Judging by its stock chart, you'd think that property owner Ventas (symbol VTR , $51.59) was headed for the graveyard. Shares of the real estate investment trust have cascaded 28% so far this year, wiping out more than $7 billion in market value. But the stock is ripe for a rebound, and while you wait for the comeback to materialize, you can scoop up a 5.7% dividend yield and count on the payout to climb in coming years.
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One of the country's largest health care REITs, with a stock market value of $17 billion, Ventas owns nearly 1,300 senior-living properties, medical office buildings and hospitals, including a few in Canada and the United Kingdom. Until recently, its portfolio included dozens of skilled-nursing-care facilities. But Ventas recently carved out most of these properties to form a separate REIT called Care Capital Properties ( CCP ). Shares of Ventas slid about 13% after the spinoff in August as investors received shares of the nursing-care REIT. Because of the dividends and the value of the spin-off, Ventas's stock has lost 14.2% on a total-return basis. That's not as bad as the 28% drop in the share price suggests, but it's still a lousy number. (Prices and returns are as of November 19.)
Although Ventas doesn't own as much real estate now, it's in a stronger position to boost income and hike dividends. The nursing-care properties were a drag on the business because of low reimbursement rates from Medicare and Medicaid (which are trying to hold down costs). About 83% of Ventas's net operating income will now come from private-pay facilities, whose services tend to be covered by insurance companies or individuals. That should lead to improved profitability and revenue growth, says analyst John Roberts, of brokerage Hilliard Lyons in Louisville, Ky. Ventas can now focus on sprucing up the properties it retained, supporting higher rents. And it's got plenty of firepower to buy more real estate, with access to more than $2 billion in credit and a relatively low level of debt compared with the value of its equity.
Perhaps most compelling is the stock's valuation, says Roberts, who recently upgraded Ventas to a "long-term buy" after years of recommending that investors steer clear. Despite a lot of ups and downs, Ventas's share price has barely budged in the past five years. But the business is now larger and healthier. Funds from operations (the REIT industry's preferred measure of cash flow) have climbed about 30% since 2010, the dividend is up nearly 36%, and Ventas has bulked up, having spent more than $11 billion on medical office buildings and senior-housing properties. Furthermore, the stock trades at a discount to other large health care REITs, Roberts adds, based on a variety of valuation measures.
The knock on REITs, of course, is that they'll slump if interest rates climb. Yet a modest rise in rates shouldn't have much impact on Ventas's business. Its debt matures, on average, in 7.1 years, and only 6% of it comes due through 2016. With Ventas expected to earn $4.21 per share in FFO in 2016, the REIT should have more than enough money to cover its dividend of $2.92, while still leaving cash to upgrade its properties, make investments and hike its payout.
Over the long term, Ventas is likely to fare well simply because more Americans will need health care and senior housing as the nation ages. The number of residents age 65 and older is expected to climb from 43 million in 2012 to 73 million in 2030, making senior citizens the fastest-growing segment of the population. "The demographics of the business are unbelievable," says Roberts, who sees the stock hitting $65 in two to three years.