Here's Why Investors Should Retain Ventas (VTR) Stock for Now
Ventas, Inc. VTR owns a well-diversified portfolio of healthcare real estate assets. In the wake of the pandemic, the company’s senior housing operations portfolio (SHOP) has been benefiting from the healthy operating trends of the senior housing industry. Also, the positive outpatient visit trend and the increasing need for biopharma drug development opportunities have bolstered its outpatient medical and research portfolio’s growth. However, dependence on a few tenants and a high interest rate environment make us apprehensive.
What’s Aiding it?
The senior citizens’ population is expected to rise in the years ahead. As a result, the national healthcare expenditure by senior citizens, who constitute a major customer base of healthcare services and incur higher healthcare expenditures than the average population, will likely increase in the upcoming period. Ventas’ SHOP segment is expected to capitalize on this positive expenditure trend, boosting the segment’s growth.
Moreover, the segment is witnessing favorable demand-supply fundamentals, which is likely to drive its growth over the next three to five years. Improving revenue and expense trends during the second quarter of 2023 led to a year-over-year margin expansion of 160 basis points.
Therefore, given the favorable demographic trend for the senior housing industry and muted new supply in its markets, Ventas’ SHOP segment is well-prepared for a compelling multiyear growth opportunity. For 2023, our estimate indicates a year-over-year rise of 12.3% in the SHOP segment's net operating income (NOI) in 2023.
Ventas’ outpatient medical and research portfolio, which includes outpatient medical buildings and research centers, is likely to gain from the rising outpatient visit trends of people aged 65 years and above. Given this age cohort's expected population increase in the upcoming period, the company’s outpatient medical segment’s performance is likely to flourish.
Also, to further enhance its research portfolio, which is essential for delivering crucial healthcare services and research related to life-saving vaccines and therapeutics, the healthcare real estate investment trust (REIT) is carrying out accretive investments. Such efforts augur well for the segment’s performance. We estimate a year-over-year increase of 5% and 5.7% in the company’s outpatient medical and research segment’s NOI in 2023 and 2024, respectively.
Ventas maintains a healthy balance sheet position with ample financial flexibility. It had more than $2.7 billion of liquidity and a net debt to further adjusted EBITDA of 7.0X as of Jun 30, 2023. In addition, credit ratings of BBB+ from S&P Global Ratings and Fitch, and Baa1 from Moody’s render the company easy access to the debt market at favorable costs. Hence, a robust financial footing is likely to continue supporting the company’s efforts to capitalize on long-term growth opportunities.
What’s Hurting it?
Competition from national and local healthcare operators may weigh on Ventas. The company’s operators contend with peers for occupancy, which could limit the company’s power to raise rents and affect revenues and profitability.
Ventas’ triple-net-leased property segment is exposed to tenant concentration risk, with properties leased to Brookdale Senior Living, Ardent and Kindred accounting for a significant portion of total net operating income in the three months ended Jun 30, 2023. Hence, in case of no lease renewal, a change in lease agreements or any adverse development concerning these three tenants could lead to a deterioration in the company’s financial condition and results.
Further, given the prevailing high interest rate environment, this healthcare REIT may find it challenging to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. For 2023, management expects higher interest rates to impact its normalized funds from operations (FFO) by 16 cents per share. We anticipate a year-over-year rise of 38.1% in interest expenses in the current year.
Shares of this Zacks Rank #3 (Hold) have lost 3.8% in the past three months compared with the industry’s decline of 1.1%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower WELL, SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.54.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past week to $12.91.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 1.6% over the past month to $1.26.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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