The Bottom Fishing Club: Ventas – Ventas, Inc. (NYSE:VTR)

Ventas (VTR) represents a safer, high-dividend-yielding real estate investment choice for your portfolio. Against the tremendously overvalued S&P 500 index, Ventas holds a more typical valuation against its 10-year financial metrics. What catches my attention is the late 2019 swoon in the stock quote, created by a stagnation in business results during 2019-20. An oversold momentum position historically was reached at the $54 low in December, and this equity appears to be smartly drifting higher again.

The company is a diversified real estate investment trust (REIT) focused on stable return, healthcare-related properties. Ventas owns senior housing, medical office and research properties, health systems, inpatient rehabilitation facilities, and long-term acute care buildings.

Source: Ventas

The best description of its primary senior housing business (54% of income generation) is taken directly from the company’s website:

Ventas owns seniors housing communities located in the United States, Canada and the United Kingdom, providing high quality residential environments for 70,000+ seniors living in dignity.

Representing a little over half of the company’s net operating income (NOI), our seniors housing portfolio is well-positioned to capture the powerful seniors housing upside. We employ proprietary data analytics to leverage favorable macroeconomic and societal trends and deliver long-term outperformance.

Ventas has strategically partnered with and invested in best-in-class operators with industry scale and sector skill, including Atria Senior Living, Sunrise Senior Living, and, most recently, Le Groupe Maurice, each a recognized leader in senior care.

Valuation Argument

Against the S&P 500 average 1.7% direct return of capital proposition today, a sustainable 5.4% dividend yield available from Ventas is quite appealing. Buying Ventas at an average to below-average valuation vs. its trading history could prove a solid capital allocation idea. Below are some highlights of the company’s sound business setup, and substantial total returns achieved by long-term investors in the stock.

Venats 20 Year Total ReturnSource: Company Website

Below I am drawing a 10-year chart of some important financial metrics. The graph shows Ventas’ price to sales, price to cash flow, operating margin, and debt to assets remain in a normal range vs. historical comparisons. While not an extraordinary bargain, a comprehensive evaluation of its fundamental financial ratios describes a decent entry price today. The main fundamental argument for ownership is its strong “relative” worth vs. the S&P 500’s sky-high valuation of early 2020.

Ventas is priced at 15x trailing cash flow and 5.6x sales. Both metrics are slightly better than their decade averages. Ventas owned about $22 billion in depreciated real estate assets at the end of September, valued from a purchase cost basis. When the effects of inflation are factored into its numbers, Ventas’ true liquidation value is likely considerably better than its current 2x price to book value calculation. My estimate is the company’s liquidation value at updated real estate market pricing is as high as $35-40 per share, against the current stock quote of $58. How many other Wall Street investments in early 2020 have a liquidation worth not far from its security price? Not many.

From a contrarian investment standpoint, where buying out-of-favor blue-chips has increased odds of long-term gain, Ventas scores well. Sell-side analysts on Wall Street are generally Neutral to Bearish on Ventas currently, as pictured below. Even Seeking Alpha’s Quant Rating at a 1.6 number out of 5, based on shorter-term trends, is not very positive on Ventas in February.

Technical Momentum

Here is some bullish reversal evidence after the recent equity price decline. Pictured below is a two-year price and volume chart. Notice the rising oversold line in the standard 14-day Average Directional Index (ADX). The sell-off reached an even greater trend extreme in December than the February 2018 event, each circled in green. After the 2018 pattern example turned the 50-day moving average of price higher in May, Ventas rose 60% the following 18 months. My point is buying a blue-chip REIT, after a large sell-off, can be a terrific idea for long-term investors. One piece of data I find particularly attractive is the stable performance of the Negative Volume Index (NVI) over the last year. On falling volume days, buyers have shown up, essentially purchasing on weakness, despite the overall price drop.

Final Thoughts

Ventas holds the rare characteristics in combination of (1) a stock earning operating profits to reinvest, (2) a bond with a high-yielding, dividend-growing component, and (3) a real estate investment that has been climbing in value over time from government money printing and inflation. The fact it focuses on a diverse list of healthcare properties brings another “margin of safety” layer for long-term investors, as this sector of the economy tends to be less sensitive to recession. Yes, Ventas is truly a defensive equity investment idea.

I really like this selection in a hedged portfolio design. I fully expect Ventas to outperform the S&P 500 return the next 2-3 years. A high dividend yield will help offset the potential of future short-term losses in the stock quote. If Wall Street crashes or a severe recession begins in 2020, I project Ventas will perform far better as an investment than other buy-and-hold selections, throwing darts at the S&P 500 list.

As always, consider this article a starting point for your research into Ventas, if my investment thesis makes sense. There are plenty of good articles on Seeking Alpha breaking down its property portfolio and slower business expansion of late. The absence of obvious growth drivers into 2020 was the primary cause of its stock quote drop in the second half of 2019. Any advance in bullish sentiment by Wall Street should put a floor under the Ventas stock price, and encourage a gradual increase in buy momentum moving forward.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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