[Update] Ventas to Spin off SNF REIT, Acquire Ardent Health for $1.75 Billion

Ventas, Inc. (NYSE: VTR) announced early Monday morning it will acquire Ardent Health Services, Inc., one of the 10 largest for-profit hospital companies in the U.S., for $1.75 billion in cash.

Owned by private equity funds, Ardent owns and operates leading health systems across the U.S. and generates approximately $2 billion in annual revenue with more than half coming from private pay sources.

Ventas has long pursued a deal with Ardent as a way to establish a stronger presence in the acute care hospital sector, Ventas Chairman and CEO Debra A. Cafaro said in a call with analysts after announcing the deal.

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The Ardent acquisition is a “beachhead investment” that will facilitate further growth, Cafaro said. Ventas views it as similar to past deals with Atria and Lillibridge, which opened up opportunities in the senior housing and medical office building sectors, respectively.

As part of the closing, Ventas will separate the hospital operations from the real estate and sell the operations to one or more newly formed entities owned by Ardent, other equity sources, and up to 9.9% owned by Ventas.

The companies will enter into a long-term triple net lease agreement with an expected going in cash yield exceeding 7% and annual escalators estimated at 2.5%. The EBITDARM to rent coverage ratio for the purchased facilities is expected to be approximately 2.9 times in year one, Ventas said.

“This transaction builds upon our excellent track record of executing innovative and value-creating opportunities, and solidifies our leadership position in health care real estate,” said Cafaro. “The addition of Ardent’s platform, which includes high-quality assets with significant market share in three key markets, and a highly-regarded hospital management team, creates a strong avenue for growth in the attractive hospital real estate market.”

The 10 hospitals include acute care, heart, rehab, women’s health hospitals, and comprise approximately 3.2 million square feet and 2,045 beds.

High-quality hospitals will be “winners” as the health care system transitions to accountable care, bundled payments and similar pay-for-performance policies, Cafaro said. While Ventas will continue to invest in senior housing and MOBs, growth in the hospital sector also is an increasingly important priority, she emphasized.

“We’re doing some early stage creative investment with Ardent and we hope that will grow,” she said, after stating that the hospital system brings a “pipeline of opportunities” to Ventas.

REIT Spin Off

Also announced Monday, Ventas said it plans to spin off most of its post-acute/skilled nursing portfolio into an independent publicly traded real estate investment trust (REIT). Expected to close in the second half of 2015, the “SpinCo” will own 355 high-quality triple net leased SNF and other assets operated by 44 private regional and local care providers.

The portfolio will cover 37 states and no operator is expected to constitute more than 10% of SpinCo’s NOI. During the first year of full operations, the company is expected to generate an estimated NOI of $315-320 million and estimated funds from operators of $240-245 million.

Larger SNF operators, including Kindred and Genesis, will remain in the Ventas portfolio, Cafaro clarified on the call with analysts. Going forward, the plan is that these larger operators will continue to work with Ventas, as they are well-served by the larger REIT for a variety of reasons, including better capital pricing.

The thinking behind a separate REIT for local/regional players is that it can more freely pursue a high-growth strategy in that highly fragmented market, Ventas executives said.

“The truth of the matter is, Ventas and the large-cap health care REITs have not really been allocating significant amounts of capital to this segment,” Cafaro said. This has created a “gap” that the new SpinCo REIT can fill, she added.

The spin off distinguishes Ventas from Health Care REIT (HCN) and HCP Inc. (HCP), the other so-called “big three” health care REITS in the senior living space, Stifel analyst Chad Vanacore told SHN.

Specifically, Ventas’s decision to separate most of its skilled nursing portfolio runs counter to HCN, which has been acquiring skilled nursing/post-acute care assets, such as through a deal last year with Indiana-based developer Mainstreet.

“This says look at us versus HCN,” Vanacore said.

The move also reduces Ventas’s reimbursement exposure and might also improve management’s focus by removing a “distracting” portion of the portfolio, Vanacore commented.

“Maybe they have been holding back the growth of the skilled nursing portfolio to focus on private pay senior housing,” he said.

When asked if Ventas has been constrained in SNF growth, company leaders on the call with analysts focused on the potential of the new REIT to expand rapidly.

“Our team is back from the [National Investment Center for Seniors Housing & Care] conference on the West Coast with a briefcase full of opportunities in the space we can start working on now,” Cafaro said.

While the cost of capital for the new REIT will be higher than for Ventas, it still is expected to be attractive, Cafaro said. Initially, most of the SpinCo financing will come from banks, but the plan is to transition to more bond market financing as the rating agencies weigh in on it.

SpinCo and Ventas will be independent companies, and therefore potential transactions between them would be at “arm’s length” and unrestricted, Cafaro said. There is the potential for the two companies to collaborate on opportunities down the road; for example, they could split up portfolios that include both large SNF operators and local/regional players.

The spin off into a dedicated skilled nursing REIT comes right on the heels of the Omega Healthcare Investors, Inc. (NYSE: OHI) merger with Aviv REIT, Inc. (NYSE: AVIV), which was finalized last week and created another publicly traded SNF REIT with an estimated market capitalization of $11.1 billion.

The Omega REIT is investment grade, and Ventas expects the new REIT to also “get there,” executives said.

When the deal is completed, Raymond J. Lewis, currently President of Ventas, will serve as CEO and as a director of SpinCo, and Douglas Crocker II, currently Ventas’s Presiding Director, will serve as SpinCo’s independent Non-Executive Chairman of the Board.

“This transaction demonstrates our continued commitment to enhancing shareholder value by creating two focused companies with distinct strategies,” added Cafaro. “SpinCo will thrive as an independent, pure-play SNF REIT with a seasoned management team and a strong Ventas heritage. For Ventas, the spin-off enhances our growth profile, increases our NOI contribution from top-tier operators, and improves our industry-leading private pay NOI composition.”

“With a focus on the highly fragmented post-acute/SNF market, SpinCo will have the necessary size, balance sheet strength and access to capital to pursue significant consolidation opportunities,” Lewis said.

Written by John Yedinak with additional reporting by Tim Mullaney and Elizabeth Ecker

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