Here's Why Investors Should Retain Ventas (VTR) Stock for Now
Ventas, Inc. VTR is well-poised to benefit from its diversified portfolio of healthcare real estate assets in the key markets of the United States, Canada and the United Kingdom. An aging population and the rise in healthcare expenditure by senior citizens are likely to benefit the senior housing operating portfolio (SHOP).
The outpatient medical and research segment is expected to gain from favorable outpatient visit trends. Ventas’ accretive investments to expand its research portfolio are encouraging. A healthy balance sheet acts as a tailwind. However, competition from other industry players and dependence on a few tenants raise concerns. High interest rates add to its woes.
What’s Aiding VTR?
The senior citizen 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, is likely to increase in the upcoming period.
Per the company’s third-quarter 2023 Earnings Presentation, it is projected that the average annual growth of people aged 80 years and above will more than double over the next four years and nearly double again in the following four-year period. Hence, with an expectation of a rising senior citizen population in the years ahead and a muted new supply in its markets, VTR is well-prepared for a compelling multiyear growth opportunity. Our estimate indicates a year-over-year rise of 9.5% in the SHOP segment's NOI in 2023.
Moreover, the healthcare sector is relatively immune to the macroeconomic uncertainty compared with office, retail and apartment companies, as consumers still need to spend on healthcare services while curtailing discretionary purchases. This aspect of the industry provides stability to the company during tough economic conditions and shields it from market volatility.
Amid favorable demographics and growing outpatient trends, Ventas is committed to capitalizing on this upside within its outpatient medical and research portfolio, which includes outpatient medical buildings and research centers. The growth in the people aged 65 years and above is driving the increase in outpatient visits as they make three times more visits to the doctor than the general population. It is projected that this age group will represent 20% of the U.S. population by 2030. Therefore, the portfolio is well-positioned to capitalize on this rising demand.
The same-store NOI growth for this segment was more than 3% for eight out of nine quarters. We estimate a year-over-year increase of 5% and 5.3% in the company’s outpatient medical and research segment’s NOI in 2023 and 2024, respectively.
The company is carrying out accretive investments to enhance its research portfolio, which is essential for the delivery of crucial healthcare services and research related to life-saving vaccines and therapeutics. Ventas owns research centers in notable life science clusters of Cambridge, San Francisco, Maryland, Raleigh and Philadelphia, with a presence in some of the top-tier research university campuses.
Moreover, per the third-quarter 2023 Earnings Presentation, 73% of the company’s annual rent comes from high-quality tenants from top-tier universities and companies. With top-rated tenants and long-lease terms, its high-quality portfolio assures steady growth in cash flows. Our estimate indicates year-over-year growth of 7.8% in the company’s outpatient medical and research segment’s total revenues in 2023.
Ventas maintains a healthy balance sheet position with ample financial flexibility. As of Sep 30, 2023, the company had more than $3.1 billion of liquidity and a net debt to further adjusted EBITDA of 7.0X. It has a well-laddered debt maturity schedule with a weighted average maturity of 5.3 years. The company’s decent financial flexibility is likely to support its growth endeavors.
Shares of this Zacks Rank #3 (Hold) have rallied 23.2% in the past three months compared with the industry’s increase of 21.5%.
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What’s Hurting VTR?
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 Sep 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, a high interest rate environment is a concern for Ventas. Elevated rates imply high borrowing costs for the company, which would affect its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt as of Sep 30, 2023 was approximately $13.4 billion. In the fourth quarter of 2023, management expects interest expense to increase due to higher rates. For 2023, it expects higher interest rates to impact its normalized FFO by 16 cents per share.
Our estimate indicates a year-over-year increase of 13.9% in interest expenses in the current year. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Lamar Advertising Company LAMR and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Lamar’s current-year FFO per share has been revised 1.7% upward over the past two months to $7.31.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past two months to $2.28.
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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