Health Care REIT Inc.
), 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.
) - 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 CR REIT (HCN): Free Stock Analysis
SUNRISE SENIOR (SRZ): Free Stock Analysis
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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
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
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.