Denver-based real estate investment trust Healthpeak Properties, with a portfolio that includes 15 continuing care retirement communities, plans to merge with Milwaukee-based Physicians Realty Trust in an all-stock deal valued at approximately $21 billion, the companies announced Monday morning.
The deal is expected to close in the first half of 2024. Both companies’ boards have unanimously approved the transaction, which also will need shareholder approval.
Healthpeak President and CEO Scott Brinker and Chief Financial Officer Peter Scott will have the same titles at the newly formed company, with Physicians Realty Trust President and CEO John T. Thomas serving as vice chair of the board of directors. On a Monday morning call, the companies stressed that the transaction is the joining of the two companies rather than a case of one company acquiring the other, although the combined company will operate under the Healthpeak Properties name.
“This combination joins two leading platforms, bringing them to the next level to create a company uniquely focused on healthcare discovery and delivery, a large and attractive playing field with strong secular growth,” Brinker said in a statement. “Physicians Realty Trust brings complementary strengths to Healthpeak, including its internal property management platform and established industry relationships.
In senior housing, a focus on CCRCs
Healthpeak changed its name from HCP in 2019 and had moved its headquarters from Irvine, CA, to Denver by early 2021. The headquarters of the combined company will be in Denver, and other existing offices will be maintained.
The REIT, with a portfolio that at one point included Atria Senior Living and Brookdale Senior Living-branded properties, among numerous other senior living operators, first announced that it was considering pruning its portfolio of senior living properties, except CCRCs, in 2020.
“We believe senior housing will remain a vital asset class in our society and will continue to serve the demand of the rapidly growing baby boomer demographic. However, our focus going forward will be on growing in our three core businesses of life science, MOBs [medical office buildings] and CCRCs,” Thomas Herzog, then-CEO of the REIT, said at the time.
Brinker became CEO in late 2022, having joined the REIT in March 2018 as executive vice president and chief investment officer and then being named president and chief investment officer in January 2020.
Today, Healthpeak’s portfolio includes 15 CCRCs, in Washington, DC (1), and five states — Alabama (1), Florida (9), Michigan (1), Pennsylvania (2) and Texas (1) — as well as life sciences properties and medical office buildings. Life Care Services operates 13 of the CCRCs, and Sunrise Senior Living operates two. The CCRCs represent 9.3% of the REIT’s portfolio income as of Sept. 30, Healthpeak said in a presentation posted to its website.
On Monday’s call, Scott said that the REIT’s CCRC-related strategic and operational initiatives produced “strong results” in the third quarter. “Same-store growth for the quarter was an exceptional 32.1%, driven by occupancy gains, reduced labor costs and margin improvement,” he said.
Brinker said on the call that Healthpeak’s strategy for its CCRC portfolio “hasn’t really changed.”
“That’s a business that is performing well. We think it’s a great asset class,” he said. “We’ve got a great portfolio and internal team running it, as well as a great third-party property manager in LCS.”
Still, the CEO said, Healthpeak could decide to sell the portfolio “if the financing markets make sense and we get a fair price.” Proceeds would be used to “capitalize or recycle into our core businesses,” he added.
Brinker’s remarks about the CCRC portfolio echo ones he made about a year ago during Healthpeak’s third-quarter 2022 earnings call. At that time, he said that the REIT’s 15-property CCRC portfolio was not a “perfect fit” for Healthpeak and that the REIT would be “opportunistic and open-minded” if a good opportunity to exit it ever existed.
The combined company
The combined company of Healthpeak Properties and Physicians Realty Trust would have a 52 million square foot portfolio, including 40 million square feet of outpatient medical properties concentrated in markets such as Dallas, Houston, Nashville, TN, Phoenix and Denver, the companies said. Physicians Realty Trust’s portfolio also includes specialty hospitals. The company acquires, develops, owns or manages healthcare properties that are leased to physicians, hospitals and healthcare delivery systems.
