On Mar 15, 2013, we reiterated our long-term recommendation on Ventas Inc. (VTR) at Neutral. We are encouraged with the decent fourth quarter result at Ventas as well as the dividend hike announcement. We expect the company’s significantly diversified portfolio, strategic move in Atria and other opportunistic acquisitions to provide significant upside potential to the stock going forward. Yet, a large portion of its revenue originates from a few tenants, which exposes it to concentration risk and undermines its growth potential to some extent.
Ventas has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities. The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate business model with sufficient competitive edge over its peers.
Also, the healthcare sector is relatively immune to the economic problems faced by office, retail and apartment companies and offers stability to the company amid the volatility in the market. Consumers will continue to spend on healthcare while cutting out discretionary purchases.
Its normalized FFO reached 99 cents per share in the fourth quarter 2012, 2 cents ahead of the Zacks Consensus Estimate and 10 cents above the prior-year quarter figure. The results were aided by the strategic acquisitions made in 2012 and in the prior year, decent performance of its seniors housing communities and rental escalation from its triple-net lease portfolio.
Moreover, Ventas has a strong balance sheet, which provides its adequate financial flexibility to aim high-yielding acquisitions, high ROI (return on investments) capital projects and steady dividend payouts. Ventas increased its first-quarter 2013 cash dividend by 8% to 67 cents per share.
However, a large portion of Ventas’ revenue originates from a few tenants, which exposes it to concentration risk. If one of the company’s larger tenants runs into financial difficulty, earnings could be negatively affected.
Also, a considerable amount of Ventas’ income is determined by government reimbursement rates. If the government cuts reimbursement rates through Medicare or Medicaid, revenue could fall in the future and adversely affect its long-term growth potential.
Following the release of the fourth-quarter and full-year 2012 results, the Zacks Consensus Estimate for full year 2013 has gone up 0.5% to $4.06 per share with 5 estimates going north and 2 going south in the last 30 days.
Also, the Zacks Consensus Estimate for full year 2014 increased 1.2% to $4.28 per share as 2 estimates were revised upward while none moved down. With the Zacks Consensus Estimates going up for both full-year 2013 and 2014, the company now has a Zacks Rank #3 (Hold).
Other Stocks to Consider
REITs that are currently performing well include MHI Hospitality Corp. (MDH), Ryman Hospitality Properties Inc. (RHP), both carrying a Zacks Rank #1 (Strong Buy), and Alexandria Real Estate Equities Inc. (ARE) having a Zacks Rank #2 (Buy).
Note: 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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