Breaking Down the Billion-Dollar Bet Make by American Realty Capital Healthcare Trust, Inc. and Ventas, Inc.

Ventas will be buying American Realty Capital Healthcare Trust and there is one thing dividend investors need to know about this major move.

Patrick Morris
Patrick Morris
Jul 1, 2014 at 2:37PM

In early June, we learned American Realty Capital Healthcare Trust (UNKNOWN:HCT.DL) had agreed to be acquired by fellow health care REIT Ventas (NYSE:VTR) in a $2.6 billion deal. And this may be good news for some, but not so good news for others.

The major move
Despite the lawsuit from a shareholder seeking to block the purchase of American Realty Capital (ARC) Healthcare by Ventas, with every passing day investors are inching closer and closer to the expected official closing of the sale in the fourth quarter of this year.

And while the stock of ARC Healthcare is still trading somewhat below the 14% premium of $11.33 per share offered by Ventas to complete the acquisition, it has still risen by 10% since the deal was first announced.

But with all that in mind, an examination of what the possible competition of the acquisition may mean for shareholders of both companies is important to keep an eye on.

The reason for the deal
Investors had barely gained an understanding of American Realty Capital Healthcare, as it first went public in April of this year and reported just one quarter's earnings results before the deal was made.

Yet the reason behind the move was simple according to the CEO of ARC Healthcare, who noted in the announcement:

We are very excited to announce this transaction which delivers our shareholders a compelling premium to the Company's addition, it provides them the opportunity to participate in the future growth of what will become the largest, and in my view, best managed health care REIT and 6th largest overall REIT in the country.

As a result of the deal, Ventas would be able to expand its medical office building footprint by four million square feet, further adding to its industry leading position. It was also provide it entrance into Canada through 29 senior housing communities which all find themselves in markets that have above average incomes and growth, plus occupancy rates of 90% and margins of 50%.

In addition, as a result of the acquisition of ARC Healthcare, Ventas would see greater diversity among its property holdings, as it would add a host of high-quality assets which also held significant growth potential. All of this is why Ventas expects its per share funds from operations -- which stood at $4.14 in 2013 -- to be boosted by $0.10 by 2015. 

All of that certainly sounds great, and the reason for optimism and excitement from the executives atop the firms is warranted. Yet there is one thing shareholders must know about the acquisition.

The shrinking dividend yield
ARC Healthcare revealed when the deal was announced its shareholders would watch the dividend yield of their investment fall from 5.8% to 4.3% once the acquisition is complete. In fact, of the REITs in the health care industry, Ventas has the lowest dividend payout ratio -- its total dividend payments divided by its funds from operations -- standing at just 66% in 2013. 

Some investors depend on income depending on the stage of life they find themselves in, and such a move may be worrisome.

Yet despite its low payout ratio, since 2010, Ventas has grown its annual dividend by roughly 8%. But even more remarkably, thanks to its impressive payout, since the end of 1999 it has delivered a staggering total return of 3,700% -- which includes reinvested dividends -- whereas the S&P 500 stands at just 77%:

VTR Chart

In this, we can learn Ventas may not pay out the highest amount of its income or its share price to its investors, but it clearly is one of the best at ensuring they receive remarkable returns.