“With a broader footprint in strategically important markets and a high-quality portfolio, we will be able to better serve the real estate needs of leading health system, physician and biopharma tenants, which we believe is a competitive advantage that should lead to more opportunities for growth and enhanced value creation for shareholders,” Brinker said in a statement. “We expect the transaction to be immediately accretive to each company’s shareholders, augment our strong balance sheet, and position the combined company for offense.”
Under the terms of the agreement, each Physicians Realty Trust common share would be converted into 0.674 of a newly issued Healthpeak common share. Pro forma for the transaction, Healthpeak and Physicians Realty Trust shareholders would own approximately 77% and 23% of the combined company, respectively.
Following the planned closing of the merger, the combined company is expected to pay an annualized dividend of $1.20 per share, consistent with Healthpeak’s current dividend level.
Healthpeak plans to assume Physicians Realty Trust’s $1.25 billion in existing senior unsecured notes and $400 million term loan and to enter into a new five-year, $500 million term loan, the company said in a filing with the Securities and Exchange Commission.
The new company would trade under Physicians Realty Trust’s ticker, DOC, on the New York Stock Exchange.
The merger is expected to generate run-rate synergies of at least $40 million by the end of year one and up to $60 million by the end of year two, according to the two REITs.
The board of the combined company would include eight existing Healthpeak directors and five existing Physicians Realty Trust directors, including former US Health and Human Services Secretary Tommy G. Thompson. Katherine Sandstrom, Healthpeak’s current board chair, would lead the board.
“I’ve known Scott for many years and believe that together, we will be able to leverage the power of both our platforms and people to support the growth of our health system partners and help shape the future of healthcare delivery,” Thomas said. “We are confident in our strategic vision to capitalize on our increased scale, complementary platforms and deep relationships to create immediate and future value for both shareholders and tenants.”
No guarantee
Board approval, which this deal has secured, does not guarantee ultimate deal finalization, as recent merger plans involving senior living providers have shown.
Newton, MA-based real estate investment trusts Diversified Healthcare Trust and Office Properties Income Trust announced their intention to merge in April, but the deal was called off in September after it faced opposition from two proxy advisory firms and two shareholders, all of which recommended that shareholders vote against the merger.
As of June 30, according to an Aug. 1 presentation, Diversified Healthcare Trust had 230 properties in its senior housing operating portfolio as well as 27 senior living communities with triple net leases. Operators doing business with the REIT include Brookdale Senior Living, Cedarhurst Senior Living, Charter Senior Living, Five Star Senior Living, IntegraCare Senior Living, Life Care Services, Navion Senior Solutions, Northstar Senior Living, Oaks-Caravita Senior Care, Omega Senior Living, Oaks Senior Living, Phoenix Senior Living, Stellar Senior Living and The RMR Group.
And a planned merger between the parent organizations two of the largest not-for-profit senior living and care organizations in the country also was called off this year, in July, after being delayed several times.
Sioux Falls, SD-based Sanford Health, which includes the Evangelical Lutheran Good Samaritan Society, discontinued the merger process with Minneapolis-based Fairview Health Services, which includes Ebenezer Senior Living, Minnesota’s largest senior living operator, when the parties determined that they were “without support for this transaction from certain Minnesota stakeholders,” Sanford Health President and CEO Bill Gassen said in a statement at the time.
The deal had been announced in November 2022 but faced questions from the Minnesota attorney general’s office, which said it was investigating the proposed transaction’s compliance with state and federal charity and antitrust laws. The office said that it received thousands of comments from the public, with questions about how the merger might affect employees, state health insurance premiums and access to care. The University of Minnesota, which has a collaboration with Fairview, and a healthcare union also reportedly raised concerns.
The Good Samaritan Society is the second-largest US not-for-profit multi-site senior living and care organization overall, according to the 2023 LeadingAge Ziegler 200, and ranks No. 1 for total nursing care beds, No. 2 for total assisted living units and No. 4 for total independent living units.
Ebenezer ranks No. 1 overall on the LZ 200 for the number of managed-only units and is the No. 126 overall not-for-profit multi-site senior living and care organization. The company ranks No. 41 for total assisted living units, No. 82 for total nursing care beds and No. 196 for total independent living units.
