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On Aug 23, we reaffirmed our long-term Neutral recommendation on Ventas Inc. (VTR - Analyst Report). The decision is based on the company’s diversified portfolio, growing healthcare spending and aging population. Strategic acquisitions and a decent cash flow would provide the tempo for riding on the growth trajectory. Yet, rising rates and the company’s substantial exposure to long-term leased assets remain our concern. Also, a large portion of its revenue originates from a few tenants, which exposes it to concentration risk.
Why the Reiteration?
Aided by an uptick in net operating income in its private pay seniors housing communities, triple-net lease portfolio and medical office building segment, Ventas reported second-quarter 2013 normalized Funds From Operations (FFO) per share of $1.01, increasing 6.3% year over year. Including the non-recurring items, FFO in the reported quarter came in at $1.03 per share, up 27.2% from the year-ago quarter.
Backed by its strategic efforts and accretive acquisitions, Ventas, which has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities, raised its outlook for full-year 2013.
Going forward, we believe that its adequate size and scale would help it capitalize on the acquisition opportunities that the huge healthcare real estate market is offering. Growth in healthcare spending along with the aging population will drive the demand for Ventas’ properties. The company has a strong balance sheet with ample liquidity to support its strategic measures and make steady dividend payouts.
Yet, rising rates are a concern for Ventas. With the fixed rate nature of a substantial part of the company’s revenue on one hand and rising cost of debt amid an increasing interest rate environment on the other, the company’s profitability gets adversely affected.
Also, a large portion of Ventas’ revenues originate from a few tenants, which exposes it to concentration risks. Moreover, the cut-throat market and competitive market limits its power to significantly raise its top line and crack deals at attractive rates.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share moved north by a cent to $4.11 while the Zacks Consensus Estimate for 2014 inched down by a cent to $4.31 per share. The stock currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other stocks in the related industry that are worth considering include Douglas Emmett Inc. (DEI - Snapshot Report), Highwoods Properties Inc. (HIW - Analyst Report), SL Green Realty Corp. (SLG - Snapshot Report), all carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.