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Close on the heels of the acquisition of Sunrise Senior Living Inc. – one of the largest providers of senior living services in the U.S., Health Care REIT Inc. (HCN - Analyst Report), a leading health care real estate investment trust (REIT) that operates senior housing and health care real estate, has decided to offload its management company business.

To materialize the decision, Health Care REIT has penned an agreement with the affiliates of investment firms Kohlberg Kravis Roberts & Co. (KKR - Snapshot Report), Beecken Petty O’Keefe & Company, and Coastwood Senior Housing Partners LLC, to form a new entity that would acquire the divested business. Health Care REIT would invest about $26 million for a 20% ownership stake in the joint venture.

The divested business would include the existing management contracts of Sunrise Senior Living along with the 125 communities set to be acquired by Health Care REIT. The newly-formed joint venture entity would subsequently induct all the employees of the erstwhile Sunrise Senior Living and operate under the ‘Sunrise’ brand.

The current deal is effective within the framework of the previously announced merger of Health Care REIT and Sunrise Senior Living, under which the former would acquire all the outstanding shares of the latter for $14.50 per share in an all-cash transaction. The company expects to partially fund the acquisition from the proceeds of the divestment of the management business.

With a median age of eight years, the acquisition will enable Health Care REIT to own high-quality private pay senior housing communities in high-barrier-to-entry affluent markets. In addition, the company is likely to gain operational synergies as an experienced and dynamic management team from Sunrise Senior Living, with over 30 years of experience, comes on board.

Besides improving the economies of scale, the acquisition would further enable Health Care REIT to gain access to higher yielding embedded investment opportunities, as more ownership stakes in joint venture properties come up for grabs. The senior housing sector is a highly-fragmented market with limited new supply and positive growth indicators, with the over-85 demographic growing at three times the rate of the overall population.

Health Care REIT invests across the full spectrum of senior housing and healthcare real estate properties. Headquartered in Toledo, Ohio, the company also provides an extensive array of property management and development services.
 
Founded in 1970, the company was the first REIT to invest exclusively in healthcare facilities. Health Care REIT provides senior housing operators and healthcare systems with a single source for facility planning, design and turn-key development, property management, and monetization or expansion of existing real estate.
 
We maintain our Neutral recommendation on Health Care REIT, which currently has a Zacks #3 Rank that indicates a short-term Hold rating.

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