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.