This $18 billion healthcare deal could be a sign of things to come

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Consolidation of real estate investment trusts (REITs) continues into early 2022. Latest deal will see healthcare REITs Health Care Real Estate Trust ( HR -11.14% ) and Healthcare Trust of America (ETS -5.32% ) combine in a nearly $18 billion deal. The transaction will create the world’s largest REIT focused on ownership of medical office properties (MOBs).

Here’s a look at what’s driving the deal and whether investors can expect more consolidation in the sector.

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Driven to find a suitor

Healthcare Realty has agreed to acquire Healthcare Trust of America (HTA) for $35.08 per share. HTA shareholders will receive a special dividend of $4.82 per share in cash and one Healthcare Realty share for every HTA share they currently own. The deal values ​​the combined company at $17.6 billion.

He will create the greatest Healthcare REITs focused on MOBs. Healthcare Realty will own 727 properties with 44 million square feet of medical office space, nearly double the square footage of its next-biggest rival. The agreement will expand the combined company’s relationships to include properties associated with 57 of the top 100 healthcare systems. It will also expand its development pipeline to more than $2 billion, save it $33-36 million in annual expenses, and immediately contribute to Healthcare Realty’s bottom line per share.

The transaction ends an escalating battle between HTA and one of its major shareholders, activist investor Elliott Management. Elliott pushed the company for a strategic review, believing a sale was in the best interests of all shareholders. He pointed to the REIT’s long history of underperformance and growing competition from Unlisted REITs. These factors placed it at a competitive disadvantage and hampered its ability to unlock shareholder value and grow. She believed that a sale was the best way forward for the business.

Merger mania hits the REIT sector

The Healthcare Realty/HTA combination is the latest in a series of mergers in the REIT industry over the past year. Notable offerings included:

  • Real estate incomeThe acquisition of VEREIT by created a $50 billion REIT focused on triple net leasehold properties.
  • VCI properties and MGM growth properties combine to create a $45 billion gaming REIT.
  • Kimco Real Estatethe acquisition of Weingarten Realty Investors by Weingarten Realty Investors has created a leading grocery store Retail REITs valued at over $20 billion.
  • American towerthe $10.1 billion acquisition of REIT data center CoreSite Realty expanded its data infrastructure operations.

Several factors are driving the wave of consolidation in the REIT industry. An important factor is the desire to scale up. This factor will reduce a REIT’s operating costs and its cost of capital, thereby enhancing returns.

Another catalyst is the ramp-up REIT equity values ​​over the past year, giving them valuable currency to make acquisitions. Meanwhile, interest rates remain low, making borrowing to finance acquisitions cheaper.

Add them up and conditions remain ripe for further REIT consolidation, especially given the likelihood that interest rates will rise over the next few years. REITs will likely want to lock in rates on new debt while they’re low, which could incentivize them to strike a deal as soon as possible.

With more than 200 publicly traded REITs – including more than a dozen healthcare REITs – there is ample room for further consolidation. Given the growing scale of Healthcare Realty in the MOB sector, this could entice some of its rivals to join forces so that they can reap the benefits of scale.

The negotiation continues

Healthcare Realty’s merger with HTA will make it the largest MOB-focused REIT. This is the latest in a series of deals aimed at building leading, large-scale REITs to cut costs and improve their competitive position. This continuation of transactions will likely spur further transactions, especially since interest rates may not stay so low for long. This could mean that we will see more transactions in the REIT sector in the coming months, which could benefit long-term investors.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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