Companies:

Ventas(VTR)

by Alex Mason | Nov 24, 2020 | Companies, Episodes | 0 comments

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Mental Details

The History of Ventas

  • Ventas, like other REITs, now exists in its current form because it was spun off from a previously existing business.
  • In 1985, Vencor was founded, which was a company that owned and operated long-term acute-care facilities. Essentially, these were hospitals that required patients to stay for longer than average amounts of time due to their health conditions.
  • By the late 1990s, they had grown into a large healthcare provider with facilities in over 46 states.
  • Unfortunately for Vencor, things took a rough turn. In 1997, Congress passed the Balanced Budget Act, which cut Medicare spending by $112 billion. This had a severe impact on the company and sector as a whole. Not to mention, Vencor was sued because of receiving overpayments from Medicare (shady financial dealings).
  • Recall that in episode 89 we looked at Centene Corporation and first examined the Medicare and Medicaid systems. Even though these are systems run by the U.S. government, it is private companies that administer the care from these programs. Vencor was one such company.
  • In addition to the budget cuts, Vencor had $1.4 billion in debt and ended up filing for bankruptcy in 1999. They re-emerged from bankruptcy as Kindred Healthcare, which went on to go public, and then was taken private in 2018 and split up by multiple buyers.
  • Just a year before the bankruptcy, Vencor spun off Venta as a stand-alone real estate investment trust. Venta would own the healthcare facilities, while Vencor would operate them.
  • By 2002 Venta was on its way to establishing its own corporate identity. They put a fresh management team in place and began to acquire healthcare-related real estate assets.
  • By 2007 they purchased Sunrise Senior Living, a REIT acquisition that gave them nursing home facilities in Canada as well as the U.S.
  • Throughout the financial crisis they managed to grow their staff, and by 2009 they had joined the S&P 500.
  • In 2010 and 2011 they made some major acquisitions – Lillibridge Healthcare Services, Atria Senior Living Group, and Nationwide Health Properties.
  • Throughout the rest of the decade they began to move beyond senior living facilities and invest in medical office buildings, as well as research centers affiliated with universities.

Business Overview

  • Ventas operates at the intersection of real estate and healthcare, which is an interesting mix. They are the landlords primarily for senior living facilities, but also for medical office buildings, research centers, and other healthcare facilities.
  • Ventas owns over 1200 properties spread throughout the United States and Canada, with a few in the United Kingdom.
  • About 1/3rd of these properties are operated under “triple net”’ leases. Let’s dig into what that means. In a typical lease agreement, the landlord makes an arrangement with a tenant to pay rent. In a residential situation, that is usually it. Once rent is paid, everybody is happy. The tenant lives in the property and the owner collects their check.
  • With a “single net” lease, the tenant not only pays the rent but also the property taxes on the real estate.
  • With a “double net” lease, the tenant not only pays the rent, but also the property taxes as well as insurance on the property.
  • With a “triple net” lease, the tenant not only pays the rent, but also the property taxes, and the insurance costs, and the maintenance costs.
  • Why would a tenant ever agree to this?? It sure sounds like a lot of expenses, and it is. The benefit for the tenant is that landlords typically charge a lower base level of rent in order to compensate for this.
  • From the landlord’s perspective, I kind of view as a way of stabilizing your cash flow – you’re shifting more of the variable costs of property ownership onto the company that’s actually utilizing the property. So for both parties, it can be a win-win, depending on the specific lease terms.
  • Ventas collects rent from their tenants, and also hires third party companies to manage their properties. From time to time they also provide financing related to senior housing or other healthcare operators
  • There are four sources of revenue for this business. Remember we always have to first ask “What does this business do?” and then “Where does the cash come from?”
  • Although we can think of Ventas as a landlord (which they are), they actually only derive about 1/3rd of their income from rents. The other 2/3rds come from fees and services that they provide. This is interesting because they are in essence acting as both landlord and property manager.
  • Healthcare properties require specialized construction and operation as compared to other types of real estate. Let’s think about a laboratory where experiments are being conducted. I’ve worked in a lab before, and in order to properly outfit one, there are all sorts of safety and functional considerations that need to be taken into account. There may be several sinks, fume hoods, as well as electrical and safety requirements that need to be accounted for in the building’s infrastructure.

Financials

2012 2019 CAGR (%) / Comments
Sales 2.4 3.8 6.7%
FFO 1.1 1.4 3.5%
Adj. FFO Per Share $3.80 $3.85 0% Shareholder’s have gotten no profit growth!
Cash 68 MM 106 MM
Long Term Debt 8 12
Main. Capital Ex. (183 MM) (561 MM) Expenses to operate the senior living facilities are their most costly expense
Operating Cash Flow 1 1.4
Investing Cash Flow (2) (0.7)
Financing Cash Flow 1.2 0.2
Dividends $2.48 $3.17 3.5%
Shares Outstanding 294 MM 373 MM 3.4%

Valuation and Closing Thoughts

  • There is a big picture case that could be made here that demand will be strong for Venta’s services, primarily due to the fact that the percentage of Americans aged 65 and older is expected to grow from about 15% now to about 20% by the year 2040. In typical American culture, people do not have their elder family members live with them as they age, but rather send them to live at a senior living facility, so this is a trend that is arguably in Venta’s favor.
  • I also like how the company has diversified into other areas of healthcare – for example they partner with universities to provide them with high end facilities to do research.
  • Right now Ventas (VTR) stock trades for around $44/share or so. Based on an FFO of $3.85 in 2019, that is about a P/FFO of 11, which is not bad. The price was as high as in the $70s and as low as in the teens within the last year, so it has experienced similar price action as a lot of stocks have throughout 2020 (huge drop and subsequent recovery, though not returning to previous highs)
  • Not sure about management’s ability to take care of shareholders. The dividend yield is around 4%, which is nice.

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