Health Care REIT Inc. (HCN), a leading health care real estate investment trust (REIT) that operates senior housing and health care real estate, has recently acquired full ownership of all the real estate assets of Genesis HealthCare, a leading provider of short-term post-acute, assisted living and long-term care services, for $2.4 billion. The transaction is expected to complete during the second quarter of 2011.
With the deal, Health Care REIT will own 147 post-acute, skilled nursing and assisted living facilities across 11 states in the Northeast and mid-Atlantic region of the U.S. Genesis is the largest provider of post-acute and skilled nursing care facilities in most of its markets, which include Massachusetts, Maryland, New Jersey, Pennsylvania and West Virginia.
The acquired portfolio is characterized by high barriers to entry and significant hospital system referral source admission efficiencies. 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. Consequently, the acquisition provides an unrivalled market differentiator category and strengths Health Care REIT’s position in the post-acute and skilled nursing sector.
Furthermore, the deal offers excellent organic and inorganic growth opportunities, driven by an established pipeline of potential acquisitions. Organic growth in the acquired portfolio is expected to be driven through increases in short-term, post-acute patient population. In addition, Genesis has strategically focused on the growing post-acute patient population and has spent $405 million in capital improvements in the last six years and has developed over 120 clinical specialty units.
Health Care REIT expects Genesis properties to be $0.39 accretive to FFO (Funds from Operations) and $0.29 to FAD (Funds Available for Distribution) on an annualized basis. Post-acquisition, Genesis will continue to operate the facilities in accordance with the long-term triple-net lease agreement. Under the terms of the triple-net lease agreement, Health Care REIT will receive $198 million as rent in the first year. The rent is expected to increase by 3.5% for the first five years of the lease and 3.0% per year subsequently for the entire lease period of 15 years.
The acquisition brings two of the most complementary customer franchises on the same platform in healthcare real estate market and increases the scale and diversification of the combined company. The acquired assets overlap with Health Care REIT’s health system, assisted living and senior housing portfolio and offers continuum of services. On the other hand, the deal enables Genesis to continue its investment in optimizing and expanding its facilities to meet the increased needs of acute patient population.
Health Care REIT is a leading healthcare REIT with a strong portfolio of senior housing facilities, long-term care facilities, and medical office buildings across the U.S. We maintain our ‘Neutral’ rating on Health Care REIT. The company currently has a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for HCP Inc. (HCP), a competitor of Health Care REIT.
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