Ventas, Inc. (VTR): A High-Yield, High Quality Healthcare REIT

This means that sales and cash flow growth (specifically free cash flow, or what Ventas calls Funds Available for Distribution, or FAD) can be lumpy. This lumpiness is reflected in Ventas’ solid, though volatile, growth track record.

Ventas VTR Dividend

Source: Simply Safe Dividends

Most recently, the company’s quarterly revenue grew by roughly 5%. Note that two of the most important metrics to watch, growth in FAD/share (which funds the dividend) and the FAD payout ratio (how safe the dividend is), were the result of two countervailing deals.

Metric Q3 2016 Q3 2015 YoY Change
Revenue $866.6 million $827.6 million 4.7%
Normalized FAD $314.2 million $231.6 million 35.7%
Shares Outstanding 354.2 million 336.3 million 5.3%
Normalized FAD/Share $0.89 $0.69 28.8%
Dividend $0.73 $0.73 0%
Dividend Payout Ratio 82.3% 106.0% -22.4%

Source: Earnings Supplement

The first deal disposed of over $4 billion in skilled nursing facilities (SNFs) by spinning them off into a new REIT, Care Capital Properties Inc (NYSE:CCP). The CCP spin off resulted in a decline in cash flow that resulted in last year’s Q3 payout ratio rising above 100%. However, the spinoff strengthened Ventas’ portfolio, improving its mix of private pay contributions, reducing its exposure to SNFs, and boosting occupancy.

Ventas VTR Dividend

Thanks to a stronger balance sheet, Ventas, unlike its rival HCP, Inc. (NYSE:HCP), which is also spinning off its SNF properties into a separate REIT (2), was able to maintain its dividend.

In comparison, HCP, Inc. (NYSE:HCP) just announced that the loss of cash flow from its spinoff would require a 36% dividend cut, ending its streak of 30 consecutive years of dividend increases, and its dividend aristocrat status.

The big differentiator between Ventas and HCP, Inc. (NYSE:HCP) was in its balance sheet and the quality of its management team.

For example, Ventas has continued to grow through acquisition, with over $1.4 billion in net investments during the first three quarters of 2016. This is mainly made up of the $1.5 billion acquisition of Wexford Life Sciences, which consists of 25 current, and under construction research labs used by some of America’s most prestigious research institutions such as Yale, Duke, and Washington University.

It also gives Ventas about a 10% market share in the fast growing, $38 billion university R&D industry, itself part of a far larger $259 billion global R&D industry. Better yet, this industry is only set to grow as drug makers race to create new drugs to treat the world’s increasingly older citizens.

Of course, all these growth acquisitions could hurt long-term dividend investors if management were to go overboard with debt, as HCP’s did in recent years, and create a balance sheet that threatened its ability to grow, or even maintain the current payout.

Follow Healthpeak Properties Inc. (NYSE:DOC)