Blackstone Sale of Sunwest JV a “Massive Outperformance,” More Private Equity Deals Ahead?

This past week, HCP (NYSE:HCP) was the latest healthcare real estate investment trust to make a mammoth move in the senior housing space with the $1.73 billion acquisition of a 133-property portfolio owned by an Emeritus Corp. (NYSE:ESC) and Blackstone Group joint venture. By all accounts, it seems like it was a good deal for everyone, and more deals may be on their way in upcoming months.

“It’s positive for both companies [involved]—HCP gets an accretive transaction with very good rent increases, and Emeritus gets almost $3.00 a share in cash and will have upside in cashflow from continuing to stabilize the portfolio,” says Daniel Bernstein, an analyst with Stifel Nicolaus.

The transaction had about a 6.6% cap rate on a trailing 12-month basis, but could actually be a little higher as the assets continue to stabilize, Bernstein says. 


It wasn’t just beneficial to HCP and Emeritus. Blackstone made 2.4 times its $225 million investment in the portfolio it bought with Emeritus in 2010 for a total of $1.25 billion, according to Stephen Schwarzman, the private equity group’s chairman and CEO, during the group’s third quarter earnings call.

“This is a massive outperformance because this investment was compounding at 45%,” Schwarzman said during the call.  

The gain on the portfolio is part of a recovery effort to minimize losses to Sunwest equity investors that was deemed “miraculous” by a U.S. District Court judge. The investors who kept their money in the portfolio are now expected to receive 100%—or more—of their original investment back, up from a prior expected return of about 60%.


HCP is acquiring 133 of the 145 Sunwest properties, with Emeritus using HCP financing to purchase the nine remaining communities. It will continue to operate the entire portfolio. The acquisition marks a substantial addition to HCP’s existing 314-property senior housing portfolio as of the second quarter of 2012. 

Ultimately, it’s a good turnaround story, says Michael Vaughn, senior vice president at Walker & Dunlop and head of the firm’s FHA Finance Health division. 

Not only did Blackstone “come in and make a bundle,” he says, HCP expects the acquisition will be immediately accretive to earnings, while Emeritus is now more operationally leveraged. 

Look for more instances of private equity offloading some of their senior housing assets before the end of the year, says Bernstein.

“Private equity continues to monetize their real estate investments here in the second half of the year, given what the REITs are willing to pay for the assets,” he says. “There is tax uncertainty coming up at the first of the year. If you’re a private equity firm with a large gain on the books, you’re incentivized to sell the assets today. It might be more that are sold before the end of the year.”

There’s going to be a lot of movement in the senior housing and care space, and it won’t just be on the private side, says Vaughn. 

“The REITs are selling properties they’ve owned for a while, too, maybe because they have leases where they think their upside has been capped and they can redeploy that money better,” he says. “We’ll continue to see buying and selling by REITs and private equity.” 

Written by Alyssa Gerace

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