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Analyst Blog

On May 31, 2013, we reiterated our long-term recommendation on Ventas Inc. (VTR - Analyst Report) at Neutral. Our stance was based on the company’s successful execution of strategic initiatives.  However, Ventas’ reliance on a few tenants for revenue generation, exposes it to concentration risks and this remains a plausible concern.

Why Neutral?

Ventas once again posted impressive results for first-quarter 2013. Its normalized FFO (funds from operations) reached $1.03 per share in the reported quarter, 4.0% ahead of the Zacks Consensus Estimate of $0.99 and 13% above the year-ago figure of $0.91. The results benefited from strategic investments in 2012, decent senior housing communities’ performance and increased rent from its triple-net lease and medical office buildings portfolios. However, a rise in expenses, debts, asset sales and loan repayments acted as dampeners.

Notably, Ventas has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities. The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics.Consequently, Ventas has achieved normalized FFO/share compound annual growth rate (CAGR) of 15% since 2010.

However, as a large portion of the company’s revenues originates from a few tenants, it is vulnerable to concentration risks. In 2012, the company generated 49.6% of its total revenue from senior living operation, 10.5% from Kindred, and 6.4% from Brookdale Senior Living. 

Following the release of first-quarter 2013 results, over the last 30 days, the Zacks Consensus Estimate for 2013 moved north by 0.2% to $4.10 per share. However, for 2014, it remained stable at $4.30 per share. The stock now carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better performing REITs include Sunstone Hotel Investors, Inc. (SHO - Snapshot Report), Diamondrock Hospitality Co. (DRH - Snapshot Report) and Extra Space Storage Inc. (EXR - Snapshot Report). While Sunstone has a Zacks Rank #1 (Strong Buy), the last two stocks carry a Zacks Rank #2 (Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.

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