The normally sleepy world of senior housing REITs got a shakeup on Wednesday with the announcement that Health Care REIT (HCN) and Revera Inc., a leading provider of senior living facilities in Canada, had partnered to purchase and recapitalize Sunrise Senior Living, LLC from affiliates of private equity firmKohlberg Kravis Roberts & Co (KKR).
Sunrise Senior Living operates 290 senior communities with around 26,400 units in the United States, Canada and the United Kingdom. Services run the gamut from senior independent living to assisted living to advanced care for patients with Alzheimer’s disease and other memory-related conditions.
The acquisition should be a good fit for HCN, one of the largest REITs in the healthcare and senior living sectors and completes an earlier investment in Sunrise’s property portfolio. HCN currently owns a “little bit of everything,” including senior living communities, medical office buildings, inpatient and outpatient medical centers and life science facilities, and Sunrise gives the REIT better exposure to the biggest demographic investment opportunity of our time: the aging of the Baby Boomers.
Let’s take a peek at HCN’s portfolio. About 65% of the portfolio is in senior housing, split between properties that HCN operates (40%) and those that are leased on a triple-net basis (25%). In a triple-net lease, the tenant is responsible for all taxes, insurance and maintenance; the landlord’s only responsibility is to collect the rent check. Medical office buildings and skilled nursing facilities make up another 15% and 14% of the portfolio, respectively, and the rest is split between hospitals and research facilities.
Impressively, apart from the skilled nursing facilities and hospitals, which depend heavily on Medicare and Medicaid, HCN’s tenants have very little dependence on the government. Across its portfolio, 82% of its tenant revenues are from private pay clients. That’s a major positive in an era of slashed reimbursements and ObamaCare restrictions.
Looking at HCN stock, we have a REIT paying a 5.6% yield with a long track record of raising its dividend.
An established income payer on the right side of a major demographic wave. Is there anything not to like here?
I may be nitpicking, but I tend to be biased against the biggest large-cap REITs. What they gain in economies of scale they tend to lose in lack of focus. In HCN’s case, I consider its diversified property base to be a mixed bag. Management would better serve shareholders by picking a single property specialty and by focusing on finding the properties with the highest potential returns on investment within that subsector.
Size itself is also a mixed bag. While the largest REITs tend to offer greater liquidity and broader tenant diversification than they upstart brethren, it gets harder and harder to maintain growth at attractive cap rates the larger the portfolio gets.
So, with all of this said, is HCN a buy? I consider it a decent option in a diversified REIT portfolio. Truth is, there aren’t that many “pure” on the senior living theme. The deceptively-named Senior Housing Properties Trust (SNH) has about 30% of its property portfolio in medical office buildings
Omega Healthcare Investors (OHI) is a more focused option, getting virtually all of its revenues from skilled nursing an assisted living facilities. It also happens to pay one of the highest dividend yields on offer at 6.4% and has doubled its dividend over the past 7 years.
