Are Senior Housing REITs at RIDEA Exposure Max?

Senior housing-focused real estate investment trusts may have found the sweet spot for RIDEA exposure, says an S&P analyst who cited the structure’s risk factor as a component to why some REIT portfolios could be at their limit. 

Two out of the ‘big three’ REITs in particular—Ventas (NYSE:VTR) and Health Care REIT (NYSE:HCN)—have grown their RIDEA exposure in recent years, notes George Skoufis, a credit analyst with Standard and Poor’s, while the third, HCP, has largely stayed away from the structure.

A recent S&P report expects healthcare REITs’ RIDEA investments to produce stronger net operating income growth in the mid-single digits compared to triple-net leased investments, which are expected to deliver low-single-digit NOI growth. 

“On the senior housing side, where some of these REITs have RIDEA exposure, that’s where you might get more healthy rent revenue growth [compared to triple-net leases],” Skoufis says. “Ventas has good revenue growth from its operating portfolio, in the mid to high single digits.” 

Ventas’ 433-property portfolio of triple-net leased senior housing assets is nearly twice as large as its 229-property operating portfolio. But in the second quarter of 2013, nearly 29% of the REIT’s NOI came from its RIDEA-structured portfolio, compared to 24.2% from the triple-net leased properties, according to that quarter’s supplemental information.

But the benefits of tapping into the upside of operating assets comes with a potenial downside of shared risk, and that’s why REITs may not continue seeking those kinds of deals.

An August 2013 Moody’s rating update noted Ventas’ significant growth since the end of 2010, but added that while the REIT’s size and scale provide cost of capital advantages for continued growth, those positive factors are offset by earnings volatility and operational risk from its RIDEA-structured senior housing operating assets. 

“It has reached a point where they [may have reached] the high end of the range where they want to have RIDEA-structured deals [in their portfolio],” Skoufis says, based on comments made by REIT execs. “But as they acquire more [assets structured as a] triple-net lease and that proportion increases, then they might do more RIDEA.”

Health Care REIT, the third-largest healthcare-focused REIT with a $17.98 billion market cap, is “purposefully diversified” by asset type, investment structure, geography, and operator, says Scott Brinker, executive vice president of investments at HCN, calling RIDEA an “important part of that diversification.” 

The REIT has 357 properties in its senior housing operating portfolio, compared to 322 properties that are triple-net leased to operators. In the second quarter of 2013, 34% of HCN’s NOI came from the RIDEA-structured assets, compared to 27% from the triple-net leased properties, according to a September corporate presentation. 

“We are comfortable with our current portfolio mix,” Brinker says. “The mix will change within reasonable ranges in the future based upon opportunities and market conditions.”

Ventas, the second-largest healthcare REIT with a $18.54 billion market cap, describes its senior housing operating portfolio as comprised of quality assets in primary markets managed by top operators, Atria and Sunrise. 

“These high quality characteristics of the RIDEA portfolio are the most important in ensuring a superior upside with limited risk,” says Lori Wittman, senior vice president of capital markets and investor relations at Ventas. “We believe in having a balanced, diversified portfolio which provides consistent superior returns for our shareholders.” 

HCP, Inc., by contrast, had just 21 RIDEA-structured properties, which accounted for less than 3.4% of second quarter NOI, although its overall senior housing portfolio contributed nearly 36% of total NOI, according to quarterly supplemental information. HCP has a $19.21 billion market cap, making it the largest of the healthcare REITs.

On the other end of the scale, National Health Investors (NYSE:NHI), with a $1.58 billion market cap, recently expanded its RIDEA joint venture with Bickford Senior Living with the acquisition of 17 buildings for a total of 30 properties. 

NHI expects that approximately 15% of its full-year NOI in 2014 will come from the Bickford joint venture, the REIT said during its second quarter earnings call. Through the first half of 2013, the RIDEA-structured properties represented approximately 7.5% of the REIT’s NOI, according to Roger Hopkins, chief accounting officer of NHI.  

“We expect our RIDEA concentration to be in a range of 15 to 25% of our total revenue. In the near term this concentration will be entirely comprised of our Bickford relationship. We would entertain adding other RIDEA partners but do not have any imminent plans to do so at this time,” Justin Hutchens, CEO of NHI, told SHN.  

Whether or not REITs pursue more RIDEA-structured joint ventures ultimately depends on the operators they’re doing business with. 

“It’s not just what the REIT wants, but who they’re acquiring, and how they want to structure the sale as well,” Skoufis says.

Written by Alyssa Gerace