Ventas Spinoff May Inspire More Health-Care REIT Deals: Real M&ABrooke Sutherland
Ventas Inc.’s plan to break itself up could encourage copycats.
The $25 billion health-care real estate investment trust announced Monday that it will spin off most of its skilled-nursing facilities and buy Ardent Medical Services Inc. to expand its hospital properties. Ventas shares soared 5 percent, the biggest gain since 2011.
Most of that jump is probably tied to investor enthusiasm about the value that will be unlocked by the spinoff, said Jeung Hyun of Adelante Capital Management. The sum of Ventas’s parts should add up to as much as $80 a share, about 9 percent higher than where the stock was trading last week, according to Jefferies Group LLC. That could encourage the other top health-care REITs -- HCP Inc. and Health Care REIT Inc. -- to weigh spinoffs of their own skilled-nursing businesses, Hyun said.
REITs have been using breakups to simplify their businesses and then find takeover targets that can have a meaningful impact on earnings expansion. Simon Property Group Inc. and Vornado Realty Trust are among the more than 10 companies in the global industry that have announced spinoffs in the past two years. Chicago-based Ventas is one of the first health-care REITs to join the trend, though probably not the last.
HCP and Health Care REIT “have been in the same boat for the past year or two where in order to continue to grow their earnings, M&A is increasingly important and increasingly hard to find,” Jeffrey Langbaum, an analyst at Bloomberg Intelligence, said in a phone interview. “This is the kind of thing that maybe they would look at as well.”
Ventas’s planned purchase of Ardent Medical will give it a bigger stake in the U.S. hospital market, which is set to grow amid an aging baby-boomer population and an increased number of insured Americans under the Patient Protection and Affordable Care Act. At the same time, the company is shedding much of its slower-growing skilled-nursing and post-acute facilities, which should improve the quality of its portfolio, Omotayo Okusanya, a Jefferies analyst, wrote in a report on Monday.
Skilled-nursing facilities usually have long-term net leases, where REITs collect rental streams that have contractual increases over the life of the lease, making them geared more toward stable cash flow than growth, Langbaum said. Also, skilled-nursing operators are largely dependent on government reimbursement, he said, making them vulnerable to changes in health-care policy.
Hyun of Adelante said the move “basically separates out the growth assets and the value assets in the Ventas portfolio and by finding the right home for both, you’re unlocking some value.”
“It’s a formula that can work for the other two as well,” he said of HCP and Health Care REIT. Adelante owns shares of both those companies, among the $2.4 billion in assets that it oversees.
Representatives for HCP and Health Care REIT didn’t respond to requests for comment.
Skilled-nursing facilities make up about 30 percent of HCP’s portfolio and about 20 percent of Health Care REIT’s assets, Hyun said. Slimming down may better position the companies to grow via acquisitions.
Those firms’ hunt for deals has been stalled by a limited number of sizeable targets and high real estate valuations, Langbaum of Bloomberg Intelligence said.
“When you’re so big, it gets harder to grow,” he said. “If you shrink that base down, each individual entity has a smaller base from which to grow.”
Shares of both HCP and Health Care REIT rose on the news of Ventas’s spinoff. Ventas was the best performer in the Standard & Poor’s 500 Financials Index.
“Seeing the positive response, it’s something they would have to take a look at,” Hyun said.
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