By spinning off its physical assets into a separate company, Vencor says it's positioning itself to develop its ancillary businesses.
Calling its new enterprise VenTrust, the Louisville, Ky.-based long-term-care chain is launching the nation's second largest healthcare real estate investment trust, which will have $2.5 billion in assets.
VenTrust will own Vencor's buildings and land and lease them to Vencor, which will run the facilities.
Vencor owns and operates 60 long-term-care hospitals and 309 nursing homes in 46 states.
"It allows Vencor, as the operating company, to focus more time on our ancillary services we are trying to grow," said Earl Reed III, executive vice president and chief financial officer at Vencor. "It's much easier to add ancillary contracts than to acquire nursing homes."
Although Vencor's 1997 revenues rose 21% to $3.1 billion, the company has said it needs to focus on adding more ancillary contracts to cope with changes in Medicare reimbursement laws. "We need to be providing more rehabilitation services, pharmacy services, supplies, billing and collection services," Reed said.
By creating the REIT, Vencor is attempting to boost a recently sagging stock price and eliminate assets from its balance sheet.
REITs offer tax advantages unavailable to other corporations. REITs don't pay federal taxes on income distributed to shareholders.
As a REIT, VenTrust will distribute 95% of its taxable income to shareholders and won't incur corporate taxes. Shareholders, however, will be taxed on their dividends.
Healthcare REITs, led by Needham Heights, Mass.-based Meditrust, have been trendy on Wall Street. Meditrust is a publicly traded REIT with $3.3 billion in assets.
But unlike Meditrust, which has a "paired share" structure that allows it to not only own facilities but also operate businesses, VenTrust will have to get its revenues from lease payments. Initially, VenTrust will earn $225 million a year in lease payments from Vencor facilities.
"The REIT is going to grow outside the Vencor umbrella, and we're not compelled to grow in such a way that we can only acquire assets that would be operated by Vencor," Reed said.
VenTrust has set aside more than $150 million for acquisitions through 1999. Primary targets are hospitals, nursing homes, assisted-living facilities and healthcare-related office buildings.
The facilities could be leased to Vencor or other healthcare providers.
VenTrust also won't ignore acquisition opportunities beyond the healthcare sector. "When you get into the REIT world, that's an industry in and of itself," Reed said. "It's a competitive environment for real estate."
Terms of the transaction call for Vencor shareholders to receive one share of Vencor stock and one share of VenTrust stock for each of their current Vencor shares. The distribution is a taxable transaction to both Vencor and Vencor stockholders, but Vencor executives said the company will "incur little or no taxable gain as a result of the transaction."
The split and creation of VenTrust will become effective in the second quarter of this year. Like Vencor, VenTrust will be traded on the New York Stock Exchange.
Bruce Lunsford, Vencor's chairman, president and chief executive officer, will be president and CEO at VenTrust.