Health Care REIT Inc. has finally closed the acquisition of the Sunrise Senior Living Inc. property portfolio and vended Sunrise’s management company. Alongside, it sped up the planned joint venture partner buy-outs.
The acquisition is a strategic fit and would enable Health Care REIT to own high-quality private pay senior housing communities in high-barrier-to-entry affluent markets.
To date, Health Care REIT has shelled out $3.4 billion on the acquisition and expects the amount to rise to $4.3 billion by July 2013. This increase would result from the exercise of its rights to buy additional joint venture partner interests at predetermined purchase prices. The total investment worth $4.3 billion will likely comprise 120 wholly owned properties and five joint venture properties.
Concentrated in affluent areas of London, Southern California, Chicago, Philadelphia, Boston, Washington D.C., and Montreal, these properties generate average monthly rental rates which are approximately 100% higher than the national average.
Hence, we believe this acquisition to provide significant upside potential for Health Care REIT. Also, the company itself expects the $4.3 billion acquisition to generate a 6.5% unlevered initial yield, or 6.1% after capital expenditures, which is quite decent.
Moreover, prior to the purchase of the Sunrise property portfolio, an entity managed by affiliates of Kohlberg Kravis Roberts & Co. and associates of Beecken Petty O’Keefe & Company, purchased Sunrise’s management company for around $130 million. The deal included Health Care REIT investing about $26 million for a 20% ownership interest.
Health Care REIT financed the deal, which required around $3.1 billion in cash so far to close the loans, the purchase as well as for secured debt repayment, with its capital raises in 2012 and available funds under its new unsecured credit facility.
We expect the deal to be accretive to Health Care REIT, improving its economies of scale and further enabling it to gain access to higher yielding embedded investment opportunities, as more and more ownership stakes in joint venture properties come up for grabs.
Further, we note that the senior housing sector is a highly-fragmented market with limited new supply and positive growth indicators. According to the U.S. Census Bureau, the elderly population (aged 65 and older) is expected to jump 36% from 2010 to 2020 to 54.8 million.
Therefore, the latest acquisition by Health Care REIT, which currently has a Zacks Rank #2 (Buy), reinforces the buzz in the healthcare REIT industry, spurred by an aging Baby Boomer generation’s increased demand for assisted and independent living facilities.