EXPERT OPINION: A Conversation with Charles Herman

March 29, 2011

In this "Expert Opinion" interview, Chuck Herman, Executive Vice President and Chief Investment Officer of Health Care REIT, discusses the rapid growth of the health care REIT industry over the past month.

Chuck Herman, Heath Care REITWatch the video      Read the transcript

Chuck Herman is an Executive Vice President and the Chief Investment Officer of Health Care REIT, one of the largest health care REITs in the country, and he has held these positions since 2006. In addition, Mr. Herman served as Vice President and Chief Investment Officer of the Company from May 2004 to March 2006 and served as Vice President of Operations from August 2000 to May 2004. From 1998 to August 2000, Mr. Herman was a founding member and President of Herman/Turner Group, LLC, a health care consulting company. Prior to that date, Mr. Herman was a founder and Chief Operating Officer of Capital Valuation Group, a health care consulting firm founded in 1991.
 

Contact Information:
Mr. Charles Herman
Executive Vice President and Chief Investment Officer
Health Care REIT, Inc.
4500 Dorr St
Toledo, OH  43615-4040
419-241-2800
cherman@hcreit.com 

 
Watch the video of the interview: 
 

 

 

Read the interview transcript:

Steve Monroe:
The health care REIT industry has been in the news a lot in the past month, growing very rapidly. Obviously, one of the largest consolidators has been Health Care REIT. I have with me Chuck Herman, Executive Vice President and Chief Investment Officer of Health Care REIT. In terms of the number of transactions that you guys have recently announced, when in the timeline did you realize that this is a large increase? When did you realize that this volume was going to really pick up for you guys?

Chuck Herman:
What’s interesting is that we’ve had a lot of capital market support over the last couple of years. And there’s a lack of alternative capital out there. So when we really were reviewing the market and trying to figure out what our strategy was going forward, we felt like it was a good time for us to move on things.

So, mid-last year, early last year we had already targeted who we wanted to do business with. We were able to successfully do the Merrill Gardens transaction, which gave us a lot of credibility amongst the operators in the marketplace. And that opened up some other opportunities for us.

Steve Monroe:
So you think, when that one was announced, that kind of got the ball rolling?

Chuck Herman:
I think that, at the time, the potential tax changes that were going on and the lack of available capital, all those things contributed to it. Plus, the fact that the private equity folks and people in that industry were coming into the end of the life of several funds, and some of the assets that they controlled, and needed to find some type of exit. I think that also spurred things.

Steve Monroe:
And then of the five deals that you’ve announced so far this year, three of these five have been the so-called RIDEA structure, because you can do them without using that technical structure, but the RIDEA structure, is that going to be kind of your favored structure going forward, or deal-by-deal specific?

Chuck Herman:
It’s going to be deal-by-deal specifically. We have a target portfolio allocation on how we look at the world. We think 25 to 30 percent of our portfolio, maybe as high as 35 percent, will be in the RIDEA format. We still like the consistent cash flow, the triple net lease world, which is what we did on the Genesis transaction. We’re trying to do a nice balance of the two.

Steve Monroe:
But when you look at that, I think the timing for seniors housing is good because they’re pretty much coming out of the bottom, occupancy-wise, so in theory, NOI growth should start ramping up. So is it, as opposed to 2.5, 3.5% lease escalators for your increase in return, are you saying, “Jeez, this company is going to be ramping up. I’m going to get 5, 6, 7 percent NOI growth, RIDEA makes more sense.”  From your growth perspective.

Chuck Herman:
For us, we look at what the operator wants to accomplish. So, part of the time, we try to figure out what structure works best for that organization. We also look at the characteristics of the organization. Is it a stable organization that we can add in a triple net lease world and just kind of move on, or is it something where the company has some pretty significant growth plans and they want a capital partner to help them grow?

We tend to try and deal with growth companies. But each portfolio, each operator, and each group of investors has a different set of objectives and we try and fit the capital plan to their specific needs.

