[Update] HCN Inks $2.3 Billion Deal with HealthLease, Mainstreet

Health Care REIT, Inc. (NYSE: HCN) has agreed to acquire HealthLease Properties REIT (TSE: HLP.UN) in a deal valued at $950 million, and has entered into a partnership with Mainstreet in a transaction that represents a combined potential $2.3 billion investment.

The combined deal includes 53 senior housing and health care properties currently owned by HealthLease, and 17 Mainstreet communities along with the Carmel, Indiana-based developer’s 45-property pipeline.

HCN will acquire the outstanding units of HealthLease for CAD$14.20 (US$13) per share on a fully diluted basis in an all-cash transaction. The acquisition will bring to HCN’s portfolio 53 senior housing, post-acute care and long-term care communities that are managed by existing operators under long-term triple-net lease agreements. Mainstreet Property Group is the external management company for the portfolio.

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Even after paying a roughly 30% premium to the Aug. 12 closing price for HealthLease, investment firm Morningstar pegs the deal’s initial NOI yield as 6.8% on an estimated forward-12-month basis, according to Senior Analyst Todd Lukasik’s note on the transaction.

HCN has also entered into a partnership with Mainstreet — the largest developer of senior housing and post-acute facilities in the U.S. — and will acquire 17 of its NextGeneration communities in addition to 45 communities in Mainstreet’s pipeline.

Analysts say the deal is in line with the types of acquisitions HCN and the others in the Big Three are seeking in the current landscape.

“HCN’s deals with HealthLease and Mainstreet typify its investment strategy of partnering with top operators and allocating capital in a manner that creates shareholder value. Like Ventas and HCP, the company’s balance sheet easily supports multi-billion dollar investments,” says Michael Knott, an analyst with Green Street Advisors.

Including the nearly $1.4 billion in additional development properties acquired from Mainstreet through 2017, Morningstar estimates the deal’s overall initial 12-month-forward yield to be roughly 7.3%, while HCN expects 7.4%.

“The yield compares favorably in the current environment and looks attractive relative to our mid-7s estimated weighted average cost of capital for Health Care REIT,” Lukasik writes. “Given the initial blended yield of 7.3% combined with 2% to 2.5% rent escalators, this deal looks like it can provide total returns to Health Care REIT in the mid- to upper-9s range, which we think will be value-accretive to shareholders.”

HCN will acquire the 17 Mainstreet properties for approximately $369 million with a 2.5% initial cash yield. The REIT’s acquisition of Mainstreet’s 45-property pipeline will represent a $1 billion acquisition at a 7.7% cash yield. In total, the transaction represents a potential $2.3 billion investment at a 7.4% blended initial cash yield, HCN says.

Under the partnership, HCN will provide mezzanine financing at mid-teen interest rates and receive purchase rights at HCN’s option for the additional 45 NextGeneration development projects under long-term triple-net lease agreements.

“At Mainstreet, we’re grateful and humbled to team up with such a great partner as HCN to lead the nation in the development of post-acute health care properties,” said Zeke Turner, founder and CEO of Mainstreet and chairman and CEO of HealthLease. “Americans deserve better choices for their health care and this partnership is built to offer just that.”

Mainstreet has targeted innovation in senior living and post-acute care development through its hotel-like NextGeneration Medical Resorts and high-end nursing home concepts.

The NextGeneration communities each feature a mix of 70 post-acute beds, 30 assisted living beds and rehabilitation therapy space.

“Throughout HCN’s history, our strategy has been to fuel its growth by forming mutually beneficial partnerships with leading seniors housing and post-acute operators,” said Tom DeRosa, CEO of HCN. “We’re excited to expand our relationship-based platform with an innovative developer, who shares our mission to improve health care delivery. Mainstreet’s award-winning NextGen prototype gets patients out of acute-care hospitals and into a lower-cost, more consumer-friendly environment.”

HCN intends to fund the transaction through its $2.5 billion unsecured credit facility and $207 million of cash available, as of June 30, 2014. Long term, HCN intends to finance the transaction in accordance with its target capitalization of 60% equity and 40% debt.

The REIT’s announcements follow recent moves in the senior housing and health care spaces, as some expect more consolidation among large companies on the horizon.

Written by Emily Study

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