On Wednesday, Toledo, Ohio-based Health Care REIT, Inc. (NYSE:HCN) and McLean, Va.-based Sunrise Senior Living (NYSE:SRZ) announced a mammoth merger and acquisition deal with a real estate value of $1.9 billion—a figure that has the potential to grow substantially bigger in upcoming years—but there are still plenty of details that need to be hammered out.
For one, the management structure—which HCN says will be done through RIDEA—needs to be determined. Sunrise will operate the communities acquired by HCN, but the terms have not yet been released due to confidentiality agreements and ongoing negotiations.
The transaction involves HCN buying all of the approximately 58.3 million outstanding stocks of the senior living chain Sunrise Senior Living for $14.50 per share, or approximately $845 million. But even though HCN will now own Sunrise’s 20 wholly-owned properties, along with its 28% interest in 105 joint venture properties, the operator is expected to remain very much involved.
While the exact terms of that management contract are still being finalized, Scott Brinker, Healthcare REIT’s executive vice president of investments, said the REIT is confident the final agreement with have an alignment of incentives so both the operator and HCN have long-term interest in the assets.
“Sunrise’s management services will be separate from the real estate,” he noted during a call with analysts on Wednesday. “We’re very confident the management company is going to get spun out and recapitalized.”
As the transaction heads toward finalization—which isn’t expected to happen until the first half of 2013—a break-up fee of $40 million is in place, but the REIT has the right to match any higher offer from competitive bidders. Although the deal is subject to approval by many third parties, including those involved in the joint venture parties, Health Care REIT believes the six-month estimated timeline to close the transaction is “more than achievable.”
Industry feedback on the acquisition has been, for the most part, positive. More than one have said the transaction is “good for the industry” and said they expected something like this would happen for Sunrise.
“It appears to be a good opportunity for [HCN] to be able to expand into high-end, private pay assisted living,” said Adam Kaplan, vice president of operations at Chicago, Ill.-based Senior Lifestyle Corporation, noting that with the transaction’s purchase options, the deal “could end up being significantly bigger.”
Some analysts seemed a bit skeptical at the premium HCN paid for Sunrise’s shares—a more than 60% increase than the previous night’s closing price. A Jefferies analyst characterized the deal as “hairy,” perhaps referencing some of Sunrise’s financial struggles from early 2009, but Brinker disagreed.
“There isn’t much hair,” he says. “The 20 [wholly-owned] buildings are high quality, and the other 105 are exactly the type of assets we want to own. We have a pretty good road map in timing and purchase assets. We don’t see much hair.”
With a deal of this size—and its future potential for getting even bigger, if and when HCN decides to exercise purchase options on eligible joint venture properties—the question of the REIT’s liquidity was brought up during the call with analysts.
The REIT will use 40% debt and 60% equity to fund the acquisitions—and it still has wiggle room on its balance sheet, says Brinker.
“We have $2.7 billion available,” he said. “We think we have some good flexibility.”
That flexibility may be necessary in upcoming months, as 50 of the 105 joint ventures will have an exercisable purchase option in the next two years.
“We believe our investment in Sunrise communities could grow to $4 billion within 18 months of closing,” Brinker said during the analyst call. The current $1.9 billion real estate investment is expected to generate an initial NOI yield of approximately 6% after management fees.
Ultimately, HCN seems bullish on the deal.
“We could not be more excited about this transaction,” said Chapman, citing Sunrise’s national presence and well-regarded brand. “These are great assets, [they have an] attractive yield, and meaningful growth opportunity. This transaction advances virtually every strategic goal we have articulated.”
For more information, check out the analyst call transcript.
Written by Alyssa Gerace
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