{ The Art of the Deal }
pay, meaning profits are not dependent
on government reimbursement. Fourth,
a recent law change makes possible the
RIDEA joint venture structure that
allows REITs to reap financial benefits
from rent profits but leave the day-to-day
operations in the hands of experienced
operators.
What common denominators
determine which operators attract the
interest of REITs? Well-established,
respected providers with a history of
good operations and margins, high
customer service ratings, reputation
for innovation, quality outcomes, and
proven ability to drive growth over the
long term, suggests Robert M. Main, a
research analyst with Saratoga Springs,
New York-based investment firm Morgan Keegan & Co. Inc.
Another key factor may be location,
suggests Charles J. Herman Jr., executive
vice president and chief investment of-
ficer of Toledo, Ohio-based Health Care
REIT, which is looking to consolidate its
assets primarily in East and West Coast
markets and the 31 top metropolitan
statistical areas (MSA). “In general, we
have found there are higher barriers to
entry, and these tend to perform well over
time,” Herman notes. To that end, Health
Care REIT has executed mega-deals
with, among others, Wellesley, Massachu-
setts-based Benchmark Senior Living,
Irvine, California-based Silverado Senior
Living, Seattle-based Merrill Gardens,
and Mount Laurel, New Jersey-based
Brandywine Senior Living.
the operators. In all cases, they were
high-quality, best-of-class operators.”
Educating oneself about a poten-
tial partner also is crucial, and that can
mean studying and communicating
with a company for years before pulling
the trigger on a merger or acquisition,
especially if both are public entities, says
Debra Cafaro, chairman and CEO of
Chicago-based Ventas. For example, the
REIT’s $7.4 billion purchase of Nation-
wide Health Properties (NHP) last year
started six to seven years ago with con-
versations between both entities before
Ventas’ board of directors decided that
the strategic combination made sense for
NHP shareholders.
“You really have to understand a com-
pany, what its pros and cons are, how that
company fits with your own company,
and what it brings to your own com-
pany,” Cafaro says. “What are its flaws, its
Achilles heel? The art is understanding
how to overcome any obstacles and prob-
lems, whether they are in deal structure
or tax structure, and really understanding
what that company adds to Ventas and
what the combined enterprise and its
prospects will look like.”
In the case of what NHP brought
to Ventas, benefits included scale, an
increased rating from three rating agen-
cies, more diversification, a tremendous
medical office business, and lowered debt
costs, she adds. Other recent big deals for
Ventas include its $3.1 billion acquisition
of 117 Atria Senior Living communities.
How to Prep the Canvas
Health Care REIT’s $890 million
RIDEA-structured joint venture with
Benchmark started with Chairman and
CEO Thomas Grape receiving a phone
call in August 2010 from Herman. Grape
and Herman had known and liked each
other for 20 years, including sitting on
the ALFA board together. Both say they
had great respect for each other’s businesses, but never had occasion to partner.
Then Benchmark’s biggest financial
backer, the Australian GPT Group, had
announced a desire to exit from all its
American ventures.
“I knew [Benchmark] had a high-
quality portfolio and was known to pro-
vide a very high quality of care,” Herman
says. “We liked the markets it was in.”
As soon as Grape spoke to Herman,
28 SENIOR LIVING EXECUTIVE | MAY/JUNE 2012 | WWW.ALFA.ORG
