Ventas Gains Competitive REIT Advantage Through SNF Spin Off

The latest move by Ventas, Inc. (NYSE: VTR) to spin off its skilled nursing assets into a separate real estate investment trust (REIT) may have come as a surprise for a company that has continually touted the diversification of its portfolio.

But the move may actually position the REIT as having a strategic advantage against its Big Three peers, analysts say.

“The spin-off goes against the Ventas playbook of emphasizing the benefits of diversification, but it is the clear handiwork of a CEO who has an impressive and obsessive focus on shareholder value-creation,” Michael Knott, managing director at Green Street Advisors, tells SHN, referring to Ventas Chairman and CEO Debra A. Cafaro. “That is a defining hallmark of Ventas, and the spin fits neatly into that.”

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Ventas has always pointed to diversification as one of its strong points. And the spin-off transaction further aligns Ventas’ portfolio with its “core strategy,” Ventas Chairman and CEO Debra Cafaro tells SHN.

“It enhances our growth profile, increases our NOI contribution from top-tier operators, and improves our industry-leading private pay NOI composition,” she says. “As one of the top REITs globally, Ventas will maintain our diversification, scale, strong balance sheet, and superior dividend and cash flow growth.”

The move follows Omega Healthcare Investors, Inc.’s (NYSE: OHI) creation of an $11 billion skilled nursing facility (SNF) REIT — the result of Omega’s acquisition of all of the outstanding shares of Aviv REIT, Inc. (NYSE: AVIV). And Ventas is seeking to capitalize on the significant valuation premium at which the lone skilled pure-play, Omega, trades, Knott says.

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“Omega trades at nearly a 65% premium to the value of its assets, or net asset value, whereas Ventas’ diversified portfolio fetches a much lower premium of 25% before the spin-off news,” he says. “The stock market loves the high yields of a competent nursing home REIT, as well as the state and operator risk diversification that can be achieved with Omega’s scale, so Ventas rightly recognizes that and is supplying the market with more of what it wants.”

Ventas’ spin off of most of its post-acute/skilled nursing portfolio into an independent publicly traded REIT distinguishes Ventas from competitors Health Care REIT (NYSE: HCN) and HCP (NYSE: HCP), the other “Big 3” health care REITS in the senior living space, Stifel analyst Chad Vanacore recently told SHN. Specifically, HCN has been acquiring skilled nursing/post-acute care assets, such as through a deal last year with Indiana-based developer Mainstreet.

“The [Ventas] spin off is a noteworthy capital recycling event for the health care REIT sector which has generally been an aggressive net asset aggregator over the past few years,” says Britton O. Costa, director of REITs at Fitch Ratings, adding the move “is more a reflection of their preference to reduce exposure to reimbursement risk when capital values are high as opposed to an overarching change to the strategy of portfolio diversification.”

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Larger SNF operators, including Kindred and Genesis, remain in the Ventas portfolio.

In addition to its SNF SpinCo, Ventas also announced the $1.75 billion cash acquisition of Ardent Medical Services, Inc. Ardent is one of the 10 largest for-profit hospital companies in the U.S.

Given the risk that companies in the sector may end up paying a premium for new investments, given favorable equity valuations, the spin off should be a boon to Ventas, says Sean Pattap, primary Ventas analyst and senior director at Fitch Ratings. But the company appears to be trading one risk for another.

“In that sense, the spin off is a positive for Ventas in that it shows that the company is becoming more opportunistic in terms of capital recycling while remaining diversified by property type, geography and operator/manager,” Pattap says. “However, Ventas has exchanged one asset class that is further out on the health care real estate risk spectrum (i.e. SNFs) for another in general acute hospitals.”

Written by Cassandra Dowell

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