Ventas REIT offers outstanding growth potential for its dividend and health care facilities assets.

Ventas (VTR) is one of the top three health care REITs, with HCP (HCP) and Welltower (HCN) being the others. Combined, these three firms comprise 70% of the market cap for the health care REITs industry.

Ventas management focuses on quality and desirable properties in areas favorable to demographics. Last year, the company spun off its skilled nursing care as a separate REIT, Care Capital Properties (CCP). Senior Housing comprises 58% of Net Operating Income NOI, Medical Offices 20%, and Hospitals 13%. Many of the leases are long-term and are triple-net, which are generally beneficial to the landlord.

VTR focus is also on properties in areas with preferred financial background. From their recent presentation, VTR compares itself to industry benchmarks:

VTR Peers

Median Household Income $73,315 $53, 706

Median Home Value $393,000 $191,277

75+ Population Growth 11.2% 10.7%

Building Age 16 yrs 22 yrs

As shown, VTR’s properties are in locations with higher incomes, higher home prices and a slightly faster aging rate. The age of their building are on average younger than benchmark peers.

The REIT owns 1,288 properties, but has concentration risk from its customer base. Five firms generate 53% of Net Operating Income NOI. Listed below are locations of their properties, which favor the Northeast, Florida, Texas, and the West Coast. VTR has properties in all the top 30 metropolitan centers. 43% of NOI is generated from the East Coast and 20% from the West Coast, areas which have high barriers to entry due to population density.

While health care REITs have been around for a while, they account for a smaller percentage of properties owned than hotels, malls and apartments. Based on the top 50 mall owners and the top 25 hotel chains, REITs own about 50% of properties. Comparable REIT penetration of health care facilities is pegged at 15%. Management believes health care REIT opportunities include over $1 trillion in assets, of which 80% falls within their business focus.

VTR has raised its dividend at twice the rate of its leading peers over a 3-yr, 5-yr and 7-yr time period. Income and dividends should grow at an average rate of 5% a year.

However, not all is perfect with health care REITs. There is concern health care costs cannot continue to escalate at 2.5 times the underlying CPI. With the nation’s focus on controlling costs, rent increases may be more difficult to implement. While the cost to relocate is prohibitive in many instances, tenants will begin to defect if health care lease costs far exceeds the going rate of similar neighboring commercial properties.

As with many interest sensitive sectors, such as utilities, 2015 was not kind as investors shied away from income producing assets. VTR total return in 2015 was -5.5%.

The current yield of 5.11% should provide ample long-term income and distribution growth should continue to far exceed the overall rate of inflation.

This article first appeared in the Feb issue of Guiding Mast Investments. Thanks for reading, George Fisher