Health Care REIT signs definitive agreement to acquire Genesis for $2.4 billion

Feb 28 2011

Health Care REIT, Inc. (NYSE:HCN) announced that it has signed a definitive agreement to acquire substantially all of the real estate assets of privately-owned Genesis HealthCare (Genesis), a leading provider of short-term post-acute, rehabilitation, assisted living and long-term care services, for a purchase price of $2.4 billion.

Genesis' highly respected and tenured management team will continue to operate the facilities pursuant to a long-term triple-net master lease. HCN will have the right to own certain facilities that Genesis currently leases from third-party landlords, pursuant to fixed price purchase options, as well as any facilities that Genesis acquires or develops during the initial 15-year term of the lease at pre-determined attractive lease yields. In addition, HCN has the option to acquire a 9.9% ownership interest in Genesis for a fixed price equal to $47 million throughout the initial lease term. This option will enable HCN to share in the future growth of Genesis.

The long-term triple-net lease with Genesis will provide for rent in the first year of $198 million with an initial cash yield of 8.25%. The rent, which includes a combination of fixed and CPI escalators, is expected to increase by 3.5% on the first five anniversary dates of the lease and 3.0% per year thereafter. EBITDAR coverage is expected to be 1.5x. Genesis will have a renewal option at the conclusion of the initial term for an additional 15 years with rent increased to the greater of 103% of the prior year's rent or fair market value.

"We expect Health Care REIT's acquisition and leaseback of Genesis HealthCare's assets will be highly accretive to HCN's earnings," says George L. Chapman, Health Care REIT's Chairman, Chief Executive Officer and President. "The acquisition is consistent with our commitment to partner with best-in-class operators across the health care acuity spectrum. The investment provides embedded opportunities for both organic and external growth. Genesis is positioned to grow its quality payor mix and optimize occupancy as it continues to meet the needs of an increasing post-acute, short-stay patient population. In addition, Genesis has built a robust pipeline of potential acquisition and development opportunities as it expands its footprint along the eastern seaboard. This new partnership between Genesis and Health Care REIT is an exciting growth story."

George V. Hager, Jr., Chief Executive Officer of Genesis added, "We at Genesis are delighted to have the opportunity to partner with Health Care REIT. Together, we will continue our high level of investment in optimizing and expanding our facilities to meet the needs of our increasingly acute patient population. Genesis prides itself on providing patients and residents with outstanding clinical care, delivered by highly skilled practitioners in a warm and comfortable setting. We selected HCN as our partner because of this shared vision and its commitment to serve as a trusted, long-term partner in our growth."

Health Care REIT will acquire from Genesis 147 post-acute, skilled nursing and assisted living facilities located in 11 states in the Northeast and Mid-Atlantic. Genesis' largest markets include Massachusetts, Maryland, New Jersey, Pennsylvania and West Virginia. The portfolio has geographic density in attractive metropolitan markets with high barriers to entry, significant hospital system referral source admission efficiencies and high replacement costs. These notable portfolio strengths are an unparalleled market differentiator for Genesis in the post-acute and skilled nursing sector. Genesis is the largest provider of post-acute and skilled nursing care in the majority of its markets.

The transaction is expected to be $0.39 accretive to FFO and $0.29 to FAD on an annualized basis, representing a pro forma 12% and 9% growth over the midpoint of HCN's 2011 guidance as previously issued on February 16, 2011. Accretion estimates assume HCN's traditional 45% debt to undepreciated book capitalization structure. Actual 2011 guidance will be updated to reflect the timing of the closing of the transaction and the composition of the funding of the transaction. Pro forma for transactions announced to-date, HCN will have nearly $13 billion in assets comprised of a well-balanced portfolio of 880 properties. A reconciliation of FFO and FAD measures can be found in the exhibit at the end of this document.

Genesis HealthCare, based in Kennett Square, Pennsylvania, is a leading provider of short-term post-acute, rehabilitation, assisted living and long-term care services. Genesis has successfully expanded its clinical capabilities in recent years to become a leading provider of short-term, post-acute services, demonstrated by the fact that 90% of patients are admitted from hospitals and 62% of Genesis patients are discharged to the home. As part of this post-acute focus, Genesis now has over 120 clinical specialty units. Given its strong clinical capabilities, Genesis facilities are well positioned as the lowest cost post-acute inpatient setting. With $405 million in investments in facility improvements and clinical programs, Genesis' quality mix has increased from 47% in 2006 to a projected 55% in 2011 and is positioned for significant growth as the short-term, post-acute patient census accelerates. Driven by growth in quality mix, clinical capabilities and operational efficiencies, Genesis has generated 9% annual average revenue growth, 14% average annual EBITDAR growth and consistent average occupancy of 91% over the last five years. Genesis is privately-owned by affiliates of Formation Capital and JER Partners.

