Consolidation among real estate investment trusts (REITs) is continuing in early 2022. The latest deal will see healthcare REITs Healthcare Realty Trust (HR) and Healthcare Trust of America (HTA) combine in a nearly $18 billion deal. The transaction will create the largest REIT focused on owning medical office buildings (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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Pushed 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 share of Healthcare Realty for each share of HTA they currently own. The deal values the combined company at $17.6 billion.
It will create the largest healthcare REIT 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 deal will broaden the combined company's relationships to include properties associated with 57 of the top 100 health systems. It will also expand its development pipeline to more than $2 billion, save it $33 million to $36 million in annual expenses, and be immediately accretive to Healthcare Realty's financial results on a per-share basis.
The transaction puts to end an escalating battle between HTA and one of its largest shareholders, activist investor Elliott Management. Elliott has been pushing the company to conduct a strategic review, believing that a sale was in the best interests of all shareholders. It pointed to the REIT's long history of underperformance and the increasing competition from non-traded REITs. These factors put it at a competitive disadvantage and hampered its ability to unlock shareholder value and grow. It believed that a sale was the best path forward for the company.
Merger mania hits the REIT sector
The Healthcare Realty/HTA tie-up is the latest in a string of mergers across the REIT sector over the past year. Notable deals included:
- Realty Income's acquisition of VEREIT created a $50 billion REIT focused on triple net lease properties.
- VCI Properties and MGM Growth Properties are combining to create a $45 billion gaming REIT.
- Kimco Realty's acquisition of Weingarten Realty Investors created a leading grocery-anchored retail REIT valued at more than $20 billion.
- American Tower's $10.1 billion acquisition of data center REIT CoreSite Realty expanded its data infrastructure operations.
Several factors are driving the consolidation wave across the REIT sector. A big factor is the desire to increase scale. This factor will reduce a REIT's operating costs and their cost of capital, improving returns.
Another catalyst is the surge in REIT equity values over the past year, giving them a valuable currency to make acquisitions. Meanwhile, interest rates remain low, making borrowing money to fund acquisitions cheaper.
Add it up, and conditions remain ripe for additional REIT consolidation, especially given the likelihood that interest rates will rise over the coming years. REITs will likely want to lock in the rates on new debt while they're low, which could spur them to complete a deal as soon as possible.
With more than 200 publicly traded REITs -- including more than a dozen healthcare REITs -- there's ample room for additional consolidation. Given Healthcare Realty's growing scale in the MOB sector, it could spur some of its rivals to join forces so that they can reap the benefits of scale advantages.
The deal-making continues
Healthcare Realty's merger with HTA will make it the largest REIT focused on MOBs. It's the latest in a string of deals to create leading large-scale REITs to reduce costs and enhance their competitive position. This continued deal-making will likely spur other transactions, especially since interest rates might not remain this low for much longer. This may mean we'll see more deals in the REIT sector in the coming months, which could benefit investors over the long run.
