Don’t you just love it when a plan comes together? Just when Welltower announced a deal to buy Holiday Retirement Corporation’s 86 owned assets, and Atria Senior Living agreed to buy Holiday itself, Ventas steps in and buys New Senior Investment Group. New Senior owns 77 Holiday-managed communities, 21 communities that have recently been switched from Holiday management to Atria, 15 other communities managed three other providers, and one large community triple-net leased to Watermark Retirement Communities. At the end of the first quarter, just four communities were managed by other companies, so things must have moved during the second quarter. Jay Flaherty must be loving it.
The total purchase price, including assumed debt of $1.5 million, comes to $2.3 billion, or about $185,400 per unit, or more than a 20% premium to what Welltower paid for the 21 Holiday assets recently purchased. Based on first quarter annualized NOI the cap rate comes to 5.3%, based on projected 2022 it is 6%, and based on stabilized estimated (by Ventas) NOI sometime in the future, they believe the cap rate will end up at 8%. That is the difficulty of coming up with a cap rate when the most recent cash flow numbers, pretty much for all sellers, are from the pandemic’s low, and everyone expects cash flow to rise throughout 2021 and into 2022. The share price also represents a 31% premium to New Senior’s pre-announcement price.
This sale should come as no surprise, as it had been much discussed for a year or two, as a basically one-tenant REIT is not something investors like, not to mention the small size. And no surprise, equity analysts had also dropped their coverage. The cost of running a public REIT is not cheap, and Ventas could possibly save up to 90% of New Senior’s G&A expense. Ventas stated that the acquisition was 20% to 30% below replacement cost. But as we have argued, you cannot compare a 25-year-old building with a “replaced” new one. The real benefit is the competitive advantage of having lower capital costs compared with a new, more expensive building.
The portfolio has nine properties each in California, Texas and Florida, with eight each in North Carolina and Oregon. The first quarter annualized NOI, including rent from one leased CCRC, was about $121 million, down from just over $135 million a year earlier, annualized. Ending occupancy on March 31, 2021 was 80.2%, down 720 basis points from March 31, 2020, but the NOI margin only dropped by 360 basis points in the past year to 36.1%. That is a pretty healthy margin in the depths of the pandemic, but the portfolio is basically all independent living which should have high margins, and which nationally was the least impacted of the different senior care product types, other than active adult.
Ventas owns 34% of Atria, so with the expanded Atria/Holiday relationship with Welltower, the dynamics could be interesting, but definitely more civil than under a previous regime. With this deal, the totals for June come to about $5.5 billion, so far. To say the M&A market is back is an understatement. It looks like it is roaring back, and with so many REIT divestitures in the past 12 to 18 months, as well as the PE dry powder, the third quarter could be explosive.
