OVERVIEW OF THE DEAL
On June 28, 2021, Ventas, a Chicago-based real estate company focused on healthcare, announced it has reached an agreement to acquire New Senior, a major owner of senior housing properties. Both companies are currently listed on Nasdaq. Ventas’ leadership is thrilled to add the properties of New Senior, fitting with Ventas assets. Indeed, as Justin Hutchens, Ventas’ Executive Vice President, states it “enhances [their] senior housing business to capture upside from the industry recovery”.
As Hutchens’ declaration highlights, the health and economic crisis of Covid did not spare this industry. However, it is set to return quickly to growth and has been consolidating for years, even if the M&A wave’s rebound resulting from Covid-19 seems to be weakening. The aging population in the US is a key driver for this market with 20 million US citizens expected to be over 80 by the end of the decade. The new group could benefit from the connections established by Ventas with operators as well as from New Senior’s ones. In addition to this mutualization of relationships, building from the ground up properties to rival the quality and position of New Senior’s portfolio would be 40% more expensive than the announced deal according to Ventas’ press release. The resulting entity would be ideally placed to take advantage of the upcoming growth by making the share of Senior Housing within the group’s Net Operating Income go from 44% to 48%.
Ventas’ optimism is shared by Susan Givens, CEO and President of New Senior as she highlights that the “enhanced size, scale, relationships and financial strength” of the new group is an important opportunity for the target’s stakeholders.
In terms of pricing and payment method, the deal is an all-equity one, each New Senior shareholder receiving 0.1561 new Ventas shares for each New Senior share. Based on the 25th of June closure stock prices, it corresponds to a payment of $9.10 per share and a 31.7% premium compared to the firm’s latest market capitalization. The amount of deal is also said to be 10% over New Senior’s estimated enterprise value.
Company Details: Acquirer – Ventas
Founded: 1998
Headquarters: Chicago
CEO: Debra Cafaro
Status: Public (Nasdaq, S&P 500)
Number of Employees: 448 (as of 12/31/20)
Market Cap: $22.04 billion (as of 06/25/21)
Revenue: $3 694 million (TTM)
EBITDA: $1 604 million (TTM)
Ventas is a healthcare Real Estate Investment Trust (REIT) based in Chicago and managing around 1200 properties in the United States, in Canada and in the United Kingdom. Its portfolio includes senior housing, medical offices, research facilities and other healthcare-specialized properties.
To generate revenues, REIT rely on operators which retain between 4,5% to 7% of revenues as management fees. Ventas also owns a 34% stake in Atria, the company operating 20,8% of their properties based on gross book value.
In 2021, Ventas already announced two dividend payments, the first paid in April, the second to be paid in July. At least since 2010, Ventas pays dividend four times a year. However, with $0,45 per share, the 2021 payments are below average compared to precovid years. Indeed, the industry suffered from the pandemic: operating costs rose due to new procedures, potential new residents could not visit the communities, move-in criteria complicated arrivals. After this setback, the Healthcare REIT sector is expected to grow and increase its profitability again.
Among its shareholders, Ventas regroups almost a thousand institutions, accounting for 94.67% of total shares, with The Vanguard Group representing 15.8% and Blackrock representing 9.94%.
Company Details: Target – New Senior Investment Group
Founded: 2012
Headquarters: New York City
CEO: Susan Givens
Status: Public (Nasdaq)
Number of Employees: 17(as of 12/31/20)
Market Cap: $572 million (as of 06/25/21)
Revenue: $329 million (TTM)
EBITDA: $107 million (TTM)
New Senior Investment Group is a healthcare REIT too, it specializes in senior housing properties in the United States. It owns 103 properties as of March 31, 2021, 28 down compared to the end of 2019, these properties having been sold to ReNew REIT for $385 million. New Senior Investment does not use the same operators as Ventas, and is much more concentrated with Holiday managing properties that generates 84% of New Senior’s revenues.
Just like Ventas, New Senior Investment suffered from Covid-19. However, demographic changes, the lack of consolidation in this industry and room for procedures improvements are key drivers of the market trends.
With 195 institutional investors, New Senior has far less institutions among its shareholders than Ventas. Still, institutions account for 83.42% of shares, just like for Ventas, The Vanguard Group is the top shareholders with 9.58%, Blackrock comes third behing Prudential Financial and its 8.3%.
SYNERGIES
• Expected synergies
Thanks to the realization of this deal, Ventas hopes to obtain annual synergies ranging from $16 to $18 million. Indeed, even if debt repayment may be funded by the new entity, Ventas anticipates that by enlarging its markets and their reach among communities thanks to New Senior’s portfolio, it will be able to have more valuable investment opportunities, thus creating more revenue for the group.
