The sleepy, slumping healthcare real estate investment trust business got a bit of a stir with Health Care Property Investors' recent proposed purchase of American Health Properties.
The merger of AHP into Newport Beach, Calif.-based HCPI would create the largest healthcare REIT, with 423 properties in 44 states. But whether the nearly $1 billion stock-and-debt deal is a winner or a wash depends on where you sit.
Healthcare REITs have performed miserably in the past year. The National Association of REITs in Washington measures healthcare REIT performance based on total return (or dividend income plus capital appreciation before taxes and commissions) on 14 companies. In 1998, that performance was -25.72%; from January through July of this year, -9.96%. Investor squeamishness over healthcare equities in general hasn't helped REITs.
Under the deal announced Aug. 4, AHP shareholders would receive 0.78 shares of HCPI common stock per AHP common share. HCPI also would assume $100 million of debt and issue $100 million of preferred stock.
HCPI Chairman and Chief Executive Officer Kenneth Roath says the addition of Englewood, Colo.-based AHP, which has a strong hospital portfolio, creates a more-diversified company (See chart). The combined company would have market capitalization of $2.9 billion. Executives hope to close the transaction by November.
Jerry Doctrow, a REIT analyst with Legg Mason Wood Walker in Baltimore, says the transaction does create a larger, more-liquid company.
Analysts say the deal frees up roughly $200 million in credit capacity for HCPI, which is potentially good news for providers who use REIT financing.
But some say the deal is anything but a home run for investors. "I'm not sure this one creates any value for shareholders," notes an equity analyst for a major investment banking firm, who asked not to be identified.
"It's very ho-hum," adds Ethan Parks, an analyst for New York-based Duff & Phelps Credit Rating Co. The agency placed HCPI's BBB+ senior unsecured debt rating and BBB subordinated debt and preferred stock rating on "Rating Watch-Down," signaling the possibility of a future downgrade.
On the upside, "they bring in a lot of pretty nice facilities," Parks notes. Roughly 16% of the combined company's portfolio represents facilities leased to Santa Barbara, Calif.-based Tenet Healthcare Corp.