Zacks_Analysts' Blog : Ventas Upgraded to Outperform - Analyst Blog

We have recently upgraded the long-term recommendation for Ventas Inc. (VTR), a premier healthcare real estate investment trust (REIT), from Neutral to Outperform primarily driven by its healthy third quarter 2011 results and strong growth perspectives.

Ventas is engaged in the business of financing, owning and leasing healthcare-related and senior housing facilities. The company has one of the largest and most diversified portfolios in the healthcare sector with exposure to all types of facilities.

The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.

Ventas usually leases its healthcare facilities under "triple net" leases, under which the tenant pays all taxes, insurance and maintenance for the properties, in addition to rent. This insulates the company from short-term market swings that may adversely affect the operations of a particular facility, and provides a steady source of income.

Ventas reported strong third quarter results largely due to the accretive effect of the acquisitions of Nationwide Health Properties Inc. and Atria Senior Living Group, Inc., that had resulted in potential synergies and cost savings.

In addition, the company has lately obtained a new credit facility that has reduced the interest burden and increased its borrowing capacity to enable it to capitalize on favorable investment opportunities in future. This provides a significant upside potential for the company in the long run.

Furthermore, healthcare is relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare while cutting out discretionary purchases.

The healthcare industry is the single largest industry in the U.S. based on Gross Domestic Product (GDP), and an aging Baby Boomer generation’s demand for assisted and independent living facilities should increase in the coming years.

However, a large portion of Ventas’ revenue originates from a few tenants, which exposes it to concentration risk and undermines its growth potential to some extent.

We presently have a Zacks #1 Rank for Ventas, which translates into a short-term Strong Buy rating. However, we have a Neutral recommendation and a Zacks #2 Rank (short-term Buy) for HCP, Inc. (HCP), one of the competitors of Ventas.