To RIDEA or not to RIDEA? That was one of the questions addressed by executives of healthcare Real Estate Investment Trusts (REITs) during the Assisted Living Federation of America’s annual expo and conference in Charlotte, N.C. last week.
RIDEA, which stands for the REIT Investment Diversification and Empowerment Act, was adopted in 2008 and allows REITs and operators to share in the risk of the property or portfolio, while also sharing in the profits from operations via rental income.
Ventas (NYSE:VTR) and Health Care REIT (NYSE:HCN) have been the most active in using the RIDEA structure, with Ventas having acquired Atria Senior Living Group for $3.1 billion in 2010 and HCN completing a string of RIDEA transactions including partnerships with Merrill Gardens for $817 million and others with Benchmark Senior Living, Senior Star Living, and Silverado Senior Living.
Despite all the buzz around these types of deals, don’t expect them to take over the marketplace, the panelists said. According to John Cobb, chief investment officer of Ventas, the company would like to see about 25% of its portfolio being RIDEA.
“Every REIT has a different spin on it—where they see the best risk and reward,” he said.
Over time, Health Care REIT might like to see 30% to 40% of its portfolio be RIDEA-based, but Chuck Herman, executive vice president and chief investment officer admits it really depends on what the market brings.
“When we signed up to do these transactions, it was with those folks who we think are the best,” Herman said. “There are management incentives on the contracts in place, and ways for the operator to do better if they hit certain metrics.”
Smaller REITs like National Health Investors (NYSE: NHI) have also done RIDEA transactions, but on a much smaller level. Initially NHI wasn’t all that interested in doing a RIDEA transaction, but that changed when it found the perfect partner in Bickford Senior Living, according to Justin Hutchens, chief executive officer of NHI.
Announced last year, the deal included 10 properties made comprising assisted living and memory care, with NHI owning 85% of the joint venture, and Bickford owning the rest.
“[Bickford] has the track record, management experience, and sophistication to go public down the road,” said Hutchens. “Rather than take that route, they went public through us when we wrote them a check.”
In order to do a RIDEA deal, operators need to be have accounting systems to make sure they are Sarbanes-Oxley compliant. Not all operators have the level of sophistication needed by the REITs to do these types of deals. For those that do, Ventas is looking for assets in great markets with great operators.
“It doesn’t mean it has to be the biggest operators, but for us its private pay senior housing,” said Cobb. “We are bullish on [RIDEA] , but disciplined on how we use it.”
Written by John Yedinak