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Recently, Health Care REIT, Inc (HCN - Analyst Report) penned a triple net lease deal with Emeritus Senior Living (ESC - Snapshot Report) for a portfolio of 38 senior housing communities. The transaction is part of the company’s efforts to strengthen its long standing ties with Emeritus, and consequently enhance its portfolio reach.

The leased portfolio, comprising around 4,400 units, offers both assisted and independent living as well as memory care services to customers. The assets are positioned across 8 states, and mostly in Washington and California. 

Notably, the properties are currently owned by Health Care REIT in an 80%/20% joint venture (JV) with Merrill Gardens. Upon the completion of the lease deal, Health Care REIT plans to acquire Merrill Gardens’ 20% interest in the leased portfolio for $173 million, which includes pro rata mortgage debt of $82 million. The transaction is likely to conclude in the third quarter of 2013, upon gaining regulatory and lender consents. 

As a matter of fact, in the future, Health Care REIT and Merrill Gardens will continue their JV partnership in 10 premium communities, situated across several prosperous, infill markets – such as Seattle, San Jose and San Diego.

Lease Deal Terms

The triple net lease deal carries an initial term of 15 years, with an additional 15-year extension option. Moreover, in the first year, Health Care REIT will receive $54 million of rent on the leased assets to Emeritus.

As per the term, the annual rent increment would equal to the greater of Consumer Price Index (CPI) or 4.00% in the second year of the deal and greater of CPI or 3.25% thereafter. Additionally, in the third year, Health Care REIT will be entitled to get additional rent, if gross revenue from the portfolio exceeds a certain limit.

Moreover, the company announced that the rent would get reset to fair market value during lease renewals, with floor and ceiling ranges specified. The floor would be prior year’s rent plus the escalator while the ceiling would be 110% of the previous year’s rent.

Our Take

This particular deal with Emeritus – one of the largest assisted living and memory care services providers in the U.S. – depicts Health Care REIT’s concerted efforts towards increasing its top line through strengthening its ties and flexibility to its business model. Moreover, with the management projecting the deal to be moderately accretive to earnings in the first year, we remain encouraged and view it as a strategic one.

Health Care REIT currently carries a Zacks Rank #3 (Hold). REITs that are performing better include CubeSmart (CUBE - Snapshot Report) and DCT Industrial Trust Inc. (DCT - Snapshot Report), both of which carry a Zacks Rank #2 (Buy).

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