‘All publicly listed Canadian senior-living names could be takeout candidates,’ says analyst

Share

The frisky M&A market in the Canadian senior-living sector is heating up even more.

Health Care REIT (HCN) is teaming up with privately held Revera Inc. to buy Regal Lifestyle Communities Inc. for approximately $374-million in cash, a premium of over 27 per cent to where the stock closed on Wednesday.

Toronto-based Regal owns and operates 23 housing facilities for seniors in Canada. Under the deal HCN will own 75 per cent of Regal, with Revera owning the balance. HCN is kicking in $306-million in cash and Revera is contributing the rest.

Brookfield Financial and BMO Nesbitt Burns Inc. are acting as financial advisors to HCN and Revera. CIBC World Markets Inc. is advising Regal.

Ohio-based HCN and Revera of Mississauga, Ont. formed a joint venture in May 2013 with the aim of acquiring senior living facilities and this is the third deal the duo have partnered on. If the Regal deal gets done, the joint venture will own 94 properties. Last year, Revera and Health Care paid $350-million to buy Virginia-based Sunrise Senior Living Management Company.

Curiously HCN is unable to acquire operating companies outright and must instead partner with other players such as Revera in joint venture deals in order to maintain its status as a REIT for tax purposes.

"As a U.S. healthcare REIT we're quite limited in the types of assets that we're able to own. So we can't actually own operating companies like Revera," said Scott Brinker, chief investment officer with Health Care REIT.

"We would lose our classification as a real estate investment trust if we started buying operating companies like Revera."

Mr. Brinker says Health Care essentially functions as a "passive" real estate owner and allows its more than 40 partners to manage its properties. (Under the Regal deal, Revera will be the operator of the properties).

In an interview, Thomas Wellner, CEO of Revera suggested more joint venture deals are in the works, saying the company is "working on a number of other opportunities" with HCN.

"Expect more consolidation in the space," wrote Frederic Blondeau, analyst with Dundee Capital Markets Inc. in an note to clients, pointing out that there has been a "surge in M&A" in the Canadian senior-living sector over the past three years with average of $2.4-billion per year in deals. (compared to $0.7-billion per year from 2008-2011).

Mr. Blondeau figures that "all publicly listed Canadian senior living names" could be takeout candidates with Sienna Senior Living Inc. and Extendicare Inc. as the most likely candidates. Sienna is particularly attractive "due to its relatively small size, lack of a controlling block, strong management platform and potential development opportunities" he added.