Ventas Inc. (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.
Though 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.
