of its approximately $1 billion in total assets. The REIT ”doesn’t provide debt financing just for the sake of having mortgage loans on our books for investments,” according to CFO Harold Andrews.

Last year, Sabra committed to a forward purchase program with First Phoenix Group, LLC in which it will eventually purchase up to 10 pipeline assisted living and memory care communities, along with provide some pre-development funding for the projects. First Phoenix will operate the new assets under its Stoney River Assisted Living brand under a triple-net lease structure with Sabra. 

“We’re a REIT that ultimately wants to be an equity holder in the real estate we invest in, so we try to be somewhat creative with our operators and developers we have relationships with to help them fund their growth operations,” Andrews says. “The way we like to structure financing is to just provide a small piece of the capital stack, then have a purchase agreement to buy the asset outright upon stabilization.” 

With the First Phoenix/Stoney River deal, Sabra has agreed to provide a small amount of predevelopment financing—around $1 million or less, Andrews says, just enough to get the project off the ground. With Sabra’s purchase option on the backend, the developer has leverage to get “more reasonably priced” mortgage financing for the development from a traditional mortgage lender. 

Sabra plans to keep its new project financing to a small percentage of its overall portfolio, but it could grow to 4-5% over time, if “meaningful opportunities” arrive. “We don’t want to tie up a lot of dollars where there’s not a more immediate return,” Andrews says.

Other REITs stick almost exclusively to repositioning or replacement financing that’s available only to existing operator relationships. 

“We have a very stringent program for our senior housing partners,” says Jeff Miller, executive vice president of operations and general counsel for Toledo, Ohio-based Health Care REIT (NYSE:HCN), which has a market capitalization of more than $18 billion. “It’s not a major part of our portfolio.”

Healthcare REITs have been among the top-performing REIT sectors throughout the past several years—and that trend continued through the first quarter of 2013 as the segment produced the highest returns in the Global REIT index, revealed a recent S&P Down Jones Global Real Estate Report on Thursday. 

The Healthcare segment of the S&P Global REIT index gained nearly 14.4% for the quarter, outpacing the 7.9% return of the broader S&P Global REIT, says Michael Orzano, Associate Director of Global Equity Indices at S&P Dow Jones Indices.

Other indices Healthcare was measured against include Office Space (12.5%), Hotel/Resort/Leisure (14.3%), and Industrial (10.9%).

Credit: S&P Dow Jones Global Real Estate Report: First Quarter 2013

Not only has the Healthcare sector outperformed the other eight indices on a quarterly basis, it has also produced higher returns on a year-over-year basis. 

“Over the past 12 months, the Healthcare segment is up more than 34%, while the S&P Global REIT has gained 20.3%,” Orzano said. “The investment community seems to be confident that the demand for healthcare facilities will continue to increase.”

However, the healthcare REIT sector is “heavily concentrated,” he noted, as three U.S. companies—HCP, Inc. (NYSE:HCP), Ventas, Inc. (NYSE:VTR) and Health Care REIT (NYSE:HCN)—represent about three-quarters of the S&P Global REIT– Healthcare Index.

“Overall sector performance is highly sensitive to the performance of these three companies,” Orzano says.

One should also bear in mind that the healthcare REIT sector is heavily concentrated. Three U.S. companies: HCP, Ventas and Health Care REIT, represent about three quarters of the S&P Global REIT, so overall sector performance is highly sensitive to the performance of these three companies. 

The S&P Global REIT Indices are subsets of the S&P Global Property including only REIT and REIT-like securities.

Written by Alyssa Gerace

Capital One Closes $19.5 Million Loan for Revera Health Systems

Capital One Bank announced on Monday it had provided a three-year, $19.5 million secured term loan to Revera Health Systems, Inc., a long-term care and rehabilitation provider with multiple skilled nursing centers across the U.S.

Proceeds of the loan were used to refinance existing senior debt on eight of the health system’s skilled nursing facilities in Maryland, New Hampshire, New Jersey, and Vermont. Revera Health Systems also expanded its relationship with Capital One Bank to include despots and treasury management services. 

The use of RIDEA structures in REIT acquisitions is becoming more commonplace in the senior housing sector as a model that helps drive long-term growth, and analysts say the days of healthcare REITs enjoying healthy margins are far from over. 