• Synergies analysis and outlook
Revenue Synergies
As stated before, Senior Housing is believed to bounce back rapidly from coronavirus, thus, by acquiring New Senior Investment’s portfolio, Ventas grant itself a larger share of this recovery to boost its earnings, which were lagging behind direct competitors lately. Despite New Senior’s negative current result, revenue synergies could be achieved by implementing group-wide management processes. We will go deeper into the following point later but, as a matter of fact, new competition for operators and increased negotiation leverage for Ventas may make it possible for the new group to improve the management of its real estate.
Cost Synergies
This type of synergies stems mostly from changes in New Senior’s operating procedures. Indeed, by Introducing new operators to compete with Holiday for the management of agepagepage former New Senior residences, Ventas may be able to negotiate better contract terms and lower management fees.
Financial Synergies
Ventas’ indebtment was already high compared to most companies, therefore few synergies linked to lower Cost of debt or financing can be forecast. However, it should not be detrimental either as investors, credit institutions and other financing organization understand that indebtment is a very regular issue for REIT.
RISKS AND UNCERTAINTIES
The fact that third parties must operate most of Ventas’ assets could hinder the firm’s ability to implement the changes needed to achieve a part of expected synergies. Even if the merger should reduce the concentration of operators, it could still be an issue as the company’s revenue depend mainly on a handful of managing structures.
Moreover, if this merger fails to produce the expected synergies and to reinforce Ventas’ position on the market, it could negatively affect the new group’s ability to rival its competitors in a consolidating industry by preventing it from reaching an agreement on other deals or from investing in other opportunities.
However, the strategy behind this deal, betting on an impending rebound on the senior housing market, could pay off quickly if Covid led many to believe non-stop healthcare support could help them live a better and longer life.
FINANCIAL CONSEQUENCES
In the wake of this deal’s completion, Ventas shareholders will face low dilution, as New Senior shareholders will account for only 3.3% of the new group.
Due to the REIT industry’s features and the lack of representativeness of EBITDA for this sector, Ventas’ Net Financial Debt to EBITDA ratio is already quite high at 6.21. The increase following the merger is however reasonable as the ratio is expected to rise to 6.56.
During our calculations, using pre-pandemic growth trends, Ventas’ forecast net income growth and the low dilution compensated the fact that the expected synergies do not cover New Senior’s current losses (-$19.12 million TTM), resulting in a slightly accretive deal with a 0.93% increase of Earnings Per Share.
However, in the REIT industry, as stated before, EBITDA is not widely used as a tool for evaluation. Indeed, due to depreciation and amortization considerations, Net Operating Income is often preferred to EBITDA for multiples and Funds from Operations are preferred to EPS. Thus, using industry-specific indicators, Ventas announces that the deal will offer an accretion around $0.10 per share (8.55% accretion) and a Market Value of Assets/NOI ratio of 16,7.
IS THIS DEAL FAIRLY PRICED?
Lately, many deals in this industry involved Private Equity funds or private companies, thus few multiples are available for this very specific sector. However, we estimated a Market Value of Assets/NOI multiple by using reports of past capitalization rates trends, which are used to value such firms. Thus, this deal seems to be reasonably priced. Indeed, the announced capitalization rate of 6% results in a 16,7 multiple whereas, lately, average multiples ranged between 15 and 18.
Using a 6.88% estimated WACC, the Net Present Value of synergies is valued at $183.72 million, $2.21 million above the premium paid. That means that the completion of the synergies would actually create value for Ventas at the same time as it strengthens its competitive edge.
To keep on rivaling Healthpeak Properties and Welltower, the two other members of the industry’s “Big three” among public companies, Ventas had to find a way to catch up in terms of earnings and enlarge its offering without over-investing. Thus, New Senior Investment may just be the right opportunity for the Chicago-based firm.
MARKET REACTION AND PROBABILITY OF DEAL COMPLETION
Regarding merger arbitrage strategies, we can say that the market expects the deal to come through. As a matter of fact, on July 2nd , 89% of the initial gap between New Senior share price and the price announced in the deal was already bridged as the share price rose from $6.91 on June 25 to $8.86 on July 2nd. The reaction was immediate as the price even reached $8.92 on closure the day of the announcement
At the same time, Ventas share price went down from $58.31 on June 25 to $57.27 on July 2nd. This decline was expected due to dilution and uncertainty, moreover, its scale is very limited.
If the exchange ratio of 0.1561 new Ventas share per New Senior Investment share is fixed, the gap is even closer to be completely bridged because of the opposite movements of share price. The fact that only 3.9% of this scenario’s gap remains to be closed reflects the market’s confidence about the Ventas-New Senior deal’s completion.
Author: Gabriel Bouvet
Contact: gabriel.bouvet@hec.edu
Date: 06-Jul-21