Ventas: Healthy Yield from Health Facilities

12/02/2019 5:00 am EST

Focus: REITS

Jacob Kilstein

Associate Analyst, Argus Research Company

Ventas Inc. (VTR) is a real estate investment trust that invests primarily in real estate serving the healthcare industry, notes Jacob Kilstein, and analyst with Argus Research.

The REIT acquires, develops, leases, and manages about 1,200 senior housing and medical office properties. The company was founded in 1998 as a spinoff of Vencor, a healthcare services company. Since 2004, Ventas has completed nine major acquisitions for about $19 billion. VTR shares are a component of the S&P 500.

In 3Q19, Ventas funded investments of $490 million in development and redevelopment projects. In September, Ventas acquired 29 Canadian senior housing communities from Le Groupe Maurice (LGM), a Canadian seniors housing company, for $1.7 billion.

Ventas also has a $1.7 billion pipeline of development and redevelopment projects, and Research & Innovation projects at five universities. It expects $1.25 billion in dispositions this year.

We believe that Ventas has strong opportunities in the medical office, life science, and healthcare real estate market, driven by favorable demographic trends, increased healthcare spending, and growing demand for low-cost medical outpatient facilities.

We also like its experienced management team, access to low-cost capital, and $1.7 billion development pipeline, which is focused on fast-growing life science and research facilities.

VTR shares have underperformed the broad market over the last three months, falling 19% compared to an 8% increase for the S&P 500. The shares have also underperformed over the last year, declining 4% compared to a gain of 14% for the index.

We believe that the recent underperformance of VTR shares reflects current oversupply in the senior housing market and management’s muted outlook for 2020.

However, we expect the company to benefit over time from more limited supply and new acquisitions, and believe that the stock has already bottomed, providing investors with a favorable entry point. The shares also carry an above-average dividend yield of about 5.4%.

Our target price of $67 implies a projected 2020 price/AFFO multiple of 17.3, still below the peer median of 19.3, and a potential return, including the dividend, of 20% from current levels.

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