Actions of New main investment group (NYSE: SNR) rose dramatically when negotiations began on June 28. In the first few minutes of trading, shares of the Real Estate Investment Trust (REIT) rose just under 28%. The big news was a deal with the industry giant Ventas (NYSE: VTR).
To quickly summarize, Ventas is buying New Senior as it seeks to double what it expects to be a rebound in demand for senior housing following the industry downturn caused by the pandemic in 2020. It s This is an all-stock arrangement in which New Senior shareholders will receive 0.1561 Ventas shares for each New Senior share they own. The value is approximately $ 9.10 per share, a 30% premium over the average share price of New Senior over the previous 30 days. Ventas estimates the deal will be $ 0.09 to $ 0.11 accretive to normalized operating funds (FFO) per share.
The big story here, however, is that the percentage of Ventas’ portfolio dedicated to senior housing will drop from 44% of net operating income (NOI) to 48%. Meanwhile, the assets Ventas owns and operates, known as SHOP assets in the industry, will drop from 26% of NOI to 31%. The performance of SHOP assets is directly reflected in Ventas’ income statement, unlike net rental properties where rental income is the main source of return. This is essentially a leveraged bet that the worst is over and that the long term demand from an aging baby boomer population will turn this acquisition into a winner.
Investors who own New Senior but do not wish to own Ventas should probably consider selling New Senior’s shares to ensure gains, given the all-equity nature of the transaction. Others must take a step back and think carefully about the purpose of this acquisition at a time when some formerly diversified REITs, notably Health summit, are emerging from the space of residences for the elderly. That’s not to say Ventas is making a mistake, just that it is relying more and more on an industry that has been very troubled in 2020 and which, in fact, is still working on the rebound effort. It could be an opportunistic buy that improves yields or a leaden weight if the coronavirus pandemic continues to linger and hamper the recovery of the senior housing industry.
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