The SeniorCare Investor: Ventas And Atria Ink Deal--
After Months Of Rumors, Ventas Pays $3.1 Billion
After several months of rumors and speculation, on October 22 it was finally revealed that Ventas (NYSE: VTR) had entered into an agreement to buy 118 senior living properties with about 13,500 units owned and operated by Atria Senior Living Group. The total purchase price comes to $3.1 billion, comprised of $150 million of cash, $1.35 billion of Ventas stock (fixed at 24.96 million shares) and the assumption of approximately $1.6 billion of debt, some of which may be refinanced by Ventas at closing or shortly thereafter. Atria is the fourth largest operator of senior living properties in the country and is owned by private equity funds managed by Lazard Real Estate Partners. When the transaction closes, the management company will be spun off, with the Lazard funds owning a majority interest, while Atria management and Ventas will have a minority share.
This transaction follows on the heels of the Health Care REIT (NYSE: HCN) 80/20 joint venture with Merrill Gardens in a deal that was valued at $817 million, or about $186,000 per unit, compared with about $230,000 for the Atria assets. Both transactions are being done using the relatively new structure authorized by the REIT Investment Diversification and Empowerment Act of 2007 (RIDEA), which allows REITs the opportunity to keep all the economic benefits of real estate ownership as opposed to simply receiving rents and the 2.5% annual rent increases. With the cost of capital for the large health care REITs at perhaps an all-time low, these RIDEA-structured transactions are becoming increasingly popular, even though very few have actually closed.
The Rumor Mill. As we stated, this announcement came after a few months of rumors, and the interesting thing is that as it turns out, almost all of the rumors were somewhat accurate, except for the timing of what happened with whom. Readers will remember that at the recent NIC Conference each day passed without the “expected” announcement that Atria had cut a deal with HCP, Inc. (NYSE: HCP), with some people claiming, with confidence, that the announcement was coming “tomorrow morning.” As it turns out, according to sources discussions with HCP had ended weeks before the conference began and negotiations with Ventas were already quite serious. It has been well known that, because of the structure of the ownership by the various real estate funds, Atria would eventually sell, merge, recapitalize or go public in order to provide some liquidity to its investors. Atria CEO John Moore had always been looking and talking because he had a fiduciary responsibility to do so and to maximize the return for his investors. As the markets began to improve this year, and as the cost of capital for REITs began to decline, he must have seen the opening he was waiting for, and Atria then hired Lazard Group (NYSE: LAZ) to start an actual sales process as soon as it looked like there was going to be some traction for a deal. We believe this was sometime in May.
The four REITs that everyone talked about late in the summer were contacted, and while there may have been a few others, Ventas, HCP, Health Care REIT and Nationwide Health Properties (NYSE: NHP) appear to be the four with the most interest, and they were the four REITs that the rumor mills focused on when many of us should have been relaxing on the beach somewhere. After an initial round of bids where, we believe, the prices may have come in higher than expected, a second round and then a “final and best” round took place, and we understand that HCP was the winner at that stage. This is where we believe the 5.5% cap rate that HCP was rumored to be paying came into play.
Now that we have the forecasted numbers for 2011, backing out a few things it looks like this rumored 5.5% cap rate bid by HCP may have been based on the trailing four quarters EBITDA before capital expenditures, at that point in time in June. While we don’t know what happened during HCP’s 60-day exclusivity period during the summer, there has been some speculation that HCP may have inflated their bid a little to win and subsequently tried to lower it based on additional information. Or there just could have been legitimate differences of opinion, or personality. Whatever the reasons, by the end of the summer a brick wall was being hit in the negotiations, and when the exclusivity period expired, Ventas and Atria resumed their discussions. And this is where the rumor mill was right and wrong.
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