Health Care REIT Makes $643M Seniors Buy

Health Care REIT Inc. has agreed to acquire a 90 percent interest in a portfolio of 29 seniors housing properties from an affiliate of Arcapita Inc., an investment bank based in Atlanta, for $643.5 million. Sunrise Senior Living Inc. will continue to operate the properties, while retaining a 10 percent ownership interest in the portfolio.In a conference call this morning, George Chapman, chairman & CEO of HCN said that the transaction has been structured to take advantage of the recently enacted REIT investment Diversification and Empowerment Act of 2007 (RIDEA). According to an analysis issued today by the Memphis-based investment firm of Morgan Keegan & Co., Health Care REIT is the first publicly traded healthcare REIT to take advantage of the new law, which allows “healthcare REITs to participate in property-level cash flows using a taxable REIT subsidiary (TRS) structure.” Under the federal tax code, REITs receive favorable tax treatment as long as they satisfy two gross income tests. First, 75 percent of annual gross income must come from real estate related sources like rents for real property and mortgages on real property. Second, 95 percent of annual gross income must come from the real estate sources listed in the first test plus other passive sources such as dividends and non real estate interests. The phrase “rents from real property” does not include money paid for tenant specific services, such as those services provided to guests in a hotel and to residents of senior assisted living facilities. Under the REIT Modernization Act (RMA), which was enacted in 1999 and took effect in 2001, REITs were given the right to own up to 100 percent of the stock of a TRS. The act went on to say that “A TRS may not operate or manage lodging or health care facilities, but it may lease lodging facilities from its affiliated REIT at market rates so long as an independent contractor operates and manages the lodging facilities.” What the RMA gave to lodging REITs, it did not give to healthcare REITs. RIDEA remedies that and allows health care REITs to use a TRS to hire an operator, pass a portion of the revenue along to the TRS, which in turn pays rent to the REIT that owns the property. “This is generally what we would expect to see following the enactment of RIDEA,” Dara Bernstein, senior tax counsel with NAREIT in Washington, D.C., told CPN. “Under the old structure, a healthcare REIT would own a property and lease it to an operator. But operators don’t like to be lessees. Today, we would expect that health care REITs would form a TRS, which will lease the property from the REIT and retain and operator.” In a prepared statement, Health Care REIT said that RIDEA would enable the REIT to capture the benefits of property-level net operating income and asset appreciation more efficiently. “The portfolio’s occupancy rate averages 94 percent,” Scott Estes, Health Care REIT’s senior vice president & CFO, said on a conference call this morning. “For the most part, this is a mature, stabilized portfolio. There are, however, a few properties close to 90 percent occupancy; so there is a chance to increase the portfolio’s overall value.” Health Care REIT will finance the transaction with $365.4 million in cash and by assuming 90 percent of the $309 million in debt that the Arcapita affiliate holds on the properties. At that price the portfolio’s net operating income cap rate is projected to be 6.6 percent for 2009. The 29-property portfolio contains 2,082 units and carries a total valuation of $715 million or $343,000 per unit. The properties are concentrated in major metropolitan markets including New York, Los Angeles and Chicago. Twenty-five of the 29 communities are Sunrise-developed mansions built between 1999 and 2003.