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

On the topic of government changes to healthcare spending policies, Donald Trump’s impact on the entire healthcare value chain is worth paying attention to. If part or almost all of ObamaCare is repealed, some of Ventas’ tenants could be negatively impacted.

Hospitals are one group that comes to mind. According to the U.S. Department of Health and Human Services, there are 20 million newly insured people under the Affordable Care Act (ACA). While their lengths of stay are shorter, hospitals have still benefited nicely from the volume increase.

What impact could Trump have on patient volume in hospitals? Presumably growth will slow, or maybe the number of insured people would meaningfully decrease. It’s really hard to say since so much is up in the air right now.

Ventas’ exposure to hospitals is around 12% of its NOI – material, but not something its entire business hinges on. Importantly, Ventas is also aligned with some of the best operators. As seen below, all of Ventas’ NOI from hospitals is by top-ranked operators, which are presumably better positioned to navigate the changing landscape.

Source: Ventas Annual Report

The other major risk to Ventas is rising interest rates, but not necessarily for the reason you think. Yes, Ventas has $1.8 billion in floating rate loans, and yes the REIT business model, being both highly capital intensive and necessitating the use of debt capital funding, means REITs in general are interest rate sensitive.

However, another thing that many REIT investors might not realize is that conservative management teams such as Ventas’ also need to tap equity markets via the periodic sales of new shares. Since so many investors have recently been buying REITs as bond alternatives, rising interest rates represent a threat to growth potential of REITs.

That’s because, in recent months, as the market prices in the high likelihood of a December rate hike (81% and climbing), REITs have sold off 12% as a sector, and Ventas in particular is down around 18%. While that makes for a great long-term buying opportunity, it also means the Ventas might not be able to raise as much cheap equity capital with which to grow in the future.