Ventas: Senior housing income

by Stephen Leeb, editor The Complete Investor

In today’s record-low interest rate environment, REITs are more alluring than ever to income investors.

We are adding another REIT to our Income Portfolio: Ventas (VTR), the nation’s biggest owner of senior housing, with more than 1,300 senior living and skilled nursing facilities.

The company had the distinction of keeping its payout intact as the financial crisis escalated. But that’s not why we picked it.

Rather, we like Ventas because the company, the leader in its sector, is positioned to benefit from two powerful and related trends: a striking demographic shift to an older population and growth in health care spending.

Many of its assets are protected by highly structured triple-net leases (where the tenant both pays rent and is responsible for the property’s operating costs), with annual rent increases.

Ventas also is the largest owner of private-pay senior housing properties. And it has a major national presence in the fast-growing medical office-building sector, where it owns or manages around 14 million square feet of properties.

Its 4.4 percent dividend yield makes it attractive for income investors, as does its history of dividend growth — since 2004, its dividends have risen an average of 8 percent a year.

As the ranks of retired baby boomers swell, senior living will become an ever bigger business: strikingly, over the next 25 years the population aged 75 years or older is projected to grow four times faster than the under-75 population.

Ventas is notable for its financial strength and access to low-cost capital,which have enabled it to become a major consolidator in the industry.

It made several acquisitions last year, including the $3.1 billion acquisition of the real estate assets of Atria Senior Living Group, which transformed Ventas into the country’s largest owner of private-pay senior housing.

Ventas has continued on the acquisition path this year. Its plan, announced in February, to acquire Nationwide Health Properties for $7.4 billion would be its biggest purchase so far and would make the company the country’s largest health care-leveraged REIT.

We like the prospects of the combined company. Not only would it be the dominant player within the still fragmented industry, the acquisition would be immediately accretive to Ventas’ earnings.

Ventas’ valuation remains attractive: the REIT trades at a slight premium to its peers but still below its historical premium of 10 to 15 percent.

Ventas’ limited exposure to government reimbursements (less than 30 percent of net operating income) is yet another positive.

Learn more about this financial newsletter at Stephen Leeb's The Complete Investor.