Steve Monroe:
And if you’re looking at one and you decide to go with the operator, and it’s okay to go one way versus the other, I assume you do price them differently and that the sale/leaseback will be priced a little lower than a RIDEA transaction?

Chuck Herman:
Well, in all of our deals we’re trying to figure out what the market returns are out there, what the market requires to effectuate a transaction. We build in more coverage on a sale/leaseback transaction versus a RIDEA transaction in that we’re going to be participating in the upside of the cash flow on the RIDEA deal.

Steve Monroe:
So it’s all yours.

Chuck Herman:
It’s all ours, at least on that portion of the portfolio that we own. So each deal is specific to what’s going on in the marketplace. Where do we expect to be able to place the capital? What are the needs of the operator? How much debt or lease financing are they able to successfully manage? There are a lot of different factors that go into it. The size of the portfolio, the quality of the portfolio. A bunch of other things.

Steve Monroe:
With Health Care REIT and some of your competitors, you’re getting so big and you have so many assets, so many companies, and I know you in particular have historically liked to pretty much have all of a company’s assets and business. How do you deal with your new size and geographic overlap when you have your portfolio companies bidding on the same five property potential acquisition? And you’re their capital provider and they both came to you saying, “Hey, can you finance it?” How do you referee something like that?

Chuck Herman:
We face that issue all the time, because we’ve got 65-plus operators in our portfolio and 50 acute care systems in our portfolio, as well. And it really depends on a lot of different factors. How we referee it? We’ve got great communication with our operators. We’re talking to them all the time. We’re actively involved in meeting with them very frequently. We’re constantly talking with them about what their plans are, where they expect to go with things, what do they want to do.

So, to date, it’s been a pretty successful management strategy. All of our colleagues realize that there are times when there’s going to be some form of conflict that needs to be resolved. Since you have a good relationship with them, it tends to work out pretty well.

We also have done a pretty good job at being geographically diverse. And I think that has been helpful, as well.

Steve Monroe:
Let’s switch gears a little bit. With this RIDEA structure, your investors, are they focusing more on the economic benefits of growth that’s going to be accruing to you? Or are they kind of looking at, “Jeez, we’d like the steady 2.5, 3.5 percent lease escalators. I don’t know about this NOI, it may go up or down.” Which way are they looking at it?

Chuck Herman:
The investor community has been very receptive to what has occurred in the last couple of months as we’ve done a bunch of these transactions. They like the quality of the assets that we have acquired. They like the operators that we’ve done business with. So we’ve felt that it’s been pretty successful in that aspect.

We’ve also tried to balance it, too, if you look at the Genesis transaction, that’s a triple net lease sale/leaseback with a very nice yield and comparing that to the RIDEA transaction, it’s been a very nice balance of the two.

So, generally, they’ve been very receptive. We did one of the largest equity offerings in REIT history recently. It was very well received in the marketplace, so we think that the market likes what we’re up to.

Steve Monroe:
And, finally, you have the option to buy companies or portfolios and you have the option to buy another REIT if that ever comes up. In this kind of market environment, is it cheaper to buy the REIT that already has everything or is it cheaper to buy the companies right now?

Chuck Herman:
Well, with the lack of a lot of different forms of capital for the private operator, right now it’s easier for us to go out and buy—or accretive for us to go out and buy—the private market transactions versus the public market transactions. And we look at everything, we see all the deals that are out there. We’re pretty granular in how we look at the industry. We’ve got a lot of different operators that we could partner up with different assets and different deals. So we find generally that, currently in this market, the private transactions make the most sense for us.

Steve Monroe:
Well, congratulations, I know there’s been a lot of people at Health Care REIT who have been working very hard the last few months.

Chuck Herman:
The team’s worked very hard, you’re right.

Steve Monroe:
So I hope you get some rest and I’m sure this will not be the end of your deals.

Chuck Herman:
Well, thanks, Steve.

 
 

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