“We see the RIDEA structure as a way for the REITs to remain competitive within the acquisition marketplace, and further benefit by the long-term profitability of the individual properties,” says Matthew Whitlock, a senior vice president at real estate broker CBRE’s National Senior Housing Group. ”While initial returns may be below that of a traditional REIT lease structure, RIDEA does allow the REIT to participate in the upside of the property in future years.” 

A recent Forbes column implied that Ventas’ days of enjoying “unusually high” margins are over as supply of senior living assets catches up to demand. The columnists cited a net operating profit after tax (NOPAT) margin that shrunk from a peak of 72% in 2003 to a low of 8% in 2011 along with a “rapidly declining” return on investment capital (ROIC). 

However, the industry’s solid fundamentals, including increased occupancy, indicate the ‘Big 3′ REITs (HCP, Inc., Ventas, Inc., and Health Care REIT) can safely expect to enjoy healthy margins for the foreseeable future, according to some analysts.

One reason why REIT are seeing certain margins decline is because they’ve incorporated RIDEA structures into their portfolios instead of exclusively utilizing triple-net leases. Rather than contractual escalators with a triple-net lease that allow for a set amount of annual revenue, RIDEA agreements allow REIT landlords to share rewards with an asset’s manager if the property outperforms. 

“It’s not that there’s more cost pressure—they’re concentrating in a  different asset class that has less margins but better growth potential for NOI (net operating income),” says Jeff Theiler, an analyst with Green Street Advisors. 

It’s a riskier structure, he says, but it has greater potential upside.

“REITs right now think it’s a great environment for senior housing, and they’re willing to take that risk to capture outsized growth,” says Theiler. “The downside is a scenario where the senior housing sector doesn’t grow at that magnitude or has negative growth, and that will flow through to the REITs’ performance.” 

That inherent risk means most REITs probably won’t start buying up distressed properties, despite upside potential. Instead, RIDEA structures are predominantly deployed when a REIT sees future benefit from either the stabilization of operations—perhaps a high-quality asset still in lease-up phase—or the improvement of margins through a management change or capital expenditures, says Whitlock. 

“The [largest three REITs] are not going to change their pattern and dip into distressed assets—it has not been their [practice] to do that,” says Daniel Bernstein, an analyst with Stifel Nicolaus. “They’d rather let private equity take the risk on distressed assets.”

A perfect example, he says, is the troubled Sunwest portfolio that was acquired in a joint venture between The Blackstone Group and Emeritus and then bought by HCP for $1.73 billion after the assets were mostly stabilized, but still had some additional upside. 

“If we can achieve RIDEA-like NOI growth without the RIDEA operating risk, that’s first prize. And obviously, we are able to achieve that in a very, very significant measure with our October 31, 2012, closing on the Blackstone JV with Emeritus,”James Flaherty, chairman and CEO of HCP, Inc., said during a fourth quarter earnings call. “We may do some more of that, we may do some more RIDEA, but it will all be in the context of looking at risk-adjusted returns.” 

Senior Housing Properties Trust’s president and CEO David Hegarty called his REIT’s RIDEA portfolio its ‘most value-creating opportunity’ during the Citi Global Property CEO Conference in early March.

The independent living sector was particularly hard-hit when the housing market crashed, Hegarty recounted. In September 2011, SNH agreed to purchase a portfolio of nine Vi properties that had been about 94% occupied prior to the economic recession before dropping to a low of just under 84% occupancy.

“We bought them when they were a little over 85% occupancy and we have no reason to believe they can’t get back up to [those] low- to mid-90% occupancy levels,” Hegarty said. SNH’s operating partner, Five Star Quality Care, is now managing the portfolio, and in 2013 Hegarty says the REIT will be “pumping CapEx into the properties and bringing them up to be extremely competitive—if not top of the market.” 

The CapEx strategy has a good chance of success. 

“RIDEA in general has paid off pretty well, because seniors housing growth has been pretty great over the past several quarters,” says Theiler. “It seems that growth versus safety is paying off for these guys, and it could continue.” 

Ultimately, Bernstein doesn’t believe the Big 3 REITs’ operating margins and earnings ability will be compromised in the next 12 to 24 months, especially with rising pressure on occupancy rates. 

“I don’t see any reason why seniors housing margins would deteriorate [for REITs] on a same-store basis,” he says. “From our point of view, the fundamentals of seniors housing are very strong, and we wouldn’t expect anything but either flat or increasing margins.” 

