Ventas Adds Value
Ventas’ spin-off of skilled nursing facilities and Ardent acquisition add value for shareholders.
Health-care real estate investment trust Ventas (VTR) recently announced two value-enhancing actions. First, Ventas plans to spin off the majority of its skilled nursing facilities; second, it announced a $1.75 billion acquisition of Ardent Health Services. The spin-off has no immediate impact on our current fair value estimate but should provide greater transparency to operations at both the remaining Ventas and the spin-off company, which could benefit Ventas’ share price. The acquisition, on the other hand, looks to be value-accretive to shareholders. With its 7% (or greater) expected initial unleveraged cash yield plus 2.5% expected annual rent escalators, the potential 9.5% total return to shareholders looks favorable relative to our mid-7% estimate of Ventas’ cost of capital. Due to the combination of expected value creation from the Ardent transaction plus the impact from the time value of money since our last update, we expect to increase our fair value estimate for Ventas to $81 per share from $76.
Furthermore, Ventas expects to be able to increase its dividend (combined at both the spin-off and Ventas) by 10% or more. After incorporating the Ardent deal in our model, we think its combined dole for 2016 could reach $3.55 per share, up from $3.16 currently. Based on our new 2016 forecast, our projected 2016 dividend would represent less than 80% of our normalized adjusted funds from operations estimate. While this is higher than Ventas’ recent low-70s payout level, it would keep Ventas with the largest payout buffer among health-care real estate investment trusts we cover. We think this favors Ventas, not only for the relative dividend safety it provides but also for the incremental cash flow Ventas can retain to reinvest to grow its asset base, giving it some benefit from relatively fewer shares issued for growth.
Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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