Health Care REIT, Merrill Gardens to Form $817M Partnership

Health Care REIT Inc. and independent- and assisted-housing owner/operator Merrill Gardens L.L.C. announced plans for a partnership valued at $817 million, joining forces to own and operate a 38-property portfolio of independent-living, assisted-living and dementia-care communities in various coveted markets on the West Coast. Executives at both firms believe the timing is perfect--for their own strategies and to address the demands of the seniors housing market.

By Barbra Murray, Contributing Editor

Health Care REIT Inc. and independent- and assisted-housing owner/operator Merrill Gardens L.L.C. announced plans for a partnership valued at $817 million, joining forces to own and operate a 38-property portfolio of independent-living, assisted-living and dementia-care communities in various coveted markets on the West Coast.

The group of properties, located predominantly in affluent, high-barrier-to-entry markets in California and Washington, accounts for an aggregate 4,388 units and has an average occupancy level of 92 percent. The communities consist of a 13-property HCR portfolio valued at $307 million and a $510 million group of 25 Merrill Gardens properties, including Merrill Gardens at Queen Anne in Seattle (pictured).

The agreement calls for HCR to own an 80 percent stake in the joint venture and Merrill Gardens the other 20 percent interest, with HCR’s stake to be granted in exchange for cash and the pro-rata assumption of $249 million of the total $381 million in debt secured by the entire partnership portfolio. Merrill Gardens will remain as manager of the communities.

HCR and Merrill Gardens have planned for the transaction to capitalize on the structure authorized by the REIT Investment Diversification and Empowerment Act of 2007, which gives REITs the opportunity to participate in property-level cash flows using a taxable REIT subsidiary structure to hire a property operator and pass along a fraction of the revenue to the TRS, which then pays rent to the REIT that owns the property. HCR is no stranger to RIDEA. As reported by CPE in September 2008, an analysis issued by investment firm Morgan Keegan & Co. pointed to HCR as the first publicly traded healthcare REIT to take advantage of the act.

Executives at the two companies believe they timed the transaction perfectly to meet their goals and address the state of the seniors housing market. “We were on the verge of looking for alternatives for capital expansion,” Bill Pettit, president of Merrill Gardens, told CPE. “It’s about the attractiveness of the future expansion of the healthcare real estate market, and this partnership fits a variety of needs, so the timing was right and the partner was right.” Added HCR CEO George Chapman: “The seniors housing market had sort of a down cycle that went along with the economic downturn, but the economy is moving up so we agree that the timing is right.”

And indeed, the seniors housing market is destined for a post-recession growth spurt. “Over the last year-and-a-half to two years, we did see hesitancy among seniors to move into independent-living communities, but they were just deferring the decision,” Petit said. “For the next couple of years, they’ll be making the decision for independent living if not assisted living. But the supply is insufficient to handle the demand going forward, demand that will be led primarily by deferred decisions.”

In the more distant future, the Baby Boomer set will further increase the call for seniors housing accommodations. “The Baby Boomer influence on seniors housing is still 15 years off, so the growth in the near term will come from deferrals and in the long term from the absolute growth of the seniors population.”

The HCR/Merrill Gardens transaction is on track to close in September of this year. “This partnership just absolutely makes sense,” Chapman said. “We’ve done business together for 15 years, both organizations are close and both are transparent. This partnership deepens the relationship and we’ll have a lot more intellectual interaction–and hopefully, we’ll produce better seniors housing.”

The partnership, Petit believes, has an even broader meaning, with the potential to impact not only the service side of the seniors housing industry but the business side as well. “It brings an attractive alternative to those of us who have built private companies in seniors housing and are facing the choice between selling assets or going out and raising capital,” Petit said. “The partnership creates a very viable model for a private, regional company to find growth capital and to achieve access to the more efficient capital and debt markets available to public REITs. It’s a tremendous tool, and I would be very surprised if other private operators didn’t seek this type of partnership.”