Ventas' $1.75 billion cash offer for Ardent Medical Services speaks to the booming healthcare real estate market and the potential for hospitals to find new revenue streams in their real estate assets.
The Chicago-based real estate investment trust said Monday that it is planning to buy Ardent from its private equity owner, Welsh, Carson, Anderson & Stowe. Ardent, based in Nashville, operates hospitals under the names BSA Health System in Amarillo, Texas, Hillcrest HealthCare System in Tulsa, Okla., and Lovelace Health System in Albuquerque.
The transaction marks Ventas' entry into the $1 trillion hospital market and “positions us to be a consolidator in this huge, attractive space,” CEO Debra Cafaro said during an analyst call. “We will enhance and broaden our asset class diversification, and therefore our investment opportunities, with the addition of quality U.S. hospital rent.”
For Ardent, the takeover will provide a cash infusion that will allow the chain to acquire more hospitals and enter new markets.
"Competition for healthcare real estate is very, very intense," said Philip ("P.J.") Camp, a principal at investment bank Hammond Hanlon Camp. Those high prices then become another source of capital for hospitals. "This allows the hospital system to extract whatever cash is in the building. The argument to do these REIT deals becomes very compelling."
The deal also is particularly noteworthy coming just months before the expected U.S. Supreme Court decision in King v. Burwell, which will determine the fate of insurance subsidies for people using the federal insurance marketplace.
“We are encouraged that a quality player like Ventas is not deterred by the pending SCOTUS decision and is making an opportunistic investment in the hospital industry,” UBS analyst A.J. Rice wrote in a note to clients.
At closing, expected in the middle of 2015 and subject to regulatory approvals, Ventas plans to separate Ardent's hospital operations from its real estate and sell the operations to a new operating company owned by current Ardent management and other investors. Ventas intends to retain as much as 9.9% of the new company and will lease back the property.
“The transaction evidences how strong the healthcare real estate market is,” said Laca Wong-Hammond, managing director in the healthcare mergers-and-acquisitions practice of Duff & Phelps. “That spans the whole acuity spectrum.”
Hospitals that are part of a larger chain are most attractive to REITs, but smaller hospitals in very competitive markets also are appealing, Wong-Hammond said.
As more care moves to the outpatient setting, many hospitals are operating below capacity with empty beds or even empty wings. That unused space could be repurposed for lower-acuity care such as rehabilitation, senior living or assisted-living centers. Not only does the strategy bring in more patients, but hospitals can command higher rates for offering those services in an inpatient setting instead of off-campus, Wong-Hammond said.
The hospital market also has benefited from a number favorable trends, including an aging population, an increasing number of emergency room visits, higher adjusted admissions and lower bad debt, Cafaro said on the call.
“We've been waiting a long time to find the right entry point into the domestic hospital market because of its strong improving trends and we've been very selective,” Cafaro said. “Ardent is the deal we've been waiting for.”
While REITs are making a bet on the long-term viability of the hospital industry, a sale-leaseback transaction also gives hospital chains more flexibility to walk away from the real estate once the lease is up, Camp said. That could be especially important given how rapidly healthcare is evolving, particularly in the direction of lower-cost, lower-acuity care settings.
The Chicago-based REIT also announced it would spin off its post-acute and skilled-nursing portfolio into an independent publicly traded REIT in the second quarter of 2015. The new company would own 355 facilities.
Following the two transactions, about 6% of Ventas' net operating income will come from hospitals, while skilled-nursing facilities will account for only 4%, down from 18% currently.
Ventas' full portfolio includes more than 1,600 medical office buildings, senior-living facilities, hospitals and post-acute and nursing facilities.
Welsh Carson became Ardent's majority owner in 2001, when Ardent was still a behavioral health provider. At that time, Ardent began to acquire medical/surgical hospitals and, in 2005, the chain sold its psychiatric hospitals to focus on acute care.