09/13/2012 | By Carisa Chappell
Trading at the highest premium to net asset value (NAV) of all REIT sectors, health care REITs continue to be active in the transactions market.
Health Care REIT Inc. (NYSE: HCN) announced an agreement in August 2012 to acquire Sunrise Senior Living for $1.9 billion. It marked the latest in a string of deals involving a publicly traded U.S. health care REITs in the last two years.
During that period, Ventas Inc. (NYSE: VTR) completed the acquisitions of Cogdell Spencer Inc. and Nationwide Health Properties Inc. for a combined total of more than $8 billion. Prior to those deals, Tiptree Financial Partners completed the acquisition of Care Investment Trust Inc. in the second half of 2010, with a transaction value of $264 million.
In an interview with REIT.com, Jason Lail, manager of the real estate research group at SNL Financial, said financing the acquisitions through equity is an appealing avenue for health care REITs, which is helping to increase the number of mergers and acquisitions in the sector. Lail also said consolidation may be seen as a way to combat smaller profit margins and other costs associated with the Affordable Care Act.
"The Affordable Care Act could put a pinch on profits going forward due to increased compliance costs and reduced margins," Lail said.
Lail said Ventas and HCP Inc. (NYSE: HCP), the health care sector's two largest companies, still have a large amount of cushion on their balance sheets, with a lines of credit plus cash and cash equivalents at the end of the second quarter amounting to $1.7 billion and $1.5 billion, respectively.
Also, Ventas is trading at a premium to NAV of 47 percent, while HCP is trading at a 57 percent premium. Lail pointed out that this gives both companies the ability to tap into equity markets in the future to possibly finance other acquisitions.
A graying population is continuing to drive the demand for health care investments, according to Jeff Theiler, research analyst with Green Street. Theiler said the historically low supply growth across the health care sector likely won't last. As a result, while large premiums to asset value are the norm for health care properties now, those spreads will likely fall as new development comes online.