Tuesday, December 3, 2013

Stock Bought: VTR

Today I bought shares of Ventas (VTR), a diversified healthcare REIT. The company owns over 1,400 properties and its net operating income (NOI) comes from seniors housing (27%), seniors housing operating assets (27%), skilled nursing facilities (20%), medical office buildings (17%), hospitals (7%), and loan assets (3%). Over half of its NOI comes from triple-net leases and 84% of revenue comes from private pay sources. Ventas is well-positioned to capitalize on the higher healthcare needs of the increasing population of seniors in the United States over the next few decades.

Ventas has a pretty good dividend track record. The 5- and 10-year dividend growth rates are 5.5% and 9.6%, respectively, and the most recent dividend increase was 8.1%, announced in February 2013. The company does not appear on the Dividend Champions, Contenders, and Challengers list because it froze its dividend in 2009, breaking a string of dividend increases that dated back to 2001. However, with a current streak of four consecutive years of dividend growth, Ventas will rejoin the Dividend Challengers with an increase in 2014. The company is in a good position for future dividend growth, with high single-digit percent growth in funds from operations (FFO) and a payout ratio (based on FFO) of just 65%, which is relatively low among REITs.

The company has a stable balance sheet, with a debt/capitalization ratio of 49% and adequate interest coverage. It has investment grade credit ratings from all the major agencies, allowing it to issue debt at low interest rates to fund new acquisitions. Value Line gives the company financial strength and safety ratings of B+ and 3, respectively.

I think VTR is undervalued at the current price. It has a P/FFO of 13.5 (using the estimated FFO for 2013), a P/S of 6.0 (vs. a 5-year historical average of 7.0), P/B of 1.8 (vs. 2.5), and dividend yield of 4.8% (vs. 4.4%). Using a Dividend Discount Model with a dividend growth rate of 5.5% (matching the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $58.97. Morningstar gives a more generous fair value of $70.00 and a 4-star rating. The average of those two estimates is $64.49, which implies a 13% margin of safety at my purchase price.

Interested readers can find additional information about Ventas in two recent articles on Seeking Alpha and in an investor presentation from last month:
I bought 40 shares of VTR at the price of $55.90 per share plus commission, giving me a 4.78% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $26.80 from this purchase, which will add a total of $107.20 to my annual dividend income. The next dividend should be declared any day now and paid in late December, so I will not have to wait long for my first payment. This purchase was made in my Roth IRA using rollover money. Ventas becomes the 34th stock in my portfolio and the third REIT; I think it nicely complements my HCP position in the specialty area of healthcare REITs. My forward 12-month dividend total increases to $3,611.

21 comments:

  1. Never heard of this one. I added to my watch list. I like what I see on F.A.S.T. graph. I'm liking this one. thanks

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    1. FFd: You're welcome, I'm glad I was able to put it on your radar.

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  2. Same here, had never heard of VTR. I have HCP, OHI in my REIT watch list and will add VTR for sure. I really like the fact that VTR has better dividend growth rate than other REIT. Thanks!

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    1. Fab: You're welcome, and I agree -- even with the freeze in 2009, VTR has achieved a good dividend growth rate compared with its peers.

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  3. DGM, I can see you like REITs very much!. I have some HCP and I am thinking in purchase more.

    Here, in Spain, we think USA stocks are, generally speaking, overvalued, so I have stopped in my planning there and I am purchasing in my country (as Bill Gates in FCC lol).

    Very good blog, I read it weekly!

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    1. ClassicCo: I think many REITs are attractively valued now, which is why I've been loading up on them. Thanks for visiting my blog from Spain!

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  4. I was just looking at this company yesterday after reading an SA article. I like what I see but I'm somewhat concerned about the effects of rising interest rates on REIT's. I'm sitting on the sidelines for now but I'd be open to initiating a position at some point to compliment my OHI position. Thanks for your take on VTR.

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    1. AAI: I think the prospect of rising interest rates is mostly factored into the prices of many REITs already. However, I am aware that more downside is possible, so I understand your decision to sit on the sidelines for a while. Based on my current REIT allocation, I might make one more purchase before the end of the year.

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  5. Very good post, DGM!
    I've also never heard of Ventas.
    But the market capitalization is quite large.

    In 2011 you can see the crashing down of the dividend: http://dividata.com/stock/VTR/dividend

    But that's been the only slip-up!
    I think the company is not bad! :-)

    best wishes
    D-S

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    1. D-S: Thanks for your comment. The 2011 dividend data is a bit misleading. There were actually five payments that year, with one of the regular quarterly dividends split into two payments. This was done as part of a merger agreement with National Health Properties. If you look at the dividend for the entire year, there was no cut; in fact, there was an increase over 2010.

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  6. I'm not familiar with VTR, but it appears to be a solid company. I will have to take a look sometime as I'm always interested in healthcare REITs. Perhaps I'll add this one to my 2014 watch list, I will not be buying additional REIT shares till then.

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    1. CI: I also find healthcare REITs to be of particular interest in the real estate area. I might make one more REIT purchase in 2013, then hold off until the new year.

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  7. I saw those articles the other day that you linked and like many others, this was the first I heard of VTR. I'm currently long OHI and don't want overlap but I need to take a look at VTR. I do like their FFO growth rates over the past 10 years.

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    1. PMU: VTR wasn't on my radar until recently, mainly because it is not on the Dividend CCC List. However, both its dividend and FFO growth rates over the past several years have been nice.

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  8. Nice buy! I opened a position in VTR earlier this week, along with HCP and HCN.

    I like that VTR's yield is actually somewhat competitive at this valuation, and the growth rate of the distribution should be much better than a lot of the other REITs. I'll take an almost 5% yield with a mid-high single digit growth rate any day.

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    1. Warrior: Nice, it's good to hear from another new VTR shareholder! I agree with your take on VTR, especially when it is compared with other REITs.

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  9. Hello, today bought 55 shares of Ventas. A good start. Thanks for the tip! I'm trying to buy me some REITs now that they are undervalued. The problem is that I have most REITs in my portfolio. I think I'll also buy into AIG and Citigroup, which I think has great upside. Swedish shares are overvalued. Best regards P from Sweden

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    1. P from Sweden: You're welcome, and congratulations on joining me as a VTR shareholder. Perhaps as a reward for our investing decisions, the company announced an 8% dividend increase today. :)

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  10. DGM,

    I love your analysis and I follow you on SA. Keep doing a great work.
    One thing I never understood is which formula you use for Dividend Discount Model? Can you please clarify that?

    Thanks
    Alex

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    1. Anonymous: Thank you. Regarding the Dividend Discount Model, I use the following formula:

      Fair Value Price = Dividend / (Discount Rate - Dividend Growth Rate)

      where "Dividend" is the annualized dividend payment for *next year* based on the estimated dividend growth rate. I usually set the discount rate equal to the current yield plus the dividend growth rate, which seems to work well for most stocks (i.e., I get fair value estimates that seem sensible). I hope this helps.

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