An overview document discussing further details of the Genesis transaction will be available on the Featured Partners page of HCN's website at www.hcreit.com/featuredpartners.

Transaction Benefits

• Post-acute platforms are emerging as a critical component in the evolution of health care delivery and reimbursement: Changes in health care delivery models and health care reform favor the post-acute platform as a lower-cost alternative to hospitalization. Genesis' strategy to focus its care model on the growing post-acute patient population includes $405 million in capital improvements in the last six years, the creation of more than 120 clinical specialty units and an initiative to significantly increase the numbers of physicians or nurse practitioners in their facilities.
• Alignment with HCN's relationship investment strategy and commitment to invest across the acuity spectrum: Health Care REIT and Genesis' shared alignment in their relationship and partnership approach to business creates value for both companies. Additionally, the significant overlap with Health Care REIT's health system, assisted living and senior housing portfolio partners in the Northeast and Mid-Atlantic creates a continuum of care within Health Care REIT's portfolio of operators, ensuring that patients can receive services in a facility owned by HCN at any point along the health care continuum. HCN's health system, assisted living and independent living care partnerships provide the potential for referral relationships and a platform in which to share best practices with the goal of increasing quality while lowering the cost of care.
• Embedded opportunity for organic and external growth: Genesis is positioned for superior organic and external growth. Organic growth will be driven through increases in short-term, post-acute patient population, which in turn will drive higher quality payor mix. Since 2006, Genesis has increased the quality payor mix from 47% in 2006 to a projected 55% in 2011 with room for additional growth. External growth opportunities will be driven through an established pipeline of potential acquisition opportunities along the eastern seaboard through existing purchase options and rights of first refusal. Additionally, the company also has received Certificates of Need (CON's) in key markets suitable to develop modern post-acute facilities.
• Geographic advantage: Genesis' geographic focus in contiguous states along the Northeast and Mid-Atlantic provides for an industry-leading system of provider relationships. High barrier to entry markets and replacement costs create a portfolio that would be extremely difficult to replicate. Operational efficiencies and strong, local brand presence are additional benefits of geographic density.
• Strength of management team: Genesis' executive management team, led by George V. Hager, Jr., Chief Executive Officer, has been in place for almost 20 years and will continue to manage the operations. The team's forward-thinking approach recognizes that coordination across the health care continuum is critical to efficient and effective health care delivery.
• Highly accretive transaction: The transaction is expected to be $0.39 accretive to FFO and $0.29 to FAD on an annualized basis, representing a pro forma 12% and 9% growth over the midpoint of HCN's 2011 guidance as previously issued on February 16, 2011. Accretion estimates assume HCN's traditional 45% debt to undepreciated book capitalization structure. Actual 2011 guidance will be updated to reflect the timing of the closing of the transaction and the composition of the funding of the transaction. Pro forma for transactions announced to-date, HCN will have nearly $13 billion in assets comprised of a well-balanced portfolio of 880 properties. A reconciliation of FFO and FAD measures can be found in the exhibit at the end of this document.

Transaction Terms

The transaction, which has been approved by Health Care REIT's Board of Directors and the shareholders of Genesis, is structured as an equity purchase of the Genesis subsidiary that holds the real estate. Completion of the transaction is subject to satisfaction of conditions regarding regulatory approvals and third party consents, and to other customary closing conditions. HCN expects the acquisition to close during the 2nd quarter of 2011, although there can be no assurance that the transaction will close or, if it does, when the closing will occur.

Health Care REIT has obtained a commitment for a bridge loan in an amount up to $2.4 billion which will be available to finance the acquisition of Genesis, if needed.

UBS Investment Bank was exclusive financial advisor and lead capital markets advisor to HCN on the transaction. Arnold & Porter, LLP, Shumaker, Loop & Kendrick, LLP, and Sidley Austin, LLP, acted as HCN's legal advisors. In connection with the transaction, BofA Merrill Lynch and Citi are Genesis' financial advisors and Arnall Golden Gregory, LLP, Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates and Williams Mullen are their legal advisors.