The biggest private-equity deal of the year is a bet on the aging of the baby boom generation.
HCP Inc., a Long Beach-based real estate investment trust, announced that it would pay $6.1 billion to buy the real estate assets of nursing home giant HCR ManorCare Inc.
HCP is acquiring 338 post-acute, skilled nursing and assisted-living properties in 30 states, including Ohio, Pennsylvania and Florida.
HCR ManorCare, based in Toledo, Ohio, will continue to run the company and will lease back the properties. HCR ManorCare is owned by private-equity giant Carlyle Group, which acquired the company for $6.1 billion in 2007.
Despite their staid image, nursing homes have become darlings of Wall Street in recent years. They're especially popular among free-wheeling private-equity funds, which are seeking ways to cash in on the aging of the American population.
In the last five years, there have been 46 buyouts of nursing home companies totaling $20 billion, according to research firm Dealogic.
"What's going to drive profitability of healthcare real estate or senior-housing real estate moving forward is a demographic shift to more seniors," said John Arabia, head of healthcare research at Green Street Advisors, an independent real estate research firm.
The entire real estate industry is searching for ways to capitalize on graying baby boomers, whether it's buying nursing homes, developing retirement communities or retrofitting properties to allow the elderly to stay in their homes, experts say.
"There's a lot of conversation among developers saying, 'How do we take advantage of this demographic shift?' " said Gary Painter, research director of the Lusk Center for Real Estate at USC.
Baby boomers present a lot of opportunity for the real estate industry, said Michael Lombardi, president of Stonebridge Holdings, a healthcare real estate development company in Century City.
"We don't have enough medical facilities," Lombardi said. "One of the major demands for real estate development will be healthcare."
Aside from the demographic trends, nursing homes and other senior living facilities are generally considered to be financially stable during troubled economies.
The HCR ManorCare deal is the latest sign of revival in the private-equity business after two lean years.
In an indication that firms are growing more upbeat about the economy, there have been 536 private-equity buyouts this year totaling $86 billion, a 73% increase from a year earlier, according to Dealogic.
More important for the industry, private-equity firms have sold 246 companies for almost $90 billion, a 338% jump from 2009. Such exits are critical because they allow firms to recoup their investments and put profits to work in other deals.
Prior to the HCR ManorCare deal, the largest private-equity deal this year had been a $5.2-billion purchase by KKR and other buyout firms of Del Monte Foods.
The proposed deal by HCP involves $3.53 billion in cash and $852 million in HCP common stock, as well as $1.72 billion from the payoff of HCR ManorCare debt that HCP already owns. HCP also is getting an option to buy a 9.9% stake in HCR ManorCare for $95 million.
"This transaction reinvests our substantial debt investment in a secure, long-term, growing income stream," said Jay Flaherty, HCP's chairman and chief executive. The deal, which is subject to regulatory approval, is expected to close in the first quarter of next year and will boost HCP to $19 billion in assets.
HCP closed at $32.96, up 44 cents or nearly 1.5%.