Ends 2011 With A Bang, Starts 2012 With Major Acquisition

Just when we thought that maybe the health care REITs would wait out the election year uncertainties and continue digesting their huge acquisition volume of 2011, the largest transaction of the year (so far) was announced in mid-February.  It is important to keep in mind that the five health care REITs that tapped the capital markets last year raised a total of $8.1 billion, with one-third of that new equity and two-thirds debt (excluding expanded lines of credit).  This is an extraordinary amount of capital in one year, but it was an unusual amount of acquisition volume as well. 

While most of that new capital was used to fund last year’s acquisition activity and pay down revolvers, their capacity to raise more capital is almost unlimited.  A case in point is Health Care REIT (NYSE: HCN), which at the end of February sold 20.7 million shares of common stock at $53.50 per share to raise more than $1.1 billion.  At the same time, the REIT sold $287.5 million of new preferred stock, increased from the originally planned $100 million. The only real limitation these REITs have today is being able to find enough acquisitions, especially ones with sufficient size to make a difference.  There are still some potential candidates, but to start the year off, Health Care REIT went north of the border to snag the first big one of the year, at least 50% of it.

It what we believe to be the first of its kind, Health Care REIT partnered with Canada-based Chartwell Seniors Housing REIT (TSX: CSH.UN) to purchase a portfolio of 42 retirement communities in Canada with 8,187 units (or suites, as they are referred to in Canada).  According to Chartwell, the purchase price is C$931 million, while HCN  reported a price of U.S.$925.2 million, or $113,000 per unit.  With overall occupancy of 88%, there appears to be some upside beyond just normal rate growth.  About 45% of the properties are in Quebec, 45% in Ontario and the remainder in British Columbia and Alberta.  Although REIT tax laws are not the same in Canada, this is equivalent to a RIDEA structure since Chartwell will actually become the manager of the properties, and when it closes they will become the largest seniors housing operator in Canada. 

The joint venture is not completely as straightforward as a 50-50 partnership, as 39 of the properties will be co-owned on a 50-50 basis and three will be 100% owned by Health Care REIT, but still managed by Chartwell.  Those three communities, with 525 units, will be purchased separately for $81.4 million, or $155,000 per unit, which is much higher than the rest of the portfolio.  The average occupancy for these three was just 76%, with one at just 65%.  HCN will be investing $73.2 million of cash for these three 100%-owned properties and $186.2 million of cash for the other 39 properties, with the rest of the capital coming from existing and new debt. 

Health Care REIT is expecting an NOI yield of 7.4% after management fee for the first year after the deal closes, but they expect the portfolio’s NOI to grow by 4% to 5% annually.  That certainly beats a 2.5% lease escalator.  We are not that familiar with transaction multiples in Canada, partly because it is a much smaller and less liquid market, but we believe the cap rate for the acquisition was between 7% and 8% depending on who you are talking to and whether it is current cash flow or pro forma for the first year.  That fits in relatively closely with the U.S. market for a transaction of that size and with the upside that we see….Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today