Teachers Pension Plan (OTPP) buys a retirement home

Ryan M Sep 02, 2015

News broke on Wednesday of a purchase being done by the Ontario Teachers Pension Plan at a significant premium relative to historical prices. Amica Mature Lifestyles (ACC.TO) is a designer, developer and owner of luxury senior residences with 24 facilities operating in Ontario, B.C. and Alberta. On Tuesday, the company had a price of $8.79 and a market-cap of nearly $271 million. As of close on Wednesday, ACC had a price of $18.51 and market-cap of roughly $570 million. While unlikely to be a big-ticket item for a pension such as the OTPP (BayBridge Seniors Home is a subsidiary of the OTPP), when a deal is done at such a significant premium, it is worth looking at closely. Before we jump into the why, let us look at what the deal consists of.

The Deal:

  • BayBridge seniors housing (will be referred to OTPP herein for simplicity) is purchasing Amica for $18.75 in cash, representing a 113% premium.
  • This is a 125% premium to the average price over a 20-day period
  • ACC is being taken private.
  • Deal requires 66.67% approval, OTPP already has confirmed 24.4% of the votes through directors, insiders and select shareholders.
  • $25 million breakup fee if ACC leaves – Nearly 10% of ACC’s market-cap before the deal.
  • Amica has a non-solicitation covenant – They cannot seek out a better price.
  • The September dividend will be paid. Future dividends are suspended. 

Certainly, ACC shareholders should be jumping for joy right now. This is a huge premium that is made all the more sweet in a volatile market. Teachers pension holders who diligently sock away that pension money from each pay cheque may raise an eyebrow, however. But never fear teachers, you are likely in good hands and here is why such a premium might make great sense:

Asset-Liability Management: The primary purpose of a pension plan is to generate a return that satisfies the future liabilities. They are not trying to generate ‘alpha’ or beat the market. Both of these are nice but they NEED to meet liabilities that come due. So if the OTPP needs to generate X% on this investment, and that rate is attained even after they purchase an asset at a 110% premium, then why not? Sure, they could have likely done it for a 75% premium or some other big number but if priced too low, they could risk losing the deal, which leads to the next point.

Competition: Other senior home operators likely have a higher hurdle rate in order to justify a purchase of a company like this and while $570 million is likely not a whole lot to a pension plan, it would be a much more material amount to smaller senior home operators. The high premium makes it hard for competitors to match and avoids a bidding war.

Nowhere else to go: A pension plan can sometimes have a tough time justifying too much equity exposure due to the volatility but fixed income offers meager returns currently as well. Commodities do not really offer much in the way of cash flows and OTPP probably already has a substantial real-estate portfolio. Senior homes offer an interesting middle ground. There is the stability that comes with real-estate but the demand for senior housing will likely be at least stable over the long term, if not growing due to demographics. This adds an extra layer of security to the assets. They are not as sensitive to GDP or the economy like office or industrial properties and it caters to the largest demographic out there right now.

Financing and dividends: These businesses essentially run on leverage and it is safe to assume that the OTPP can garner a very attractive borrowing rate. This means that the OTPP could refinance the debt and improve margins almost instantly, which helps to further justify a premium. Since it is being taken private, the buyer can also cancel the dividend and reinvest the cash flow. If it is being diverted to pension payments instead, and assuming the dividend yield of nearly 5% is greater than the rate of return the pension plan requires, they would simply keep the difference.

While Amica is a relatively small company in the scheme of things, whenever such significant takeovers occur, it is worth watching. This may open investors’ eyes up to the potential that exists in senior residences as a means for good growth based on strong demographic trends as well stable cash flows. The takeover of ACC leaves only a few options on the TSX for investors. Members of 5i Research will already be familiar with Chartwell (CSH.UN) up just over 6% on this news. Other names to watch would be Sienna Senior Living (SIA.TO), up slightly over 3% and Extendicare (EXE.TO) up just over 5%. With another 5i Research company, Healthlease Properties, being taken over essentially a year ago, Amica was not the first senior living deal done, but they will probably not be the last. 



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