05/29/2014 | by
Article Author(s)

It may not be the Wild West, but fierce competition in the health care sector has left public, non-listed REIT (PNLR) Griffin-American Healthcare REIT II taking what Dan Prosky, the firm’s president and chief operating officer, describes as a “rifle shot” approach to new acquisitions.

“We completed $1.5 billion in acquisitions in 2013 by doing multiple small transactions,” he says. Whereas stock exchange-listed health care REITs are using a “shotgun” strategy to acquire entire portfolios, Prosky says his company prefers to “pick off individual properties that have value.”

Even though the company may be taking a different path than some of its publicly traded counterparts, the destination is the same, according to Jeff Hanson, chairman and chief executive officer of Griffin-American Healthcare REIT II.

“When we launched Griffin-American Healthcare REIT II in 2009, we did so with a strategy to build a diversified portfolio of clinical health care real estate similar to the portfolios of the largest and most successful health care REITs,” he says. “We were determined to keep the portfolio unburdened by debt, and have successfully accomplished both of our strategic goals. Today, we are the fourth largest diversified health care REIT in the country with a portfolio that carries just 13.1 percent debt as of the close of 2013. As a result of the way the balance sheet has been constructed, we believe the company is primed for continued growth and has maximized its strategic options for stockholders.”

Management appears to have positioned Griffin-American Healthcare REIT II as a prized takeover target, too. According to a May report from The Wall Street Journal, the company could fetch as much as $3.7 billion from four finalists bidding to acquire it: Ventas, Inc. (NYSE: VTR); Health Care REIT, Inc. (NYSE: HCN); American Realty Capital Healthcare Trust, Inc. (NASDAQ: HCT); and a division of NorthStar Realty Finance Corp. (NYSE: NRF). The company had no comment on the report.

Expansion Strategy

The health care sector is favored by demographics, according to Prosky, as an aging population ensures that demand for space will go up regardless of what happens to the economy. He notes that even during the recession, the health care sector generated job growth.

“In the long term, we’ll see an increased pace of mergers and acquisitions in the health care industry delivery systems,” Prosky says.

PNLRs in the health care sector have been particularly aggressive buyers of property, says Jeff Theiler, a research analyst with Green Street Advisors. (Editor’s note: Since the time when REIT.com conducted this interview with Theiler, he left Green Street for a position with Physicians Realty Trust (NYSE: DOC) where he will serve as executive vice president and CFO.)

“Non-traded REITs have raised a lot of capital, and they’re incentivized to buy property to generate income and pay dividends,” Theiler says. “The pace of purchases is driven by the amount of money they’re raising.”

Griffin-American Healthcare REIT II owns a portfolio that is diversified across different property types within the health care sector and spread across 31 states and the United Kingdom. Prosky says that because PNLRs raise money consistently and over a long period of time, they have more cash available and tend to acquire more property than listed REITs. Griffin-American Healthcare REIT II has raised $2.8 billion in the past four years. The company’s focus has been on clinical health care facilities—places where patients are being seen, according to Prosky.

“Our biggest property segment is medical office buildings,” he says. “We look for areas where we can acquire concentrations in an area such as multiple medical office buildings on one campus or several in one city where we can have a local leasing manager.”

“Generally, within the health care sector, geographical location isn’t as important as it is for other property types,” Theiler says. “Investors look for a location near a good hospital or in an affluent area, but most health care REITs own pretty widely dispersed properties.”

Prosky admits that Griffin-American Healthcare REIT II would like to own more hospitals, but he says the REIT is extremely selective and wants facilities with superior cash flow.

“The ones we want to buy aren’t for sale,” he says.

The company also has diversified by going global. A handful of publicly listed health care REITs have invested in the United Kingdom and Canada, and Griffin-American Healthcare REIT II followed them by acquiring a $472 million portfolio of senior housing facilities from the Caring Homes Healthcare Group there in 2013.

“We’ve been looking at Canada and the U.K. for a year or two because of the lack of a language barrier and because there’s a similar ethos and level of health care in those countries to the U.S.,” Prosky says. “We liked the Caring Homes deal because the high quality of their properties, which are in and around London. They have a high percentage of private payers, too.”

Development Projects

While Griffin-American’s acquisitions helped push their net operating income (NOI) up approximately 102 percent from 2012 to 2013 ($161.0 million in 2013 versus $79.6 million in 2012), the REIT is also active on the development side, financing long-term acute care facilities, medical office buildings and senior living facilities.

“Our development strategy is similar to how we acquire properties,” Prosky says. “For instance, the medical office buildings are all pre-leased. We’re not speculative; we’re mostly expanding existing relationships. If a property is performing well, we’ll see if we can add to its value.”

Prosky anticipates that 2014 will be a little quieter than 2013 for Griffin-American Healthcare REIT II, but he says the REIT’s lack of debt and it’s high percentage of assets without mortgages put it in a good position for continued acquisitions and development.