Ventas, Inc. VTR, with its diversified portfolio of healthcare assets, is well-poised to capitalize on the growing demand for healthcare assets amid rising healthcare spending and favorable demographics. However, the environment for senior housing operating assets remains challenging.
Markedly, senior citizens constitute the major customer base of healthcare services as they end up spending more on healthcare services compared with the average population. Hence, with the upcoming ‘silver tsunami’, Ventas has strong upside potential, being well-poised to capitalize on this expenditure trend of senior citizens on healthcare services.
Additionally, amid favorable demographics and growing outpatient trends, the company is focusing to capture the upside with its office segment, which includes medical office buildings (MOBs), academic medical, and research and innovation (R&I) businesses.
Further, the resumption of elective procedures across its medical office markets is likely to drive stable rent receipts. Moreover, higher need for drug innovation and additional demand for space for biotech research is anticipated to drive leasing activities in its office segment.
The company has also made efforts to strengthen its balance sheet and preserve liquidity that has become a focal point amid these unprecedented times. In fact, it has undertaken several capital conservation actions such as reductions in corporate positions, dividend cuts and lower planned capital expenditure.
As of Aug 5, Ventas had $3.5 billion of liquidity, consisting of $0.6 billion of cash and cash equivalents, and $2.9 billion of available capacity on hand. This positions it well to sail through the tough times and pursue its growth endeavors.
However, amid the pandemic, the company’s senior living operating portfolio is witnessing a negative revenue trend. Specifically, resident move-ins and leads below the prior-year levels, significant move-outs, and higher operating costs are hindering occupancy, revenues and net operating income at the seniors housing assets. With 63.5% of its investments in seniors housing communities, soft market conditions for senior housing are primary concerns for Ventas.
Moreover, high-supply conditions in certain markets and rising labor costs are worrisome for the company as it affects pricing power and limits growth in the occupancy level.
In March, it formed a perpetual life vehicle — Ventas Life Science and Healthcare Real Estate Fund, L.P — to focus on investments in R&I centers, medical office and seniors housing real estate asset classes. To seed the fund, the company sold six properties to the fund-generating net proceeds of $620 million. Although such efforts enable it to optimize its portfolio, near-term dilution in earnings and impact on net operating income in the near term from the sale of assets is unavoidable.
Shares of this Zacks Rank #3 (Hold) company have rallied 19% over the past three months compared with the industry’s growth of 6%.
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Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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