EUR 850.00 For Business Accounts Only

Morningstar | Ventas Disappoints With Low Growth in 4Q That Continues Into 2019 Outlook

Ventas reported fourth-quarter results and a 2019 outlook that disappointed, though there was nothing that changes our long-term outlook or our $63 fair value estimate for the no-moat company. In the operating senior housing portfolio, same-store revenue growth was only 0.9%, below our 1.3% estimate, as Ventas sacrificed rate growth to maintain occupancy in the fourth quarter. Combined with 3.1% expense growth, same-store cash net operating income growth was negative 3.5%, missing our negative 2.5% assumption. Ventas underperformed our assumptions in other sectors as well, with triple net growing 2.1% (compared with our 3.4% assumption), medical office flat at 0.0% growth (1.4%), and life science up 8.8% (9.1%). As a result, Ventas only produced a 0.2% growth rate for the total same-store portfolio compared with our 1.3% estimate. This led Ventas to report $0.96 normalized funds from operation in the fourth quarter, $0.02 below our $0.98 estimate.

Guidance for 2019 was equally disappointing. Normalized FFO was set at $3.75-$3.85, which after accounting for a $0.02 reduction from a change in accounting standards suggests zero growth from an annualized fourth-quarter result and is 5% below our 2019 estimate. Our 1.8% same-store net operating income growth assumption for the total same-store portfolio is above the company's outlook of 0%-1% growth. The company’s outlook for senior housing operating is negative 3% to flat, total office is 1.5%-2.5%, and the triple-net portfolio is 0.5%-1.5%, while our estimates come in at the high end or above the ranges for all three sectors. The company is also estimating $500 million in dispositions, above our $120 million estimate. Despite all these numbers coming in below expectations, we still like the portfolio's potential for growth as baby boomers age and think the just-announced $1.5 billion pipeline of life science development projects should create a lot of value for Ventas over time.

While it will be a drag on 2019 and take a few more years to fully realize, we really like the potential that Ventas could eventually realize from the announced $1.5 billion pipeline of life science properties. In a collaborative partnership with a first-class developer and manager of life science properties, Wexford, Ventas has identified projects with several large, research-oriented universities. These projects will take time to complete, as they generally take two years from start to finish and another year or two to fully stabilize, but we think Ventas' goal of achieving 6.5%-8.0% stabilized development yields on the pipeline is reasonable. Ventas plans to stagger the starts for this pipeline over 2019 and into 2020 as it wants to match the initial development spending with proceeds from dispositions as they occur. Still, we only assumed that Ventas would spend $400 million on office development at an average 7.5% yield over the next two years, so this should create significantly more value for Ventas over time than our current assumptions. Ventas just announced a $77 million project with Arizona State University at an expected 7.7% stabilized yield, so the pipeline has already gotten off to a good start. The dispositions will hurt NOI in this year, and it will take a few more years before these moves become accretive for Ventas' shareholders. Regardless, given that Ventas' internal growth story is also about waiting for stronger years as supply diminishes and demand rapidly expands, we think Ventas is a good story for investors willing to invest for the long term.