Here's Why You Should Sell Ventas (VTR) Stock Right Now

Healthcare REIT, Ventas, Inc. VTR accomplished the sale of its 36 Skilled Nursing Facilities (SNF) during 2017, which were operated by Kindred Healthcare. The move was in sync with the company’s strategy of “de-emphasis” of this particular healthcare real estate category. However, concentration risks associated with dependence on few tenants, intense competition with national and local operators and any rise in interest rate are concerning Ventas.

Early in February, Ventas reported in-line results for fourth-quarter 2017. Results reflected an improved property performance and accretive investments.

Notably, Ventas reaped $700 million in proceeds by completing the sale of its 36 SNFs. Amid healthcare reforms, though seniors housing, medical office buildings and hospitals have been able to record solid top-line growth in recent years. However, skilled nursing facilities are becoming more susceptible to top-line pressure due to the change in medical billing procedure. The company efficiently spun-off majority of its SNF business in 2015 and following the sale of the aforementioned 36 SNFs, Ventas successfully brought down its net operating income (NOI) from SNFs to just 1% of its aggregate NOI.

Nonetheless, as a large portion of Ventas’ revenues originates from a few tenants, it is still exposed to concentration risks.  If one of these larger tenants runs into financial difficulty, the company’s earnings could be hurt. The properties managed by Atria and Sunrise constitute a significant portion of its revenues and operating income. Though Atria and Sunrise are managers and not tenants of the company’s properties, adverse developments in their business and affairs or financial conditions could hamper its profitability.

Further, Ventas operates in a cut-throat market and competes with national and local healthcare operators on a number of factors, including quality, price and range of services provided, reputation, location and demographics of the population in the surrounding area as well as the financial condition of its tenants and operators. This significantly limits its power to drive its top line as well as cracking deals at attractive rates.

Additionally, hike in the interest rate is a concern for Ventas, particularly considering its substantial exposure to long-term leased assets. Properties under long-term triple-net leases generally have fixed-rental rates, which are subject to annual escalations. However, many of the company’s debt obligations bear floating rates with interest and related payments rates, varying with the movement of LIBOR, bankers’ acceptance or other indexes.

Therefore, any rise in the interest rate is likely to raise the cost of debt, which in turn, is expected to adversely affect the profitability of the company. In addition, rising rates increase the cost of financing acquisitions, investment and development-activity costs and also lowers the amount that third parties are ready to pay for the company’s assets at disposal.

Ventas currently carries a Zacks Rank #4 (Sell). In the past three months, shares of the company have underperformed the industry. While the stock has declined 20.9%, the industry has lost 10.4% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

A few better-ranked stocks from the real estate space include CBRE Group, Inc. CBG, FirstService Corp. FSV and HFF, Inc. HF. All three carry a Zacks Rank of 2 (Buy).

CBRE Group’s Zacks Consensus Estimates for 2018 FFO per share have been revised 6.4% upward to $2.98 over the past month. Its share price has risen 8.2% in three months’ time.

FirstService Corporation’s FFO per share estimates for the current year have moved up 11.8% to $2.65 in a month’s time. Its shares have gained 4.4% over the past three months.

HFF’s FFO per share estimates for 2018 have been revised upward marginally to $2.37 over the past month. The stock has gained 5.3% during the past three months.

Note: All EPS numbers presented in this report represents funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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