With a share price around $58, Ventas has moved into an extremely attractive valuation of 13.9x price to funds from operations (or P/FFO). Driven by a well-balanced portfolio of over 1,400 assets, Ventas has built an enviable revenue model that generates over $1.1 in annual cash flow -- one of the company's most valuable attributes.
In addition, Ventas has built its competitive moat around its fortress balance sheet. These "best-in-class" credit metrics include 29% debt to enterprise value and investment grade financial strength (at Standard & Poor's, a BBB). A majority of the company's debt is fixed rate and long term, so it will not become more expensive in the near term and renewal is a distant concern.
In preparation and by awareness that the low-rate environment cannot last forever, Ventas took advantage of the situation by issuing over $5 billion in senior notes with a weighted average cost of only 3.5%. During the first quarter the company raised $758 million in debt capital (15-year fixed rate debt with a 3.6% blended interest rate) and paid down the revolver resulting in ample liquidity for investments. During the second quarter Ventas paid down $163 million of secured debt and the revolver balance at quarter end was $260 million -- current unrestricted cash of $56 million and almost $1.7 billion in borrowing capacity available.
The Big Dividend Differentiator
Recently, Ventas said its board of directors increased the fourth quarter 2013 dividend by 8% to $0.725 per share. The dividend is payable in cash on Dec. 31 to stockholders of record on Dec. 16. Including the fourth-quarter dividend, the company's 2013 per share dividend of $2.735 represents a 10.3% increase over its 2012 dividend. For the past 10 years, the compound annual growth rate in the company's dividend has been 10%.
As evidenced by its stalwart dividend policy Ventas has never cut its dividend, with the exception of 2009 (where the dividend remained flat). The company's current dividend yield is 4.68% and the latest dividend announcement will boost the payout to over 5%. Dividend yield is a pretty good proxy for investment risk and given Ventas' long history of dividend growth and its conservative payout ratio of only around 65%, I can continue to "sleep well at night" owning Ventas shares.
Debra Cafaro, Ventas' CEO explains: "The dividend increase reflects our expectations for outstanding growth of 11% in 2013 normalized FFO per share, excluding non-cash items, and continued confidence in our business and our team. We are pleased to share our reliable, growing cash flows with our investors while maintaining a strong dividend payout ratio and credit profile."
So while Mr. Market is out trying to steal my Christmas, I will simply seize the day and take advantage of the currently depressed market price of Ventas. At one time the blue-chip REIT was the darling of REIT-dom and now the Chicago-based REIT is one of the cheapest in the sector.
I consider the shares to be undervalued by some 20% and combined with the dividend; I'll sleep well at night with visions of dividends dancing in my head.
At the time of publication the author had a position in VTR.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.