If all goes according to plan, the largest-ever public offering for a health care real estate investment trust (REIT) could occur next year — involving a company that owns more than 11,500 senior housing beds.
Two non-traded REITs — Griffin-American Health Care REIT III (GAHR III) and Griffin-American Health Care REIT IV (GAHR IV) — intend to merge in a stock-for-stock transaction, the companies announced Thursday. The REITs’ co-sponsor, American Healthcare Investors, also would be brought into the combined company through a separate transaction with GAHR III.
The combination represents a total gross investment value of $4.2 billion, as well as the assumption of $1.8 billion in GAHR III debt.
These transactions set up the new REIT — to be called American Healthcare REIT — for a planned initial public offering to take place by the end of 2022, according to an investor presentation.
American Healthcare REIT’s portfolio would include 314 buildings and campuses, with 35.1% being senior housing, 26.5% being skilled nursing and the remainder being medical office buildings and hospitals. The portfolio also would include a small amount of debt placements.
In a $1.125 billion joint venture investment that closed in 2015, GAHR III acquired a majority stake in Louisville-based Trilogy Health Services. In 2020, Trilogy was the 12th-largest senior living provider in the United States, according to Argentum rankings.
Trilogy operates more than 100 locations across Kentucky, Indiana, Ohio and Michigan, offering independent living, assisted living, memory care, and skilled nursing, among other services.
“GAHR III’s largest investment, Trilogy Health Services, provides a powerful investment opportunity in best in class operator with a captive development platform that is well positioned to capitalize on the impending wave of increased demand for senior housing and skilled nursing facilities,” the investor presentation states.
A new public REIT
The Griffin-American REITs have been signaling their intention to move in new directions.
In Oct. 2020, the board of directors of GAHR IV established a special committee to explore strategic alternatives, including listing the company’s shares on a national exchange.
Should the initial public offering take place, it would be the largest-ever for a health care REIT, based on KeyBanc Capital Markets numbers cited in the investor presentation.
By total assets, American Healthcare REIT would be the 11th-largest listed health care REIT and the 8th-largest owner of senior housing among public REITs.
The combination of the Griffin-American REITs creates a company with properties across 36 U.S. states, as well as in the United Kingdom and Isle of Man.
The acquisition of American Healthcare Investors is also meant to set up an IPO, given that the move will produce cost savings, and internally managed REITs tend to trade higher than externally managed REITs.
“American Healthcare REIT will have a fully integrated management platform with capabilities in acquisitions, asset management, finance, accounting and tax, that are expected to result in operational cost savings of approximately $21 million annually,” Thursday’s press release states.
Jeff Hanson will serve as executive chairman of American Healthcare REIT, Danny Prosky will be president and CEO, and Mathieu Streiff will be COO.
In a March 2021 letter to GAHR IV investors, Hanson and Prosky said that the board of directors had estimated the per share net asset value of its Class T and Class I common stock to be $9.22. This was a decline from a previous estimate of $9.54, taking into account the effects of Covid-19.
Such a relatively small Covid-19 impact should be taken as a “sign of strength,” Hanson and Prosky wrote.
By combining the Griffin-American REITs, there is an opportunity to unlock a NAV premium by going public, thanks to the entity’s size and scale, the investor presentation asserts.
“Listed health care REITs have consistently traded at significantly higher premiums to NAV (average of a 20.4% premium over the past 14 years versus an ‘all REITs’ average of only 0.06% over the same period),” the presentation states, citing Green Street statistics.
Bullish on Trilogy
Trilogy will play a substantial role in the future success of American Healthcare REIT. As noted in the investor presentation:
“Trilogy Investors, owned by both GAHR III (~68%) and GAHR IV (~6%) was one of our best performing assets prior to the Covid-19 pandemic and we expect it to perform well as the effects of the pandemic continue to subside.”
Trilogy has increased its beds by 29.4% since 2015, with particularly substantial growth in assisted living in 2017.
Furthermore, Trilogy has a “refined development prototype and lease-up strategy,” the presentation states. Since 2014, only one new campus development has failed to reach stabilized occupancy within three years.
Trilogy is aiming for 90% occupancy recovery by the end of 2021, CEO Leigh Ann Barney recently told SHN’s sister site, Skilled Nursing News. The company’s occupancy is up 900 basis points since January 2021, the investor presentation states.
Like other senior living and skilled nursing operators, Trilogy is facing labor challenges. The company’s turnover has gone from the low-40% range to the high-40% range — but some other providers have seen turnover go up by more than 100%, Barney said.
Even before Covid-19, Trilogy was investing significantly in workforce efforts, with a particular focus on professional development and education opportunities.
For example, Trilogy struck a partnership with Purdue University Global to fully fund online college for employees. A temporary pause on new enrollment was implemented last year, but Barney expected enrollment to resume in 2021, she told SHN in August 2020.
Going into this year, Barney was optimistic that vaccines would usher in a pandemic bounceback, and her focus was on building market confidence and workforce.
“My top priorities: continue to improve base and minimum wage scales for staff recruitment and retention,” she told SHN. “We made significant wage investments this past October for our certified caregivers, but we understand we will need to continue to make investments in wages in order to stabilize our workforce.”
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