Shares of New Senior Investment Group (NYSE: 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 (NYSE: VTR).
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.
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