The Ventas Inc. acquisition of Nationwide Health Properties “reinforces the buzz in the health care REIT industry,” declared an analysis of the deal by Zacks Equity Research.
This buzz is spurred by the aging of the baby-boomer generation and the resulting increased demand for assisted and independent living facilities.
Zacks noted that REITs of all types have had “easy access to the open market for funds,” which has provided an impetus for merger and acquisition activity.
Ventas/NHP was not the only deal in this sector just announced. Health Care REIT will purchase the real estate assets of Genesis HealthCare for $2.4 billion. Genesis is owned by JER Partners and Formation Capital LLC. Terms of the deal give Health Care REIT the option to purchase 9.9% of Genesis for $47 million.
In a statement, JER Partners managing director Frank Small said the deal allows his company to achieve its “business plan objectives for this investment and distribute capital back to our investors by taking advantage of today’s exceptionally strong demand for health care real estate assets.”
Ventas will buy NHP in an all-stock deal valued at $7.4 billion. The exchange ratio of 0.7866 shares of Ventas stock for each share of NHP gives the deal a 15% premium to NHP shareholders based on the Feb. 25 closing price.
The parties claim the deal will create the nation’s largest health care REIT, with pro forma equity value of $17 billion, pro forma enterprise value of $23 billion and over 100 customer relationships.
Fitch Ratings said the deal gives Ventas a more diversified health care property platform, reduced manager and operator concentration and a larger triple-net lease portfolio. All of those strengthen the position of Ventas’ bondholders.
This is the second deal in recent months for Ventas. In October 2010, it agreed to pay $3.1 billion in cash and stock for the real estate assets of Atria Senior Living Group.
Among the negatives Fitch cites about the deal for Ventas is integration risk because both the Atria and NHP transactions are slated to close sometime this year.
Other negatives are a near-term weakening of liquidity for Ventas and the possibility that it might have to increase leverage to achieve higher earnings growth.
Senior housing will account for 55% of the Ventas/NHP combination’s net operating income and high growth senior housing assets will account for 26% of NOI. No single tenant or operator will account for more than 19% NOI and the top three tenants and/or operators together represent 46%.
Ventas said the deal will result in reduced leverage, with a debt to enterprise value ratio below 30% and net debt to EBITDA ratio approximating five times at closing. The stronger balance sheet, larger portfolio and increased earnings diversification are expected to improve the combined company’s long-term cost of capital and credit profile.
Debra Cafaro, the chairwoman and chief executive of Ventas, will have the same jobs with the combination. Douglas Pasquale, NHP chairman, president and CEO, will take on a senior advisor role.
Centerview Partners LLC is acting as financial advisor to Ventas, and Wachtell, Lipton, Rosen & Katz is acting as legal counsel. JPMorgan Securities LLC is acting as financial advisor to NHP, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel.
To help pay for its acquisition, Health Care REIT is conducting concurrent offerings of common stock and cumulative convertible perpetual preferred stock, with gross proceeds of $1.9 billion.
The deal involves the purchase of 147 post-acute, skilled nursing and assisted living facilities in the Northeast and Mid-Atlantic States. They will be leased back to Genesis on a long-term triple net lease.
The terms of the lease call for rent of $198 million the first year. With the fixed and CPI escalators in the contract, rent is expected to increase by 3.5% on the first five anniversary dates and 3% per year after.
