The Dealmakers Forum: All Quiet On The REIT Front?

After Slow Summer, SNH Announces Vi Acquisition 
 
There was a lot of excitement generated last summer when the first of many large health care REIT transactions was announced.  Even before the mega-deals were announced, the Health Care REIT (NYSE: HCN) joint venture with Merrill Gardens was referred to as a “game-changer” by many people.  A few months after that announcement, there was a five-month period when REITs announced nine separate transactions in seniors housing and care with a total value of $21.5 billion, including four transactions with values ranging from $2.4 billion to $7.4 billion.  There were smaller acquisitions during and after this time period, but it was these transactions, with their high per-bed and per-unit prices, relatively low cap rates and the use of the so-called RIDEA structure that attracted all the attention.
At the time, the “consensus” was that REITs were on a roll and that this buying spree would continue.  We disagreed with the consensus.  Even though they were not taking over the operations, this was a large amount of activity to digest, and sometimes involving new relationships.  From March to August, most of the REITs took a break from new large transactions while they were closing the earlier ones.  However, they were still somewhat active with their existing relationships either with build-outs or smaller in-fill acquisitions.  There was speculation that after the $21.5 billion binge, they were not seeing attractive enough opportunities, or at least at values and quality levels that were attractive enough to provide the necessary returns.
The one deal that had been lurking around was the sale of all or part of the Vi portfolio.   Although Hyatt Corporation wanted to sell the entire entity (formerly known as Classic Residence by Hyatt), the valuations from buyers for the entrance-fee CCRCs were not close to what the seller wanted to get, and early last year we heard they would put those on the backburner and focus on the sale of the rental communities.  For many of the buyers, there was a total communications void which produced a lot of frustration, to say the least, because there was real interest in the rentals.  The last we heard, and this was four to five months ago, was that Ventas (NYSE: VTR) was the lead contender to purchase the rental communities.  So much for the rumor mill.
Just before the Labor Day weekend, Senior Housing Properties Trust (NYSE: SNH) announced that it agreed to buy the nine rental retirement communities operated by Vi for $478 million, or approximately $215,000 per unit.  As part of the purchase, SNH will be assuming $164 million of mortgage debt on certain communities and using cash on hand and lines of credit for the remainder of the price.  The portfolio includes 1,708 independent living units, 471 assisted living units and 47 Alzheimer’s units.  Although the communities are about 20 years old, they have been well-maintained by Vi.  Four of the communities are located in Florida with one each in Maryland, Nevada, New Jersey, New York and Texas.  Overall occupancy is 87%, which is a little higher than at the beginning of the year, and the individual occupancy rates range from 78% to 95%.  SNH will be leasing these nine communities to a taxable REIT subsidiary of SNH and all nine will then be managed by Five Star Quality Care (NYSE: FVE).  SNH expects to receive first year cash flows from these properties equaling between 7.0% and 7.5% of the purchase price, which translates to an EBITDAR between $33.0 million and $36.0 million…Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today