Healthcare real estate investment trusts (REITs) such as the Chicago-based Ventas, Inc. participated heavily in M&A activity in 2011, and with their low costs of capital, they effectively cornered the market. And with cap rates falling, these types of deals are getting more expensive and might not end up being very profitable, reports Crain’s, which could further box out other capital sources.
Ventas acquired Nationwide Health Properties, Inc., for $7.6 billion in July 2011, followed by a 117-facility portfolio managed by Atria Senior Living for $3.1 billion, and then in December expanded its medical office building presence through the acquisition of Cogdell Spencer Inc. for $760 million.
And while the Nationwide deal was “immediate accretive to earnings,” according to Crain’s, these sorts of acquisitions may not end up being very profitable.
David Aubuchon, an analyst at Robert W. Baird & Co. in Milwaukee, worries that some of the senior-care acquisitions have become expensive, with first-year returns, or capitalization rates, falling between 5 percent and 7 percent. He reckons that the Ventas/Nationwide combination will yield less than 6 percent.
“In a world with low interest rates, the cost of capital for health care REITs like Ventas has gone down dramatically, both on the debt and equity side,” he observes. “That’s how these deals make sense.”
Because REITs have a low cost of capital, these sorts of deals are still viable, despite lower returns. But for other finance sources, it won’t be so easy to obtain capital and break into the market if cap rates keep falling.
Read the article here.
Written by Alyssa Gerace