Health Care REIT Bulks Up

It appears Health Care REIT (NYSE: HCN) is itching to diversify. This morning, the company announced that it will acquire WindroseMedical Properties (NYSE: WRS), which is primarily focused on medical office buildings, for $877 million. For comparison, Health Care REIT has a $2.4 billion market cap and near $3 billion enterprise value (market cap plus debt).

Windrose owns some outpatient-treatment and ambulatory-surgery properties and one hospital property, but its primary focus is medical-office properties, which make up 88% of its square footage and 81% of its net operating income. Medical-office properties will provide Health Care REIT with not only another building type but also additional diversification of its revenues and in its tenant base.

The purchase will be made in stock, and Health Care REIT will assume the outstanding debt of Windrose. The offer is for 0.4509 shares of Health Care REIT for each share of Windrose, and the share price used for the conversion will be determined in the final weeks before the closing. To leave the door open for possible declines in the share price of Health Care REIT, the conversion rate can be upped to a maximum of 0.4650 shares of Health Care REIT for each share of Windrose.

The deal is intended to be non-taxable for shareholders of Windrose and conditional upon each party's receiving an acceptable tax opinion. Health Care REIT has also announced that it will provide 2007 guidance, including funds from operations (FFO), for the combined company when it reports its fourth-quarter 2006 earnings. However, the company is already stating that it expects the acquisition to be accretive to FFO in 2007.

In comparison with other industries, not a lot of synergies are gained when one REIT acquires another. Health Care REIT is, however, forecasting that selling, general, and administrative expense will be $1 million to $2 million less with the companies combined. But properties still require a certain level of staffing and maintenance expenses, and there are no synergies there. This means the purchase price being paid becomes very important. Glancing at Windrose's numbers, we can see that the 12 times FFO Health Care REIT paid and the fact that the acquisition will be accretive to FFO in 2007 are good signs.

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At the time of publication Nathan Parmelee owned shares in Health Care. He has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.