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Health care REITs foresee strong demand for properties

With an aging baby boomer population and the new health care law, demand for medical office buildings, skilled nursing and assisted living facilities will continue to grow, said CEOs of three of the nation’s largest health care REITs.

The three -- Debra Cafaro, of Chicago-based Ventas; George Chapman, of Toledo-based Health Care REIT Inc.; and James Flaherty, of Long Beach-based HCP Inc. -- addressed the REITWorld convention of the National Association of Real Estate Investment Trust, held at the Manchester Grand Hyatt last month.

Ross Nussbaum, a UBS (NYSE: UBS) managing director who moderated the program, likened the competition between the big health care REITs to “a grand arms race” among the industry titans.

Flaherty said he views the state of the industry more in terms of the third inning of a nine-inning game.

He said there are a lot of plays to make, some of which will lead to a further consolidation.

Flaherty suggested “shocks to the system,” such as the Affordable Care Act, will likely lead to further mergers and acquisitions, as the REITs find their place in a new reality.

When asked if this means that the big REITs are nervously eying each other’s every move, Chapman said he didn’t believe that is an issue.

“I don’t think any of us are reacting to the other that way. There have been and will be so many opportunities for each of us,” Chapman said.

This isn’t to say the health care REITs aren’t making some sizable acquisitions of smaller companies today.

Health Care REIT announced earlier this fall that its accelerated joint venture buyout of Sunrise Senior Living would boost the real estate value of that transaction from $1.9 billion to $3.2 billion.

Last Spring, Chicago-based Ventas’ $760 million acquisition of Cogdell Spencer Inc. made Ventas reportedly the largest owner of medical office buildings in the country with some 21 million square feet overall. Ventas picked up 72 buildings in that transaction.

“We can do deals in many different kinds of ways,” Ventas' Cafaro said.

But as Cafaro, Flaherty, and Chapman noted, medical office buildings are just one piece of the puzzle for these REITs; skilled nursing is another component.

Cafaro said in terms of skilled nursing facility demand, “we could see something like what happened with multifamily.”

Cafaro said she also foresees a similar demand for her firm’s assisted living properties.

Chapman noted how his health care REIT is getting into the development and ownership of outpatient surgery centers.

“They’re really hospitals with no beds,” Chapman said.

The health care REITs have been making some nice profits for their shareholders in recent years.

For example, Cafaro said Ventas’ stock has provided an average compound annual return of 32.5 percent during the past 12 years. The stock price has increased by 680 percent during the past decade.

Sometimes the REITs improve the bottom line by selling, as well as buying, medical properties.

Chapman said he has plans to sell about $500 million worth of medical office buildings in the coming months.

His Health Care REIT (NYSE: HCN) sold about $133 million worth of properties in the third quarter netting $13 million in gains for the quarter.

Health Care REIT invests across the full spectrum of seniors' housing and health care real estate, and also provides property management and development services.

As of Sept. 30, the company’s diversified portfolio consisted of 1,030 properties in 46 states, the United Kingdom and Canada.

Health Care REIT owns the Belmont Village assisted living facility in Sabre Springs acquired for $67.5 million in February 2012, and the 147-room Belmont Village Cardiff-by-the-Sea acquired for $69.3 million a year ago.

In Southwest Riverside County, Health Care REIT also owns the newly built 806,046-square-foot Loma Linda University Medical Center in Menifee.

Chicago-based Ventas (NYSE: VTR) has ownership interests in more than 1,400 senior housing and health care properties in 47 states, and the District of Columbia.

Ventas owns a total of 20 properties in San Diego County by The CoStar Group’s count.

One is the 284-bed Las Villas del Norte property in Escondido that Ventas acquired for $21.84 million in August 2006.

Another Ventas property here is Brookdale Place, a facility in San Marcos that offers everything from independent living to skilled nursing to Alzheimer’s care. The company paid $17.95 million for that property in January 2001.

Ventas also owns the Sunrise at La Costa assisted living facility in Carlsbad that was part of a portfolio of some 67 properties around the country the REIT acquired for $2 billion in April 2007.

HCP owns millions square feet in space around the country in a wide range of sectors from medical office, to biotech to skilled nursing,

CoStar (Nasdaq: CSGP) identifies 48 properties HCP (NYSE: HCP) owns in the greater San Diego area.

While most of these properties -- such as Brighton Gardens in Carlsbad that HCP acquired for $14.13 million in 2004 -- exist, a few projects are still on the drawing board.

HCP's proposed developments include a 160,000-square-foot medical office building that would be built along Scripps Poway Parkway in the Poway area, and a 121,000-square-foot medical office building along Lusk Boulevard in Sorrento Mesa.

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