UPDATED: With Health Care Reform Likely to Be Preserved With The President's Re-Election, Health-Care Property REITs See Strong Performance On Wall Street As They Gear Up For The Details Of Health-Care Reform
In the latest example of Wall Street’s intrigue with properties linked demographically to the rising wave of retiring Baby Boomers, HCP Inc. has closed the bulk of its acquisition announced last month of 133 senior-housing communities in 29 states from a joint venture of Blackstone and Emeritus Corp. (NYSE: ESC
Health-care real estate mergers and acquisitions have become Wall Street favorites, especially as the re-elected President Obama’s Affordable Care Act legislation prepares to go into full effect over the next couple of years.
In a deal first reported by CoStar Group last month, Long Beach, CA-based HCP master-leased the properties from Emeritus on a long-term, triple-net basis for $1.73 billion by pre-paying almost all in-place secured debt, in part using proceeds from HCP's planned sale of 22 million shares of common stock. HCP closed the purchase of 127 properties and expected to complete the acquisition of remaining six properties by the end of the year.
HCP had planned to close the deal by the end of October, according to CFO Timothy M. Schoen in the company's third-quarter conference call last week. But leaks and minor flooding at several of HCP's Northeast facilities caused by Hurricane Sandy, notably two Sunrise communities in Brooklyn, briefly delayed the deal completion.
Emeritus, the nation’s largest assisted-care and memory care operator, acquired the properties totaling 10,350 units with partner Blackstone Real Estate Partners VI, an affiliate of The Blackstone Group LP, and will enter into a new triple-net master lease and continue to operate the communities following the closing of the transaction.
Seattle-based Emeritus said it will invest an additional $30 million, or $2,900 per unit, into the portfolio’s real estate and operating performance. The portfolio includes a mix of 61% assisted living, 25% independent living, 13% memory care and 1% skilled nursing.
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The third quarter and the beginning of the fourth have been very busy for HCP, executing a total of $2.3 billion of investments, the largest being the Emeritus deal. HCP also closed purchases totaling $486 million first announced in July, including 1.2 million square feet of on-campus medical-office buildings (MOBs) and a $205 million mezzanine loan facility with Tandem Health Care, along with funding of development and capital projects totaling $63 million during the third quarter, Schoen said.
HCP, Health Care REIT and Ventas (NYSE: VTR
), the three leading players in the publicly traded health care property sector, have all made blockbuster acquisitions over the last two years. In August, Healthcare REIT (NYSE: HCN
) acquired Sunrise Senior Living for about $850 million cash. Each of the REITs has diversified portfolios of medical office buildings (MOBs), hospitals, skilled nursing facilities and senior housing.
As part of what HCP Chairman and CEO James Flaherty called the company's revised business model, the REIT is mobilizing "to really play offense in 2013 and 2014" with what will likely be part of a grand bargain with whoever is the new president [Obama] and whoever is sitting in Congress" as details of the Affordable Care Act are hashed out.
"What you're seeing is real health care reform start to play out in the post-acute setting, which involves payers, providers, very large acute care hospital operators," Flaherty said. "You will see cost shift here. You will see capitation. You may see some bundling going on. And you've got a management team here that has consistently taken advantage of changes in the marketplace."
Recently released third-quarter senior housing data reaffirms the improving fundamentals in the sector, according to JMP & Associates analyst Peter L. Martin. During the third quarter, independent living and assisted living facilities continued to show strength in both primary and secondary markets.
"Eleven sequential quarters of improving senior housing data continue to support our thesis that this sector has moved beyond stabilization and is in the mode of sustained recovery, which still has significant upside relative to previous cyclical peaks," Jackson said in an investor note.
As part of the deal first announced in mid-October, Long Beach, CA-based HCP, the nation’s largest health-care REIT, agreed to provide secured debt financing of $52 million for Emeritus’s purchase of nine remaining properties from the Blackstone joint venture. In a separate announcement, HCP said it would sell 22 million shares of its common stock in an offering solely underwritten by Goldman Sachs & Co., which also has a 3.3 million-share overallotment option.
The Blackstone-Emeritus venture initially acquired the portfolio out of bankruptcy in 2010 and transitioned the operations to Emeritus. The JV then invested $42 million in capital improvements, helping raise occupancy from 80% to 88%.
Flaherty said the transaction expands its strategic relationship with Emeritus, a key operating partner, and "significantly expands our senior housing portfolio" through a triple-net lease structure that guarantees rent increases.
Partnering with HCP will allow Emeritus to monetize its interests in the joint venture, resulting in more than $140 million of immediate proceeds, said Emeritus CEO Granger Cobb.