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Ventas (VTR) to Gain from Life Science Assets and SNF Sale

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Ventas Inc. (VTR - Free Report) is making every effort to ride on the growth curve through strategic dispositions and accretive investments.

The company recently accomplished the first phase of the sale of its 36 SNFs, operated by Kindred Healthcare, Inc. , to an affiliate of BlueMountain Capital Management, LLC. In the first phase, the company sold 22 SNFs, which helped it reap $488 million in proceeds, marking a 7% yield on current cash rent.

The company anticipates to generate $700 million in proceeds from the sale of the total 36 SNFs, which indicates a 7%-cash yield on the current annual cash rent of $50 million and an 8% GAAP yield. The company is projected to gain more than $600 million from the sale of all the 36 SNFs.

The move is in sync with Ventas’ strategy of de-emphasis of this particular healthcare real estate category. Notably, amid healthcare reforms, though seniors housing, medical-office buildings and hospitals have been able to reap solid top-line growth in recent years, skilled nursing facilities are becoming more susceptible to top-line pressure due to the shift in medical billing procedure.

Notably, the company successfully spun-off majority of its SNF business in 2015. Following the anticipated sale of the aforementioned 36 SNFs, Ventas will be able to bring down its net operating income (NOI) from SNFs to just 1% of its aggregate NOI.

On the other hand, Ventas is making investments for its future prospects through selective development and redevelopment. The company has targeted on fortifying its position in the medical office and life science real estate market. In the second-quarter 2017 earnings release, it announced that it expects to invest by funding around $350 million in development and redevelopment projects for full-year 2017. This would include lucrative new ground-up medical office and life science developments.

Specifically, university-based life science real estate is a new zone of investment, which has been driving attention and Ventas has already made decent amount of investments in this segment. Such investments offer the opportunity to capitalize on the growing health-care-driven research and development, supported by top-tier research universities.

Increasing longevity of the aging U.S. population, along with biopharma drug development growth opportunities, has also promoted the institutional life science and medical-market fundamentals. Further, long-lease terms and top-rated, institutional quality tenants assure steady growth in cash flows for Ventas.

Also, Ventas has a strong balance sheet with ample liquidity to eye high-yielding acquisitions and high ROI (return on investments) capital projects. As of Jul 28, 2017, the company enjoyed solid liquidity with $2.6 billion of available borrowing capacity and $95 million of cash on hand.

Additionally, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Ventas remains committed to that. In fact, the company’s annual cash dividend per share has increased at a CAGR of 8% since 2001. Given the company’s financial position, this dividend rate is expected to be sustainable.

However, increase in supply of seniors housing assets in certain markets remain a concern for Ventas. This is because elevated supply usually curtails the landlords’ pricing power and limits growth in occupancy level. Also, dilutive impact of asset dispositions cannot be bypassed in the near term.

Furthermore hike in the interest rate is a concern for Ventas, particularly considering its substantial exposure to long-term leased assets. In addition, rising rates increase the cost of financing acquisitions, investment and development-activity costs, and also lower the amount which third parties are ready to pay for the company’s assets at disposal.

Nevertheless, the stock has gained 9.3% year to date, outperforming 4.7% growth recorded by the industry it belongs to. The stock currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the real estate space include PS Business Parks, Inc. (PSB - Free Report) , InfraREIT Inc. (HIFR - Free Report) and UMH Properties, Inc., (UMH - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While PS Business Parks and InfraREIT have expected long-term growth rates of 5% and 8%, respectively, the expected long-term growth rate for UMH Properties is currently pegged at 10%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. 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.

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