Steve's Blog on Senior Care

Update

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Regrettably, No Rent-Reset Resolution

In early May, Ventas sent to Kindred Healthcare its formal notice of rent reset, asking for an additional $111 million in annual rent.  Obviously, Kindred does not believe that increase reflects the fair market rental value of the nursing facilities and long-term acute care hospitals (LTACs) it leases from Ventas.  So they had 30 days to negotiate an agreed upon change in annual rent, together with the annual rent escalators, which are currently an above-market 3.5%.  If they did not come to terms by June 8, according to the agreement entered into five years ago, each firm then would have 30 days to hire an appraisal firm, and these two appraisers will appoint a third appraiser to value the entire Ventas/Kindred portfolio in terms of what the fair market rental value is.  We expected an announcement one way or the other after the June 8 deadline, but the silence has been deafening.  There is no requirement for them to make an announcement, since the various steps that will be taken have been clearly spelled out, but we expected one anyway.  Since they have 30 days to decide on the final appraiser, we assume negotiations are continuing. 

Ventas is not sitting around with its hands tied, however.  The REIT announced today an acquisition from a third party of a 137-unit retirement community in Minnesota for $19.1 million, or $139,400 per unit, that it will lease to Capital Senior Living.  The cap rate based on the first quarter’s annualized results is just under 10%, so it appears to be an attractive deal for Ventas, and Capital Senior Living will make a $150,000 cash flow profit after a 5% management fee and an 8% lease rate.  We still have no word yet on Ventas’ negotiations to buy privately held, and Canadian-based, Senior Care REIT, which planned to go public this year.  If successfully consummated, it would be the third REIT that Ventas will have acquired.  And with Chartwell REIT taking itself out of the running for Retirement Residences REIT, you never know what Ventas may do.       

Related links:

For more articles on the senior care acquisition market, see Index links for The SeniorCare Investor

Get the inside scoop on senior care M&A at The SeniorCare Investor

Database of health care M&A transactions, including senior care acquisitions

What’s Up? Stock Prices.

Oil prices have soared, inflation’s ugly head is popping up again and the Fed keeps raising interest rates, all of which should spell lower stock prices.  But in the seniors housing and care market, that does not seem to be happening.  Year-to-date, nine of the 13 publicly traded companies have posted double-digit increases, with most well over 20%, and only two have declined (but by just 1% and 2%, so they hardly count).  Leading the pack is Advocat, up 208% for the year and hitting an eight-year high of $16.45 per share, followed by Brookdale Senior Living (up 66%), Extendicare (up 45%) and Five Star Quality Care (up 40%).  The assisted and independent living market has been hot, but two of these four companies are primarily in the skilled nursing business, while Five Star is a hybrid, so the price performance can’t be attributed to “the Brookdale effect.”  Perhaps investors have become more comfortable with SNF companies because of relatively robust state coffers and the continued profitability of Medicare.

Brookdale jumped by 57% in the six weeks after its IPO late last year and now, with its continued surge this year, it has a market cap that is larger than the five other seniors housing (not nursing facility) companies combined, including Sunrise Senior Living.  This is an astounding development for a company that underwriters thought was worth about $19 per share a little over six months ago and is now near $50 per share.  When it completes the acquisition of American Retirement Corporation, Brookdale’s market cap will exceed Manor Care’s and become number one in the entire seniors housing and care market. 

Meanwhile, the providers’ landlords are not faring as well.  For the first five months of 2006, not one health care REIT is up more than 4%, and if interest rates keep rising during the remainder of the year, they may all be in the red by December, except Ventas, if it comes out big in its rent reset negotiations with Kindred Healthcare.  But eventually, higher interest rates will begin to impact more than just the REITs, so the top of the market may have arrived.