While future strategy is generally a motivating force when two parties enter a joint venture, shared vision is crucial for RIDEA-structured deals between senior-housing focused real estate investment trusts and operators.
“A RIDEA structure aligns the interests of both parties—the owner and operator are both invested in the operations of the community, and can leverage this partnership for continuous operational improvement,” says Scott McCorvie, manager of investments at Sentio Investments, LLC. Sentio is the advisor to Orlando-based Sentio Healthcare Properties, a public non-traded REIT that announced a $150 million equity commitment from Kohlberg Kravis Roberts & Co. in February.
RIDEA has been a very prominent part Sentio’s portfolio strategy, says John Mark Ramsey, president and CEO of Sentio. All of the REIT’s private pay senior housing is owned in a RIDEA structure, a “meaningful” amount of which is owned in a joint venture with the operator.
“We like that we have very strong and vested interest alongside of our partners, and how these deals perform,” he says.
The very first RIDEA-structured deal between a REIT and an operator was the one between Merrill Gardens and Health Care REIT (NYSE:HCN) in 2010, coming in at a little over $800 million.
The deal evolved as the operator did a five-year look-back and planned ahead with a focus on industry changes, says Bill Pettit, president and chief operating officer of R.D. Merrill Co. He cited Health Care REIT, Ventas, and HCP as three “dominant” consolidators within the senior housing space.
“We believed—and I still believe—it’s going to be very, very difficult for small, regional firms to grow to larger regional firms through acquisitions,” Pettit says. “The RIDEA strategy was not only attractive to us because it allowed us to participate on an equal playing field for acquisitions of attractive existing assets in competition with other REITs, but also because the REIT strategy was very much focused on long-term ownership of senior housing assets.”
That aligned “perfectly” with the Merrill family’s interest in building a company looking forward around 10 to 20 years, rather than seven years, more typical of institutional capital seeking liquidity.
“For the growth of Merrill Gardens, we thought that it made sense to have a well-capitalized, publicly traded REIT as a partner,” Pettit says.
The RIDEA strategy accomplished a dual objective: it allowed Merrill Gardens to compete with REITs for acquisitions, while also aligning with the REIT strategy that focuses on long-term ownership. It also protected against recession-fueled speculation regarding Fannie and Freddie’s futures at a time when around 90% of Merrill Gardens’ projects were financed with GSE money.
“The challenge for us as we looked at the RIDEA venture was finding the right partner and one that philosophically aligned with our beliefs about how to own and operate senior housing, and one that looked to partner with us because of our expertise, and not because they wanted to get their hands on our real estate,” Pettit says. “For us, HCN was the perfect match.”
They’ve been called anything from perfect matches to marriages, but some senior living operators refer to RIDEA-structured partnerships on a whole new level.
“For a small, family business, it’s been a blessing,” says Mike Eby, co-president of Bickford Senior Living, which owns 28 of its 46 properties in a RIDEA-structured joint venture with National Health Investors (NYSE:NHI). “Frankly, NHI’s the perfect one for us.”
There are several advantages Bickford has realized as the operator half of a RIDEA relationship.
“[The partnership] has taken so much financial pressure off of us,” Eby says. “The margin of error is much bigger. It’s a great relationship all the way around. From our perspective, it’s really nice to have a partner who has the ability to back you up.”
With an NHI loan, Bickford was able to purchase a 17-property portfolio back from a private equity firm it had previously partnered with and is also in the process of adding onto existing communities. The operator also has three joint venture projects under development, two of which will open soon.
All of the funding for these projects is coming from NHI, Eby says. Once Bickford stabilizes the properties, NHI has the opportunity to add them to the RIDEA portfolio, which splits ownership 85/15 with NHI as the majority owner.
“Unless we’re buying our own properties back, the acquisition market is just so over-heated,” Eby says. “Most deals are going for $250,000-$300,000 a unit. We can build our own buildings for $150,000 a unit. It makes a lot more sense to develop and build new projects, right now.”
As for whether or not a RIDEA is right for everyone, Eby cautions operators to be familiar with their partners’ vision.
“It’s like a marriage Some of the smaller operators—including us—don’t like the thought of giving up control. But if you don’t make your payment to the bank, you don’t have control anyway. You’ve got to find the right partner, who believes the way you do.”
Written by Alyssa Gerace