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Ventas: The Real News Driving This Healthcare REIT Higher

Ventas Inc. (NYSE:VTR) made news on Monday by announcing its purchase of privately-held hospital chain Ardent Medical Services, sending shares up about 2% premarket and up more than 5% in Monday trading.

ventas-vtr-185Though I view the jump as a little excessive, the market is giving the deal a very enthusiastic thumbs up.

The real news in the announcement — and the reason the shares are popping — has nothing to do with the hospital purchases.

Apart from the hospital deal, Ventas announced it would be spinning off its skilled nursing facilities. We’ll jump into both of these items, but let’s tackle the hospitals first.

Ventas is the second-largest healthcare REIT in the world by market cap and the fifth-largest REIT overall. It’s also one of the few REITs included in the S&P 500. But going into the deal, Ventas had very little exposure to hospitals. In fact, Ventas’ portfolio makes it less a “healthcare” REIT and more a play on senior housing.

Dividing the portfolio by its contribution to net operating income, 53% of Ventas’ current property portfolio is invested in senior housing, split between 24% in “triple net” properties, 25% in domestic operating properties and 4% in international operating properties. Another 17% of the portfolio is invested in skilled nursing/post-acute care facilities; 18% is invested in medical office buildings, with 7% in hospitals and the remainder spread among loans and other properties.

Hospital Deal Will Boost FFO for VTR

There is a reason for Ventas’ former hesitancy to invest in hospitals: Running a hospital has historically been a lousy business with high overhead and the unsolvable problem of having to provide emergency services to the uninsured knowing full well that they had no ability to pay. About 60% of all unpaid medical services are provided by hospitals, which leaves them at the mercy of the federal, state and local governments to at least partially plug the gaps.

Well, the economics of the business have gotten a little better in this age of Obamacare. Estimates from the Health and Human Services Department show that costs for treating the uninsured fell by more than $7 billion last year. All the same, we’re still talking about roughly $38 billion in uncompensated services every year.

So, if running a hospital is such a cruddy business, why is Ventas interested?

That’s easy. Ventas won’t be running the hospital operations. Ventas intends to strip out the hospital real estate to keep for itself and sell the messy operations back to Ardent’s management. This will make Ventas a pure landlord responsible for collecting the rent and not much else. Under a triple-net lease, the tenant is responsible for all maintenance, insurance and taxes.

All in all, Ventas expects the deal to add about 8 cents to 10 cents to its annual funds from operations. That’s not bad, but we need to remember that Ventas had FFO of $4.48 last year. So while the hospital properties are indeed a nice addition to an already solid portfolio, they don’t quite explain the market’s enthusiasm. This brings us to the real news: The spinoff of the skilled nursing facilities.

Does VTR’s Spinoff News Matter to Investors?

According to Ventas, the company will spin off 355 triple-net-leased skilled nursing facilities into a new entity. Current Ventas shareholders will get shares of the new company as a tax-free distribution.

So, why is Ventas so eager to dump the skilled nursing facilities?

That’s easy. They’re looking to decrease their dependence on government payers like Medicare and Medicaid and focus more on properties with private-pay clientele.

Should investors care?

Ventas has had a great run, generating returns of about 29% per year over the past 15 years. And for the income investors in the room, Ventas stock has boosted its dividend at a nice 8.1% clip over the past five years. Management clearly has a knack for creating value, and I’m sure the spinoff will be no exception.

But based on the REIT’s current large market cap, you can’t realistically expect the kinds of total returns we’ve seen in the past.

That said, Ventas is a fantastic healthcare REIT, and it is one that I believe you can buy, dump in a drawer, and hold for decades without much in the way of risk. Today’s dividend yield of about 3% is not particularly high, but it’s not unattractive in a world of sub-2% bond yields. While I might prefer to wait for a pullback, Ventas is certainly worth considering, even at today’s prices.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/ventas-real-news-driving-healthcare-reit-higher/.

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