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Rising Demand For Seniors Care Drives Latest Health Care REIT Acquisition

Attractive Demographics Are Behind Recent Mega-Deals In SeniorHousing, Assisted Care
August 15, 2014
Baby boomers are still moving U.S. markets as they enter their retirement years, in this case the rising market for senior housing and care. Health Care REIT, Inc. (NYSE: HCN) announced that it will acquire Toronto-based HealthLease Properties REIT and partner with HealthLease external manager Mainstreet Property Group in a deal potentially valued at $2.3 billion.

The HealthLease portfolio consists of 53 communities consisting of 5,331 beds, with 46% seniors housing; 30% post-acute care, and 24% long-term care. About two-thirds are located across the U.S., with the remainder in Canada, while 30 of the 53 communities have built since 2010. The transaction is expected to close in the fourth quarter.

The transaction -- which helped send HCN shares to their highest level since late October 2013, closing at $65.69 on Wednesday -- is the latest in a wave of mergers and acquisitions in the medical property sector in recent weeks.

Last week, NorthStar Realty Finance Corp. announced a deal to acquire Griffin-American Healthcare REIT II in a $4 billion transaction. Ventas Inc. (NYSE: VTR) in June agreed to acquire competitor American Realty Capital Healthcare Trust Inc. in a $2.9 billion deal.

"Strong tailwinds for senior housing are provided by the aging of the population and a recovery in home values, the stock market, and employment," said Todd Lukasik, REIT analyst for Morningstar. "The aging of the population provides incremental demand for senior housing space, while rising home and equity values provide financial resources for seniors to pay senior housing rent and fees."

Fitch Ratings said Toledo, OH-based HCN's strong liquidity position and track record as a capital provider in the health-care real estate sector should continue to drive acquisition opportunities. However, broader concerns remain about enhanced risk linked to the vast growth of the health-care REIT sector in recent years.

"The 'Big 3' have average enterprise values of nearly $30 billion, thus requiring large transactions to move the earnings needle via external growth," Fitch said. "This dynamic may also drive REITs to employ higher leverage levels or pursue higher yielding assets, i.e. lower quality, to make transactions accretive."

Overall, the health-care REIT industry continues to display strong fundamentals, abundant capital inflow and further compression in capitalization rates, according to David Toti, REIT analyst with Cantor Fitzgerald. In particular, the medical office buildings (MOB) segment remains very competitive, with a narrowing gap between on-campus and off-campus demand.

Given the obsolescence of current senior care facilities, senior housing is one of the most active areas today for developers in the health-care space, Toti said.

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