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On Nov 21, 2013, we reaffirmed our Neutral recommendation on healthcare real estate investment trust (REIT), Ventas Inc. (VTR - Analyst Report). The decision was based on its bottom-line growth, strong liquidity, improved guidance and strategic acquisitions. Yet its substantial exposure to long-term leased assets and major revenue origination from few tenants remain our concerns.   

Why Neutral?

Ventas Inc.’s third-quarter 2013 normalized FFO per share of $1.04 exceeded the Zacks Consensus Estimate by 1.96% and the year-ago quarter figure by 8.3%. Including the non-recurring items, FFO in the reported quarter came in at $1.03 per share, up 6.2% from 97 cents in the year-ago quarter.

Quarterly results were driven by strategic investments made this year and last year. In particular, the company experienced an uptick in net operating income (NOI) in its private pay seniors housing communities, triple-net lease portfolio and medical office building segment. Ventas also increased its guidance and now projects normalized FFO per share in the range $4.12 – $4.14 compared to the prior range of $4.06 – $4.10.

For Ventas, over the last 30 days, the Zacks Consensus Estimate for both 2013 and 2014 advanced nearly 1% to $4.14 and $4.34, respectively. Therefore, the stock currently carries a Zacks Rank #3 (Hold).

Ventas has one of the largest and most diversified portfolios in the healthcare sector that allows it to capitalize on opportunities in different markets based on individual market dynamics. The company usually leases its healthcare facilities under "triple net" leases, where the tenant pays for taxes, insurance and maintenance of the properties, in addition to rent, which ensures a steady and increasing cash flow.

Moreover, the healthcare sector is relatively immune to the economic headwinds faced by office, retail and apartment companies and therefore offers stability to the company amid market volatility. Going forward, we expect the company to benefit from growing healthcare spending and aging population in the U.S.

Nevertheless, we notice that a large portion of Ventas’ revenues originate from a few tenants, which exposes it to concentration risks.  Moreover, rising rates are a concern for Ventas and particularly for its substantial exposure to long-term leased assets that bear fixed rental rate, while the company’s debt obligations bear floating rates with interest and related payments rates. This discrepancy in rates tends to affect the profitability of the company.

Other Stocks to Consider

Other better-ranked REIT –equity trust stocks include The GEO Group, Inc. (GEO - Snapshot Report), Sabra Health Care REIT, Inc. (SBRA - Snapshot Report) and Chatham Lodging Trust (CLDT - Snapshot Report). Both GEO Group and Sabra Health Care carry a Zacks Rank #1 (Strong Buy), while Chatham Lodging carries a Zacks Rank #2 (Buy)

Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.

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