Healthcare real estate investment funds, such as Ventas inc. (NYSE: TRV)saw an acceleration in selling last week, providing income investors with an opportunity to buy a well-run trust with strong recovery tendencies.

Ventas has a large and diverse real estate portfolio, with a focus on retirement homes, and its dividend payment is easily covered by funds from operations.

Importantly, following the recent liquidation, the trust now offers income investors a higher dividend yield and a more attractive valuation.

At the current share price, I think Ventas represents excellent value and the dividend has room to grow.

High quality real estate portfolio

Ventas is a large healthcare real estate investment trust that owns senior housing, medical practices, life sciences and skilled nursing facilities. The trust leases its properties to a group of mainly large operators who pay Ventas a monthly rent.

Ventas owned 1,260 properties as of June 30, 2022, the majority of which were related to the Habitation des Seniors (821). Medical surgeries constituted the second category of healthcare assets (330). Ventas has invested $30.5 billion in its real estate portfolio, and the trust’s real estate portfolio generates $1.8 billion in annual net operating income.

Ventas was hit hard by the Covid-19 pandemic as its business catered to the needs of older people, who are much more vulnerable to infection. Occupancy trends in Ventas’ Senior Housing business have deteriorated due to Covid-19, but conditions are gradually improving.

For the third quarter, Ventas expects revenue growth of 8% year-over-year in the retirement home segment and net operating income growth of 9-15% like-for-like.

The occupancy rate of Ventas’ senior residences is improving, which is driving growth in sales and net operating income.

Over the long term, the aging of the US population, particularly those aged 80 and over, is the primary driver of Ventas’ business. People aged 80 and over are a key demographic for Ventas and its operators, which provide a unique service offering. The population aged 80 and over is expected to grow rapidly in the coming years (+23% between 2022 and 2027), creating a favorable demand dynamic for SCPIs in general.

Ventas easily covers its dividend payment

Ventas cut its dividend from $0.7925 per share to $0.45 per share in 1Q-20 due to the global pandemic, which has been particularly difficult for its Senior Housing business.

However, as the company sees improving occupancy trends, the chances of the real estate investment trust increasing its dividend payout in the future increase. Ventas has played it safe so far, paying $0.45 per share per quarter in dividends, but there is room for growth.

Ventas paid out 63% of its (normalized) operating funds in 2Q-22 and around 61% in the previous twelve months, indicating that the trust not only has a safe dividend, but can also grow.

At this time, I think the trust will want to wait and see if the senior housing business continues to recover from the pandemic, but if the growth trends in occupancy and net operating income continue to be on the rise, Ventas could start increasing its dividend again. .

Currently, Ventas shares pay a dividend of $1.80 per share per year, which translates to a dividend yield of 4.1%.

Evaluation

I think Ventas can earn $3.00-3.10 per share in (normalized) operating funds in 2022, implying 3-7% year-on-year growth.

The stock trades at an FFO multiple of approximately 14.2x based on $3.00-3.10 per share in operating funds. Ventas was trading at an FFO multiple of 17.7x two months ago, so the pullback, in my view, is a great opportunity to enter the healthcare trust at a lower price.

Why Ventas might see a lower valuation

Ventas has successfully recovered from the Covid-19 pandemic, and the business appears to be on track for continued growth (given 3Q-22 senior housing guidance).

However, a decline in occupancy and slower growth in rental income/NOI may cause investors to take a more pessimistic short-term view of Ventas, even though long-term trends favor investment in Sales.

My conclusion

The Covid-19 pandemic has passed and long-term aging trends, particularly in the 80+ population, create a positive outlook for Ventas and other senior-focused healthcare trusts.

The real estate investment trust covers its dividend of $0.45 per share with funds from operations and has a payout ratio of approximately 60%.

While I don’t think the trust will increase its dividend in the short term, Ventas has the potential to do so in the long term.

Due to Ventas’ declining share price, the trust’s 4.1% dividend is a good buy.