2 Health REITs to Combine in Stock Deal

Health Care Property Investors Inc. on Wednesday agreed to buy American Health Properties Inc. for about $700 million in stock, in a deal that would create the largest real estate investment trust focused solely on health-care properties.

The purchase would boost Newport Beach-based Health Care’s holdings by 68 properties to 423. The combined company would have a total market capitalization of $2.9 billion and own nursing homes, assisted living centers, hospitals and medical office buildings across the U.S.

Health-care REITs have been hit hard over the last 19 months amid concerns that changes in the way health-care operators are reimbursed by Medicare could lower their revenue, forcing them to close facilities and request rent concessions. The Bloomberg HealthCare REIT Index, which fell 33% last year, has declined 19% more so far this year.

“This will decrease Health Care’s exposure to senior nursing homes, where [these changes] are having the biggest impact,” said James Sullivan, a real estate analyst at Prudential Securities.

Each American Health common share would be exchanged for 0.78 share of Health Care. Health Care also would issue $100 million in preferred stock and take on $300 million in debt. The transaction values Denver-based American Health at about $20.18 a share.

In New York Stock Exchange trading, American Health shares rose $1 to close at $19, and Health Care shares fell 69 cents to close at $25.19.

The transaction “will add a number of the best hospital assets currently owned in the sector, and a strong group of medical office and physician clinic buildings to what is already a well-diversified portfolio,” Kenneth Roath, Health Care chairman and chief executive, said in a statement.

Roath also said that by combining property management and leasing operations, the combined company could achieve “significant” savings in expenses that would lead to an increase in earnings. He did not elaborate.

With their share prices having fallen so, health-care REITs have been unable to sell stock to finance growth, which is their main engine of earnings. Earnings for health-care REITs are expected to rise 5.4% this year, whereas REITs overall are expected to gain 9.4%, according to PaineWebber Inc. American Health’s earnings were expected to rise about 1% this year.