Dividend Growth Forum

I have a 3% target allocation for Ventas and wondering if it deserves higher.

Bull case: Ventas is a diversified healthcare REIT with the secular tailwind of the aging population. They aren't pure play MOB or senior living, so they can take advantage of growing into whichever sector makes the most sense at the moment. This makes me tempted to use them as my sole healthcare REIT, and not have to pay too much attention to the space. They are international, with presence in Canada and the UK. They operate in upmarket urban areas (i.e. where customers can afford services) and their tenants are 82% private pay, with only 18% coming from government programs. They have a 5-year DGR CAGR of 6%, which is higher than the other blue chip healthcare REITs. They have long term lease visibility with 85% of leases expiring in 2021 or later. Brad Thomas considers them a core holding. They delivered a slight earnings beat last week.

Bear case: Morningstar points out that healthcare inflation has been more than twice the rate of general economic inflation, and says this is probably not sustainable, which means that tenants may be reluctant to renew lease contracts with 3% escalators. This could put dividend growth at risk. The yield is slightly lower than other healthcare REITs at 4.5%, and I would have little interest if the DGR moved to low single digits.

Thoughts?

OHI has a 5 year DGR CAGR of 9.7% and a current yield of 5.7%

OHI is attractive and I'll probably add it as my second. However they have higher leverage, lower credit, and a more specialized focus on MOBs. A specialized focus is good if you know what you want, but I don't pay enough attention to the space to have that kind of conviction.

OHI's focus is skilled nursing facilities. I believe their credit rating was recently increases, perhaps to BBB+. Brad Thomas has a recent comprehensive OHI article in Seeking Alpha. I bought OHI in October, 2012 and it has a total return of 66% since that time. My yield on cost is a bit over 10% now. I am a happy holder and dividend reinvestor.

I looked at it yesterday and decided to equal weight VTR and OHI. I might also add a bit of DOC as a speculative high yielder. I'd prefer not to have too many positions though.

I've been running into information suggesting that healthcare REITs might not be the place to be for the long term.

Bloomberg reports on a speculative senior housing building boom, with oversupply being a negative for REITs. In other words, people investing in senior housing and skilled nursing facility REITs anticipating a flood of demand are not ahead of the curve.
http://www.bloomberg.com/news/2014-05-15...-boom.html

An author on SA with a contrarian view to the standard drumbeat of articles says the same. In particular, he points out that OHI's wild swings in price and payout over their history were tied to changes in government reimbursement policies.
http://seekingalpha.com/article/2186043-...nvironment

Finally, Morningstar reports that healthcare inflation has outpaced general inflation by 2.5x, and suggests this is not sustainable, meaning that there is going to be risk for lease renewals with the same escalators built in. I can't link to that research report because it's only available to me through MerrillEdge.

In conclusion, I'm not going to abandon the space, but I've decided that VTR will be my only healthcare REIT after all, with a 2%-3% target allocation. I don't pay attention to public financing of senior housing, and I don't want to assume that as a risk factor with OHI. VTR is 82% private payer, and is expanding into Canada and the UK, so I'll stick with them and not worry about it too much.