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Ventas (VTR) Reiterates Sale of 36 Kindred Operated SNFs

Ventas Inc. VTR recently reaffirmed the expected sale of 36 skilled nursing facilities (SNFs) for $700 million. These SNFs, which are currently being operated by Kindred Healthcare, Inc. KND, are being sold to expedite its exit from the skilled nursing segment.

In this context, Kindred has already signed definitive deals to sell its complete SNF business to an affiliate of Blue Mountain Capital Management, LLC. The sale of the Ventas SNFs, which is expected to close in phases, will be starting in the third quarter and likely conclude by the end of this year. Upon sale, Ventas will be paid by Kindred its allocable part of the sale proceeds and in turn, the former will transfer the specified SNFs to the ultimate buyer.

The sale price of $700 million denotes a cash yield of 7% on the current annual cash rent of $50 million. With the sale of the SNFs, Ventas is estimated to realize a gain of more than $600 million. The company plans to use the proceeds to pay back debt, as well as boost its financial and liquidity condition. However, for the SNFs not acquired by Kindred by Apr 30, 2018, automatic renewal until 2025 will take place at the present rent level plus annual escalations.

The move is in sync with Ventas’ strategy of “de-emphasis” of this particular healthcare real estate category. The company successfully spun-off majority of its SNF business in 2015 and following the anticipated sale of the aforementioned 36 SNFs, Ventas will be able to bring down its skilled nursing rent to 1% of the 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, which 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 focus on private-pay assets because in such cases tenants’ revenue trend is likely to remain steadier.

Currently, Ventas carries a Zacks Rank #3 (Hold). In addition, in the past three months, shares of Ventas climbed 6.7% and outperformed the Zacks categorized REIT and Equity Trust – Other industry’s gain of 2.9%.

Stocks to Consider

Better-ranked stocks in the REIT space include Liberty Property Trust LPT and PS Business Parks, Inc. PSB. Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Liberty Property Trust and PS Business Parks have long-term funds from operations (FFO) per share growth rates of 6% and 5%, respectively.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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Kindred Healthcare, Inc. (KND): Free Stock Analysis Report
Ventas, Inc. (VTR): Free Stock Analysis Report
PS Business Parks, Inc. (PSB): Free Stock Analysis Report
Liberty Property Trust (LPT): Free Stock Analysis Report
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