Shares of New Senior Investment Group (SNR) rose dramatically as trading got under way on June 28. Within the first few minutes of trading the real estate investment trust's (REIT) shares were higher by just under 28%. The big news was a deal with industry giant Ventas (VTR 4.04%).
To sum it up quickly, Ventas is buying New Senior as it looks to double down on what it expects to be a rebound in demand for senior housing following the pandemic-driven industry downturn in 2020. It is an all-stock deal in which New Senior shareholders will receive 0.1561 shares of Ventas stock for each share of New Senior they own. The value is roughly $9.10 per share, a 30% premium to New Senior's average share price over the previous 30 days. Ventas believes the deal will be $0.09 to $0.11 accretive to normalized funds from operations (FFO) per share.
The big story here, however, is that the percentage of Ventas' portfolio dedicated to senior housing will increase from 44% of net operating income (NOI) to 48%. Meanwhile, assets that Ventas both owns and operates, known as SHOP assets in the industry, will increase from 26% of NOI to 31%. The performance of SHOP assets flows directly through to Ventas' earnings statement, unlike net lease properties where rental income is the main source of return. Essentially, this is a leveraged bet that the worst is over and that long-term demand from an aging baby boomer population will turn this acquisition into a winner.
Investors who own New Senior but don't want to own Ventas should probably consider selling New Senior's shares to lock in gains, given the all-stock nature of the deal. Others need to step back and think carefully about the purpose of this acquisition at a time when some once diversified REITs, most notably Healthpeak, are getting out of the senior housing space. That's not meant to suggest that Ventas is making a mistake, only that it is increasing its reliance on a sector that was highly troubled in 2020 and is, in fact, still working on the rebound effort. This could be an opportunistic buy that enhances returns or a lead weight if the coronavirus pandemic continues to linger and hinder the senior housing industry's recovery.