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Q&A with Raymond J. Lewis: Why Ventas is making a bold play for Sunrise Senior Living REIT

The latest chapter in the saga of Ventas Inc., which saw the Louisville-based REIT come back from the verge of bankruptcy in the late 1990s to become an active M&A player in the seniors housing realm, is the company’s venture north of the border.

In January, Ventas (NYSE: VTR) agreed to acquire Toronto-based Sunrise Senior Living Real Estate Investment Trust (TSX: SZR.UN), which owns 74 private-pay assisted living communities in the United States and Canada and has others under development.

In February, however, California-based Health Care Property Investors Inc. clouded the acquisition waters with a hostile takeover bid for Sunrise, offering about 20% more per share for the Canadian REIT than Ventas. Sunrise stockholders are scheduled to vote on Ventas’ offer in March, but it isn’t clear whether the original deal will still be on the table then, or whether a bidding war has begun.

If Ventas does ultimately win the deal, it will increase the company’s seniors housing portfolio to nearly 250 properties, with roughly 60% assisted living and the rest independent living and other facilities.

Ventas doesn’t have a heavy concentration in any single niche, since it also owns 218 skilled nursing facilities, along with 43 hospitals and a handful of medical office properties. The total price Ventas was willing to pay for Sunrise, including debt, was $2.1 billion Canadian, or about $1.8 billion (US). That figure represents a 45% premium over the average trading price of Sunrise units on the Toronto Stock Exchange during the 20 trading days before the Jan. 16 announcement of the purchase agreement. NREI spoke with Raymond J. Lewis, chief investment officer of Ventas, about the proposed Sunrise deal and industry trends.

NREI: Is there any chance that the Sunrise acquisition isn’t going to occur?

Lewis: I’m not going to speculate on that. We have a signed, binding purchase agreement to acquire Sunrise REIT, and we’re working on completing the transaction we negotiated.

NREI: Ventas agreed to purchase Sunrise at far more than traded value. What did you see in the company that the market didn’t?

Lewis: As an isolated data point, the premium might look somewhat large, but in the context of the U.S. market, it was a market-based price. There was a fundamental difference in the way that the Canadian investment community — as opposed to the U.S. investment community — valued the underlying assets of Sunrise. We saw acquiring the company as an opportunity to arbitrage that difference.

NREI: What accounted for the difference?

Lewis: There’s been a lot of discussion in official circles in Canada recently about the changing regulations governing investment trusts such as Sunrise. A number of companies in Canada have converted to income trusts recently — one of the large public utilities recently elected to do so, for example — thus taking themselves off the tax roles. So, it’s been a big issue.

NREI: Why be a major acquirer in seniors housing right now?

Lewis: The seniors housing industry is at a positive inflection point in the cycle with little supply coming on line over the last five to seven years, while demand for the product has been increasing and will continue to do so. The Sunrise portfolio saw high, single-digit revenue growth over the last 12 months, which is comparable to our existing portfolio.

Occupancy throughout the combined portfolio will be about 94%, with some properties higher than that. So there will be a limited amount of upside in terms of occupancy, but we anticipate 7% to 8% same-facility rental growth each year going forward.

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