Omega Healthcare strikes $3 billion stock deal for Chicago trust Aviv

Omega Healthcare Investors Inc. could become a $10 billion company under a deal the Hunt Valley-based owner of skilled nursing and assisted-living facilities announced Friday to acquire Chicago-based Aviv REIT Inc.

The companies struck a stock-for-stock deal that values Aviv at $3 billion and would increase Omega's footprint by half, to 874 facilities in 41 states.


Leaders of both companies said the deal would cut costs and allow them to command the market for the health facilities, which are growing in prominence as the U.S. health care system shifts away from hospital care.

The deal is the latest this year in the U.S. health real estate industry as facilities and their owners cope with federal spending cuts and lower Medicare insurance reimbursement rates, but investors see a growing customer base as baby boomers age.


"From our perspective, it's not an acquisition; it's a merger, and we're combining the best people assets from both businesses," Omega CEO Taylor Pickett said in a conference call with analysts. "We think we've gotten bigger and put ourselves in a position to grow faster."

The combined company would be based in Hunt Valley, and Omega's leadership team would remain in place. Aviv CEO Craig Bernfield would be among three representatives from that company to join an expanded 11-member Omega board of directors.

Omega, incorporated in 1992, invests in and provides financing to the long-term health care industry. Its investments include purchase/leaseback deals, direct financing leases and fixed-rate mortgages.

Aviv owns post-acute and long-term care skilled nursing facilities and other health care properties.

Real estate investment trusts, known as a REIT, allow investors to own shares in a company with real estate investments. All must return at least 90 percent of taxable income to shareholders in the form of dividends.

Pickett and Bernfield said they saw their businesses as complementary, and by combining forces they could use each other's existing business relationships to grow further. Both suspected that in many cases, they were negotiating against each other on deals for facilities.

Despite the sizes of their portfolios, both are small companies, leaving the management of their real estate to the operators that lease them. Omega had 25 employees and Aviv had 28 employees as of the end of 2013.

"From our perspective, it's strategic; it puts us in a position that no one can parallel," Pickett said on the call. Company officials could not be reached for further comment.


Citing data from Securities and Exchange Commission filings, Omega said in a presentation to analysts that the merged companies would own more than twice as many properties as their next-largest publicly traded competitor, Ventas Inc., which has 369 facilities.

The industry has seen other examples of consolidation this year. Ventas, one of the largest U.S. REITs, said in June it would buy American Realty Capital Healthcare Trust. NorthStar Realty Finance Corp. said in August it would purchase Griffin-American Healthcare REIT II Inc.

Though health providers face a squeeze in reimbursements from both Medicare and state Medicaid programs amid tight budgets, investors likely see potential profits, given the aging population and the push to cut health care costs by sending more patients to rehabilitation centers and similar facilities, rather than remaining in hospitals, said Joe DeMattos, president of the Health Facility Association of Maryland. HFAM represents 233 skilled nursing facilities and rehabilitation centers in Maryland.

"I think any investment in health care now is a bet that demand will only increase and that there will be both value and impact in developing capacity across the continuum of care and across the United States," DeMattos said.

While skilled nursing facilities and hospitals might once have been viewed as competitors, they are now being encouraged to work together to improve patient care rather than focusing on maintaining their volume of patients, he said. And they are increasingly seeing a revolving door of patients recovering from things like joint replacements and heart surgeries, as well as the more traditional elderly patients dealing with dementia and other debilitating ailments.

"They've really evolved to be mini-hospitals," DeMattos said of the facilities.


Aviv stockholders are to receive 0.9 shares of Omega for each share of Aviv owned, equivalent to $34.97 of Omega stock for each Aviv share. After closing, current Omega shareholders would own 70 percent of the combined company, while Aviv shareholders and limited partners of Aviv Healthcare Limited Partnership would own 30 percent.

Omega shares fell about 2 percent in Friday's trading, closing at $38.16. Aviv shares jumped 12 percent to $33.73.

Fitch Ratings affirmed a BBB rating for Omega, "good credit quality" according to its scale, because the deal had "negligible effects" on its debt and "incremental improvements in the combined company's portfolio diversification and quality."

Several law firms moved immediately to protest the deal on behalf of shareholders. Block & Leviton LLP in Boston and Levi & Korsinsky and the Rosen Law Firm P.A. in New York said they were launching investigations into possible breaches of fiduciary duty by Aviv. Block & Leviton said the stock price offered to Aviv shareholders represented a premium of 16 percent, and that the deal terms did not protect shareholders against future drops in the share price that could shrink the premium.

Both companies have reported steady profits. Omega made $46.8 million in its most recent quarter, which ended June 30, and $172.5 million in all of 2013. Aviv reported $17 million in profit in 2013.

Omega's Pickett is among Baltimore's highest-paid executives, receiving a $700,000 base salary and a $1.05 million cash bonus in 2013, plus $5.53 million in stock awards.


Shareholders of both companies still need to approve the deal, which is expected to close in the first quarter of 2015.

Reuters contributed to this article.