BMO Capital's John Kim Explains Why Ventas Is A Healthcare REIT Worth Watching
On July 27, BMO Capital Markets analyst John P. Kim published a research note, "Talking About a Resolution," upgrading healthcare (HC) REIT blue-chip Ventas, Inc. (NYSE: VTR) to Outperform.
Ventas, Inc. shares, along with HC REIT large-cap stalwarts HCP, Inc. (NYSE: HCP) and Health Care REIT, Inc. (NYSE: HCN) have all been under pressure 2015 YTD, in no small part due to the anticipated rise in short-term interest rates.
The healthcare REIT sector utilizes long-term triple-net leases with tenants who operate portfolio properties, which could pose a "compression" risk between the spread of the cost of capital and contract rents.
However, Ventas is on schedule to complete two strategic transactions during 3Q15 intended to help the company accelerate earnings growth. Kim also noted that Ventas' weighted average cost of capital is at a low 5.5 percent.
Ventas Shares Pop On Q2 Earnings & BMO Upgrade
Ventas shares were up about 1.3 percent mid-day on Monday, and up ~4 percent since announcing earnings on Friday morning.
During the past 52-weeks, VTR shares have traded in a range of $58.65 - $80.33 per share.
Tale Of The Tape - Past Year
Ventas Strategic Shift
Ventas shares spiked up on April 6, to $76.90 per share on the news of its planned Care Capital Properties (CCP) skilled nursing home (SNH) REIT spin-out, however VTR shares had slid steadily until Q2 earnings were announced.
Ventas expects to close its Ardent Health Services (hospital) acquisition and CCP REIT spin-out during Q3 2015; with the pro forma NOI shift shown in the BMO exhibit, above.
BMO Capital - Ventas: Upgraded To Outperform, $74 PT (Lowered 4 Percent)
The new VTR target price of $74 represents a potential 13.2 percent upside based on Friday's close of $65.39; and a total 12 month return of 18 percent, including dividends.
BMO's $74 PT "…back-of-the-envelope pro forma valuation utilizes a 16.0x (10% discount to REIT sector) and 12.5x FFO multiple (29% discount) for VTR and CCP, to support [BMO's] price target."
The $74 target price is the mid-point on the BMO sensitivity table, shown above.
Notably, Kim's five year discounted cash flow estimate yielded an $88.68 valuation; while BMO's forward NAV estimate was $63.83 per share, utilizing a 6.71 percent cap rate.
BMO Capital - Discounted Valuation
"Ventas' share price is off 14% since its announcement of the CCP spinoff and Ardent acquisition on April 6, 2015; and 20% off its January 2015 high of $81.93."
BMO noted, "As a result, Ventas is trading at a 14.3x forward AFFO multiple (2016), a 29% discount to the REIT sector average, and an 11% discount to its long-term average of 16.1x."
Kim explained, "The latter discount is a noteworthy disparity, in our view, with the company's cost of capital, which is at all-time lows (we estimate VTR's WACC at 5.5%). On a dividend yield basis, VTR's yield of 4.8% represents a 260-bp spread to the 10-yr Treasury yield, double VTR's long-term spread.
"Finally, VTR currently trades at a 3% premium to consensus NAV, versus its long-term average of 24% premium," Kim concluded.
BMO Capital - Ardent Acquisition
BMO noted that Ventas has stepped up its disposition activity during the first half of 2015, with $591 million of proceeds being greater than the past five years combined.
This activity has resulted in Kim believing that "…VTR will make the $1.4 billion Ardent acquisition leverage neutral within two quarters."
He also viewed the recently announced JV with private equity firm Equity Group International (EGI) for Ardent hospital operations as a positive for growth, with Ventas as its preferred real estate partner.
BMO Capital - VTR Bottom Line
Kim noted, "VTR's stock is off 14% since its April announcement of the spinoff, underperforming the MSCI REIT Index (by 400 bps) and S&P 500 (by1,450 bps), and VTR's recent actions have been positive."
The Care Capital spin should be a positive catalyst for VTR shares according to the BMO report.
Latest Ratings for VTR
|Nov 2016||Hilliard Lyons||Upgrades||Underperform||Neutral|
|Nov 2016||BMO Capital||Downgrades||Outperform||Market Perform|
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