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What REITs Need to Know About Acquisition Analysis

August 10, 2018
Healthcare Consulting By Rodney Farley, Director

While many senior living providers seem to be managing just fine, despite today's economy, others are in a state of uncertainty. Real Estate Investment Trusts (REITs) have an opportunity to use this to their advantage. REITs are companies that invest in income-producing real estate. Stockholders in a REIT own a share of the income that is produced through the investment. So it begs the question, what can REITs do to remain competitive and ensure a successful transaction?

DueDiligence


There are many healthcare REITs in the market today, all looking to diversify their portfolio. In particular, the healthcare industry is booming with REITs. Some of the most successful healthcare REITs, according to Investopedia, include players such as HCP, Inc., Senior Housing Properties Trust, and Ventas. In 2016, these REITs saw substantial growth. But to continue the growth, these and other REITs need to be mindful of the acquisition analysis process. Every transaction is different so this process should be customized to the particular circumstance.

Questions to Ask Before You Invest

Whether you are a REIT investing in or buying a property, acquisition analysis is key. Broadly, it's defined as the “…the level of judgment, care, prudence, determination, and activity that a person would reasonably be expected to do.” For REITs this is of utmost importance. Before the purchasing decision is made, REITs should ensure there is a cultural and most importantly a financial fit between them and the company they are entering into a transaction with.

Questions healthcare REITs should ask are:

  • Does the provider have a healthy cash flow?
  • How reliable is the provider's financial forecast?
  • Is the provider profitable?
  • Who are the provider's competitors and what impact could these competitors have on earning potential?
  • Are there operational issues (i.e., management, staffing, performance, compliance, etc.)?
  • What is the culture like (including staff sentiment, loyalty of consumers, and community perception)?
  • Is the provider up to date on taxes?
  • Are there any hidden liabilities?
  • Are there complete personnel records on file, including information on salaries and benefits?
  • Are articles of incorporation, board meeting minutes and tax registration records complete?

These are just some of the questions REITs should ask, but a thorough and complete acquisition analysis process can be complicated and lengthy. One misstep could equate to millions in potential financial loss, not to mention a compliance nightmare. So what can REITs do to ensure a smooth acquisition analysis process?

Leveraging Third-Party Acquisition Analysis Help

Relevant experience is vital, especially when it comes to acquisition analysis and managing a REIT's risks. Consultants that specialize in performing audits, inspections and other transaction activities are prime resources. REITs looking at expanding their portfolios or those entering into new markets could greatly benefit from third-party acquisition analysis help, as knowing what to look for and what questions to ask can be overwhelming. Also, ensuring you have the right people around the decision-making table can put pressure on your own internal resources. For these reasons, many REITs seek outside assistance.

Services often offered by third party consultants include:

  • Opportunity Analysis
  • Technical, Legal and Financial Analysis
  • Negotiation Assistance
  • Auditing and Ongoing Monitoring of Services
  • Strategy Development

For those REITs looking to invest in senior living properties, an experienced third party consultant can be your eyes and ears—in other words, your feet on the ground and involved in daily operations of your business-investment.

Putting It into Practice

Are you a healthcare REIT considering a new partnership, deal or transaction? It's time to put the tips in this article into practice. LW Consulting, Inc. can assist with transaction support, acquisition analysis, auditing and ongoing monitoring to ensure you are not surprised by any unforeseen liabilities.

To learn more about our consulting solutions for healthcare REITs, contact Rodney Farley, Director at 717-213-3123 or email RFarley@LW-Consult.com.

 

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A Smart Giude to Acquisition Analysis for REITs