Orange County, while primarily known as a center of medical device companies, is also home to several sizable companies that are in the business of owning and investing in real estate where healthcare is delivered, and they aim to grow by focusing on private-pay properties to achieve more reliable rents.
Irvine-based HCP Inc., the largest and oldest of the crop, with a recent market value of $15.2 billion, is creating a separate real estate investment trust by breaking off its skilled nursing and assisted living properties.
The REIT, founded in 1985, said this month that it’s spinning off interests in more than 320 properties with annual rents of $485 million into what will be known as HCR ManorCare Inc.
HCP will give investors a special distribution of HCR ManorCare stock. The spinoff is expected to be finished in the second half of the year.
Company officials said they’re spinning off the nursing home and assisted living properties so they have a bigger portion of properties that are less dependent on government reimbursement—one of the issues that have bedeviled ManorCare in recent years, along with an ongoing Department of Justice investigation into Medicare overbilling.
HCP’s portfolio is projected to go from 80% to 95% private pay after the HCR ManorCare spin is done.
“We need to eliminate the overhang in the [ManorCare] business so that the rest of the business can flourish,” said Michael McKee, HCP executive chairman, on a call with investors and analysts when the deal was announced.
“As we focused on those goals and reviewed our options, for many reasons it became clear to the board that the best pathway forward was to pursue a spinoff transaction,” McKee said. “As we explored our options for addressing HCR ManorCare’s challenges, it was apparent to us that HCP is not the optimal investment vehicle to maximize the value in our HCR ManorCare real estate.”
HCP has said that Mark Ordan, a veteran senior housing executive, will run HCR ManorCare after the spinoff but hasn’t said if the new company will move to Orange County; it now operates from Toledo, Ohio.
The upcoming spinoff of HCR ManorCare follows in the footsteps of two previous OC-based healthcare REITs that was earlier spun out of operating companies.
Irvine-based Sabra Healthcare REIT Inc., founded in 2010, came out of Sun Healthcare Group Inc. [now part of Kennett Square, Pa.-based Genesis HealthCare LLC] five and a half years ago. Sun spun Sabra out in an effort to maximize the value of its real estate. The REIT has 178 properties and a market value of $1.3 billion.
Sabra has spent much of its existence striving to diversify its business and add more private-pay properties. The idea is to make its portfolio less susceptible to government reimbursement fluctuations.
Chief Executive Richard Matros recently said that half of its properties are private pay.
“We expect this to improve, with our primary focus being the acquisition [of] private-pay senior housing,” he said on an earnings call early last month. “We would anticipate that it is unlikely we will [acquire] more skilled nursing for the remainder of the year. So our focus will be on private-pay senior housing.”
Mission Viejo-based Ensign Group Inc., a diversified healthcare provider that includes nursing homes, hospices and home health, picked up the trend in late 2014 when it separated its real estate into San Clemente-based CareTrust REIT Inc.
CareTrust has 143 properties in California and 18 other states and a recent market value of $763 million.
Chief Executive Greg Stapley has said that CareTrust remains “quite comfortable in the very familiar skilled nursing space,” and emphasized that it’s not specifically targeting a certain ratio of assets.
Nursing homes “offer a very secure income stream when we have the right operator,” Stapley said on a recent CareTrust earnings call.
Wall Street
“We are even more comfortable with management’s acquisition strategy and the outlook for its smaller, regionally focused skilled nursing facility operators,” analyst Jonathan Hughes of St. Petersburg, Fla.-based Raymond James Financial Inc., said in a May 11 report issued after CareTrust announced its first-quarter results.
The management team of Newport Beach-based Griffin-American Healthcare REIT Inc., the fourth player in OC, is familiar with the spinoff trend; it broke off from Santa Ana-based Grubb and Ellis in 2012.
Griffin-American’s healthcare funds focus on “clinical healthcare real estate,” such as medical office buildings and hospitals, and aren’t publicly traded, although they report selected financial data.
“We launch REITs from scratch, our public, nontraded REITs,” said Danny Prosky, a founding principal of Griffin-American who also serves as president and chief operating officer. “Our REITs are diversified, and we look to buy the best assets we can in any particular class.”
The company has grown by raising money and buying properties to build it up over a two- to four-year period, Prosky said.
“Hopefully at the end of that time period, we’ve got a REIT that has several billion dollars’ worth of assets,” he said, adding that Griffin-American either sells or lists the REIT on a stock exchange, depending on market conditions.
Griffin-American has created three REITs, including Scottsdale, Ariz.-based Healthcare Trust of America Inc., and has just started to solicit investors for a fourth.
Prosky shared his thoughts about why real estate investment trusts have proliferated in the county beyond just healthcare.
“Real estate in general seems to be attracted to Orange County. I think you’ve got a good talent pool. Proximity to John Wayne Airport is a plus—it’s certainly a plus for us,” he said, comparing the healthcare REIT clustering to Nashville, Tenn., which is known for its concentration of hospital operators and other healthcare businesses.
