The recently announced Ventas (NYSE: VTR) acquisition of Ardent Health services caught many healthcare real estate investors by surprise. Questions have arisen such as what are they buying, is the price right, and is the yield appropriate? We will attempt to answer these questions and more in this article. First, let’s examine the metrics around the deal.
Ventas is paying $1.75 Billion for Ardent Health Services with roughly $2 Billion in revenues, 10 hospitals comprising 2,045 beds and 3.2 million square feet. VTR states that the value of the real estate they are acquiring is $1.4 Billion and the EBITDARM coverage is 2.9 and the initial yield of 7.5%. From these figures provided by VTR, we can produce the following table:
|Price Ventas is Paying (for real estate)||$1,400,000,000|
|Initial Yield (approx.)||7.5%|
From the above table we can calculate valuation metrics around the property deal.
The Revista database contains good comparative information on the above metrics for hospital trades during the past 2 years. We go back 2 years so we have enough trades to compute aggregate metrics.
Here is a table that compares the VTR/Ardent deal to industry medians.
|Initial Yield||7.5%||7.9%||-400 bps|
The above comparative data contains data from hospital trades in Revista with information on the above metrics. These trades are on general acute care hospitals but also contain a measure of specialty hospitals. The Ardent portfolio contains primarily general acute care hospitals but also a measure of specialty hospitals. In examining the table we can determine that Ventas generally paid a premium for the Ardent portfolio when compared to median values from the Revista database. Let’s examine these performance metrics in more detail.
Note- it should be noted that while this analysis is on pure hospital real estate that the VTR/Ardent deal included hospitals and “related real estate”. Generally pricing metrics differ between hospitals and other related medical buildings which may distort some of the actual measures reported here. We would look to VTR for future breakouts and listings of the assets purchased from Ardent.
Initial yields for hospital trades are reported by the Revista database. Over the past 2 years, the median hospital initial yield is trending at 7.9%, according to Revistamed.com. The Revista data contains a mix of general acute care hospitals and specialty hospitals, which is akin to the Arden portfolio. As far as recent comps, Medical Properties Trust (MPW), recently acquired 2 general acute care hospitals from Prime Health Services in the Kansas City area and a rehabilitation hospital from Ernest Health Services at a reported yield of 8.5-9%. MPW is the major player in general acute care real estate transactions so they are generally a good measure of what the market is paying for assets. Other comps show initial yields over the past few years generally between 6.5% and 9% for hospitals. The lower yields are generally acute rehabilitation hospitals while the higher yields tend to be either surgical hospitals or general acute care hospitals. The summary is shown below:
Initial Yield Analysis
|7.5%||7.9%||6.5% – 9.0%||Slightly more aggressive pricing compared to industry and comps.|
The price per square foot (SF) for the VTR/Ardent trade comes in at a reported $438. This is roughly $38 or 10% higher than the industry median hospital price of $400 per SF. Price per SF for hospital trades generally run between $100 for larger and older acute care facilities to $900 for newer specialty hospitals. In late 2013 Medical Properties Trust purchased the real estate of Mountain Vista Medical Center in Mesa, AZ for $260 per SF. In late 2014, Griffin American Healthcare REIT III purchased the real estate of the Forest Park Medical Center at Southlake from the Neal Richards Group for $898 per SF. Forest Park Medical Center was built as an all private pay physician owned surgical hospital in 2012 while the Mountain Vista Medical Center was built as a general acute care hospital in 2007.
Price per SF Analysis
|$438||$400||$100 – $900||Slightly more aggressive pricing compared to industry and comps.|
The next comparison is price per bed. The VTR/Ardent deal carries a price per bed of $684,597. The revista database reports the median hospital price per bed has been $664,928 during the past 2 years. The recent MPW/Prime Health deal carried an aggregate price of $241,228 per bed. In 2013, Tenet Healthcare paid a total of $4.3 billion for 7,081 beds (for an aggregate of $607,258 per bed) contained in the Vanguard Healthcare portfolio. This comparison is shown below.
Price Per Bed Analysis
|$684,597||$664,928||$120,773 to >$1 million||Slightly more aggressive pricing compared to industry and comps.|
The final metric to compare the VTR/Ardent Deal on is rent per SF. VTR/Ardent deal is scheduled to generate rent per SF of $33. This is $3 or 8% lower than the industry median of $36 reported by Revista. Most comps generate rents above $30 per SF.
Rent per SF analysis
|$33||$36||$26 to $76||Slightly more aggressive pricing compared to industry and comps.|
Based on the above analysis it is fairly safe to conclude that Ventas is paying a slight to moderate premium for the Ardent Health Services portfolio. The next natural question, assuming they are paying a premium, what are they getting? Let’s take a look at the Ardent Portfolio. This will be examined in part 2 of this post. Stay Tuned…