Debt Or Equity, Everyone Wants A Piece Of The REITs
Not enough can be said about the performance of health care REITs in today’s volatile stock market.  Every REIT share price is up this year, and almost all of them are up by double-digit amounts, with dividends on top of that. And they are mostly hitting 52-week highs, with many hitting all-time highs.  Taking advantage of their share prices, health care REITs have sold nearly $2.8 billion of equity in the first half of 2012, matched by $3.27 billion of term debt.  That provides a lot of acquisition liquidity, not that any of them have been worried about liquidity these days.
While we would like to say we are surprised that there has not been much new competition, other than a few of the non-listed REITs that have sprouted up, the reality is that size is playing such an important role in terms of accessing capital, and particularly, low-cost capital, that it will be increasingly difficult to compete with the behemoths, other than for smaller deals. And at some point, these mega-REITs will consume their smaller rivals, if it makes sense and if they like the portfolio of assets.  This includes the smaller public ones, similar to the purchase of Nationwide Health Properties last year, even though that could hardly be considered small, as well as the growing private and non-listed REITs. 
Recent Financings. The appetite for health care REIT debt and equity securities continues to be high, with Senior Housing Properties Trust (NYSE: SNH) the most recent example.  It went to market to sell 8 million common shares and ended up increasing that by 50%, and when the underwriters exercised their overallotment option, the total went to $13.8 million shares. Gross proceeds were $300 million. The joint book-running managers were Jefferies & Co., Citigroup and UBS Investment Bank. This was followed a week later by selling $350 million of 30-year unsecured senior notes with an interest rate of 5.625%, or about 300 basis points above the 30-year Treasury rate.
We don’t see REITs issuing 30-year paper very often, especially when yields and spreads on the shorter end of the yield curve are much more attractive.  A case in point is the recent $300 million 10-year unsecured senior note offering by HCP, Inc. (NYSE: HCP), which sold at a yield of 3.28%, or a 176 basis point spread over the 10-year Treasury. A lot of acquisitions can be pursued with debt capital at that low cost.  And just to show the difference that size and credit rating can make for REIT borrowing, LTC Properties (NYSE: LTC) completed a private placement of 12-year unsecured senior notes in the amount of $85.8 million with an interest rate of 5.03%, or 345 basis points over the 10-year Treasury (the effective term is about 10 years because of principal pay-downs that begin in year eight).  Now, LTC and HCP are going after different acquisition targets, and each will make their respective spread on those acquisitions, but these have to be the lowest rates either REIT has seen ever.  Sabra Health Care REIT (NASDAQ: SBRA) went to market with a $75 million senior note issue with a yield to maturity of 6.9%, but upped it to $100 million the same day because of investor demand.  As the Sun Healthcare assets represent a decreasing percentage of the total, SBRA’s borrowing cost will only decline…………Want to read more? Click here for a free trial to The SeniorCare Investor and download the current issue today