By Chris Worthington, Editor-in-Chief of Income
A famous proverb, often attributed to Benjamin Franklin, states that nothing in life is certain but death and taxes.
And while that may be true, it hasn’t stopped humankind from working to delay each person’s final moments as long as possible. The result, of course, is that more and more people are living to advanced ages.
Meanwhile, the Baby Boomers – the largest generation in American history until recently – are joining the 65 and older population in great numbers.
The portion of the U.S. population over age 65 is 17.5% today… and that number is expected to rise substantially in the next 30 years. In fact, by 2045, slightly more than a quarter of all Americans will have entered that demographic.
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That’s a powerful trend… and one company in particular has made several shrewd moves in April that should help it outperform going forward.
Ventas, Inc. (VTR) is a healthcare real estate investment trust (REIT) with a diversified portfolio of over 1,600 seniors housing and healthcare properties in the United States, Canada, and the United Kingdom.
It’s an intriguing company that has outperformed both the S&P 500 and the MSCI US REIT Index (RMZ) for more than a decade while providing compound annual dividend growth of 9% – not to mention that its current dividend yield is a very nice 4.33%.
And recently, on April 6, Ventas announced two moves that should provide a significant step toward continued outperformance.
By mid-year, Ventas will close a deal to acquire Ardent Health Services, a for-profit hospital company whose network includes 12 acute care hospitals, a rehabilitation hospital, three multi-specialty physician groups, and retail pharmacies.
Ventas ultimately plans to separate the hospital operations from the real estate and sell the operations portion of the business back to Ardent Management. Ventas will maintain a 9.9% stake in the new entity, but otherwise, it’ll simply own the property and collect rent.
In conjunction with the Ardent deal, Ventas also plans to spin off its post-acute care/skilled nursing facilities into a new publicly traded REIT, Care Capital Properties, Inc. (CCP). The new company, which will be one of just two pure-play, publicly traded skilled nursing facility REITS, will own and operate 355 nursing homes across the country.
Initially, investors were thrilled by the moves, and Ventas stock shot up 5%. However, it has given up those gains in the weeks since… and that’s good news for patient investors, who now have a chance to buy VTR at a better price and hold it for the long term.
Indeed, Ventas looks well-positioned to capitalize on the enormous aging population trend – as well as some helpful changes courtesy of Obamacare.
For instance, the Affordable Care Act is making hospitals much more profitable at the moment, which bodes well for the Ardent acquisition. Estimates from the Department of Health and Human Services show that the costs for treating the uninsured fell by $7.4 billion in 2014, which represents a 21% decrease from what costs could’ve been if they’d stayed at 2013 levels. As the number of uninsured continues to shrink, hospitals should continue to see their profits grow.
Meanwhile, the Medicare Payment Advisory Commission has recommended a 3.25% increase in Medicare rates for acute-care services for FY 2016, which should provide some relief to hospitals who are often left with reimbursements that don’t cover the cost of care provided.
Plus, Ventas has been actively moving toward private-pay sources for some time now in order to avoid the pitfalls of insufficient reimbursement. According to its website, the company now derives approximately 76% of its net operating income (NOI) from such sources, which is a great sign for future growth.
Of course, being well-positioned is irrelevant if the company is expensive. Luckily, Ardent appears reasonably valued right now.
Its 2015 estimated price-to-funds from operation (P/FFO) is 15.5x, which is in line with other healthcare REITs and is below its own 10-year average. VTR is also the cheapest U.S. REIT, with a market cap of $20 billion or more right now – though, the other REITs in that group span a variety of disparate industries.
As far as growth, Ventas has posted an extremely impressive five-year annual revenue growth rate of 27.21%. And Friday’s earnings report, which featured a plethora of good news, also showed that Ventas is a healthy business. The company beat analysts’ estimates for the fourth time in five quarters and reported solid growth: The total seniors housing operating portfolio NOI of $148.6 million represents a 21% increase, and same-store cash NOI growth for the total portfolio was 3.2%.
Bottom line: Ventas appears well-positioned to capitalize on a powerful trend – the aging U.S. population. Indeed, there’s no reason to think Ventas won’t continue to outperform going forward, and investors will be paid handsomely in the short term just for holding shares of this attractive REIT.
Good investing,
Chris Worthington
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