Enormous Health Care REIT Consolidation Wave is Yet to Come

Health care real estate investment trusts (REITs) have been the most active investors in senior housing properties of late, dishing out hundreds of millions of dollars to acquire massive portfolios. But the full force of their blockbuster potential may still be yet to come.

Currently, health care REITs own about 12% of all the institutional health care real estate in the market today, and this is creating significant opportunity for future merger and acquisition activity, said Todd Stender, director of equity research at Wells Fargo Securities.

“It is an enormous opportunity for consolidation to come into this space,” Stender said Tuesday during a symposium hosted by National Health Investors (NYSE: NHI) in Nashville, Tenn.

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Health care REITs have been at the forefront of transaction activity in recent years, reaching a high point in 2011, when there were 312 deals totalling $27.6 billion in the senior housing and care sector, according to data from the National Investment Center for Seniors Housing & Care (NIC).

That year, publicly-traded companies—REITs included—accounted for 94 deals totalling $24.5 billion, which was about 89% of that year’s total investment volume in dollars. The “Big Three” in health care real estate, Health Care REIT (NYSE:HCN), HCP Inc. (NYSE:HCP) and Ventas (NYSE:VTR) have led the pack with extensive buying power and large portfolios focused in part on private pay senior living properties.

Despite the billion-dollar flurry of consolidation activity that has already taken place among health care REITs, including the finalization of the $11 billion acquisition of Aviv REIT by Omega Healthcare Investors (NYSE: OHI) in April, and NorthStar Realty Finance Corp.’s (NYSE: NRF) $4 billion purchase of Griffin-American Healthcare REIT II that closed in December—the brunt of activity has yet to be fully realized, especially when comparing REIT involvement in other sectors.

Take the mall sector, for example. Whereas REITs focused on shopping malls collectively own about 40%-50% of all U.S. mall properties, REIT investors only own about the 12% of the health care real estate market.

“That consolidating wave has come and gone [in the mall sector],” said Stender. “The wave has yet to come in health care.”

REITs are largely external growers, fueling their expansion through acquisitions, though they can experience some high “single-digit internal growth” by forming RIDEA structured deals as well, Stender said.

But at the end of the day, it all comes down to interest rates—which have for several years been at historic lows. Now, economic forces are pointing toward a pending rise in rates.

“Where interest rates are headed, that’s probably the biggest headwind right now,” Stender said.

Written by Jason Oliva

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