VTR: Best way to play undervalued REITs

 REITs are a liquid way of investing in real estate that frees investors from worrying about the arduous process of selling properties in order to realize yields from their investments. There are two main models for REITs, equity based (eREITs) and mortgage based (mREITs). mREITs borrow short term loans and use that cash, and other cash capital, to purchase long-term debt (mortgages). Because long-term debt has higher interest rates than short-term debt, mREITs make money on the "spread" between the rates. If the mREIT can make its short-term payments, it can usually generate decent profit. That profit is then distributed to its shareholders in accordance with its tax regulations. mREITs, as a business model, are becoming under scrutiny recently regarding leverage with their debt-to-equity ratios averaging above 5:1. In addition to high leverage levels, the industries profit is being manipulated by lower interest rates from the Fed. The eREIT model on the other hand, is based on equity and revenues made from leasing properties held. There is very little leverage, making their dividend yields much lower than mREITs, however with that also comes less risk.

Some eREITs are specific to regions or types of real estate, as is the case with the Equity Society’s newest holding, Ventas Inc (NYSE: VTR). Ventas invests in properties focused on the needs of senior citizens adopting the model of an eREIT. Their holdings include senior living facilities, hospitals, and a number of private medical offices. With over 1300 holdings in various aspects of healthcare and senior living and growing, continuing to renew leases is increasingly important for Ventas. Last week the company acquired Cogdell Spencer Inc. gaining 72 high quality medical offices (MOBs). 

Although the real estate market has seen better days, the Baby Boomer generation will begin entering retirement within the next five years and Ventas is well-positioned to play the demographic shift. Furthermore, Ventas is also a liquid and relatively low-risk way to call the bottom of the real-estate market, which is a leveraged play on the economic recovery in the US.

by Lucas Hougo