Market analysis by our public securities expert, Geoff Shaver
April 5, 2020
A Drastic Stock Slide at Ventas: What’s Ailing One of the Largest Healthcare REITs?
by Geoff Shaver
Director of Public Securities
Ventas (VTR), one of the largest healthcare real estate investment trusts (or “REITs”), has been drastically repriced as of late. From the period starting February 19, 2020, when the S&P 500 last peaked, through April 3, 2020, VTR is down -62%, while the S&P 500 is down -27% and the FTSE Nareit All Equity REITs is down -34%. But, Ventas’ stock slide didn’t start on February 19. In fact, their most recent 52-week high (and all-time closing high) was last year when they closed at $75.23 on September 6, 2019. That’s a -70% slide in price to their April 3, 2020 close of $22.52. Furthermore, the April 3 close was already well above their recent 52-week low close of $16.97 on March 18, 2020, and that low closing price doesn’t even tell the whole story as VTR traded below $14 for a brief time that day, a move that likely made even the most dedicated REIT investors swoon. We believe VTR has a net asset value (or “NAV”) of at least $31 per share and they should trade around a 15% premium to NAV when their earnings re-enter growth mode, giving us a target price around $35-$36. Right now, you can buy them at a discount to NAV. This implies a return on price of 58% at the midpoint from the April 3, 2020 closing price, in addition to some very attractive dividends along the way.
What Caused Ventas’ Stock Slide?
Ventas, headquartered in Chicago, is one of the largest healthcare REITs and is colloquially named one of the “Big 3,” with the other two being Welltower (WELL) and Healthpeak Properties (PEAK). Ventas owns hospitals, medical office buildings, long-term acute care facilities, research and life science assets, as well as skilled nursing facilities and senior housing. The senior housing assets can be owned in two forms. They can be leased on a triple net basis to an operator, where VTR collects only the rent, or they can be held in a RIDEA structure where VTR hires a manager to operate the asset and receives all operating cash flow after paying the manger a fee. The cash flows of the latter will be more volatile, as they are tied to the actual operations of an asset versus just collecting a pre-determined rent. Senior housing makes up 62% of Ventas portfolio by investment dollars and 53% by NOI. It is likely the performance from, and exposure to, these senior housing assets that has caused the majority of VTR’s stock slide.
Source: Company presentation dated December 31, 2019
In June of 2019, VTR announced they were investing about $1.5B in a joint venture that would own 31 senior housing communities and four development projects in Quebec. Much of this was financed with a follow-on offering of stock priced at $62.75 per share, which raised about $794M of proceeds before bankers’ fees. In hindsight this looks brilliant given today’s stock price, but VTR’s woes began when they announced their 3rd quarter 2019 earnings results in October of that year. With that earnings release, it became apparent that many of VTR’s legacy senior living assets, especially ones in a RIDEA structure, were not living up to expectations. Fears began to arise that the newly acquired senior communities would live up to the same fate, and Ventas shares took a hit but seemed to stabilize in the mid-$50s to $60 until February 2020. Around this time, the COVID-19 pandemic began to disproportionally affect the elderly population, just the type of tenant that would most likely be found in a senior living facility. New fears arose that this virus would not only slow the rate of new residents moving into senior facilities, but also that it had the potential to affect existing residents, creating new vacancy at such properties. This news, along with a massive re-pricing of risk across asset classes, led to the VTR stock slide that appears to have bottomed on the March 18th date mentioned above.
How Has the Market Re-priced the Value of Ventas’ Assets?
Let’s take a look at VTR’s capital stack. The amount of debt VTR has outstanding really hasn’t changed that much recently. They had $11.7B of debt at share on September 30th, 2019, and ended 2019 with $11.9B. They did issue $500M of 10-yr senior unsecured notes with a 4.75% coupon last week, but would be largely holding the cash right now, so we can safely assume their net outstanding debt is still close to $11.9B now. What has changed, and wildly, is the value of common equity in their capital stack. While it was worth $27.4B on September 30th, 2019, it fell to $21.7B at the end of 2019, to a low of just $6.4B at the close on March 18, 2020 and sits at $8.5B on April 3, 2020. This begs the question, are Ventas’ assets really worth $19B less than they were at September 30, 2019?
Source: Origin Investment Advisors, company presentations and SEC filings, Google Finance
What are Ventas’ Assets Really Worth?
