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Ventas (VTR) Reaches Deal with Kindred for 36 SNF Sale

KND VTR DRE CLI

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In a notable development, Ventas Inc. (VTR - Free Report) announced that it has reached agreements with Kindred Healthcare, Inc. (KND - Free Report) that would expedite the latter’s exit from the skilled nursing segment.

The Deal Details

Specifically, per the agreement, Kindred has the option to acquire some or all of the 36 skilled nursing facilities (SNFs) operated by Kindred for $700 million on or before Oct 31, 2018. This denotes a 7% yield on the current annual cash rent of $49 million. However, for those SNFs not acquired by Kindred by Apr 30, 2018, automatic renewal until 2015 would take place at the present rent level.

Kindred stated that it plans to resell the 36 purchased SNFs for exiting its entire SNF business and expects the move to complete by year-end 2017. With the sale of the SNFs, Ventas is estimated to realize a gain of more than $600 million.

Moreover, under the agreements, the lease term for all of Ventas’s Long Term Acute Care Hospitals (“LTACHs”) operated by Kindred that were slated to mature in 2018 and 2020, have been extended at the current rent level to 2025. This makes more than 75% of the $121 million in annual cash Kindred LTACH rent, fully secured through 2025. Moreover, now no leases with Kindred mature before 2023.

The Strategy

Importantly, this move is in sync with Ventas’ strategy of “de-emphasis” of this particular healthcare real estate category. The company had already made a successful spin off of majority of its SNF business in 2015 and following the expected sale of these 36 SNFs, the company would be able to lower its skilled nursing rent to 1% of its total business.

Amid the healthcare reforms implementation, healthcare REITs have been distancing themselves from the skilled nursing facility business. This is because though seniors housing, medical-office buildings and hospitals have been able to reap solid top-line growth in recent years, skilled nursing facilities are becoming more susceptible to top-line pressure due to the change in medical billing procedure.

In fact, tenants of the skilled nursing facilities 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, that 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 rather focus on private-pay assets because in such cases, tenants’ revenue trend is likely to remain steadier.   

Ventas currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors interested in the REIT industry may consider stocks like Duke Realty Corp. (DRE - Free Report) and Mack-Cali Realty Corp. (CLI - Free Report) . Both of these stocks carry a Zacks Rank #2 (Buy).

Duke Realty has experienced upward revision in full-year 2016 estimates over the past two months, while Mack-Cali has long-term expected growth rate of 6.4% against the industry average of 5.8%.

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