HCN to Acquire Sunrise Senior Living - Analyst Blog

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Health Care REIT Inc. ( HCN ), a leading health care real estate investment trust (REIT) that operates senior housing and health care real estate, has recently penned an agreement with Sunrise Senior Living Inc. ( SRZ ) - one of the largest providers of senior living services in the U.S., to acquire all of its outstanding shares in a move that could redefine the market dynamics.

The offer price of $14.50 for each of the Sunrise Senior Living share represents a 62.4% premium to its closing price on August 21, which is perhaps the most that it could have bargained for, given the continued challenging macroeconomic environment. This could have led to a unanimous approval of the proposed merger by the board of directors of Sunrise Senior Living.

The offer price equates to a real estate value of approximately $1.9 billion. Health Care REIT intends to pay approximately $950 million in cash and the balance through the assumption of debt at an average interest rate of approximately 4.9%. The transaction is likely to close in early 2013, subject to mandatory regulatory approvals and closing conditions.

With the deal, Health Care REIT is poised to acquire 20 wholly-owned senior housing communities from Sunrise Senior Living, along with its 105 joint venture properties. About 17 of the wholly-owned properties are located in the U.S., while the remaining three are in Canada. The bulk of the joint venture properties are also located in the U.S. (about 78), with the remainder in the U.K. (27).

The domestic portfolio is mostly concentrated in New York, Los Angeles, San Francisco, Washington, D.C., Philadelphia, Boston, and Chicago. Almost half of the acquired portfolio is located in the top 5 MSAs (metropolitan statistical areas). The acquisition would position Health Care REIT as one of the largest owners of senior housing facilities worldwide with over 58,000 units in the U.S., Canada, and the U.K.    

With a median age of eight years, the acquisition would enable Health Care REIT to own high-quality private pay senior housing communities in high-barrier-to-entry affluent markets. In addition, the company is likely to gain operational synergies as an experienced and dynamic management team from Sunrise Senior Living, with over 30 years of experience, comes on board.

Besides improving the economies of scale, the acquisition would further enable Health Care REIT to gain access to higher yielding embedded investment opportunities, as more and more ownership stakes in joint venture properties come up for grabs. The senior housing sector is a highly-fragmented market with limited new supply and positive growth indicators, with the over-85 demographic growing at three times the rate of the overall population.

According to the U.S. Census Bureau, the elderly population (aged 65 and older) is expected to jump 36% from 2010 to 2020 to 54.8 million people. The latest acquisition by Health Care REIT, therefore, reinforces the buzz in the healthcare REIT industry, spurred by an aging Baby Boomer generation's increased demand for assisted and independent living facilities.

The acquisition brings two of the most complementary customer franchises to the same platform in the healthcare real estate market and increases the scale and diversification of the combined company. The acquired assets overlap with Health Care REIT's health system, assisted living and senior housing portfolio and offers continuum of services.

On the other hand, the deal also enables Sunrise Senior Living to continue its investment in optimizing and expanding its facilities to meet the increased needs of the acute care patient population. Consequently, the transaction is a win-win deal for both of the participating companies.

Health Care REIT intends to structure the acquisition under RIDEA (REIT Investment Diversification and Empowerment Act) to tap a new source of revenue. Under RIDEA, healthcare REITs can receive rent from healthcare operators based on the fair market rental value of the leased facility, as well as receive profits from its operations as a tenant. Based on the current market scenario, Health Care REIT expects property-level net operating income to increase 4% to 5% per year on an average over the long term from the acquired portfolio.

With the successful completion of the proposed deal, Health Care REIT's private pay percentage would increase from 74% to 77%. Sunrise Senior Living is expected to become Health Care REIT's second largest operator.

Health Care REIT invests across the full spectrum of senior housing and healthcare real estate properties. Headquartered in Toledo, Ohio, the company also provides an extensive array of property management and development services.
Founded in 1970, the company was the first REIT to invest exclusively in healthcare facilities. Health Care REIT provides senior housing operators and healthcare systems with a single source for facility planning, design and turn-key development, property management, and monetization or expansion of existing real estate.
However, deep cuts in Medicare have been proposed over the next five years by reducing or freezing payments to skilled nursing facilities, hospitals, and other healthcare providers. With a large portion of revenues being determined by government payout rates, forces beyond the company's control could negatively affect revenues and operator coverage ratios. Consequently, we maintain our Neutral recommendation on Health Care REIT, which currently has a Zacks #3 Rank that indicates a short-term Hold rating.

HEALTH CR REIT (HCN): Free Stock Analysis Report
SUNRISE SENIOR (SRZ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: HCN , SRZ

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