Written by Alyssa Gerace 

After snapping up several large ‘Class A’ senior living portfolios between 2011 and the present, real estate investment trusts (REITs), hungry to keep their margins healthy, are casting wider nets that may include off-market deals, other asset types, and new development.

“The biggest challenge the REITs are currently facing is a shortage of quality properties to purchase,” says Ryan Saul, managing director of Senior Living Investment Brokerage. “A number of large, portfolio transactions have been acquired over the past three years and not too many remain.” 

In terms of large ‘Class A’ portfolios, REITs have purchased all that they can—at least so far, says Matthew Whitlock, a senior vice president at real estate broker CBRE’s National Senior Housing Group. 

But while the acquisition marketplace of available properties has “shrunken dramatically,” according to Whitlock, “there are still a number of portfolios that have not been put on the market for sale that remain as acquisition candidates.” 

With fewer acquisition opportunities, most major REITs are considering a number of different investment opportunities to diversify their acquisition strategies into other avenues, he says.

Ventas, for example, has been actively pursuing medical office buildings, including the $760 million acquisition of Cogdell Spencer‘s 72 MOBs that closed last April, while HCP, Inc. has been providing high-yield debt financing in transactions where they’re not participating in the equity. 

Another strategy is development. Health Care REIT has been buying portfolios with existing operating partners, such as its $3.4 billion—and growing—deal to acquire nearly all of Sunrise Senior Living’s property assets, and it’s also offering development capital, according to Eric Anderson, vice president of development at Ryan Companies. 

Not many REITs are taking the plunge into new construction financing, he says. While HCN is willing to fund a percentage of the equity on deals, it has to be in a market they’re interested in, and there has to be an operator who’s willing to do a sale-leaseback.

“Few REITs want to do deals with a guaranteed take-out—they want to provide part of the equity on the front end, and then on the back-end a preferred right to buy, but not a commitment,” he says. 

While CBRE has also heard in the marketplace that REITs are beginning to consider development through their operating partners, Whitlock says they’ve yet to see it occur.

The more established REITs with aging portfolios, he says, will wrestle with “culling out older properties that will be feeling considerable pressure from new, state-of-the-art properties”—particularly in markets with limited demand growth and lower barriers to entry.

“We continue to see REITs lead the charge in acquisitions,” Saul says. “I think it is realistic for the REITs to maintain a healthy margin with such a low cost of capital… [they] remain aggressive for high quality, performing properties that are well-located [and] are going to need to purchase individual assets in order to add to their portfolio and grow.” 

As the size of available senior living portfolios decreases, from 20 properties to 10 to just one or two, the competition for that asset increases, Whitlock says, because the relative value of smaller portfolios to bigger REITs is diminished.

More competition may come in the form of regional and local buyers that are well-capitalized with strong banking relationships and are aggressively looking for turnaround opportunities, according to Saul, or deals located in more secondary markets.

The M&A market could easily stay dominated by REITs, however. 

“REITs will continue to diligently pursue any and all acquisition opportunities,” Whitlock says. “Their cost of capital is [still] typically less than that of private equity, and that will continue for 2013 and for the foreseeable future.” 

Written by Alyssa Gerace

There’s plenty of room to grow in memory care, but it’s not a quick fix, say those who have studied the market and successfully made inroads into it. 

“Is the product needed? Absolutely,” says Joe Weisenberger, vice president of senior housing for Health Care REIT (NYSE:HCN). “But the modeling has to be done right.”

The market for memory care units in the United States is just 1% penetrated, compared with a 10% penetration rate for senior living overall, according to market data presented by panelists at the recent NIC regional conference in San Diego. While providers and investors agree there is room to grow in the sector with memory care expected to boom in the coming years, it’s a different beast when compared to other forms of senior living development. 

“The due diligence upfront makes or breaks the project,” says Ryan Novszyk, CFO for New Perspective Senior Living. “I see a lot of deals where developers fail to get something off the ground—typically when they did not do their homework. They’ve spent on the plans, but it’s not going to work.”

A major consideration, even more so than in other types of senior living, is staffing to meet the residents’ needs, says Paul Mullin, vice president of development for Silverado Senior Living. 

“The reason the rent is so high is we staff for the appropriate level of care as well as programming,” Mullin says. “To provide good care, you have to staff appropriately. Sticks and bricks is only about 5% of it. We carry quite a bit of overhead, particularly in staffing. If you’re not engaging people in memory care, they will get frailer.”