Let’s take a quick look at a NAV for Ventas. From their fourth quarter 2019 earnings supplement we can see the in-place annualized NOI from each property type as of December 31, 2019.
Source: Company presentation dated December 31, 2019
We can do a little rearranging as senior housing comes in two flavors, triple net and RIDEA. Also, we will treat their loan book as a balance sheet item at a discount to book value rather than a stream of NOI. Let’s apply some cap rates to their various property types and we can see that the value of their operating assets is almost $31B in the table below.
We can add in some items from their balance sheet such as cash, account receivables, accounts payable, construction in progress, and the aforementioned loan book, but these items are not really needle movers. Next, we subtract their debt outstanding at December 31, 2019 of just under $12B, to get a net asset value of about $19.2B. We then divide this by the outstanding shares and units as of December 31, 2019 to arrive at a NAV per share right around $51. While reasonable people could have a discussion about cap rates, this $51 NAV is not that different from the consensus NAV per share of $53.18 on VTR as of December 31, 2019, and again our $51 value is using fourth quarter 2019 run rates with no adjustments for anything coronavirus-related.
But things have changed during this pandemic and values have fallen across almost all asset classes. Today VTR has a consensus NAV per share of $51.21, and we believe this number will go down further as sell-side analysts update their models. The problem is, it is not clear how much cap rates have risen and what the ultimate impact will be on cash flows. Let’s assume that senior housing values, both triple net and RIDEA have dropped 35%, and the value of Ventas’ other assets have fallen 10%. Is 10% enough, too much, or just right? It’s hard to say, but what we do know is that during the fourth quarter of 2019 and across all of 2019, VTR saw positive same-store NOI growth in all property types except senior housing with a RIDEA structure. In fact, when VTR initially gave guidance for 2020, they expected +3.5% growth for their office segment and +2.0% for all of their triple net assets, including the senior housing triple net assets.
If we take a look at the updated values by property type and NAV after a 35% and 10% reduction, we see that the value of operating assets has fallen to $23.4B and we get a new NAV per share right around $31.
Historically, VTR has tended to trade at a premium to NAV, including most of 2019. They now trade at a discount not only to today’s consensus NAV, but even after a speculative adjustment downward of 35% on their senior living assets. This means you can buy VTR stock today for less than what the sum of their assets is really worth.
We view Ventas as having a strong balance sheet, inclusive of investment grade ratings from S&P (BBB+), Moody’s (Baa1), and Fitch (BBB+). VTR currently sports a div yield above 10%, and while there is always the potential for a cut during difficult times, we will remind you that VTR did not cut their dividend in the 2007-2010 timeframe when most REITs did. Even if VTR is subject to a dividend cut this time given the uncertainty around COVID-19 and senior housing, keep in mind that total return, comprised of dividend distributions and stock price appreciation, is what really matters. We expect VTR and their assets to outlive the COVID-19 pandemic and to return to a growth profile in the future.
VTR is one of several stocks that make up our Growth REIT Block and Healthcare REIT Block. Download the Path app to learn more about these REIT Blocks and see if they might be a good fit for your portfolio.
1 VTR and S&P 500 pricing sourced from Google Finance, FTSE Nareit All Equity REITs Index pricing sourced from Investing.com
Director of Public Securities
Geoff leads the construction and monitoring of the public real estate securities portfolios available in our Path by Origin app. Prior to Origin, Geoff spent the last 12+ years researching and investing in public REIT securities at both Duff & Phelps Investment Management Co. and J.P Morgan Asset Management.
Geoff Shaver and clients of Path by Origin, LLC own VTR, PEAK, and WELL. Neither Mr. Shaver nor Path have a business relationship with any company whose stock is mentioned in this article.
Path by Origin, LLC (“Path”) is an SEC registered investment adviser. Mr. Shaver is the Director of Public Securities of Path. The views expressed herein are subject to change, and no forecasts can be guaranteed. The comments provided are for educational purposes only and may not be relied upon as recommendations, investment advice or an indication of trading intent. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of information available from public sources. The stocks mentioned in this article have been highlighted based on some reported news, quality or characteristic and do not necessarily represent all of the securities recommended for a particular portfolio. Path is not soliciting any action based on this communication. Investments involve risk, including the possible loss of principal and fluctuation of value. Past performance is not indicative of future results. Mr. Shaver and Path disclaim responsibility for updating any information herein. In addition, Mr. Shaver and Path disclaim responsibility for any third-party content.