Brookdale Senior Living and Emeritus Corp. announced a merger agreement late last week. For the rated REITs that are landlords to the combined company, Fitch expects the merger will enhance coverage modestly while also boosting concentration, which is a negative for credit quality. The transaction will also enable further dispositions of properties to tenants via exercised options.
The combined company expects revenue and expense synergies. A healthier tenant will be a credit positive as it reduces cash flow volatility stemming from a previous bankruptcy. The transaction may also allow the REITs to push rents over the longer term, although their ability to do so remains uncertain. While the headline of
A healthier tenant base reduces the probability of default but the larger and more concentrated profile increases a default's potential consequences. Fitch estimates the combined company will represent a significant percentage of revenues for HCP, Inc. (21% of revenues; IDR: BBB+/Stable), Ventas, Inc. (7%, IDR: BBB+/Stable) and Health Care REIT, Inc. (7% of investments not revenues, IDR: BBB/Stable). Larger, more concentrated tenants have significant leverage when negotiating lease renewals given the pooling of assets into master leases. The downside potential from material tenant concentration will continue to be a focal point for healthcare REIT ratings.
Of less importance initially is the combined company's focus on realizing value by reacquiring
Large scale M&A in the for-profit healthcare industry has traditionally been encouraged by the financial benefits of scale and geographic diversification. These elements are being reinforced by secular shifts in the landscape, including growth in the consumer share of healthcare spending, regulatory reforms including the Affordable Care Act, and a shift toward value-based payments. These factors are resulting in lower payments to providers and pressuring profit margins.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Corporate Finance - U.S. REITs
Corporate Finance - Healthcare
Source: Fitch Ratings
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