A second major point to consider is the style of the community whether small, individual units, or “cottages,” versus larger, more traditional buildings, or “mansions,” developers and architects say. 

Both models have been used, with pros and cons to each and today’s designs working to make mansions feel like cottages through architectural techniques. 

“With cottages, residents don’t have too much to learn or negotiate,” says Douglas Pancake, principal, Douglas Pancake Architects. “They’re also associated with with reduced levels of environmental stress with less choice, decision and competition.”

Silverado has built a model based on a “neighborhood” approach with 30 to 100 beds being its “sweet spot.” Within the model community, there are four neighborhoods at maximum with about 15 units per neighborhood. 

“Removing dead ends will bring residents back,” Pancake says. “The floor plan can act as an environmental device.”

While Silverado has successfully built and reproduced this model across the United States, it is not a concept to rush into, executives say. Market research and demand analysis is increasingly important as a factor that can make or break the success of a new memory care community. 

“When you see a market that looks really good on paper, you don’t really know until you get into the communities,” Mullin says. 

That includes surveying competition inside and out, developers say. 

“You can build the best building, with a good location, but somebody’s coming in at the same time… I see that often,” says James Tellatin, principal for Tellatin, Short & Hanson, Inc. “Quite often, there’s no awareness you have competition coming in alongside. See what else might be in the pipeline. Interview competitors. There could be state regulatory departments that can provide insight.”

Written by Elizabeth Ecker

Senior housing transactions may have reached a fever pitch toward the end of last year as sellers tried to beat the capital gains tax increase, but more acquisitions are continuing to close in 2013 and industry executives say still more opportunities are in the pipeline. 

“The deal pipeline is quite robust,” said Jay Flaherty, chairman and CEO of HCP Inc. (NYSE:HCP), during a conference call with analysts discussing fourth quarter earnings. ”Relative to a couple years ago, there are more opportunities presenting themselves in the sense of absolute dollar value [and] more in the sense of absolute number of transactions [along with] the sense of different types of transactions.”

HCP, headquartered in Long Beach, Calif., invested $2.6 billion in 2012, including the $1.7 billion acquisition of the Blackstone/Emeritus joint venture portfolio.

Going forward, Flaherty says that by  ”squeezing more juice” out of HCP’s existing portfolio through various measures, the REIT will be able to remain “completely opportunistic” when it comes to incremental acquisitions.

Chicago-based Ventas, Inc. (NYSE:VRT) completed $2.7 billion of investments in 2012, with chairman and CEO Debra Cafaro characterizing the $1 trillion healthcare and senior housing investment market as “growing, highly fragmented, rapidly changing, and consolidating.” 

“I would say that the pipeline is very active and very large as it has been for the past multiple years. We are in a great sector for external growth,” said Cafaro during a fourth quarter earnings call. “And it’s really across the sector: senior housing, medical office and the government reimburse sectors as well as others, and so we feel really good about the forward environment.”

The Chicago-based REIT’s 2013 guidance assumes about $100 million of acquisitions already under contract and about $400 million of debt financing, assuming no additional unannounced acquisitions. 

Health Care REIT (NYSE:HCN) invested nearly $5 billion in 2012, primarily into the private pay senior housing and medical office building sectors. Last year’s pipeline was robust, with the REIT adding a $530 million investment to its Belmont Village Senior Living relationship and expanding its relationship with Brookdale Senior Living by $240 million along with another major milestone: acquiring Sunrise Senior Living.

Already, the Toledo, Ohio-based REIT has completed an additional $2.5 billion of acquisitions in 2013 from closing the Sunrise transaction and buying out several joint venture partners’ interests, with an additional $745 million of Sunrise-related closings anticipated in July. 

“We will continue to  aggressively look at opportunities both in the senior housing and healthcare sectors,” George Chapman, president and CEO, said during the fourth quarter conference call with analysts. 

HCN also plans to divest about $500 million worth of its skilled nursing portfolio. Half the disposition of the REIT’s “nonstrategic” skilled nursing assets is scheduled in 2013. When it’s completed, HCN would have only about a $3 billion portfolio, with $2.6 billion of it operated by Genesis three or four operators managing the remainder. 

One of 2012′s biggest senior living deals, the $845 million acquisition of Sunrise Senior Living by Health Care REIT, Inc. (NYSE:HCN) in a transaction that spun off the company’s management team and gave Sunrise investors $14.50 per share, was completed two weeks ago but continues to grow as joint venture interests are bought out.

