Ventas and healthcare real estate investing
2,400% more earnings for Ventas shareholders since its IPO
Healthcare real estate is a $1 trillion market in the US alone and can offer investors some of the most consistently profitable niches in global property markets. Ventas is Wall Street’s preeminent healthcare real estate investment trust, or Reit, whose shareholders have earned more than 2,400 per cent since its IPO from its successful acquisitions in senior housing (assisted living) specialised hospital ownership and medical office buildings. As the Baby Boomers, the richest, largest generation in American history, reaches its retirement years and Obamacare adds 20 million people in to Uncle Sam’s insurance umbrella, I cannot think of a more profitable long term property investment theme than senior housing, medical office buildings and specialist hospitals. Healthcare spending per capita for Baby Boomers in the 50-65 age group is three times higher than the other demographic segments in US society.
This is the reason Ventas’ $3.1 billion acquisition of Atria Senior Living Group, the fourth-largest operator of assisted living opportunities in the US, was a strategic coup. It is significant that Atria’s revenues are derived from private consumer demand, not US federal government disbursements. Obamacare will also benefit the firm’s medical office building growth potential since it increases the size of the US insured patient pool.
While public companies own 50 to 60 per cent of America’s shopping malls, only a mere 12 per cent of the $1 trillion healthcare and senior housing real estate sector is owned by Reits. This fragmented ownership offers huge potential for a serial, experienced healthcare acquirer like Ventas. Ventas has done $5 billion in acquisitions in 2015 and has amassed a portfolio of 1,300 properties. Ventas has also diversified its net operating income among the world’s leading senior housing/assisted living operators, from Atria to Ardent, Brookdale to Kindred and Sunrise. Its acquisition skill is matched by a track record of growing the platform of its operators. There is convergent trend in senior healthcare, with growing interconnections among hospitals, outpatient facilities, post-acute care facilities and community clinics that increase its long-term franchise value. The US senior population will grow seven times faster than other adult demographic segments, while seniors spend five times more than other adults on healthcare. There are 20 million US “seniors” alive now but there will be 35 million in 2030 aged 75 or more. This makes senior housing a secular growth area.
Assisted living is 40 to 60 per cent cheaper than recreating the same benefits for seniors at home. This includes savings in nursing care, emergency assistance, dining, social life, transportation and housekeeping. Ventas estimates there benefits could be $12,000 a month in New York far higher than its $5,549 monthly rate. Ventas’ ownership of acute healthcare facilities is a strategic winner, since shorter hospital stays means higher spending in acute care. Investing in hospitals is all about data on its local market share, patient profile, payer/provider leverage, scale, cost efficiencies, lease/credit structures and growth prospects. Ventas is also the owner of the largest US medical office buildings, with 94 per cent occupancy rates and 87 per cent affiliated to major hospital chains like HCA. My buy/sell range for Ventas is 54-70.
Demographics and stable, growing dividends makes Ventas an attractive long-term investment in healthcare real estate. Senior housing rental income is resilient to recession risk since many medical costs are paid by the US government. Rental growth in medical office buildings and senior housing also hedges investors against inflation risk, which I expect to rise in the next year. Fears about aggressive Fed monetary tightening led Ventas to fall from 71 to 50 in 2015. The June FOMC rate hike could cause Ventas to fall to my 54 entry level from the current 59 price. Yet this is the class act in healthcare Reit investing, with the best strategy, balance sheet, acquisition track record, operator platforms, tenant leases and management teams in the business. Any selloff in the shares this summer should be a buying opportunity for strategic long-term investors looking for a 15 per cent total return investment.