CEO Debra Cafaro of $25.5 billion cap Ventas, Inc. VTR has a reputation for being an innovator in the healthcare REIT space, who places a high value on diversification, balance and scale.
On April 6, Cafaro announced that Ventas was spinning out the majority of its skilled nursing facility (SNF) assets in a tax-free transaction. Ventas shareholders will receive one SpinCo share for each four shares of VTR common stock, or a 1:4 ratio.
Cafaro also announced the purchase of for-profit hospital operator Ardent Medical Services, Inc. (along with its affiliate Ardent Health Services) for $1.75 billion in cash.
While both of these transactions are significant in their own right, one signals a new initiative, while the other represents a shift in corporate strategy.
Tale Of The Tape - Positive Market Reaction
The Ventas announcements were well received by investors, with VTR shares gapping up at the open, and closing the day at $76.50, up 5 percent on the news.
Cafaro hosted a conference call prior to the opening bell, which included a 22 slide presentation which explained the rationale, financial impacts and management changes stemming from these two blockbuster announcements.
Ventas Conference Call - Investor Highlights
The net effects of these two major announcements may have been difficult for investors to understand in the absence of the detailed presentation and investor conference call hosted by Ventas management.
SpinCo - Key Takeaways
The SpinCo nursing home strategy will be to continue to focus on external growth through regional/local providers, typically operating 25 or fewer assets. SpinCo will target both post-acute and skilled nursing home growth on an opportunistic basis.
The combined Ventas and SpinCo dividend is expected to increase ~10 percent, with Ventas maintaining below 70 percent pay-out ratio post-spin, and SpinCo between 70 - 75 percent. The combined G&A run-rate is anticipated to increase approximately $15 million.
Ventas President/COO Ray Lewis will become CEO of the newly formed SpinCo. This position will not be filled at Ventas, as part of Cafaro's design to flatten out the VTR organizational chart. The other key SpinCo executives are also coming over from Ventas, insuring a smooth transition.
Ardent Acquisition - Key Takeaways
In addition to receiving 100 percent of the Ardent PropCo triple-net lease revenues, Ventas will be making a significant equity investment of up to 9.9 percent in the Ardent hospital OpCo entity, which will be reported on the Ventas P&L as an unconsolidated equity investment.
The Ardent acquisition is expected to be accretive for Ventas earnings year one, based upon an initial cash cap-rate of at least 7 percent.
Ventas will not be spinning out its nursing home run by publicly traded national operators such as Kindred Healthcare and Genesis HealthCare.
Over time, Ardent Health Services could serve as a "beachhead" operating company in the for-profit hospital sector for Ventas, in a similar fashion to Lillibridge for medical office and Atria for senior housing.
While at first blush spinning out the SNF assets might have seemed to be a step back for Ventas when it comes to diversification, in actuality it appears to be more of a strategic shift, with the hospital sector becoming another major engine for Ventas growth moving forward.
Ventas Bottom Line
The new Ventas SpinCo will compete with the newly merged Omega Healthcare/AVIV entity in the pure-play SNF REIT space, and management hopes that the SpinCo will achieve an investment grade rating in the near term.
Ventas will receive a "debt dividend" of ~1.3 billion from the SpinCo, which it plans to use to strategically pay down its own debt, (minimizing prepayment penalties).
The Ardent acquisition is anticipated to be accretive to Ventas year one -- in the range of $0.08 to $0.10 per existing VTR common share -- and be the basis for a long-term Ventas hospital industry diversification initiative.
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