Spin-off Boosts Ventas

10/23/2015 8:00 am EST

Focus: REITS

With its exemplary stewardship, discounted valuation, and industry-leading growth prospects, we think this recommended healthcare property firm deserves a place in investors’ portfolios, explains Todd Lukasik, analyst with Morningstar StockInvestor.

Ventas (VTR) has decided to spin off the majority of its skilled nursing facilities as a separate real estate investment trust, Care Capital Properties (CCP).

This reduces Ventas’ exposure to our least favorite property type within healthcare while giving Care Capital its own management team, shareholders, and balance sheet to focus on its area of specialization.

We’re relatively bearish on the growth prospects of skilled nursing facilities because of their reliance on government reimbursements through Medicaid and Medicare.

After the Care Capital spin-off, Ventas derives only 4% of its net operating income from skilled nursing facilities, down from 18% previously.

Ventas’ portfolio is now more concentrated in senior housing and medical office buildings, which are among our favorite healthcare property types.

Ventas also recently acquired Ardent Health Services, setting the stage for consolidation of the fragmented hospital real estate market.

In general, we think healthcare REITs enjoy some of the best growth prospects in the REIT industry.

We reduced our fair value estimate for Ventas to $81 per share from $90 to reflect the value of the properties spun off as Care Capital.

Although we are not formally covering Care Capital Properties, our initial valuation work puts its fair value around $38 per share ($9.50 per Ventas share, accounting for the 1:4 distribution ratio).

Meanwhile, Ventas’ senior housing operating assets are concentrated in top metropolitan areas with relatively high average household incomes and home values.

These factors, combined with the aging of the population, should drive strong demand.

Similarly, Ventas’ medical office portfolio benefits from favorable locations, with 96% of its properties on or affiliated with a hospital campus.

At the current stock price, Ventas yields 5.2% and we forecast dividend growth in the mid- to high single digits for the foreseeable future.

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