The Big Three healthcare real estate investment trusts (REITs), Health Care REIT Inc., HCP Inc., and Ventas Inc., are all very active in the senior housing market this year. Health Care REIT recently announced a multi-billion dollar deal with HealthLease Properties REIT and Mainstreet Property Group; Ventas is acquiring American Realty Capital Healthcare for $2.6 billion; and HCP entered into a $1.2 billion deal with Brookdale Senior Living to create a 49 property RIDEA structured joint venture. As the Big Three continue to make these deals, some industry watchers are discussing what this means for themselves and for smaller companies in the industry.
Analysts Debate the Future of the Big Three
A main topic of discussion concerns whether the Big Three REITs will enter into any more large deals during the remainder of the year. In order for them to justify the growth expectations that support their equity valuations, the Big Three need to acquire high-yield assets. This has some analysts concerned the Big Three could end up purchasing overly risky senior housing portfolios, overpaying for those portfolios, or taking on an excessive amount of leverage to acquire them.
Other analysts are decidedly more comfortable with the Big Three’s current approach to deal making. Todd Lukasik, a senior analyst at Morningstar, recently said that Morningstar “has a slightly downbeat view of Ventas’ recently announced $3.5 billion worth of acquisitions, given the aggressive prices paid and the related dilutive equity issuance at a price below our fair value estimate.” However, he went on to say, “our skepticism isn’t enough to change our overall opinion, so we’re maintaining our $76 fair value estimate and our narrow Morningstar Economic Moat Rating. At its current stock price, Ventas appears to be a relative bargain among our overall real estate investment trust coverage.”
Another topic of discussion concerns the effect these large acquisitions will have on smaller companies in the industry, as well as on the industry as a whole. Will the Big Three’s pursuit of large portfolios lead to price increases across the board for senior housing properties, forcing smaller buyers out of the running for certain assets? Or will their actions have a negligible effect on overall prices and the actions of smaller companies in the market? Most analysts believe the latter is more likely. They argue that strong demand for senior housing assets will encourage more property owners to sell, and the Big Three’s actions will have no material impact on sale prices across the industry. The feeling among analysts is, should a significant shift in transaction activity occur, it will be due to changes in interest rates and other market fundamentals.
Before interest rates rise and the cost of borrowing increases, senior housing providers and investors interested in obtaining capital for acquisitions should contact Cambridge Realty Capital to learn about the different financing options it offers for a wide variety of senior housing transactions.