Nursing home operators have been popular targets among real estate investment trusts and private equity firms since the economic downturn began. American Realty Capital Healthcare Trust Inc., CNL Financial Group Inc. and Griffin Real Estate Management have each been on the hunt for targets in the space, but it is Health Care REIT Inc. (NYSE: HCN) that has managed to stand out among the uptick of land-grabbers in this sector.
Under the guidance of Scott Brinker (pictured), executive vice president of investments, HCN took note of the deal opportunities arising from an aging populace and turned its attention to the senior living sector. The most recent deal was the Toledo, Ohio-based company's $1 billion acquisition of a senior housing portfolio from Revera Inc. The May deal put 47 senior housing communities, with some 5,000 units located in major Canadian metropolitan markets, under HCN ownership.
Preceding that deal was HCN's $897 million acquisition of Sunrise Senior Living Inc. in January. Before the takeover, Sunrise posted losses for four of the last five years and lost $23.4 million in 2012. The company also found itself dealing with charges related to investigations and various restructuring costs.
HCN saw a silver lining. Sunrise, deemed the most recognized brand in the senior living space, reported a $147 million gain for 2011. Buying it would add some 20 senior housing communities that Sunrise owns outright as well as an interest in joint ventures that control 105 additional properties. Most of the centers are aimed at the higher end of the market, and they are concentrated in markets like New York, Los Angeles, Chicago and London.
"Sunrise was really a once-in-a-lifetime opportunity," Brinker says, noting the sector's resilience, as well as a lack of the volatility that other sectors have had. "The U.S. senior living space has a highly fragmented ownership that over time will consolidate to a significant degree," he adds.
So far, HCN has a head start, facilitating the bulk of its deals with cash and relatively little debt. "Health Care REIT was able to acquire one of the best portions of senior housing in the U.S. along with getting a large portion of very high quality assets in the U.K., and Sunrise was able to execute its plan to raise shareholder value, " says Randy Paine of KeyBanc Capital Markets, which advised Sunrise Senior Living on the deal.
However, senior living is just one aspect of the company's over $21 billion portfolio. Brinker expects to see much consolidation of operators of outpatient medical centers, which HCN has been known to acquire as well. The upswing in deals comes as the Affordable Care Act-known colloquially as Obamacare-begins its first phase of implementation, with enrollment beginning Oct. 1.
"Under health care reform, Medicare, Medicaid and commercial insurance providers are incentivized to get patients out of hospitals and into an outpatient setting," Brinker says. "Health care reform will reward operators with scale and that means more consolidation."