Senior Housing REIT Fills Purse With Up to $1B to Buy

Without identifying any potential acquisitions, during a conference call, David Hegarty, president and COO, said the specialty REIT just amended its $250-million credit facility to increase borrowing capacity to $550 million, "and it can be expanded to $1.1 billion," he said.

The amended facility also has an improved rate, he said, and the maturity date is extended to November 2009, and it is backed by 19 lenders versus the previous eight. "This gives us an added advantage as acquisition competition increases from other healthcare REITs and foreign investors," he said. While demand is rising, Hegarty also sited a study by the American Senior Housing Association that states there is less new development in this sector in 2005 than in 2004.

In response to a question about expansion potential at existing properties, Hegarty said, "most of our operators are exploring what they can add, and about three-quarters of our portfolio would fall into that category." At the end of second quarter, the portfolio contained 184 properties in 32 states run by 11 different operators. However, more than half of SNH's rent revenues come from properties leased to locally based Five Star Quality Care.

"Diversification of operators is not as critical as high-quality assets and efficient management," Hegarty said. While SNH would look to acquisitions to "bring down that percent," he said, "it doesn't preclude our doing significant transactions with Five Star if we like the assets."

Meanwhile, he reported that year-to-date SNH has spent more than $500,000 in litigation costs over a dispute with HealthSouth, the Birmingham, AL-based company that, along with its CEO Richard Scrushy, was charged by the SEC with a $1.4-billion accounting fraud. The SNH HealthSouth dispute pertains to SNH leases for two HealthSouth hospitals that it seeks to terminate on the basis of being supplied with fraudulent or insufficient financial data.

"We are currently seeking an expedited judicial determination that the lease termination was valid. …We have also begun work to identify and qualify a new tenant operator," Hegarty said in a statement. During the conference call he added that despite the costs, "we believe it's worth a fight with a potential upside."