Ventas’ Revaluation Equals A 5.6% Yield At Deep Discount Prices

Is Ventas 5.6% Yield A Suckers Play?

Ventas’ Revaluation Equals A 5.6% Yield At Deep Discount Prices

Revaluation, the two-edged sword. Depending on the investment in question and the individual investor’s position on the investment revaluation can result in losses or gains, disaster or opportunity, it just depends. In this case, a massive revaluation in Ventas (VTR) share prices has caused catastrophe for some but opportunities for others.

Those counting on Ventas’s return to earnings growth had their hopes crushed with the 3Q earnings report. The company misjudged the timing of a key market and now earnings growth won’t return for another year. What this means for Ventas share price is a -25% decline in share prices that is the opportunity today.

Ventas is not a bad company, it is not losing money, and management isn’t about to cut the distribution. At today’s prices, the stock is paying over 5.6% and offering an incredible value opportunity.

Ventas Misjudged The Timing Of Senior Housing Growth

Ventas is a diversified healthcare REIT with operations in the U.S., Canada, and the UK. The company operates in several segments alongside Senior Housing including Medical Office, Research, inpatient acute facilities, rehabilitation, and health systems. Over the past few years, the company has been working toward revitalizing an old and tired portfolio, cleaning up the balance sheet, and putting one of America’s oldest and leading REITs on a track toward EPS growth.

The plan centered, centers, around the U.S. aging population. With the need for senior healthcare and housing expected to grow by triple-digits over the next 30 years the outlook for Senior Housing REITs is robust.

The problem for Ventas is two-fold. First, the demographic trends driving the need for senior housing are easy to see, the Baby Boomers are a large portion of the U.S. population and they will all be 65 or older by 2031, so competition for market share is fierce. Second, Ventas counted on demand picking up this year, in 2019, and it didn’t. That left Ventas out in the cold so to speak, too much capacity and not enough traffic.

The Other Business Was Good, The Outlook Is Positive

Ventas Other business segments are good, very good, and helping the company offset weakness in the senior housing portfolio. Revenue and FFO were better than expected due to the growth of revenue from new investments and strength in the office, healthcare, and research portfolios.

Ventas Chairman and CEO Debra A. Cafaro noted in the 3rd quarter press release that "robust performance in our medical office, healthcare and research & innovation portfolios, our high quality and accretive investments and effective capital markets execution.” helped to drive results.

Coincidentally, Argus Research analyst Jacob Kilstein upgraded Ventas to buy from hold, citing opportunities in medical office, life science, and health-care real estate markets.He is the only one of two dozen analysts to have a buy rating on the stock. That situation opens the door for a massive round of upgrades once the senior-housing issue blows over.

The Dividend And Value Are Attractive

Ventas has made a name for itself as a safe dividend payer and that has not changed. What has changed is the yield. Going into the 3Q report Ventas was paying about 4.30%. Now that share prices have fallen back to attractive levels the yield is up substantially, over 100 basis points, to over 5.6%.

The slight adjustment to next year’s growth outlook increased the payout ratio to 83%, up 3%, but Ventas is still in-line with its health industry REIT peers. The average payout ratio among the group is just above 80% and not likely to change, REITs pay most of their earnings to dividends and always will. The company chose not to increase the dividend with the most recent distribution breaking the 18-year history but that’s OK, I’m content to let business catch up before they raise the yield again.

In terms of value, Ventas was trading near 18X forward earnings and average for its peer group. Now the stock is trading around 14.5X forward earnings and offering quiet a discount for investors. Based on these numbers investors could expect VTR share prices to rebound simply because of the value proposition. Add in the market-leading, Treasury-beating, 5.6% yield and the rebound could produce strong momentum.

The Technical Outlook: A Rebound Is Coming

The technical outlook is clear, a rebound is coming. The question is whether the rebound will be able to regain the upper side of key resistance. Resistance is at the $57.30 level which was a previous low and provided support during the last downdraft. The indicators are particularly promising but do not guarantee a break above resistance, a resistance that will be stronger because of the 30-day moving average.

Coming back to the indicators, MACD turned bullish while VTR was setting its last lows which I find intriguing. In terms of divergence/convergence theory, this is the most divergent I think I have ever seen MACD. That divergence is echoed by stochastic and it divergence/strong buy signal. All that’s left now is to wait and see what happens. A move up to and above $57.30 would be bullish and a signal to buy. If price action fails to move above $57.30 another leg lower in prices may be on the way.