However, Ventas, Inc. (NYSE:VTR)’s world class management team, led by Chairman and CEO Debra Cafaro, (who has generated 27% total returns since she became CEO in 1999), has done an exemplary job of balancing growth with a strong, and steadily improving balance sheet. As seen below, Ventas maintains a reasonable total debt to enterprise value ratio of 31%, and its fixed charge coverage sits at 4.7x.
In fact, Ventas has one of the strongest balance sheets of not just any medical REIT, but any REIT period, which allows it to access debt at super cheap levels; including its revolving credit facility which has an interest rate of just 1.5%.
This gives Ventas a low weighted average cost of capital below 5% and allows management to generate more accretive investments (i.e. that grow FAD/share quickly and allow for a highly secure and growing dividend).
Overall, Ventas has a portfolio of diversified healthcare properties run by best-in-class operators who should collectively benefit from favorable demographic trends over the coming decades. Management has shown capital allocation skill over the last 15+ years, and the large and fragmented nature of the market provides numerous opportunities for continued growth.
However, there are risks to every investment.
Key Risks
There are two big risks with investing in any medical REIT: government changes in healthcare spending policy, and interest rates.
Because of the rising cost of treating America’s aging seniors, changes in Medicare policy, away from a fee-for-service model and towards one based on outcomes, can be a risk to Ventas’ tenants and operating partners.
This is especially true given that certain sub sectors of the industry, such as SNFs, run on razor thin margins. This can result in some long-term care providers running into hard times. For example, Kindred Healthcare, Inc. (NYSE:KND), just reported a horrible quarter and announced it was exiting the SNF industry all together.
Now Kindred represented 9% of Ventas’ net operating income, or NOI, and management is confident that it will be able to come to a mutually beneficial agreement in which it sells the properties operated by Kindred and further de-emphasizes the importance of SNFs to its cash flow.
After all, this was the main reason why Ventas opted to spin off Care Capital Partners and focus on more stable businesses such as senior housing, and medical office buildings, which are mostly funded by private payers, and not the government. In fact, before the Kindred Healthcare, Inc. (NYSE:KND) announcement Ventas was obtaining just 17% of its NOI from Medicare/Medicaid, and that figure is sure to drop even further now.
However, in the short-term, the need to further sell off SNF assets means that Ventas’ short-term cash flow growth might dim, and the prospects for short-term dividend increases along with it.
In fact, the company announced it reached an agreement with Kindred Healthcare, Inc. (NYSE:KND) to sell its 36 SNF facilities on Monday, November 14. However, the market was happy about the deal and pushed Ventas’ stock higher by nearly 4%. This strategic move further derisks Ventas’ business, reducing its SNF rent exposure to just 1% of its total business.
