EXPERT OPINION: A Conversation with Arnold Whitman - April 19, 2011

April 19, 2011

In this "Expert Opinion" interview, Arnold Whitman, CEO of Formation Capital, discusses the announced sale of his Genesis HealthCare properties to Health Care REIT and the dramatic surge in the marketplace for REITs.

Arnold WhitmanWatch the video      Read the transcript

Arnold Whitman is the founder and CEO of Formation Capital, a leading equity investor in the seniors housing and healthcare services for the elderly business. Over the past 10 years, Mr. Whitman has strategically led Formation Capital in its growth and execution of over $6 billion in transactions.  Mr. Whitman is Chairman Emeritus of NIC, a current board member for the second time, and has participated in all 20 NIC conferences.  His other interests in the “seniors” business include being a Principal in Primecare Properties, and a board member of Care Institute and Simple C.  Mr. Whitman’s 25-year career has allowed him extensive speaking engagements both domestically and internationally.  He has written and been featured in many publications including National Real Estate Investor, McKnight’s Long Term Care News, The SeniorCare Investor, Contemporary Long Term Care, Assisted Living Today, Modern Healthcare and Real Estate Forum.  Among his personal accomplishments, Mr. Whitman won a gold medal for basketball at last year’s National Senior Games and has run 44 marathons. 
 

Contact Information:
Mr. Arnold Whitman
CEO of Formation Capital
1035 Powers Place
Alpharetta, GA 30004
770-754-9660
awhitman@formationcapital.com

 
Watch the video of the interview: 


 

Read the interview transcript:

Steve Monroe:
I know it was just a few months ago, Arnie, that I sat with you and we talked about the market. And by the way, congratulations on the sale of your Genesis HealthCare properties to Health Care REIT. That's a great deal. But it's unbelievable, what a difference just a little bit of time can make. I remember not too long ago, everyone was freaking out there was no capital, there was no liquidity, and then bam, in less than six months, we've got $20 billion of announced transactions by health care REITs. What changed?

Arnold Whitman:
Well first, thank you, Steve. Boy, I guess the marketplace for the REITs essentially changed dramatically in terms of their ability to not only access money and raise capital, but their willingness to utilize both the RIDEA structure and to expand upon their current platforms of sale-leaseback activity. It seems almost as if it's become a horse race in that you've got three or four large—well, I would have said four, now it looks like it may be down to three, large REITs that have a voracious appetite to invest in specifically senior housing.

And I think a lot of it is around the fact that both the analysts and the investors out there find the industry attractive from a historical standpoint and they find the industry attractive on a go-forward basis with all the compelling dynamics as you look at the demographics and just the amount of capital being consumed by the elderly population today.  It's almost mind-boggling. I'm not sure there's any real easy answer as to why it's exploded as much as it has, but it sure feels good.

Steve Monroe:
It's obvious that there's a little bit of a land grab going on there now. You have on the skilled nursing side, HCR ManorCare and your Genesis properties, on the senior housing side, you've got Atria, Benchmark, Brandywine, several others, Merrill Gardens—high-quality portfolios that these REITs are going after. Are there many more of these kinds of higher quality, large entities that you think may be available for the REITs?

Arnold Whitman:
You know, I think there are a few, but I think also your point about the grab of these high-quality operating businesses is the key point and sort of answers your last question, which is if you are a real high-quality operating business today and you have a growth plan that is meaningful and sustainable, the REITs are now in a position with this new RIDEA structure and the TRS structure to really become a hybrid investment strategy that is not just real estate as it's been in the past but really sort of a hybrid real estate corporate investor. It gives them the ability to really surpass, in my opinion, the private equity investment houses and private equity in general because their cost of money is so low and the ability to bifurcate the operations and the real estate in such a way where the growth comes from the operating businesses, the real estate pays the dividend and you've got a real marriage of both a real estate and a corporate play.

Steve Monroe:
But do you think the REITs have unlimited demand right now for portfolios and properties?

Arnold Whitman:
I think they have a very voracious appetite for growth. And I will say it concerns me a bit that the growth is sustainable.

Steve Monroe:
Now, your transaction—I know with SEC issues, you can't go into it, but yours was not the so-called RIDEA. It was a traditional sale-leaseback.