The real estate value of the acquisition has grown from about $1.9 billion when the deal was first announced last August to its current $3.4 billion valuation as of the Jan. 9, 2013 closing, with the investment expected to reach a $4.3 billion value through the acquisition of additional joint venture partner real estate interests.

Sunrise Senior Living’s acquisition by a capital source was a strategic move to enhance stockholder value by a “standalone public company that was constrained in the ability to take advantage of opportunities with acquisitions or joint venture interests,” according to Sunrise’s announcement of the deal. During the end of 2011 and beginning of 2012, the company’s management worked with advisors regarding how to structure possible transactions, including a sale of Sunrise’s real estate business, its management business, or of the whole company.

While Health Care REIT ended up as the acquirer, Sunrise’s management team had contacted multiple entities during the process of determining interest levels in exploring potential strategic transactions.

Prior to the economic downturn, in the fall of 2008, HCN had previously been in talks to acquire 29 Sunrise Senior Living properties for $643.5 million. The financial crisis halted the merger, and while the Toledo, Ohio-based REIT wasn’t the only interested buyer, it’s possible that the previous agreement helped position them toward the front of the eight other “potentially interested” parties, which included private equity firms, a provider of on-site services, and companies in the senior living and real estate industries.

It probably helped that Health Care REIT was interested in investing in both Sunrise’s real estate assets and management team and its proposed acquisition price was higher than other offers, which included bids for the company’s real estate business alone, its management business alone, and the whole company, along with alternative transaction structures proposals.

In the days leading up to the deal, the potential buyers were whittled down to HCN and another real estate investment entity revealed only as “Company A.” The two engaged in a bidding war that eventually drove the price per share up to $14.50, causing Company A to withdraw from the process and leaving Sunrise to proceed with Health Care REIT in the merger agreement.

The final deal with HCN includes a 20% interest in the spun-off Sunrise Senior Living Management Company, which is jointly owned by the REIT along with private equity management and investment firms Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC.

Senior Housing News reached out to Health Care REIT’s executive vice president of investments, Scott Brinker, to gain more insight into the acquisition and what’s next for both the REIT and the senior living chain.

Senior Housing News: How is the 20% investment into the Sunrise management company a strategic investment for HCN in the long-term? Do you anticipate working with the new management company for other properties in the HCN portfolio, or for future acquisitions?

Scott Brinker: The Sunrise management company was recapitalized as part of the real estate transaction and is now privately owned by KKR, Beecken Petty, and HCN. Sunrise now has the financial wherewithal to capitalize on its premier brand name, well-regarded “Sunrise mansion” building prototype, and innovative resident services.

We acquired a 20% interest in the Sunrise management company to align interests and maximize performance with respect to our $4.3 billion real estate investment, and to benefit from potential expansion in a consolidating industry. We have high regard for Sunrise and would like to expand our portfolio with them. We also maintain strong relationships with most of the other leading operators in the seniors housing industry and remain committed to growing with them as well. HCN is uniquely positioned to expand its market share in its core markets.

SHN: Are there any geographic locations or asset types where HCN needs to fill gaps in its portfolio?

SB: We typically grow our partnerships through investments in an operator’s existing markets in order to benefit from geographic economies in name brand, marketing, referrals, staffing, and corporate oversight. Geographic clustering in markets with high entry barriers, above average wealth, and dense populations is a distinguishing part of our investment strategy. The vast majority of our portfolio is located on the east and west coasts, as well as the Top 31 MSA’s.

SHN: When you talk about expanding your portfolio with Sunrise as well as with other leading senior housing operators, does that mean buying additional joint venture interests/expanding through acquisition, or are you looking to do development of properties regionally or within different brands as part of the company’s relationships?

SB: We have a long history of growing with our operating partners. We are a strategic capital partner, not a financier. Our reputation is the REIT that offers strategic advice, access to growth opportunities, and sophisticated capital that enables senior housing operators to expand their market share through acquisitions and new development. We’ve done follow [up] on investments with each of our RIDEA partners.

SHN: While about 30 properties are under five years old, some of the other Sunrise properties are quite a bit older. Will there be significant investment in renovations or repositioning? Will you be looking at communities’ occupancy and revamping units to reflect demand (converting independent living to assisted living, or adding memory care units, etc.) to maximize performance?

