Ventas Inc. (VTR - Free Report) has an impressive and well-diversified portfolio of senior housing and healthcare properties that positions the company well for long-term growth. However, a large portion of the company’s revenues originates from a few tenants, which exposes it to concentration risks.
Notably, concentration on private-pay segment shields it from the unpredictable government settlements. Also, Ventas is fortifying its position in the medical-office life-science real estate market and has already made decent amount of investments in this segment. Such investments offer it an opportunity to capitalize on the growing healthcare-driven research and development, supported by top-tier research universities.
Further, long-lease terms and top-rated, institutional quality tenants assure steady growth in cash flows for Ventas. We believe the company’s cash flows will remain stable due to diverse property types.
Notably, the company remains focused on executing strategic priorities. Its mutually beneficial agreements with Brookdale to restructure Ventas’ wholly-owned Brookdale communities into one master lease and security agreement has enabled it to extend lease with Brookdale.
Moreover, in a bid to expand its senior housing operating portfolio, Ventas recently acquired an independent seniors housing community — Battery Park — for nearly $194 million from Brookdale Senior Living (BKD - Free Report) . (Read more: Ventas Enhances New York Portfolio With Battery Park Buyout).
Ventas’ strong balance sheet, which will take care of its growth plans, remains a positive factor. As of Jun 30, 2018, the company had $93.6 million of cash and cash equivalents. It also enjoys manageable debt maturity schedule. In fact, the company has consistently increased its dividend every year for more than a decade. Considering from 2001, the company’s annual dividend increase is 8%. Given the company’s financial position, this dividend rate is expected to be sustainable.
Additionally, shares of this Zacks Rank 3# (Hold) company have outperformed the industry over the past six months, rallying 20.6%, compared with the industry’s gain of 13% over the same time frame.
Nonetheless, increase in supply of seniors’ housing assets in certain markets remains a concern for Ventas. This is because elevated supply usually curtails landlords’ pricing power and limits growth in occupancy level.
Also, since healthcare REITs are most sensitive to spiking interest rates, courtesy long-term leases and narrow re-leasing spreads, rising interest rates remains a headwind. Furthermore, taking into consideration high dividend yield, healthcare REITs have comparatively higher correlation with the 10-year US Treasury yield and perform poorly relative to other REIT sectors in a rising interest rate scenario. In addition, rising rates escalate 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.
Lastly, Ventas contends with national and local healthcare operators on a number of factors, including quality, price and range of services provided, location and demographics of the population in the surrounding area. This significantly limits its power to drive the company’s top line as well as crack deals at favorable prices.
Better-ranked stocks from the REIT space include Park Hotels and Resorts, Inc. (PK - Free Report) and PS Business Parks, Inc. (PSB - Free Report) . Both stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Park Hotels and Resorts’ FFO per share estimates for 2018 witnessed 1.3% upward revision in 30 days’ time. Its shares have appreciated 29.8% over the past six months.
PS Business Parks’ FFO per share estimates for the current year moved up marginally in the past 30 days to $6.39. The stock has rallied 16.6% in six months’ time.
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