Arnold Whitman:
Correct.

Steve Monroe:
But do you think that with these RIDEA-type transactions, is that what is generating the interest level from the sellers?

Arnold Whitman:
Well, I think it's enabling the REITs to pay a higher price, and therefore it becomes more attractive to the sellers, yes. And it also gives the seller the ability to continue to operate the business and grow the business and participate in it in a meaningful way.

Steve Monroe:
And then three of these recent deals involve as sellers—you being included—private equity firms or quasi-private equity firms. Do you see them being able to get back into the market as buyers again, or are they just going to be outbid by the REITs?

Arnold Whitman:
I don't think the larger private equity firms right now can compete with the REITs. I just don't think they can. I don't think they can get the kinds of returns that they would want, especially in the environment that we're in.

Steve Monroe:
And we know that these portfolios have been on the higher-quality side, but the REITs are paying pretty high per-bed and per-unit prices. Cap rates have gotten aggressive. Do you think that's going to impact the rest of the market in terms of valuations and pricing, or is this just a complete health care REIT type phenomenon?

Arnold Whitman:
Well, it's an interesting question, and I think it will have an impact, but I don't believe it will be as great as I think the rest of the industry would like it to be. I think there's going to be a bifurcation of quality and valuation that will take place where the premier providers, the so called brand companies, will benefit from the lower cap rates. And then I think you're going to have quite a drop-off when the transaction sizes get meaningfully smaller, under $100 million. Even $100 million, I'm not sure $100 million moves the needle today for a $20 billion health care REIT.

Steve Monroe:
Eighteen months ago, $100 million was a very big transaction.

Arnold Whitman:
Yes, it was.

Steve Monroe:
Now, it has gone down to being on the small side, given what's been going on. But for the little guy out there—not even the $100 million deal—the $5 million, $10 million, $15 million deal, are these REIT transactions going to make any difference in that area of the market?

Arnold Whitman:
Well, I believe in the premise that when liquidity gets created, which is what's happening here, you've got liquidity in the marketplace in the form of health care REITs. At the end of the day, there's a takeout there that's attractive. You need volume, you need quality to get there. I think once you create that liquidity, I think the rest of the markets and the capital follow it. So I do believe it will be beneficial to the whole industry. There will be some differentiating between the valuations due to size and certainly quality.

Steve Monroe:
And for buyers with cash—and I assume you are still a buyer out there. You have liked this market the entire time you've been in there. You buy, you sell, you buy again, so you're never getting out. But for buyers with cash, what's the best opportunity right now? Is it turnarounds? Is it SNFs? Is it assisted living facilities? Where do you see the best opportunity to put your cash to work?

Arnold Whitman:
Well, I think there's several opportunities out there right now in the marketplace that are attractive, certainly from my perspective. I've sort of come full circle. My history has been to be primarily a real estate investor. We're now going to control one of the largest operating businesses in the skilled and rehabilitation spaces, the post-acute sector, in the country. I like that. It comes with lots of risks and issues, but I think there are tremendous opportunities as we look to the future to filling the needs of delivering health care and services to our elderly population. And if you can provide business services around both a real estate and a service and ancillary and operating platform of quality, and from a technological standpoint and a quality of care standpoint, I think there is tremendous opportunity.

That leads me to other areas.  I like the hospice business, I like the home care business, I like the rehab business. I like the operating businesses because you can buy them at a multiple, or at least I believe you can buy them at a multiple that I would consider to be reasonable, and it gives you the ability to create value. The real estate side of the equation now, creating value in that investment platform right now for someone like ourselves may be hard to recognize.

Steve Monroe:
All right. Well, listen, congratulations again on your transaction.  We'll be looking forward to seeing what else comes down the pike with you.

Arnold Whitman:
All right. Thanks, Steve.
 
 

Comments

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Arnold Whitman

Mr. Whitman has brought trust and quality back to the for profit long term care space and dealings with the REITs and is insrumental in reviving this activity to the level where it once was. Hisleadership in this space can only help get liquidity back into this segment of the industry and will help update LTC facilities to where they need to be.

Post new comment

The content of this field is kept private and will not be shown publicly.