Last Monday, we wrote that CNL Retirement Properties was “on the block” and that we would publish who we heard was the winner a few days later in the May issue of The SeniorCare Investor. Unfortunately, we did not know that the deal had progressed as fast as it did, with the formal announcement coming the next day, Tuesday, that Health Care Property Investors (HCPI) was the winning bidder at $5.2 billion plus the $120 million cost of the “external advisor” to CNL, for a total price of just over $5.3 billion. The price we had heard was $5.4 to $5.5 billion, so we were close, but the transaction is not expected to close until sometime in the third quarter.
Equity analysts are having a hard time trying to figure out the impact the acquisition will have on HCPI, because the final structure will not be known for a while and HCPI stated that it plans to sell off some of its existing assets (primarily skilled nursing facilities and hospitals) and put up to $2.0 billion of the CNL assets into joint ventures and other off-balance sheet vehicles. The goal of HCPI management is to position the REIT for the future, with a large portfolio of newer assets for the most part built in the past five to 15 years (CNL) to supplement (and replace) the older real estate of the original HCPI, with the average age of the nursing facilities at 30 years. While out with the old, in with the new makes sense, we hope the new properties will all be in the black soon from a rent coverage basis.
The CNL acquisition is a bold move for HCPI because of its size as well as the fact that up to 50% of the seniors housing portfolio does not quite have sufficient cash flow after management fees to cover current rent payments. While rent coverage has been increasing, it is going to be tight for at least a year, so there will be little room for error. And, while there are plenty of good assets, any portfolio is going to have some warts, and when you get to the size of $5 billion, there are going to be more than a few. CNL came up with a value of $180,000 per unit for the seniors housing portion, stating that the figure was below replacement cost. That may be the case, at least in many of the markets, but $180,000 per unit for a portfolio of that size is certainly at the high end, even in a bullish market. And then there is the matter of some of the “shell” lessees, which are thinly capitalized companies used by CNL that in turn hired companies such as Sunrise Senior Living to manage the facilities. REITs are used to having the operating company on the hook for lease payments, not a company with few assets, so we don’t know how HCPI will deal with the issue, if at all.
The big question we have not found an answer to is, What was the amount of the back-up offer? If it was close, then the market is even stronger than we thought. If it was at least 10% lower, or $500 million below HCPI’s bid, then HCPI may have an interesting ride ahead.
Related links:
For more articles on the senior care acquisition market, see Index links for The SeniorCare Investor
Get the inside scoop on senior care M&A at The SeniorCare Investor
Database of health care M&A transactions, including senior care acquisitions
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