Closing Window of Opportunity for Major Senior Housing Company Sales

Next year’s senior housing acquisition landscape is looking more favorable for company-to-company deals compared to the past year, but time for sellers to arrange favorable blockbuster deals is running low, some analysts say. 

Financial services firm Stifel Nicolaus met with management-level executives for 11 publicly traded REITs and two nontraded REITs all focused on the healthcare space during NAREIT’s REITworld event, held recently in San Francisco. 

“Some managements feel that the nonpublic REIT and private equity investments of today may become the investment opportunities of tomorrow,” the firm writes in an industry update following the conference. “…The slowdown in new investments, coupled with low cap rates on acquisitions, could herald company-to-company acquisitions.”

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The major healthcare REITs already have experience with REIT-to-REIT M&A, notes Daniel Bernstein of Stifel. Ventas acquired Provident Senior Living Trust, a private REIT, for $1.2 billion in 2005. The following year, HCP bought CNL Retirement Properties, a nonpublic healthcare REIT, for $5.2 billion.

Ventas has also bought three public senior housing companies: ElderTrust (in 2003, for around $184 million), Sunrise Senior Living REIT (in 2007 for around $1.8 billion, and Nationwide Health Properties (in 2011, for $5.8 billion).

These types of transactions create opportunity for stock-to-stock deals where cap rates don’t matter as much as relative value of the equity, Ventas CEO Debra Cafaro indicated during the conference, according to Stifel’s industry update. 

“With cap rates for acquired properties hovering near cap rates for some public companies, we could see public-to-public or public-to-private acquisitions re-emerge as a growth vehicle,” says Stifel. 

However, the public companies that are trading at cap rates above private market transactions typically aren’t those focused on seniors housing, says Bernstein; it’s those concentrated on the medical office buildings or life science space. 

Still, some non-traded REITs that focus on senior housing could potentially be considering an IPO or a sale toward the beginning of 2014. Considering where private market transactions are generally, they might be inclined to consider REIT-to-REIT, he says. In any given year, the odds of such transactions are extremely low. In 2014, the odds are still low—but they’re much higher than usual.

“Given increasing costs of capital for public healthcare REITs, rising interest rates, the potential for increased construction or oversupply in the next two to five years in senior housing, there’s probably a limited window for cap rates to stay where they are today,” Bernstein says. “If you’re considering selling assets, there may not be a better time to do it.” 

Large senior living providers such as Brookdale (NYSE:BKD), Emeritus (NYSE:ESC), Capital Senior Living (NYSE:CSU) and Five Star Quality Care (NYSE:FVE) are examples of public companies with significant real estate holdings that are trading below the sum of their parts—in some cases significantly, Bernstein says.

That’s not to say those companies necessarily should look to sell, he adds, and if they’re not looking to be acquired, then there’s obviously no right or wrong time.

However, with implied cap rates of many of the healthcare REITs remaining below 7% or even 6.5%, operators looking to split out their real estate into a separate holding company—something Brookdale has mentioned as a consideration—may not get as much value than if they sold the company outright. 

“We do believe there’s a limited window of opportunity,” Bernstein says. “At some point, investor return on investments will change.” 

Written by Alyssa Gerace

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