Did The Fed Organize An Opportunity In Ventas?

| About: Ventas Inc. (VTR)

Summary

The recent FOMC meeting summary led to a sell-off in the Healthcare REIT sector.

While concerns are increasing for a March interest rate hike there are opportunities opening up for long term investors.

Here is my buy-point for VTR.

The Fed's decision from Wednesday indicated that a March interest rate increase is not off the table. Though the message was that the committee will continue to monitor the impacts of global economic and financial developments on U.S. economy outlook the immediate reaction of the equity markets was a sell-off, especially in the interest rate sensitive sectors.

A risk of Interest hike would have a significant impact on the REIT business based on its leveraged nature and indeed the sector took a significant hit with a 2% drop in average.

The major pullback was seen in the Healthcare REIT sector. Welltower Inc. (HCN) stock fell by 6.7% HCP, Inc. (HCP) price dropped by 5%, Omega Healthcare Investors, Inc (OHI) by 4.6% and Ventas Inc. (VTR) by 3.8%.

This temporary pullback could be a great opportunity to generate or to strength a position.

The healthcare REIT in general is expected to benefit from the demographics tailwind in the coming decades. Based on a Census.com analysis in the next 15 year the U.S. population aged 65 and older is expected to grow from 15% of the population to 21% of the population. As the overall population is expected to grow by ~10% the absolute number of U.S. population aged 65 and older is expected to grow by ~60%, going from ~46 million in 2015 to ~74 million in 2030.

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It means that there will be a significant incremental need for senior healthcare facilities and services alongside senior housing and other facilities that are related for the benefit of this population.

When exploring the percent of real estate owned by REITs it is obvious that the local U.S. Healthcare REITs hold a great opportunity. Only 12%-15 % of the U.S. Healthcare assets are owned by REIT companies. It means that this sector has a huge growth opportunity of owning publicly owned assets and to enlarge its footprint by efficiently manage it.

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Ventas is a ~$30B healthcare REIT that holds ~1,300 assets across the U.S, Canada and the U.K. In the recent year the company spun off a ~$4B worth of its portfolio to maintain its focus on high quality and its partnership with the leading operators in the healthcare sector like Sunrise and Atria.

Its diversified portfolio includes senior housing and healthcare operators. Medical offices, hospitals and skilled nursing facilities

VTR has an impressive growth track record over the recent decade with a ~10% multi-year cumulative growth rate of its FFO and a dividend growth factor of ~9% year over year during that decade.

The company is expected to report a $4.43-4.46 FFO/share for the year 2015 which means that the $2.92 dividend per share is very stable. The company maintained a relatively low payout ratio of 65% overtime.

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Ventas' strategy to maintain growth in the coming years is through utilizing its unique position with the leading operators in the healthcare business like Atria Senior Living, Ardent Health Services, which owns and operates hospitals and multi-specialty physician practices, and Sunrise Senior Living, which manages communities throughout the U.S., in Canada and the United Kingdom.

The company's vision is to deliver integrated solutions for these healthcare providers based on the changing requirements of the healthcare and senior living facilities.

Hospitals are changing their role over time and based on the company's strategy would become have an important role in the healthcare supply chain. In the coming future there the company expects to see consolidation of elderly communities, hospitals and senior living services, like medical offices and assisted living facilities. The ability to scale a full solution across the different facilities in the most efficient fashion, taking into account the required technologies, services and property management will allow to scale down the cost of living in these communities and by that make it affordable for a larger portion the relevant population.

Ventas' strategy is based on such tremendous tailwinds that an occasion change in Interest rate will not harm its long term prospects.

I would keep an eye of the behavior of the stock in the next couple of days. Based on the $2.92 dividend per share, which was delivered in 2015, the current dividend yield is at 5.3%. The stock price could drop even further to the levels of $50 or slightly lower which means an attractive yield that is closer to 6%.

Back in November, during the days of high anxiety from the approaching Fed's first hike, the stock faced a temporary pullback to the sub $50 territory. It has completely recovered in the month after and I suspect that the current pullback would be a short one as well.

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Conclusions:

Ventas has a great strategy, a great management team and great tailwinds that will push it success forward in the coming years. I plan to take advantage of any pull back below $50 to add to my existing position in this company's stock.

As always, I appreciate your feedback.

Happy investing

Disclosure: I am/we are long VTR, HCP, OHI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision. About this article:Expand