Battle brewing over Sunrise facilities

VENTAS THOUGHT IT HAD 74-PROPERTY PORTFOLIO SEWN UP UNTIL HCP MADE A BID

By John Mugford

 

For several weeks in January and into February, it looked as if things were proceeding smoothly for Louisville, Ky.-based Ventas Inc. (NYSE: VTR) in its agreement to acquire a majority interest in 74 assisted living facilities from Toronto-based Sunrise Senior Living Real Estate Investment Trust (Sunrise REIT).

When the $1.8 billion transaction was to close in coming months, Ventas would be taking another step toward its goal of increasing its revenues from private-pay sources. Following the acquisition, Ventas would have increased revenues from private-pay sources to about two-thirds of its total revenues. The Sunrise REIT portfolio, expected to yield total revenues of $387 million in 2007, would also give Ventas a portfolio of new facilities in a variety of metropolitan markets as well as an entrée into the Canadian market, where 11 of the properties are located.

The deal with Ventas calls for McLean, Va.-based Sunrise Senior Living Inc. (NYSE: SRZ), which established Toronto-based Sunrise REIT (TSZ: SZR.UN) as an independent acquisition entity in 2004, to continue managing the facilities under an existing long-term agreement.

But, in recent weeks, things have gotten more complicated.

HCP makes rival offer

In mid-February, Long Beach, Calif.-based Health Care Property Investors Inc. (NYSE: HCP) announced that it had submitted a competing offer for the Sunrise REIT portfolio. HCP says its bid of (Canada) $18 per unit (share) represents a 20 percent premium over Ventas’s accepted offer of C$15 per unit.

After receiving the offer from HCP, Sunrise officials announced that they needed more information before taking any action. The question Sunrise REIT needs to answer is whether its agreement with Ventas prohibits HCP from negotiating for the acquisition of any Sunrise assets – at least for a period of 18 months. A hearing in the Ontario Superior Court of Justice was scheduled for late February to determine whether HCP can negotiate with Sunrise REIT and potentially enter a memorandum of understanding (MOU) with the company.

Ventas officials have voiced their opinion that their agreement with Sunrise indeed prohibits HCP from negotiating with Sunrise. The company says its acquisition agreement with Sunrise was the result of an “extensive” auction process conducted by Sunrise REIT’s trustees. Ventas says HCP was a participant and a finalist in that process, but that HCP withdrew and declined to submit a final proposal. In the end, Sunrise REIT’s Special Committee of the Board of Trustees approved the agreement with Ventas.

According to a press release from Ventas officials, “HCP has a standstill agreement that by its express terms prohibits it from, among other things, making proposals to acquire Sunrise REIT.”

Aside from the legal aspects, Ventas officials state that “Sunrise REIT and its unit-holders should have serious concerns with respect to HCP’s serial proposals… each of which includes a changing set of unfulfilled conditions. By contrast, Ventas has a signed, binding purchase agreement with Sunrise REIT. Our transaction is fully financed and Ventas has entered into arrangements with Sunrise Inc. that enable us to acquire the REIT in a timely manner.”

If the court rules in favor of Ventas, Sunrise REIT shareholders are scheduled to vote on the Ventas offer on March 27. Should the agreement be broken, Ventas would receive a breakup fee of about C$40 million.

HCP touts its bid

HCP, however, says its offer is legal because it meets the standards for a “superior proposal” set forth in the agreement between Sunrise and Ventas. HCP also states in prepared statements that its proposal “has greater certainty of completion than the proposed transaction with Ventas.”

In addition to offering more money, HCP says its offer is otherwise “identical” to the agreement Sunrise entered with Ventas.

In a letter to R. Michael Warren, chairman of Sunrise REIT’s board of trustees, HCP’s chairman and CEO, James F. “Jay” Flaherty III, touted his company’s financial position and experience in large transactions.

“As you know, we raised $760 million through equity and debt financings last month and an additional $2.4 billion in late 2006,” Mr. Flaherty wrote.

“In addition to our superior financial condition, we have greater experience in executing large acquisitions than Ventas. Our ability to execute transactions of this size is evidenced by our recent $5.3 billion acquisition of CNL Retirement Properties, the largest healthcare REIT transaction in history.”

Should Ventas acquire the properties, the REIT would own more than 525 properties in 43 states and two provinces in Canada. Ventas would acquire 100 percent ownership stakes in 18 of the properties and an 85 percent stake in the remaining 56.

HCP currently owns or controls 731 healthcare properties, including hospitals, medical office buildings, and senior living facilities. q