Ventas Inc. VTR recently accomplished the first phase of the sale of its 36 skilled nursing facilities (SNFs) to an affiliate of BlueMountain Capital Management, LLC. These SNFs, which are currently operated by Kindred Healthcare, Inc. KND, are being sold to expedite Kindred’s exit from the skilled nursing segment, as well as lower Ventas’ exposure to this asset category.
In the first phase, the sale of the 22 SNFs helped Ventas reap $488 million in proceeds that marked a 7% yield on current cash rent. The company anticipates to generate $700 million in proceeds from the sale of the total 36 SNFs, which indicates a 7%-cash yield on the current annual cash rent of $50 million and an 8% GAAP yield. The company is projected to gain more than $600 million from the sale of all the 36 SNFs.
However, Ventas had previously announced that an early disposition of the larger part of the portfolio, along with the expected payback of LIBOR-based debt, would lead to a one cent per share per-month reduction in funds from operations (“FFO”). Thus, since a major chunk of the total portfolio sale has already been accomplished, the company’s 2017 normalized FFO is likely to lower by one cent per share per month, beginning Sep 1, 2017.
Nevertheless, the above discussed move is in sync with Ventas’ strategy of de-emphasizing this particular healthcare real estate category. The company successfully spun-off majority of its SNF business in 2015, and following the anticipated sale of the aforementioned 36 SNFs, Ventas will be able to bring down its net operating income (NOI) from SNFs to just 1% of its aggregate NOI.
Amid the healthcare reforms implementation, healthcare REITs have been distancing themselves from the skilled nursing facility business. This is because though senior housings, medical-office buildings and hospitals have been able to reap solid revenue growth in recent years, SNFs are becoming more susceptible to top-line pressure due to the gradual shift in medical billing procedure.
In fact, tenants of the SNFs derive majority of revenues in the form of payments from Medicare and other government insurance programs. However, these tenants have been facing shorter stays and lower rates amid the shift in the billing practices, which stresses more on the value of care provided rather than the volume of services offered. So, healthcare REITs prefer to refrain from this asset category and focus on private-pay assets, because in such cases tenants’ revenue trend is likely to remain steadier.
Also, Ventas is making decent investments in university-based life science real estates. Such investments offer scope to capitalize on growing health-care-driven research and development, supported by top-tier research universities. Nonetheless, there is rising supply of senior housing assets and near term dilution of earnings from asset dispositions cannot be bypassed. Further, hike in interest rate is a concern for the company, considering its substantial exposure to long-term leased assets.
Currently, Ventas carries a Zacks Rank #3 (Hold). In addition, year to date, shares of Ventas have climbed 8.4% and outperformed its industry’s gain of 5.0%.
Stocks to Consider
Better-ranked stocks in the real estate space include Communications Sales & Leasing, Inc. UNIT and InfraREIT Inc. HIFR, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While Communications Sales & Leasing has expected long-term growth rate of 7.5%, the same for InfraREIT is currently pegged at around 8%.
Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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