SB: Nearly all of the communities are Sunrise’s “mansion” prototype, and they are located in affluent, high barrier-to-entry markets. The real estate quality is second to none. The portfolio has been very well maintained to accommodate its high-end clientele, and we intend to maintain those high standards going forward. We do not anticipate any major conversions at this time, but we’ll work with Sunrise in the future to ensure that the mix of service offerings are optimal in each community.  Sunrise is capable of providing a wide range of services for seniors, so we’ll have the flexibility to make such changes over time if warranted.

SHN: How do you anticipate achieving the 4-5% increase in NOI in the long-term as discussed in HCN’s announcement of the deal, and how do you define “long-term”—as two years? Five years?

SB: Growth in the elderly population and limited new supply are creating strong supply/demand fundamentals for seniors housing. Occupancy and rental rates continue to increase throughout the industry. Our Sunrise portfolio is particularly well positioned for long term NOI growth due to its clustered locations within affluent high barrier to entry markets and Sunrise’s innovative resident services, which combine to produce premium rents and resilient occupancy.

SHN: You’ve issued a lot of common stock and unsecured debt recently (an $811 million common stock offering on August 10; a $1.7 billion common stock offering on September 24; and $1.2 billion of senior unsecured notes on November 27). Is there a reason you prefer one or the other in this environment? 

SB: We continue to produce consistent and resilient internal and external growth, which has been well received by both debt and equity investors. We raised more capital than any other REIT in 2012. More important, we’ve raised both debt and equity at prices that allow us to make highly accretive new investments, including the Sunrise acquisition. The mix of debt and equity reflects our desire to keep our leverage ratio at or below 40%. We believe a low leverage ratio provides us the flexibility to make accretive investments throughout all market cycles.

SHN: HCN’s acquisition announcement said you were going to assume debt at an average rate of 4.9%, on roughly a billion dollars for the acquisition. Is there a plan to refinance a lot of the debt at a lower rate, whether through the common stock equity offering, or more issuance of unsecured notes?

SB: We successfully accelerated the buyout of joint venture partners’ interests on 100 Sunrise communities at favorable purchase prices, which enabled us to control the assets and substantially improve our acquisition cap rate. To date, we have acquired $3.4 billion of Sunrise real estate, and we recently negotiated highly favorable purchase options on an additional $900 million of Sunrise real estate that we expect to close by mid-2013.

We’ve been equally successful raising capital to pay for these investments. We have repaid, or will repay by mid-2013, $2.1 billion of short term secured debt that had a blended rate of 6.0%. Meanwhile, we recently issued $1.2 billion of unsecured debt with a blended maturity of more than 12 years and a blended rate of 3.5%. The remainder of the $3.4 billion purchase price was funded with proceeds from our highly successful equity offering in September and roughly $500 million of assumed debt with a blended rate of 5.1%. The net result is a material reduction in interest expense and well staggered long term debt maturities.

SHN: Considering other publicly traded senior housing providers that are targets for acquisition, how does HCN compare to other acquirers/competing REITs in terms of financial strength and reputation? What would motivate a specific brand to be acquired by or merge with HCN over another interested party?

SB: Our balance sheet, cost of capital, sophisticated transaction team, and consistent execution make Health Care REIT a high quality buyer through all market cycles. We’ve grown our portfolio by more than 300% in the past five years, and in the process we’ve built a track record of efficient closings and acting with integrity. We tend to excel in transactions where the operator is remaining in place because in these situations our reputation as a strategic capital partner for future growth is as important as purchase price. Examples include our investments with Sunrise, Benchmark, Belmont Village, Brandywine, Silverado, Merrill Gardens, and Brookdale.

Sunrise Stockholders Approve Acquisition by Health Care REIT, Completed Jan. 9

Sunrise stockholders voted at a special meeting on Monday to approve the company’s previously-announced merger with Health Care REIT, Inc. (NYSE:HCN). A majority (98.3%) of the votes case by Sunrise stockholders were in favor of this proposal, representing 69.4% of the shares of common stock entitled to vote.

Sunrise stockholders received $14.50 per share from the merger, which includes a $2.10 special dividend. 

On Jan. 9, HCN and Sunrise announced the completion of the acquisition, an investment valued at $3.4 billion and expected to increase to $4.3 billion by July 2013 as the REIT continues to exercise rights to acquire additional joint venture partner interests at fixed purchase prices. 

