Senior Housing REITs Bullish on RIDEA Structure for 2012 and Beyond

Many healthcare real estate investment trusts (REITs) began 2012 with a bullish attitude toward RIDEA-structured seniors housing and care deals after seeing a whirlwind of activity for the transactions in 2011. Finding the structure attractive for its ability to offer an upside benefit to both the investor and operator, the outlook looked rosy for RIDEA going into the new year.

For many, it still looks that way, despite total RIDEA volume being slightly lower than last year.

“It seems unlikely the volume of RIDEA investments in the next twelve months will exceed what has occurred in the past twelve months,” Scott Brinker, executive vice president of investments for Health Care REIT, told SHN. “But the health care REITs will continue to be active acquirers, and some of those investments will be structured as RIDEA.”

Since it was made available in 2007, the RIDEA structure for real estate transactions in the senior housing sector has been widely used by REITS to allow them to share in the upside—and downside—of deals.

The structure, adopted following the REIT Investment Diversification and Empowerment Act of 2007, allows REITs to share in the risk of the property or property portfolio, while also letting them share in the profits from operations via rental income.

Operators also benefit by accessing a lower cost of capital through the REIT, leading to potential upside for both parties, although it does require a third party to manage the property, however, which can be seen as a downside.

Historically, the RIDEA structure has been used by health care REITs, with a recent example being Health Care REIT’s partnership with Canada’s Chartwell Seniors Housing REIT (TSX:CSH.UN) to own and operate a 42-property portfolio of high-quality seniors housing and care communities located in “attractive” Canadian markets.

Other REITs agree that now is the time for RIDEA deals.

“It is a structure that will be continued to be utilized for the foreseeable future,” Senior Housing Properties Trust president and chief operating officer David Hegarty told SHN in an interview. “I believe pretty much everybody in this industry believes we are at a great part of the real estate and senior living cycle where the opportunity for improvement looks very definitive for the next several years. If you’re going to use RIDEA, now is the time to do it.”

Larger deals lend themselves best, and with industry participants projecting more smaller deals this year, it could in part hold RIDEA back. But it really comes down to the deal, Brinker says.

“Our preference is to use RIDEA for large investments due to the upfront and ongoing costs associated with RIDEA,” he says. “These costs become more reasonable when they can be spread over a larger investment. We would expect each of our RIDEA partnerships to exceed several hundred million dollars. In addition, in each case, we intend to grow the RIDEA partnerships through future acquisitions and in certain cases, new development.”

Deals upwards of $200 million are best positioned to benefit from the structure, Hegarty says.

So far, there have been roughly $5 billion in RIDEA deals since January 2011, Health Care REIT data shows, including investments by Health Care REIT, Ventas, Senior Housing Properties Trust, HCP, and Medical Properties Trust.

Even though the volume may not rival that seen during the boom time for REITs over the past couple of years, it is still likely to be a highly utilized deal structure, REITs say.

“Health Care REIT has continued to utilize RIDEA in 2012, including the Chartwell and Belmont Village investments,” Brinker says. “It is also relatively early in the year, so there may well be additional activity prior to year end, particularly given the attractive cost of equity and debt enjoyed by many of the health care REITs.”

It may evolve not into a competitive edge, but a necessity for acquirers of senior housing properties, Hagerty said.

“Large portfolios of quality properties may command a RIDEA-type transaction because health care REITs will mainly be using that structure to bid as aggressively as they can,” he said.

Another caution: the use of the RIDEA structure can slow a deal down, or increase the pricing.

“It often depends with the RIDEA format as you have to engage a third party manager. This can cause delays and can affect pricing,” Hegarty says. And it doesn’t fit for everyone, like independent assets or small private portfolios that may be less suitable. The only other potential speed bump for its use is a cyclical change or fundamental shift.

“I don’t see that happening in the foreseeable future,” Hegarty says.

Written by Elizabeth Ecker