Update: Omega-Aviv Merger to Create $10 Billion SNF REIT Powerhouse

Omega Healthcare Investors (NYSE: OHI) and Aviv REIT (NYSE: AVIV) announced on Friday an agreement to merge the companies in a stock for stock transaction, creating a $10 billion real estate investment trust (REIT).

The deal, which values Aviv at $3.0 billion, gives the combined companies a portfolio of 874 properties across 41 states and 83 operator relationships, creating a major force in skilled nursing.

Taylor Pickett, Omega’s current CEO will continue to serve as the CEO of the combined company after the deal closes. Craig Bernfield, who currently serves as Aviv chairman and CEO, will join the board of directors of the combined company.

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“The combination of Omega and Aviv creates the premier pure-play skilled nursing facility REIT which, with the expertise and proven track records of the combined management teams, will be well-positioned to continue as the leading consolidator in the large, highly fragmented SNF industry,” said Pickett. “The combined sourcing and development capabilities of this company, coupled with its strong balance sheet, provides enhanced capacity to drive growth and is expected to continue to decrease our cost of capital.”

Under the terms of the agreement, Aviv shareholders will receive 0.90 Omega shares for each share of Aviv common stock they own. Based on the closing stock price for Omega on October 30, this would be equivalent to $34.97 of Omega stock for each Aviv share—representing a premium to Aviv shareholders of 16.2% over Aviv’s closing price on that day.

The deal was met with some surprise, though recent REIT-to-REIT deals such as Ventas’ acquisition of American Realty Capital REIT have set the landscape for mergers of this nature.

“There’s a strategic reason [Omega Healthcare] is doing this deal,” says Dan Bernstein, analyst for Stifel. “Aviv was one of the biggest competitors in terms of SNF buyers. If you look at those selling out of assets, it’s lots of private equity right now. Omega is looking at the landscape over the next couple of years strategically.”

Aviv REIT has a long history of skilled nursing ownership, and has remained bullish in its outlook, with a long-held expertise in owning and managing the property type through reimbursement ups and downs. But the deal also comes as a surprise for other reasons.

“Omega has enjoyed the greenest of green lights from the public market to grow the company, and they are taking out a growing rival, Aviv, in an all-stock deal,” says Michael Knott, managing director of Newport Beach, Calif.-based REIT research firm Green Street Advisors. “Omega arguably would have been better off continuing to buy nursing homes on Main Street rather than Wall Street, where the price tag is much higher.”

Both companies will benefit—Aviv in a premium offered to shareholders; who saw the stock price surge 15% following the news of the merger. But the move on Omega’s part may also signal confidence in a market that many have shied from due to reimbursement uncertainty on the nursing home front.

“This is great news from Aviv’s standpoint – they realize a huge premium, but shareholders can still choose to participate in future upside by virtue of receiving shares in the new company,” Knott says. “Omega enjoys a cost of capital advantage, but a 6.5% implied cap rate shows confidence in the benign reimbursement backdrop for nursing homes.”

Combined, the companies command total market capital of approximately $10.3 billion—$7.3 billion from Omega and $3 billion from Aviv, according to market data as of October 30.  The newly combined companies will also have $7.2 billion of equity market capital, comprised of Omega’s $5 billion and $2.2 billion from Aviv, as noted by the companies in a presentation Friday morning.

According to Pickett, the new company will have “unrivaled” resources to pursue acquisition and development opportunities with the combined base of existing operators.

“This is a strategic combination of two best-in-class companies that have been the most dedicated and successful investors in the skilled nursing sector over the past few decades,” said Bernfield in a written statement. “The combined company will now be positioned to be the premier consolidator of SNF real estate for years to come.”

In terms of number of skilled nursing properties, the merger of Omega-Aviv is unparalleled among other senior housing REITs. Together, the companies combine for 789 SNF properties, more than twice as much as the next public competitor—Ventas, which has 369 SNFs in its portfolio.

The combined platforms of Omega and Aviv have annual historical investments of approximately $900 million since 2012 and a substantial pipeline, according to Aviv’s presentation on the merger. Year-to-date in 2014, the combined companies have made over $900 million of investments in the sector already.

“The market opportunity is significant due to highly fragmented ownership and lack of competition from other well capitalized companies,” Bernfield said. “The combined management team will be the most knowledgeable and experienced in the country.”

The deal is expected to close in next year’s first quarter. Upon closing of the transaction, Omega shareholders are expected to own approximately 70% and Aviv shareholders—together with the limited partners of Aviv Healthcare Properties Limited Partnership—are expected to own approximately 30% of the combined company.

And it won’t signal a downturn in M&A activity in the sector, Stifel’s Bernstein says.

“This was certainly strategic,” he says “… but this is not the end of M&A in the healthcare space.”

Written by John Yedinak with reporting by Elizabeth Ecker

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