Why Not Only Old-Timers Should Be Interested In This Specialty REIT

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the major real estate investment trusts invested in health care facilities, Ventas (NYSE: VTR), has risen only 1.13% in 2013, compared to the 12.93% return offered by the Dow Jones Industrial Average.

Ventas is a real estate investment trust invested in health care facilities, including senior housing, specialty care facilities, hospitals, and medical office buildings in 46 states and 2 Canadian provinces. As of the end of 2011, the company possessed nearly 1,400 assets in North America. Based on market capitalization, the company is valued at $19.19 billion. Fundamentally, the company’s business model appears strong, with a TTM profit margin of 14.77%.

With the company having deteriorated over 20% from its 2013 highs, is this an opportune moment to snap up a high-quality company, or should investors remain healthy by staying clear of this particular name?

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Strengths:

  • Rapid Paced Revenue Growth: In 2003, Ventas reported revenue of $205 million; in 2012, the company announced revenue of $2.48 billion, representing year over year annual growth of 32.28%, a trend that is anticipated to considerably slow into the future with projections placing 2015 revenue at $2.80 billion.  This growth has been a result of aggressive investment by the company in new properties
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  • Dividend: Currently, the company pays out quarterly dividends of $0.67, which when annualized puts the dividend as yielding 4.09%, a major strength for long-term investors
  • Institutional Vote of Confidence: 96% of shares outstanding are held by institutional investors, representing over $19 billion in investment, displaying the confidence some of the largest investors in the world have in the company and its future
  • Historic Assets Growth: Assets of the company have grown from $813 million in 2003 to $18.98 billion in 2012, representing the ever-growing asset base of the company; this trend is  anticipated to continue into the future
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  • Diversified & Established Portfolio: As of the end of 2012, the company’s portfolio consisted of interests in 1,442 properties in the United States and Canada, including 659 senior housing communities, 337 skilled nursing facilities, 47 hospitals, 321 medical office buildings, and 42 other properties in 46 states, the District of Columbia, and two Canadian provinces; with this diversified and established nature comes a greater level of security and predictably for investors

Weaknesses:

  • High Valuation: At the moment, Ventas possesses a price to earnings ratio of 50.74, a price to book ratio of 2.24, and a price to sales ratio of 8.31; all of which indicate a company trading with a high valuation
  • Net Debt: The company’s $67.91 million in cash and cash equivalents is outweighed by its $8.41 billion in debt, resulting in a net debt of $8.34 billion, accounting for 40.75% of overall market capitalization, a major financial weakness of the company
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Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1999, Ventas has consistently raised their dividend payouts and is widely anticipated to sustain this trend into the future
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  • Growing Senior US Population: The US population is rapidly growing old, with the number of people over the age of 85 expected to triple the national average in population growth by 2035, and with this aging US population comes the opportunity for Ventas’ senior housing communities segment to prosper and expand to meet rising demand
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  • Acquisitions: In July 2011, Ventas acquired Nationwide Health Properties Incorporated; further acquisitions could add quality properties to the company’s portfolio and drive revenue growth
  • Gaining Further Market Share of Enormous Healthcare Real Estate Market: The healthcare real estate market is estimated to be worth more than $1 trillion, leaving plenty of room for Ventas to expand into this massive market which they currently possess so little a share of
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Threats:

  • Rising Interest Rates: Ventas consistently has utilized the record low interest rates to take out loans to fund expansion plans and acquisitions, however any rise in these rates could hinder the company’s growth prospects and threaten business

Competitors:

Major publicly traded competitors of Ventas include Health Care REIT (NYSE: HCN)HCP (NYSE: HCP)Brookdale Senior Living (NYSE: BKD), and Senior Housing Properties Trust (NYSE: SNH). All of these companies operate in the health care real estate industry and compete directly against Ventas.

Health Care is valued at $18.05 billion, pays out a dividend yielding 4.88%, and carries a price to earnings ratio of 254.36. Health Care possesses a price to book ratio of 1.89. Fundamentally, the company’s business model is profitable, with a TTM profit margin of 15.29%. Into the future, Health Care is anticipated to grow revenue and earnings in the low-single digit range.

HCP is valued at $19.09 billion, pays out a dividend yielding 5.00%, and carries a price to earnings ratio of 21.56. HCP possesses a price to book ratio of 1.97. Fundamentally, the company’s business model is extremely solid, with a TTM profit margin of 44.29%. Flat line growth is projected through 2015 for the company in terms of revenue.

Brookdale is valued at $3.26 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Brookdale presently carries a price to book ratio of 3.47. Fundamentally, the company’s business model is weak, with a TTM profit margin of -1.85%. In respect to revenue, the company is projected to sustain steady low single digit growth into the future.

Senior Housing is valued at $4.62 billion, pays out a dividend yielding 6.35%, and carries a price to earnings ratio of 30.91. The company possesses a price to book ratio of 1.74. Fundamentally, Senior Housing’s business model is strong, with a TTM profit margin of 20.13%. Looking into the future, Senior Housing is anticipated to experience choppy revenue growth into 2015.

The Foolish Bottom Line:

Financially, Ventas is extremely solid with disregard to its rather substantial debt position. The company possesses stable revenue growth, a growing dividend, and a diversified portfolio of properties. The company’s weaknesses include its high valuation and large exposure to rising interest rates. Looking forward, the company is likely to derive growth from investments it makes into increasing its property count. All in all, Ventas possesses an extremely predictable and stable business model, and should provide investors with solid and stable returns for years to come, however investors should wait for interest rates to stabilize before investing.

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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