I like to have a diversified portfolio, so I took my nest egg and divided it by 20 to create "positions." Since then, my portfolio has grown, but my starting position is still $25,000 because any larger number sets my nerves on edge. It takes a lot to get me to part with that amount of money, noting that I would rather hold cash than invest in something I don't love.
Which is why I bought healthcare-focused Ventas (NYSE: VTR) a few years ago and have held it right through the pandemic. But if you don't own it, this terrible health crisis could be an opportunity for you to start your own "position" (whatever the size).
One of the most attractive features of Ventas is that it spreads its portfolio across:
- Senior housing: Roughly 45% of net operating income, or NOI.
- Medical office: (23%).
- Life science: (10%).
- Triple net lease healthcare assets: A collection spanning multiple healthcare categories (17%).
- Other: (5%).
Moreover, within the senior housing category, the company operates and owns assets called senior housing operating portfolio (SHOP) properties (26% of total NOI), as well as net lease properties (18%). It is one of the most diversified names in the healthcare real estate investment trust (REIT) space.
The thing about diversification is that it means you'll own things that do well and things that do less well at the same time. Over time, performance is expected to be smoother, but you won't likely be at the top or bottom of the list.
In 2020, Ventas' exposure to SHOP assets was a huge headwind, as the dismal financial results from these properties flowed right through to the REIT's top and bottom lines. However, strong office and life sciences results were a positive offset. To be fair, Ventas had to cut its dividend, but that wasn't unusual in the healthcare space last year. And given the uncertainty, it was a good call all around.
2. Solid foundation
In addition to being diversified, Ventas has an investment-grade-rated balance sheet. That should assuage the concerns of risk-averse investors, but it also comes with other benefits. For example, the REIT just recently issued debt with a tiny 2.5% coupon. And given its size ($21 billion market cap) and industry position, it has ample access to capital markets across the board. So, even during bad times, Ventas can raise cash to continue funding its business.
That's notable because it has relationships with outside partners on the construction front. In Canada, Ventas provides funding for a company that builds senior housing. In the U.S., it does the same with a company that builds medical research assets. These offer build in growth opportunities but only pay off if Ventas can raise low-cost capital.
3. Willingness to adjust
That said, the current Ventas portfolio is different today from what it was 10 years ago. Offices and life sciences are newer focuses, for example. And the company jettisoned its nursing home business a few years ago because it believed there were better opportunities in other areas.
The two partnerships are also relatively new growth-oriented developments. Basically, Ventas looks at its portfolio in much the same way that an investor might, trying to position it for long-term success. That sometimes requires making changes, even though the core might remain largely the same.
In this case, the goal is to take advantage of the demographic tidal wave that's starting to flow into peak healthcare-need years -- in other words, aging baby boomers. I am confident that Ventas will get the mix close enough to "right" that anyone who buys today should see a good return.
4. Taking advantage of an opportunity
As noted above, the SHOP portfolio was a huge drag on results last year. It still is, which is why the dividend has yet to be increased. However, green shoots are starting to emerge in the form of increased interest from potential customers and more new move-ins. So, this business appears to be getting back on track. As performance improves here, I expect the dividend to be increased -- which is one reason now is a good time to be looking at the stock.
However, as noted above, Ventas actively manages its portfolio. It recently inked an all-stock deal to acquire New Senior Investment Group. The company operates largely SHOP assets. In effect, Ventas is betting on the recovery here, and that should provide upside leverage. That's the type of opportunistic transaction that a long-term investor should be pleased to see, given that it augments the REIT's long-term potential.
The future should be brighter from here
Ventas is not a perfect investment, but there's really no perfect investment. And after the dividend cut, the yield here is pretty miserly at just 3.2% or so. However, the stock still hasn't fully recovered from the pandemic hit, despite that the future looks increasingly positive.
And that suggests that now is a good time to start a position in the REIT, no matter what size investment is right for you. Truly conservative income investors might want to wait until dividend growth resumes, but the price might not be as attractive at that point.