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On Apr 7, we issued an updated research report on Ventas, Inc. VTR. The company’s capital allocation to office segment assets, including life science, medical office buildings (MOBs) and research & innovation (R&I) centers on the back of developments and acquisitions will enable it to enjoy strong fundamentals of these asset classes. However, the COVID-19 continues to take a toll on Ventas’ senior housing operations, hindering occupancy and financial performance.
Notably, amid growing outpatient trends, increasing need for delivery of crucial healthcare services, and research related to life-saving vaccines and therapeutics Ventas has been attuning its portfolio with higher exposure to office segment assets.
In fact, the company’s perpetual life investment vehicle — Ventas Life Science and Healthcare Real Estate Fund, L.P. (Ventas Fund), which focuses on investments in R&I centers, MOBs and senior housing communities in North America — has agreed to acquire two life science assets, spanning 454,000 square feet for $272 million. The properties are strategically placed adjacent to Johns Hopkins Medical Campus and the transaction is anticipated to have closed in first-quarter 2021.
With this, Ventas’ investment in the R&I business will span more than 9 million square feet of space, including three in-progress developments.
Moreover, the company’s R&I development joint venture with GIC, in which it holds the majority interest, facilitates the diversification of capital sources and enhances its ability to seek new investments.
Ventas also has a healthy balance sheet, and has been making efforts to enhance its cost structure, liquidity and financial strength in recent times. In fact, it had $31 billion of liquidity, consisting of $0.4 billion of cash and cash equivalents, $2.7 billion of available capacity on hand, and no commercial paper outstanding as of Mar 5. Financial strength offers Ventas to pursue new growth avenues.
Additionally, the long-term value proposition of the senior housing asset class continues to remain attractive despite near-term challenges. In fact, the aging population and demographic trend narrative remain undeterred by the pandemic as senior housing is likely to continue providing an alternative to aging at home and cater to the need for value-based care. This is expected to continue driving the demand for a long period.
Moreover, supply dynamics have now become favorable as indicated by the slowdown in construction starts and deliveries. Markedly, the rapid increase in costs of key materials amid the pandemic is curtailing near-term starts.
Hence, the combination of favorable demand and supply dynamics is likely to be an occupancy tailwind over the upcoming years for REITs like Ventas, Welltower Inc. WELL, New Senior Investment Group SNR, Diversified Healthcare Trust DHC, which have meaningful exposures to seniors housing.
Also, vaccine developments are encouraging, and have likely supported customer leads and move-in trends. In fact, as of Feb 12, 2021, all senior housing communities completed at least the first vaccine clinic. Moreover, the majority of communities were reopened for move-ins in February.
Ventas currently carries a Zacks Rank #3 (Hold). In the past year, the company’s shares have jumped 61.3% compared with its industry's rally of 13.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While monthly occupancy trends have improved significantly from January to February, occupancy continued to decline in first-quarter 2021.In fact, same-store SHOP occupancy has declined from 79.1% as of the end of fourth-quarter 2020 to 76.4% as of Feb 28, 2021. Management expects first-quarter 2021 occupancy to be “in-line with or better than midpoint of guidance” of a sequential decline of 250-325 basis points.
Also, operating expenses are likely to remain elevated, driven by higher COVID-19 labor and testing expenses. With significant investments in seniors housing communities, the lackluster trends are discouraging for Ventas and are likely to strain growth in the near term.
Also, the company is making efforts to unlock the value of its assets through opportunistic disposals of non-core assets primarily across senior housing and MOBs verticals. Although such efforts enable it to optimize its portfolio, better manage financial obligations and reinvest in its attractive development pipeline; dilution in earnings and reduced cash flows in the near term from the sale of assets is unavoidable.
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