Bill Pettit, president and COO of seniors housing owner and operator Merrill Gardens, has proven to be prophetic. In January, he said the Seattle company's $817 million partnership with Health Care REIT under the REITand Diversification and Empowerment Act (RIDEA) of 2007 was “the leading edge of a trend.”
Two weeks later, Health Care REIT unveiled a similar partnership with Benchmark Senior Living in avalued at $890 million. What's driving these deals? RIDEA allows REITs to share in the operating income produced by seniors housing companies. In this case, Merrill Gardens will remain a private company with greater access to capital.
“Fifteen years ago, there was a level landscape. The only big company was really Sunrise [Senior Living],” explains Pettit. “Today, the seniors housing industry has four or five surviving companies that might be considered to be true consolidators. The gap between the size of those companies and the size of the better regional companies is huge.”
A family-owned company, Merrill Gardens found itself at a crossroads in 2010. The owner and operator of 56 seniors housing communities in 10 states had built a successful business over 17 years. But companies such as Brookdale Senior Living and Emeritus Senior Living had access to sources of debt and equity that Merrill Gardens did not have for property acquisitions.
The partnership between Toledo, Ohio-based Health Care REIT and Merrill Gardens owns and operates 38 seniors housing facilities, with Merrill contributing 25 properties and Health REIT contributing 13 to the partnership. Merrill manages all 38 properties. Health Care REIT holds an 80% interest in the partnership, and Merrill 20%.
“It's a perfect solution,” says Pettit, “because I can now devote the vast majority of our management team's time on refining and delivering quality operating returns. I don't have to split my time between managing investors and/or looking for capital.”
Over the next five years, Pettit expects that Merrill Gardens will grow its portfolio by 50% by adding three to five properties per year across the Western or Southern states. “We'll stick to the market areas we know best.”