The first quarter of 2015 has not yet ended, but it looks like a big year for real estate investment in senior housing. Chartwell Retirement Residents, an Ontario-based company, plans to exit the U.S. market by selling its entire U.S.-based senior housing portfolio to a joint venture between Brookdale Senior Living, Inc. and REIT HCP, Inc. Chartwell’s U.S. portfolio includes 35 properties, containing 5,025 residential units across eight states – Colorado, Florida, Michigan, Ohio, Rhode Island, Tennessee, Texas, and Virginia. The acquisition is priced at $849 million.
Brookdale is the current operator of the properties, so the transition should be relatively seamless. According to Lauralee Martin, President and CEO of HCP,”Brookdale’s familiarity with this portfolio will be a tremendous asset as we avoid any transition issues and immediately implement capital investment plans to generate future growth above traditional triple-net escalators.” Since its acquisition of Horizon Bay in 2011, Brookdale has operated Chartwell’s U.S. communities. It will continue to do so after the acquisition is finalized.
Brookdale and HCP’s joint venture with an RIDEA structure (REIT Investment Diversification and Empowerment Act) gives HCP a 90% stake, with Brookdale owning the remaining 10% interest. According to Brookdale’s CEO, the acquisition is consistent with Brookdale’s approach to real estate investment. Brookdale prefers to acquire communities it already manages, in order to take advantage of the company’s understanding of the operations of the facilities, minimal transition period and expenses, lower overhead, and “the opportunity to exchange a third party management arrangement with a stable RIDEA joint venture structure.”
In addition to Chartwell’s senior housing portfolio, the joint venture will also include a leasehold interest in two communities currently owned by HCP. This leasehold interest includes 233 residential units, with 89% current occupancy. The joint venture’s portfolio is expected to yield first-year revenue of 6.6%. The sale is encumbered by a mortgage debt of $439 million, with an interest rate of 5.85%. The acquisition is expected to be finalized in Q3 of 2015.
What is the RIDEA?
The REIT Investment Diversification and Empowerment Act is a federal law passed in 2008. It is a business arrangement that allows REITs to maintain a share of the operating revenue, instead of merely collecting payments on the building’s lease. Prior to the passing of RIDEA, the tax rules for this model were not advantageous for health care REITs, as they required at least 75% of gross income to come from rent payments. As a result of the passing of REIDA, REITs will be able to manage their properties more efficiently, creating opportunities for landlords to expand their profit margin. Some analysts opine that this management structure can create extra risk for REITs. In times of economic boom, adopting REIDA can boost profits. However, in times of economic downturn, this management structure can expose REITs to heightened risk of litigation and potential for reduced revenue.