Health Care REIT expects the $4.3 billion acquisition to generate a 6.5% unlevered initial yield, or 6.1% after capital expenditures.

Health Care REIT Announces Closing of $2.75 Billion Credit Facility

Health Care REIT, Inc. (NYSE:HCN) announced on Tuesday the closing of a $2.75 billion unsecured credit facility consisting of a $2.25 billion revolver and a $500 million term loan to be funded the same day. The facility replaces the company’s existing $2.0 billion unsecured revolving credit facility. 

The new revolver matures on March 31, 2017 and can be extended for an additional year at the company’s option. The term loan matures on March 31, 2016 and can be extended up to two years at the company’s option.

Based on HCN’s current credit ratings, the revolver bears interest at LIBOR plus 117.5 basis points and has an annual facility fee of 22.5 basis points. The term loan bears interest at LIBOR plus 135 basis points. HCN has an option to upsize the facility by up to an additional $1 billion through an accordion feature, allowing for aggregate commitments of up to $3.75 billion. The facility also allows for the company to borrow up to $500 million in alternate currencies.

HCN will use proceeds from the credit facility to fund announced investment activity for general corporate purposes including investing in health care and senior housing properties.

Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC arranged the facility as joint book runners and joint lead arrangers. Bank of America, N.A. and JPMorgan Chase Bank, N.A. were co-syndication agents. KeyBanc Capital Markets Inc. was a joint lead arranger and KeyBank National Association was Administrative Agent. Deutsche Bank Securities, Inc. served as a joint lead arranger and documentation agent. 

GE Capital Agents Credit Facilities of $725 Million for Genesis/Sun Healthcare Deal

GE Capital, Healthcare Financial Services, is serving as administrative agent on a $400 million asset-based revolving credit facility, and as syndication agent on a $325 million cash flow term loan credit facility for Genesis HealthCare, being used to support the acquisition of Sun Healthcare Group, Inc.

GE Capital Markets served as joint lead arranger and sole book runner for the revolving loan and joint lead arranger and joint bookrunner on the term loan.  

Lancaster Pollard Has Record Year, $946.8 Million of Senior Housing Financing

Lancaster Pollard finished its record year with 190 closed transactions with a total loan amount of $1.4 billion. Of those transactions, 132 were in the seniors housing sector, totaling $946.8 million. The firm financed skilled nursing facilities, assisted living facilities and CCRCs in 28 states and primarily used HUD funding through FHA Sec. 232/223(f), FHA Sec. 232/223(a)(7) and FHA Sec. 232/241 programs. However, the firm also financed facilities using the Fannie Mae Seniors Housing program and privately placed tax-exempt bonds.

Lancaster Pollard Provides $6.1 Million Financing for Utah Senior Care Center

Lancaster Pollard recently announced the closing of a $6.1 million loan used to refinance Abbington Manor, a 79-unit assisted living and memory care community in Lehi, Utah.

Wentworth Senior Living Services manages Abbington Manor, which consists of two separate sites located about two miles apart.

The borrower was seeking to refinance its existing loan to take advantage of current low interest rates, benefit from debt service savings, and fund various critical repairs. Although the Abbington Manor has two separate sites, the borrower wanted to demonstrate that the sites comprised one community so it could get one loan and reduce closing costs.

HUD agreed that the two sites shared enough common resources and management to qualify as one operation, and Lancaster Pollard was able to obtain the loan using the FHA Section 232/223(f) program. The borrower will benefit from more than $95,000 in annual debt service savings with the new low interest rate and 30-year term. Additionally, the refinance will fund significant renovations associated with accessibility and safety for the community’s residents. 

Major repair items include seismic retrofitting, a fire suppression system, and a resurfaced parking lot. The borrower will also be able to make a “substantial” deposit to its replacement reserve, says Lancaster Pollard. 

HJ Sims Provides Capital for Senior Housing Acquisition

Herbert J. Sims & Co., Inc. through its affiliate HJ Sims Investments, LLC, provided financing to Watermark Retirement Communities, an affiliate of The Freshwater Group, to acquire a senior living community in Oregon. 

The finance plan included a first mortgage loan from Freddie Mac in addition to equity from a joint venture between The Freshwater Group and Prudential Real Estate Investors—10% of which needed to be provided by either TFG or a co-investment partner. 

Sims was able to structure a preferred equity investment that worked with an existing joint venture agreement between TFG and Prudential in time to close with a Freddie Mac first mortgage/bridge-to-agency senior loan.

