This High-Yielding REIT Has a Great Business Model and an Attractive Yield

GuruFocus.com
0
In this article:

- By Ben Reynolds

Investors looking to prepare their portfolios for retirement should have an eye for income producing securities.

In addition to income, safety is important as well. High yielding S&P 500 stocks strike a nice balance between providing income and being established businesses.


One compelling high yield investment in the S&P 500 today is Healthcare REIT Ventas (VTR).

Company Background

With a market cap of nearly $21 billion, Ventas is one of the largest healthcare real estate investment trusts, or REITs, in the world. The company has more 1,200 properties in the U.S., Canada and the U.K. Ventas owns and leases senior housing communities, medical office buildings and life science facilities. Ventas generated sales of almost $3.6 billion in 2017. The REIT spun off is skilled nursing facility properties into Care Capital Properties (CCP) in 2015.

By 2030, people over the age of 65 are expected to count for nearly 20% of the U.S. population. By 2050, the number of Americans over the age of 65 is expected to reach nearly 89 million, more than doubling the total from 2010. It is estimated that the baby boomer generation, those born between 1946 and 1964, control nearly 80% of the U.S. wealth. This gives this aging population enough capital to help pay for the healthcare costs as they age. Ventas, and its senior housing facilities and other healthcare properties, will likely be the beneficiary of these changing demographics.

Recent earnings results

Ventas reported second quarter results on July 27th. The company posted funds from operation, or FFO, of $1.08, topping the average analysts' estimate by $0.07. Revenue grew 5.2% year over year to $942.3 million, $32.2 million above expectations. Ventas has only missed earnings estimates once, the third quarter of 2017, in the last four and a half years. Revenues have come in ahead estimates every quarter except for the third quarter of 2015 during this same time frame. Ventas sees FFO in a range of $4.02 to $4.07 for 2018.

Same store net operate income, or NOI, was up 1.3% during the quarter. Senior housing saw revenues decline 3.1%, but this was due to openings of new communities during the quarter. For the triple net lease portion of the portfolio, where the tenant is responsible for maintenance, taxes and insurance for the property, NOI increased 4.9%. Triple net leases accounted nearly 18% of total revenues. Office sales increased 1.4% year over year due to annual escalators in place in lease agreements and a higher tenant retention rate for medical office buildings.

Ventas had some interesting developments take place during the quarter. The REIT opened a development at Washington University in St. Louis. This $47 million life science facility is already 77% leased and should see 90% occupancy rate by the end of 2018. The life science campus facility at the University of Pennsylvania is half leased and should see that rate grow to 70% by the time it opens in late 2018. In 2019, Ventas plans to open a medical office building property attached to Sutter Health's new hospital in San Francisco. This nearly $170 million property has already leased 82% of available spaces and should open sometime next year.

In addition to these developments, Ventas reduced its net debt by $1 billion since the end of 2017. The percentage of debt to gross asset value of 36% is 2% lower than at the same time last year. Because REITs often tap debt markets to fund their real estate purchase, this low rate is unheard of by many other real estate companies.

Dividend history and valuation

Accounting for the spinoff of CCP, which saw a 10% increase in the two REITs' combined dividend, Ventas has increased its dividend every year since 2009. Over the past five years, the average increase is 7.6%. Ventas increased its dividend 1.9% last December. In the prior year, the increase was 6.2%.

Based off of the midpoint of expected FFO for 2018 and the annualized dividend of $3.16, Ventas has an expected dividend payout ratio of 78% for the year. This payout ratio is on the low side for REITs. Ventas has had a fairly conservative policy in regards to the payout ratio. Over the last decade, the REIT has an average payout ratio of approximately 68%. While the company maintained its payments at the same rate during the 2008-2009 recession, Ventas wasn't forced to cut its dividend, proving that a conservative approach to the dividend was the prudent move. Ventas currently yields 5.37%, more than triple the yield of the S&P 500 (1.78%) and significantly higher than that of the 10-year Treasury bond (2.94%).

It should be noted that Ventas had historically paid its dividend during the last month of each quarter. Since the start of this year, the payments are now made during the first month of each quarter.

Based off of the September closing price of $58.85 and the midpoint for FFO for 2018, Ventas has a price to funds from operation ratio of 14.5. According to Value Line, the average P/FFO over the past 10 years is 13.9. Ventas is slightly overvalued relative to its historical P/FFO. The long term average P/FFO ratio for the REIT sector is 16.5, meaning that Ventas is nearly 14% undervalued compared to the real estate investment trust sector.

Final thoughts

With an aging population, Ventas, with its portfolio of senior housing centers, medical office buildings and life science facilities, likely has a long runway for growth in the upcoming years. The REITs' yield is also very attractive and, with a low payout ratio, likely safe.

Add to this that the stock is only slightly overvalued compared to its own history, but very undervalued relative to REIT sector and income investors should consider Ventas at current prices.

Disclosure: I am not long any of the stocks mentioned in this article.

This article first appeared on GuruFocus.


Advertisement

Recommended Stories