Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company, and Coastwood Senior Housing Partners LLC will acquire the management company business of Sunrise Senior Living (NYSE:SRZ) for approximately $130 million, Health Care REIT (NYSE:HCN) announced on Friday, Sept. 14.
For its part, HCN will invest approximately $26 million for a 20% interest in the new entity. Under the agreement, the sale will close immediately prior to the REIT’s previously announced acquisition of Sunrise.
“The acquisition of the management business by a partnership with substantial expertise in both health care and real estate, that includes KKR, BPOC and Coastwood, powerfully endorses the Sunrise value proposition,” said George L. Chapman, Health Care REIT’s Chairman and CEO. “The backing of Sunrise management ensures a stable and growing management platform that aligns perfectly with our long-term value creation expectations.”
“Our firm has deep roots in seniors housing, and we have always admired the relationship-based care that Sunrise provides seniors across the U.S. and internationally. We are delighted to partner with Sunrise management and employees to continue to grow its platform and to maintain its longstanding legacy as the industry standard,” said Bill Petty, partner at BPOC.
Sunrise’s management business includes the national senior living provider’s existing management contracts covering 282 communities, which includes the 125 communities that HCN will acquire; leasehold interests in 15 communities; and 12 development parcels.
Additionally, a subsidiary of the Sunrise management partnership will employ all employees of Sunrise and operate under the “Sunrise” name and brand as terms of the agreement.
Immediately following the completion of the sale of the management company, Health Care REIT will proceed with the acquisition of Sunrise.
The Sunrise management partnership has agreed that the management company entity will reduce the base management fees charged on the originally announced 20 wholly-owned communities to 5% of revenues, which will be adjusted up or down depending on achievement of net operating income performance hurdles.
Additionally, basement management fees on the originally announced 105 joint venture communities, as joint venture partners are bought out and the properties become wholly owned, will be reduced to the lesser of the current management fee or 5.5% of revenues, which will also depend on the performance of net operating income.
“We have been focused on investment opportunities in senior housing for the past several years as we appreciate that this sector is under served from a demographic perspective,” said Ralph Rosenberg, KKR’s Global Head of Real Estate. “Additionally, we have always gravitated to industries that are operationally intensive and look for opportunities to invest with best in class operators in those industries. Sunrise clearly fits into this theme.”
Health Care REIT expects to use proceeds from the sale of the management business to partially fund its acquisition of Sunrise Senior Living.
On Thursday, prior to the announcement, analyst firm Stifel Nicolaus said it believes HCN’s acquisition of Sunrise is “more favorable than was initially perceived” and accordingly is more confident that the transaction will be nondilutive in 2013 and accretive in 2014.
Written by Alyssa Gerace