NHP Nationwide Health Properties, Inc.

Ventas Inc. (VTR), a premier healthcare real estate investment trust (REIT), has recently completed the acquisition of its rival Nationwide Health Properties Inc. (NHP) in an all-stock deal. The transaction worth $7.6 billion created one of the largest publicly traded REITs in the U.S. and arguably the leading healthcare REIT by equity value.

The latest acquisition by Ventas reinforces the buzz in the healthcare REIT industry, spurred by an aging Baby Boomer generation’s increased demand for assisted and independent living facilities. The combined entity would have a pro-forma equity market capitalization of approximately $17 billion and a pro forma enterprise value of approximately $23 billion.

According to the terms of the agreement, each Nationwide Health share was traded for 0.7866 of Ventas' share. Based on the closing pre-bid stock price of Ventas on February 25, 2011, this equated to $44.99 of Ventas stock for each Nationwide Health’s share, representing a premium of approximately 15% to the shareholders of the latter.

Ventas' shareholders would own approximately 65% of the combined company and Nationwide Health shareholders would own the balance 35%. The transaction is expected to be accretive to Ventas' recurring Funds from Operations (FFO) for fiscal 2011.

The merged entity brings two of the most complementary customer franchises together in healthcare real estate market and creates a diversified company with better scope of operations. The combined company will have over 1,300 total assets in 47 states, the District of Columbia and two Canadian provinces at its disposal.

The combined portfolio would generate about 70% of the total net operating income (NOI) from private-pay sources, minimizing its dependence on government reimbursement rates.

Going forward, senior housing segment is expected to account for approximately 55% of the combined company's NOI, with skilled nursing facilities and MOBs (Medical Office Buildings) accounting for approximately 22% and 11%, respectively. The merger would strengthen Ventas' position as the largest owner of seniors housing assets in the U.S. and extend its national MOB footprint by 14 million square feet of owned and managed MOB space.

With the merger, the combined company is also expected to have the lowest leverage in the industry. The strong balance sheet of the merged entity is expected to improve its long-term cost of capital and credit profile, as both the participating companies have a track record of prudent balance sheet management.

In addition, the combined company's shareholders are expected to benefit from stable and secure dividend payouts of both the companies. While Ventas has increased its dividend by 8% annually on an average since 2004, Nationwide Health also has established a reputation of conservative capital management and cash returns to shareholders in the form of steady dividend.

Solid dividend payouts are arguably the biggest enticement for REIT investors as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. Healthcare is relatively immune to the economic turmoil faced by office, retail and apartment companies. Consequently, healthcare REITs are well poised to retain their growth curves and simultaneously please the shareholders with a steady pick-up in dividends.

The CEO and Chairman of Ventas will serve as the CEO and Chairman of the combined company. The merger arguably created a behemoth of sorts in healthcare REITs, with one of the most diversified portfolios in the healthcare sector and exposure to nearly all types of facilities. The transaction, therefore, is a win-win deal for both the participating companies.

We presently have a ‘Neutral’ rating on Ventas, which currently enjoys a Zacks #3 Rank that translate into a short-term ‘Hold’ recommendation indicating that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.

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