Ventas Inc., a health care real estate investment trust, has all the signs of being a strong long-term investment. Fresh off its acquisition of Lillibridge Healthcare Services Inc. in July, Ventas now owns 154 medical office buildings with 8.4 million square feet, totaling $5.8 billion in real estate and loan investments.
“By acquiring Lillibridge, Ventas establishes a platform for future [medical office building] growth, making its currently small [medical office] business more scalable,” Robert M. Mains and Chad Vanacore, analysts at Morgan Keegan & Co., wrote at the time of the announcement.
The company’s normalized FFO increased 6.4 percent to $111.9 million, or 71 cents, in the period ended June 30, from $105.1 million, or 68 cents, in the year-earlier period. The FFO exceeded Zacks Investment’s consensus estimate by 2 cents. Ventas also raised its 2010 FFO guidance to a range of $2.75 to $2.80, up from its previous range of $2.69 to $2.75.
Ventas’ $381 million acquisition of Lillibridge will be a key factor in newer revenue generation. It’s also likely responsible for Ventas’ high debt-to-total capitalization ratio of 51.6 percent. In the midst of this big acquisition, Ventas is looking to maintain a positive stream of cash flow. As of June 30, cash flow from operations grew over 6 percent from a year ago.
REITS can be highly specialized and expose the investor to high levels of market risk unless they diversify adequately. Ventas has diversified into senior living, health care and hospital real estate. But the company still might be vulnerable to operational risk.
Len Zacks, analyst at Zacks Equity Research expressed caution in an analyst blog about the company’s small pool of tenants. “A large portion of Ventas’ revenue originates from a few tenants, exposing it to operator risk. If one of the company’s larger tenants runs into financial difficulty, earnings could be negatively affected,” Zacks wrote.
Overall, Ventas’ prospects are bright, as its long-term investments are based in the relatively stable health care industry. Health care reform will likely increase demand for medical buildings, as outpatient facilities grow and uninsured individuals gain additional access to the system.