Ventas Sees More Potential in Private Pay Senior Housing, Post-Spinoff

Ventas, Inc. (NYSE: VTR) is betting big on private-pay assets, senior housing included, following the spin off of most of its skilled-nursing properties into a separate real estate investment trust (REIT) earlier this quarter.

The Chicago-based REIT, which serves as landlord to a number of the nation’s top operators across the senior housing, post-acute, medical office building (MOB) and hospital sectors, maintains a diverse real estate portfolio that encompasses 1,632 owned properties in the U.S., Canada and the United Kingdom.

Collectively, the operations from these properties contribute to Ventas’ $2.1 billion net operating income (NOI). Of this total amount, 83% of the company’s NOI now derives from its private-pay sources as a result of spinning off 353 post-acute/skilled nursing portfolio into Care Capital Properties, an independent, publicly-traded REIT.

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“We are making a big move on private-pay, going to 83% of NOI, which is industry leading,” said Ventas Chairman and CEO Debra Cafaro during the company’s NAREIT presentation Wednesday afternoon.

Health Care REIT (NYSE: HCN), Ventas’ largest competitor in the health care REIT space, however, derives 87% of its NOI from private-pay sources. In terms of senior housing exposure, approximately 63% of Health Care REIT’s NOI comes from senior housing sources, not including long-term/post-acute care, according to a company presentation compiled for the NAREIT event.

For HCP (NYSE: HCP), the company’s private pay component represented 71% of total revenues in 2014.

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The same month Ventas announced the spin-off, it also acquired Ardent Medical Services, Inc. for $1.75 billion in cash. As one of the 10th largest hospital companies in the U.S., Ardent fit the profile that is characteristic of Ventas’ operating partners.

Ventas derives 83% of its NOI from the nation’s top-20 operators in each of its property segments, with partners that include Brookdale Senior Living (NYSE: BKD), Atria Senior Living, Sunrise Senior Living, Holiday Retirement, Kindred Healthcare (NYSE: KND), Genesis HealthCare, HealthSouth and Lillibridge on the MOB side.

But senior housing accounts for most of the REIT’s NOI, representing roughly half of the $2.1 billion total. Of this share, about 24% derives from triple-net leased senior housing properties, while 26% comes from Ventas’ senior housing operating portfolio, which is managed by Atria and Sunrise.

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Meanwhile, skilled nursing and MOBs command an even split of NOI at about 18%, respectively.

Although the company’s skilled nursing spin-off and Ardent acquisition took center stage during the NAREIT presentation, the Chicago-based REIT remains committed to strengthening its senior housing portfolio, especially its SHOP portfolio where Cafaro notes margins are between 30-35%.

“We think it’s a higher growth business,” Cafaro said.

The spin-off should be a win-win proposition for Ventas, said Michael Knott, managing director at Green Street Advisors.

“Care Capital will be a stand-alone skilled nursing owner, which public investors like and clamor for the higher yield, while the remaining Ventas will sport a higher-quality portfolio focused largely on private-pay sources,” Knott told SHN in an email. “The high-quality, private-pay orientation of post-spin Ventas is generally attractive for the long term, although the public market is increasingly nervous about recently slowing NOI growth in senior housing.”

Editor’s note: A previous version of this article stated that HCP derived 33.7% of NOI from private pay, when in fact, this component represents approximately 71%. SHN regrets the error.

Written by Jason Oliva