Part of that success has to do with Health Care REIT’s choice
of operating partners, many of whom are established companies in
their own right, including Emeritus Corp. and Brookdale Senior
Living. The company had 69 partners in mid-year 2008, with no
single provider representing more than 6 percent of the portfolio
and the top- 10 operators comprising about 40 percent.
Health Care REIT helps its operating partners free up capital
by doing sale leasebacks, allowing them to monetize non-core
assets. When working with these operators, the company expects
repeat business given the upfront due diligence it must perform.
Consequently, as part of its selection, Health Care REIT looks
for tenants that focus on quality of services first, rather than
those emphasizing pure profit no matter what the cost.
“We tend to support operators who are very well organized
and deliver cost effective, quality care,” Chapman says. “Profits
naturally follow.”
New Additions
Increasingly, Health Care REIT is backing operators that place
these facilities within larger communities that provide access to
health care, retail and a broader population base. Combination
facilities and CCRCs made up 30 percent of the portfolio on
Sept. 30, up from 27 percent at the end of 2007.
“The company has been able to grow its portfolio but also
divest itself of properties on occasion to move toward the combination facility structure,” says Richard Anderson, a senior analyst
at BMO Capital Markets Corp. “What it wants are campuses
that have various levels of service in terms of the health care that
they provide.”
Medical office buildings and specialty care facilities also make
up a significant part of the portfolio, representing 34 percent of
the portfolio as of Sept. 30. Combination facilities, CCRCs and
medical facilities have also dominated the REIT’s gross investment activities of recent. Specialty care facilities made up 42
percent of acquisition volume, while medical office buildings
account for 28 percent and combination facilities 23 percent. In contrast,
stand alone facilities in areas such as
independent living, assisted living and
skilled nursing comprised just 5 percent
of acquisitions.
“The days of stand-alone nursing facilities may be coming to an end,” Chapman
says. “We favor skilled nursing combined
with assisted living, and possibly dementia as well. These combination platforms
drive more revenue by attracting a higher
quality pay mix of Medicare and private
pay. Consumers prefer multiple levels of
service, which is a big plus for occupancy.”
Health Care REIT had attempted to
take a big step forward by announcing a
tentative deal in September to acquire a
90 percent interest in 29 senior housing
properties from Arcapita Inc. for $644 million, but it canceled
the agreement after due diligence, citing changes in the capital
markets. The deal would have given Health Care REIT 28 combined facilities, operated by Sunrise Senior Living Inc., one of the
country’s leading senior housing operators. While the deal fell
through, Chapman notes more chances will come down the road.
“We will continue to pursue new investment opportunities in the
senior housing and care industry, and are committed to prudently
allocating capital throughout all economic cycles,” he says.
As it invests, Health Care REIT has diversified its portfolio
by acquiring medical office buildings, specialty care centers and
property managers. It bought Windrose Medical Properties and
Trust in 2006 for $1 billion, adding medical office buildings and
acute care centers to the mix. It followed last year with a $300
million purchase of another 17 medical office buildings and
Paramount Property Management Group from Rendina Co., a
real estate company based in Florida and California.
Another strong point for the company is its management
team. When Chapman came on board in 1992, the REIT had
$226 million in assets. President Raymond Braun joined in 1993.
Fred Farrar, executive vice president, came to the team as a result
of the purchase of Windrose, which he formerly led.
“Their management team is among the strongest in the REIT
industry,” Martin says. “There are a couple of people on the team
that could run their own company.”
As health care delivery continues to evolve, management will
follow the market, Chapman says. The company sold off $98 million worth of assets in 2007 and $70 million in 2006, with the bulk
being stand-alone facilities in assisted living and skilled nursing.
“We have always been active asset managers,” Chapman says.
“We really feel our experience in the industry has allowed us to
challenge operator assumptions and to identify problems often
before they do.” F
PIER/GET TY IMAGES
AS IT INVESTS, HEALTH CARE REIT HAS
DIVERSIFIED ITS PORTFOLIO BY ACQUIRING
MEDICAL OFFICE BUILDINGS, SPECIALTY
CARE CENTERS AND PROPERTY MANAGERS.
Charles Keenan is a contributor to Portfolio.
