When its No. 1 customer was thrown into financial turmoil earlier this year, health care REIT Ventas Inc. (NYSE: VTR) was left in a precarious situation. This week, bankruptcy turned that turmoil into a swirling storm.

Ventas owns more than 45 acute care hospitals, 200 skilled nursing facilities and 10 nursing centers. Almost all of these are leased to Vencor Inc. (OTC: VCRI), one of the country's largest long-term health care providers, which has filed for Chaper 11 bankruptcy.

This has left Ventas in quite a fix, especially since Vencor accounts for 99 percent of the company's revenue.

What makes the situation even more awkward is that -- as their names indicate -- the two companies are close. Ventas was born just last year, when Vencor decided to take advantage of REIT provisions for favorable tax treatment.

By spinning off its real estate investments into Ventas, Vencor became a true operating company. Trouble is, the spin-off came at a time when real estate investment trust stocks went into a tailspin and health care concerns took a dive.

Since all of these developments have taken place in the last year and a half, Ventas has has little time to diversify. So far, the company has only 10 assets not leased by Vencor. And if I were a tenant in one of those buildings, I would be pretty concerned right now.

Ventas has only seven employees to carry on the payroll, but even that can be difficult when 99 percent of your revenue is in the 60 days and over category. Vencor has not yet paid rent for August or September.

Right now, Ventas says it expects Vencor's major creditors to support an expedited restructuring process. But as we all know, "expedited" is a relative term in bankruptcy court.

"The bankruptcy filing of Vencor and the ultimate resolution of Vencor's obligations could significantly impact Ventas's revenues and its ability to service its indebtedness, including its ability to pay down, refinance, restructure and/or extend a $275 million Bridge Loan due on October 30, 1999, and to make distributions to its stockholders," Ventas stated in a release.

Ventas, which was stuck between a rock and a hard place, had agreed to extend a standstill agreement until Sept. 14, meaning neither company would take legal action or be evicted until that date.

"Vencor will have until September 14, 1999, to cure any default related to the non-payment of the August and September rent payments," a Vencor release declared.

Unfortunately for Ventas, their remedy was to file bankruptcy, leaving not one, but two publicly traded companies and their shareholders in the lurch.

Last year, Ventas earned $27 million income on $150 million in sales. Obviously, this is not the largest REIT around. Don't be surprised, however, if this is heralded as the beginning of the end for health care REITs, despite the fact that Ventas' problem result from a small client base.

With a price-earnings ratio hovering around 2 and a stock price at a 52-week low of 3 3/16 (down from almost 14 at the beginning of the year), Ventas is bound to become the poster child for the dangers of the risky real estate industry.

Don't let the naysayers fool you. It was the poor performance of the operating company that is taking Ventas down, not necessarily the poor performance of the REIT. They just didn't have enough time to build a diverse customer base.

Published: September 14, 1999

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