By Robbie Whelan
Ventas Inc. announced Monday that it would spin off 355 skilled
nursing facilities and outpatient recovery centers into a new
real-estate investment trust, the latest sign of the growing
interest in highly specialized medical properties, which carry more
risk but have the potential for high returns.
The new company, which isn't yet named, could have a market
value of more than $5 billion based on trading multiples for
similar companies, said Green Street Advisors, a research firm.
Ventas, one of the largest owners of health-care properties, said
the spin off would produce annual net income between $315 million
and $320 million.
"What we're doing is really creating two REITs that are
positioned to deliver outsized growth and results for
shareholders," said Debra Cafaro, Ventas chairman and chief
executive. "The market is really finally appreciating the value of
this asset class."
Skilled nursing and post-acute care facilities are seen as more
risky than medical office buildings and senior-living properties
because most customers pay for skilled-nursing care using insurance
policies and Medicare. Cuts to Medicare and other government-funded
insurance programs can divert money from the facilities, said Kevin
Tyler, an analyst with Green Street.
But demand for such facilities is rising as private insurers
push patients to use skilled nursing facilities and outpatient
facilities as an alternative to costly, prolonged hospital stays.
As a result, larger companies are buying up such facilities,
leading to more consolidation. "Broadly speaking, I think we're
seeing skilled nursing going from a fragmented private market to a
consolidated public market," Mr. Tyler said.
In October, Omega Healthcare Investors Inc. agreed to buy
competitor Aviv REIT Inc. for $1.65 billion, creating the largest
REIT focused solely on skilled nursing properties.
According to Green Street, buyers of skilled-nursing home assets
are putting them in separate companies due to the high valuation
the market has assigned to such properties. Omega's shares, which
have risen nearly 20% in the last six months, trade at a premium of
60% to the value of the company's underlying assets. By comparison,
shares of Ventas were trading at a 20% premium to their net asset
value as of last week, while most REITs are currently trading at a
premium of about 5%.
Overall, REITs that specialize in health care properties
produced total returns of 35.5% last year, including dividends,
making them the second-best performing real estate sector after
apartments.
The National Investment Center for Seniors Housing & Care, a
Maryland nonprofit that tracks investment in the medical real
estate sector, reported that sales transactions involving senior
housing and nursing care facilities rose 17.4% between 2013 and
2014, from $14.8 billion to $17.4 billion. Last year's deals in the
sector amount to nearly six times the annual dollar amount of deals
in the first years of the downturn in 2008 and 2009.
REIT executives and analysts say that partnerships between large
REITs and smaller operators of senior care and nursing facilities
are becoming more common.
In August, Health Care REIT Inc., with a market value of $27
billion the largest REIT focused on medical properties, announced a
partnership with Mainstreet Property Group, which develops senior
housing properties and post-acute care centers, where patients
receive treatment and live-in buildings that resemble hotels,
complete with private rooms and even high-end dining facilities,
after surgeries and other hospital procedures.
Under the deal the two companies struck, Mainstreet will
complete construction of 62 post-acute and assisted living
facilities using loans from Health Care REIT, which will retain
exclusive rights to buy the portfolio, worth an estimated $1.4
billion, once it is built.
"Inpatient care at hospitals is becoming less and less
relevant," said Scott Brinker, Health Care REIT's chief investment
officer. "When we're talking about an older person who has just had
knee surgery, for example, and needs to recover for 20 days or so,
that recovery is happening in a post-acute facility, rather than in
a hospital. There's been a significant increase in demand for that.
Consumers want it, the payers want it, the providers want it. It's
a huge opportunity for growth."
Despite the growing interest in skilled nursing and post-acute
care centers, Ventas is still betting big on hospitals. Unrelated
to the spinoff, Ventas on Monday also announced it would buy
hospital operator Ardent Medical Services Inc. for $1.75 billion in
cash. Ms. Cafaro said hospitals are still "at the top of the food
chain in the health care business," and benefiting from an influx
of newly-insured patients.
Write to Robbie Whelan at robbie.whelan@wsj.com
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