Ventas Increases Dividend, Improves Diversification

Ventas (VTR, Financial) is a publicly owned health care real estate investment trust or REIT.

The transition out of skilled nursing and into more diverse areas of the real estate market has made the firm's revenue more predictable and allows for a higher growth rate going forward. The new office operations segment will now account for nearly a quarter of total revenue in 2017.

Ventas has a pipeline of new developments of over 600 senior housing units and continued medical office space expansion. Ventas also maintains nearly half of its revenue from a triple-net leased portfolio. Most of these contracts are long term in nature with lease periods of over a decade. These long-term contacts have price escalators that will allow Ventas to continue increasing FFO at a steady mid single-digit pace.

The REIT has a near 5% average dividend yield, low beta and investment grade rating. It maintains a modest valuation based upon historical price/FFO as well as a limited exposure to skilled nursing versus its peers. Combined with its aggressive stance on acquisitions in new areas like academic, medical and hospital industries, Ventas should continue to be a top selection within the REIT sector.

Ventas is in an enviable position after spinning off the majority of the firm's skilled nursing facilities into a publicly traded REIT, Care Capital Properties (CCP). The skilled nursing business for all players within the health care sector has been challenging with low margins. The industry is moving toward a "bundle" based compensation system, and the transition will not be easy for those firms that hold assets in this industry. Ventas competitors Welltower (HCN) and big rival HCP Inc. (NYSE:HCP) have also reduced exposure to the precarious industry.

In addition to spinning off Capital Care Properties, Ventas recently agreed to sell 36 skilled nursing facilities it owns to Kindred Healthcare (KND) for $700 million. As part of the deal, if Kindred decides to operate but not buy all 36 facilities from Ventas by April 30, 2018, the leases will be automatically renewed at current rates. The cap rate on the sale is at 7%, above consensus. Ventas is also working with Brookdale (BKD) to exit 11 senior living assets. With the spinoff and sales of skilled nursing facilities, the REIT will now only have 4% of revenue coming from the industry. Most of its revenue will continue to come from guaranteed triple-net leases along with revenue from its new fore into higher growth areas.

The Wexford Science & Technology acquisition from Blackstone Real Estate Partners is a key element of the firm's commitment to enter more profitable business lines and transition away from skilled nursing. The Wexford acquisition brought in 25 pristine properties in the academic, medical and research fields. The $1.5 billion acquisition of science and medical real estate included top tenants like the University of Pennsylvania and Yale University. The acquisition provides Ventas with new properties into the more lucrative medical research and healthcare R&D arena. Ventas also has nine additional development sites for future growth in this promising real estate area. The Wexford transaction is estimated to be $0.07-$0.09 accretive to FFO per share in 2017.

Ventas' acquisition of Ardent Health Services for $1.75 billion last year moved the firm further into the hospital industry. Based in Nashville, Tennessee, Ardent was a top 10 private hospital operator in the U.S. With the acquisition, Ventas added 10 hospitals and real estate in Oklahoma, Texas and New Mexico. Ventas also chose to separate Ardent's hospital operations from its real estate, and a long-term lease was negotiated. Ardent then agreed to merge with Texas-based LHP Hospital Group. The combined entity will now become the second-largest private hospital operator by revenue in the U.S. The new company will have 19 hospitals with revenue of over $3 billion. Ventas will provide a $700 million secured loan to allow Ardent to make the acquisition. The floating interest rate of approximately 8% will make the loan accretive to Ventas' earnings in 2017.

Latest earnings

Ventas issued its earnings data on Oct. 28. Ventas' third-quarter results for FFO were $1.03 a share, 2 cents above analyst expectations. These results represented a solid 5% year-over-year comparable FFO growth. Same-store cash net operating income, or NOI, was up 2.5% on a year-over-year basis. Triple-net same-store cash NOI grew 4.2%, higher than expected.

The senior housing operating portfolio decelerated in the third quarter as occupancy declined by nearly 1% from last year's third-quarter results, but revenue per occupied room rose by just over 4%. The bottom line was affected in the senior housing operating division by higher costs. Ventas also earmarked approximately $150 million for redevelopment. This adds to the redevelopment budget, which is now near $375 million. The firm's management also pointed out the amendment with Sunrise Senior Living will allow Ventas to reduce fees by over $1 million. The firm currently maintains $1.8 billion in credit line and $134 million in cash. Ventas also maintains a solid return on equity of 5.6%. As for guidance, Ventas increased 2016 FFO to $4.10 to 4.13, about 3 cents above prior expectations. The health care REIT should produce revenue of nearly $3.5 billion for full fiscal year 2016.

Latest dividend increase and history

Ventas' dividend was increased by a solid 6%. Its overall yield is 4.91%. The firm started paying a dividend in 1999. Ventas has maintained a three-year growth rate of dividends of 2.3%*. Ventas currently ranks third in yield within the large cap REIT-Healthcare Facilities category. The quarterly dividend for the December payment will be 77.5 cents versus the prior-year rate of 73 cents per share.

The dividend will be paid at the new higher rate on Dec. 30 to shareholders of record at close of business on Dec. 20. Ventas is priced at $63.08. Listed in the table below are the quarterly dividend payments since 2010.

Quantitative analysis

Additional quantitative information on P/FFO ratio and historical yield;

* Ventas declared a dividend of 73 per share and CCP declared a dividend of 57 cents per share in 2015. The companies’ combined dividend increased 10% from its level of 79 cents on an aggregate basis following the spinoff. Ventas’Â 10-year dividend compound annual growth rate is 9%. Their three-year dividend growth rate is 8.5% with CCP.

Ventas' dividend history is somewhat convoluted as it depends on whether investors consider the CCP spinoff. The table above accurately depicts dividend payments, and the 2.3% rate is correct excluding CCP.

Positives

Overall Ventas is the leading player in the industry that is charging forward with its plan to reorganize the firm into a higher growth REIT with more premium properties. Our four key positives for Ventas in addition to the growth initiatives are:

• Ventas maintains an investment grade credit rating and a current dividend yield (4.91%) above its five-year average of 4.86%.
• Ventas has initiated an updated dividend with an increase of 6%, higher than its prior three-year growth rate of dividends of 2.3%. This indicates to me management's confidence in the new growth initiatives for 2017.
• Ventas is trading below its 10-year average price/FFO ratio at 14.2.
• Ventas maintains a beta of 0.75, much lower than the average company.
• Ventas qualifies as a member of our Top 100 Dividend Stocks at #69.

Disclosure:I have a position in Ventas.

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