A new entity, Fountains Acquisition Finance I, LLC was formed to issue taxable bonds, says Sims, the proceeds of which were used to make the equity investment in a new TFG/Sims partnership, which in turn invested in the joint venture with Prudential to complete the transaction. 

The bonds were structured to have a low current interest rate that grows as the cash flow improves, allowing most of the community’s current operating cash flow to be retained to further the revenue enhancement plan. 

Lancaster Pollard Refinances Hoosiers Care Portfolio for $39 Million

Columbus, Ohio-headquartered Lancaster Pollard recently refinanced seven not-for-profit skilled nursing and pediatric facilities in Indiana and Illinois owned by Indiana-based Hoosiers Care, Inc., and managed by Exceptional Living Centers of Lexington, Ky.

The refinanced facilities are:

• Exceptional Living Center of Brazil in Brazil, Ind.
• Randolph Nursing Home in Winchester, Ind.
• Richland Bean-Blossom Health Care Center in Elletsville, Ind.
• Vernon Manor Children’s Home in Wabash, Ind.
• Exceptional Care and Training Center in Sterling, Ill.
• Swann Special Care Center in Champaign, Ill.
• Walter J Lawson Children’s Home in Loves Park, Ill. 

Lancaster Pollard recommended that the owner use the FHA Section 232/223(f) program to refinance Hoosier Care’s tax-exempt bonds with 30-year, fully-amortizing, fixed-rate mortgage loans totaling $39 million. The transaction resulted in millions of dollars in annual debt service savings and also served to fund more than $1.5 million in replacement reserves and $141,000 in repairs and improvements across the portfolio.

The firm’s Steve Kennedy, senior vice president and regional manager, and Chris Blanda, vice president, led the team on the refinancing. 

Oxford Finance Provides $20 Million Financing to Senior Living Provider

Oxford Finance LLC recently announced the closing of a $16 million senior secured term loan and $4 million revolving line of credit with American Senior Living Communities.

Proceeds of the term loan were used to refinance two skilled nursing facilities in Rhode Island, while the revolver will be used to fund ongoing working capital needs at the two sites. 

Arcapita ARCAB.UL, a Bahrain-based investment firm, announced on Monday it had sold its 80% interest in a joint venture controlling five senior care communities in London to Health Care REIT (NYSE:HCN), the firm recently announced. 

The remaining 20% interest is owned by Sunrise Senior Living (NYSE:SRZ), which is being acquired by Health Care REIT. Once the transaction closes, the Toledo, Ohio-based REIT will acquire the remaining interest in the properties. 

Arcapita is in the midst of a Chapter 11 bankruptcy process that began in March 2012 due to pressure from hedge funds to repay a $1.1 billion sharia-compliant loan facility, according to Reuters. The Middle Eastern firm had invested in the senior housing portfolio in 2003 through a joint venture with an affiliate of Sunrise.

Although the dollar amount of the transaction was not disclosed, Arcapita’s chief executive officer indicated in a statement that the investment had delivered a favorable return.

“The investments have benefited from favorable demographics and their geographic proximity to London. Despite a number of challenges presented by the recent economic slowdown in the United Kingdom, Arcapita’s real estate team worked effectively with our joint venture partner to enhance the performance of the portfolio, delivering approximately 2.8 times cash on cash return for our investors over the holding period of the investment and exceeding initial target returns,” said Atif A. Abdulmalik, CEO of Arcapita, in a statement. 

Written by Alyssa Gerace

Health Care REIT (NYSE:HCN) recently sold four senior care communities in Volusia County, Fla., to Argent Properties 2012 LLC for a combined $33.3 million, reports The Daytona Beach News-Journal.

White Plains, N.Y.-based Argent Properties acquired the four properties under different limited liability company names, property records show.

The properties are:

• Oakwood Garden of DeLand, a nursing home in DeLand, Fla. that sold for $6.69 million to Oakwood Garden LLC
• DeBary Manor, a nursing home in DeBary, Fla. that sold for $9.6 million to DeBary Manor LLC
• Manor on the Green, a nursing home in Daytona Beach, Fla. that sold for $6.76 million to Manor on the Green LLC
• Coastal Health and Rehabilitation Center, a long-term care and rehab facility in Daytona Beach, Fla. that sold for $10.3 million to Coastal LLC

Written by Alyssa Gerace