Health Care REIT Sells Entrance-Fee Portfolio for $435 Million

Health Care REIT, Inc. (NYSE: HCN) announced Monday it has entered into a definitive agreement to sell seven entrance-fee communities and one rental community for $435 million.

The purchase price equates to a 5.6% cash yield on sale and is expected to generate a gain of approximately $95 million.

In a separate announcement on the same day, National Health Investors, Inc. (NYSE: NHI) entered into a definitive agreement to acquire a portfolio of eight senior living communities in the South Atlantic region for $476 million. The two announcements represent the same properties, a Health Care REIT spokesman confirmed, noting that HCN is selling the portfolio to its operator, Senior Living Communities, which is selling the portfolio to NHI.

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“Our retirement communities provide a continuum of care that no other sector of seniors housing can provide,” said Donald O. Thompson Jr., CEO of Maxwell Group, Inc., the management company for Senior Living Communities. “NHI will be a great capital partner for us as we expand our existing communities and grow our development pipeline.”

Following the transaction, NHI will lease the eight communities to Senior Living Communities, pursuant to a 15-year master lease.

“This appears to be a decent deal on all fronts,” says Michael Knott, managing director for Newport Beach, Calif.-based real estate research firm Green Street Advisors. “HCN sells non-core assets at a low cap rate, NHI gets a mid-6% initial yield on its purchase, and the operator walks away with a $40 million profit by monetizing the value built up in its lease with HCN through exercising a purchase option. The secret sauce here for the operator’s $40 million profit was the combination of a purchase option and the build-up of rent coverage that was above market norms.”

The disposition of entrance-fee properties is in addition to HCN’s most recently disclosed 2014 disposition guidance of $625 million and is expected to be completed by Dec. 31, 2014. Upon completion, HCN will own one entrance-fee community.

“This opportunistic sale of a non-strategic entrance fee portfolio is a great outcome for our shareholders,” said Tom DeRosa, HCN’s CEO, in a written statement. “It better positions our portfolio to deliver consistent, resilient returns in all market cycles, and the sale price should allow us to reinvest the proceeds accretively.”

Unlike competing REITS, such as HCP — which is making big bets on the entry-fee CCRC market through a $1.2 billion joint venture with Brookdale Senior Living — Health Care REIT has remained fairly quiet in that sector.

In its third-quarter earnings call, HCN executives told analysts it had little interest in expanding the entrance-fee segment of its portfolio, because “cash flows are too volatile.”

HCN’s eight entrance-fee properties represented a $390 million investment balance — a meager share of the $32 billion enterprise’s portfolio. Furthermore, the properties represented less than 2% of the Toledo-based REIT’s income today, according to company executives.

Overall, the average occupancy for the CCRC properties is about 86%, with the entry-fee components of those properties ranging over 80% and the rental part somewhere in the low 90s.

Editor’s note: See Senior Housing News’ coverage on NHI’s announcement of the transaction for more details on the properties. 

Written by Emily Study with additional reporting by Elizabeth Ecker