Ventas (VTR) and Welltower (HCN) are both healthcare REITs focused mainly on senior housing. They face similar risks and similar opportunities. This article describes ten similarities between the two and then provides 10 reasons why we believe one is more attractive than the other. We’ve also ranked the winner on our broader list of Top 5 Big-Dividend Healthcare REITS Worth Considering.
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They Are Similar Because…
1. Senior Housing Focus: As we mentioned above, both Ventas and Welltower are focused mainly on senior housing. For example, as the following graphics show, Ventas is 54% senior housing and Welltower is 70% (as a percent of net operating income).
2. Demographic Tailwinds: The fact that both companies invest largely in senior housing is important because they face some of the same long-term demographic opportunities. Specifically, as the following graphic shows, the number of people aged 85 and above is expected to grow dramatically in the coming years, and this also is expected to increase the demand for senior housing.
3. Potential oversupply of Senior Housing: In addition to the demographic-driven opportunities, there is a near-term risk of oversupply in senior housing. For example, during a conference call earlier this year, Welltower CEO, Thomas DeRosa, summed up the situation by saying:
“Yes, headlines of senior housing oversupply and the continuing saga of senior housing operators with poorly managed real estate make bad headlines.” Hower DeRosa went on to say “This is not our story.”
Welltower has been focusing on urban senior housing locations, an area that has experienced less supply growth challenges.
Ventas CFO, Bob Probst, also commented on the potential oversupply issues in that company’s second quarter conference call by saying:
“Despite the strength in certain high barrier markets (such as California and Canada), elevated levels of new building openings in select markets constrained our portfolio growth,” Probst said. “The second quarter saw the highest number of new units coming online in recent experience, with overall deliveries of new units in our trade areas up 50% sequentially from Q1 of 2017.”
However, Ventas CEO, Debra Cafaro, went on to optimistically explain:
“We should in all events remain financially strong and liquid, maintain diversification and balance in our portfolio, continue to drive cash flow and efficiency in our enterprise, allocate capital wisely, stay nimble and opportunistic, and continue to elevate the mix and quality of our portfolio.”
4. Regulatory Risks: Both companies operate in the same industry and face similar regulatory risks. For example, according to Ventas’ annual report:
“Regulation notably affects the operations of Ventas and its tenants. If the company does not anticipate and adapt to changes, performance could meaningfully decline.”
In particular, changes to the Affordable Care Act could impact the success of both company’s operations. Welltower describes this risk in its annual report as follows:
“The requirements of, or changes to, governmental reimbursement programs, such as Medicare or Medicaid, could have a material adverse effect on our obligors’ liquidity, financial condition and results of operations, which could adversely affect our obligors’ ability to meet their obligations to us.”
5. Private Pay: Interestingly, both companies receive 93% of their revenues from private payors. This is important because it reduces some of the direct risks of changes to government reimbursement programs. However, both companies continue to face challenges from some of their operators (more on this later).
6. Credit Ratings: Both companies have received the same credit rating from all three of the major credit rating agencies.
It’s important to note these are investment grade credit ratings, a classification many other healthcare-related organizations (for example, some of these company’s operators) are NOT able to achieve. An investment grade credit rating is an indication of higher financial safety and stability.
7. Low Betas: The common stock of both of these companies have similarly low betas. Specifically, Welltower’s beta is 0.57 and Ventas’ is 0.55. The point of sharing this information is to highlight the fact that these stocks have been less impacted by broader stock market moves than other companies (the average market beta is one). This is good for portfolio diversification reasons, and good for investors that like less risk as measured by volatility.
8. Similar Market Capitalizations: Both Ventas and Welltower are large-cap companies with market caps of $24.5 and $27.3 billion, respectively. They are among the largest of publicly traded US REITs by enterprise value (enterprise value is basically the combined value of a company’s debt and equity).
9: Similar Dividend Yields: Welltower and Ventas also offer similar dividend yields or 4.7% and 4.5%, respectively. Further still, both companies have a history of steadily increasing their dividend payments (a good thing for income-investors). We’ll have more to say about the sustainability and safety of these dividend payments later.
10: Similar Price Performance: Finally, both companies have experienced similar price performance in recent years as shown in the following chart.
Worth noting, the REIT sector, in general, has underperformed the rest of the market (as measured by the S&P 500) in recent years as fears of rising interest rate expectations have driven investors to favor other market sectors that are perceived to be more “pro-growth” and less sensitive to interest rates. In our view, this has created an attractive contrarian opportunity to invest in REITs (i.e. buy low, not high), especially since we believe interest rates will remain low for longer and because both Ventas and Welltower have the financial wherewithal to easily support their debts as evidenced by their strong investment grade credit ratings and powerful long-term growth potential.
Ventas is Better Because…
In our view, Ventas in the more attractive of these two REITs for the following reasons.
1. Less Senior Housing/More Diversification: One reason we like Ventas more than Welltower is because of its diversification. Specifically, Ventas is less exposed to the risk of near-term oversupply in senior housing. As shown in our earlier chart, Ventas has diversified more heavily into other types of real estate such as Medical Office Buildings and Life Science properties. In our view, this makes Ventas less risky.
2. Less Skilled Nursing: Another reason we like Ventas more than Welltower is because Ventas has wisely moved away from Skilled Nursing Facilities, perhaps the most sensitive healthcare real estate area relative to