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Should You Retain Ventas (VTR) Stock in Your Portfolio Now?

Ventas VTR, with a diversified healthcare real estate portfolio, is well-positioned to leverage a rebound in senior housing and favorable demographic trends. Its life-science segment is expected to benefit from the aging U.S. population and biopharma developments. The rising need for healthcare services bolsters the office segment. However, dependence on a few tenants, competition and high interest rates pose challenges.

The national healthcare expenditure is expected to rise in the upcoming years. Senior citizens constitute the major customer base of healthcare services, and they end up spending more on healthcare services compared with the average population.

With an expectation of a rising senior citizens’ population in the years ahead and muted new supply in its markets, Ventas is well-prepared for a compelling multiyear growth opportunity. Per our estimate, its senior housing operating portfolio’s net operating income (NOI) is expected to rise 8.9% in 2023.

The growth in the number of people aged 65 years old and above is driving the increase in outpatient visits as they make three times more visits to the doctor than the general population. Ventas’ medical office buildings (MOBs) portfolio is well-positioned to capitalize on this rising demand. In first-quarter 2023, occupancy and NOI margin grew for the seventh consecutive quarter for the MOB segment. Given the favorable environment for this asset category, this trend is likely to continue.

Ventas owns research & innovation centers in notable life science clusters of Cambridge, San Francisco, Maryland, Raleigh, and Philadelphia, with a presence in more than 17 top-tier research university campuses. Per the May 2023 Earnings Presentation, 73% of the company’s rent comes from top-tier universities and companies. Long-lease terms, a high-quality portfolio and top-rated tenants assure steady growth in cash flows for VTR.

Ventas has a healthy balance sheet. It has been making efforts to enhance its liquidity position and financial strength. The company had $2.4 billion of liquidity at the end of the first quarter of 2023. With a well-laddered debt maturity profile, it has decent financial flexibility to pursue growth endeavors.

However, the company faces tenant concentration risk in its triple-net leased property segment. Specifically, properties leased to Brookdale Senior Living, Ardent and Kindred account for a significant part of VTR’s segmental revenues and NOI.

In case of any adverse development with respect to these three tenants, Ventas’ financial condition and results will likely be impacted. We expect NOI for the triple-net segment to fall 1.7% in 2023 and exhibit modest growth of 2.5% in 2023.

A high interest rate environment is another concern for Ventas. Elevated rates imply high borrowing costs for the company, which are likely to affect its ability to purchase or develop real estate. Our estimate for 2023 interest expense indicates an increase of 13.8% year over year. Moreover, the dividend payout might become less attractive than the yields on fixed-income and money market accounts due to high interest rates.

Shares of this Zacks Rank #3 (Hold) company have lost 7.3% over the past six months compared with the industry's decline of 10.8%.

Zacks Investment Research
Zacks Investment Research


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Stocks to Consider

Some better-ranked stocks from the REIT sector are Host Hotels & Resorts HST, and EastGroup Properties EGP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The Zacks Consensus Estimate for Host Hotels & Resorts’ 2023 funds from operations (FFO) per share has been revised 9.1% north over the past month to $1.91.

The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has been revised 1.3% north over the past month to $7.56.

Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.

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