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No. of Recommendations: 38
Should I buy now or wait until she actually begins torquing it up?

I cannot, of course, answer that question. We all know that timing the market, short-term, is a game that few, if any, can win on a consistent basis. All we know is how badly VTR has been beaten up this year, although perhaps we can speculate on a few issues that VTR will be facing over the next 12-18 months. The stock traded at an NAV premium of about 30% as recently as April, when it announced a planned spin-off of its SNF business and acquisition of the Ardent hospital company, and now it’s lost virtually all of that premium. It was expensive back then, but now the stock is, I believe, quite cheap. But there are uncertainties that could keep the stock cheap for a while longer, or perhaps push it even lower.

There are four of them. First, the spin-off will affect VTR’s FFO and AFFO, cutting it somewhat. How much of that is priced into the stock (although the stock price will be adjusted downwards to reflect the spin-off )? I think this is probably a lesser concern.

Second, and more importantly, there are issues of new supply in the assisted-living (seniors’ communities) space. Green Street believes that the new supply could be substantial enough to reduce VTR’s internal growth rate to as low as 2% in 2016-2017 (vs. 5% and higher until very recently). But I believe that much, or most, of this is also priced into VTR’s stock today, even though management of the HC REITs aren’t yet acknowledging that this is going to happen. There is also more wage pressure on seniors’ communities owners, to which VTR is more exposed due to the fact that much of its seniors’ properties are not net-leased to operators who take profit margin risk.

Third, because it is spending $1.75 billion to acquire Ardent, VTR’s leverage ratio is now at about 40%, and there is much speculation that VTR will need to (or want to) raise equity to reduce leverage back to, say, 35%. Thus there may be an “overhang discount,” in expectations of a substantial secondary offering. VTR should have raised equity back in April when it made the announcement.

Finally, now that VTR stock is no longer trading at a substantial premium to NAV, its “currency” is weaker and this will deter VTR from issuing fresh equity for acquisitions and reaping immediate NAV accretion thereby. It will have to make acquisitions at bargain prices, which is somewhat harder to do.

I now look at VTR as a kind of well-managed bond proxy. The stock yields 5%, and the dividend is well covered. The dividend may go up, although it may not do so over the near term because of the dilutive impact of the SNF spin-off. The company should be able to grow free cash flow at 3% or so annually over the next couple of years (and possibly more), so if the stock trades at NAV, we should expect a total return of 5% + 3%, or 8%. And Debbie may be able to pull a few rabbits out of the hat to increase that growth rate. So, I am still not really excited about VTR, but I think it’s a low-risk way to generate 8% total returns, with a very high current yield. I have added to my VTR position modestly over the past week.

Ralph
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