Ventas, Inc. (NYSE:Â VTR) is a real estate investment trust that owns a diverse set of healthcare properties and currently pays investors a growing 5.8% dividend yield. They have senior housing properties, hospitals, medical offices, university life sciences buildings, and more.
And the market just put its shares on sale:
Source: Google Finance
Compared to the S&P 500 which has continued ever-upward over the past several months towards unusually high valuations, Ventas shares recently experienced a big sell-off.
This was due to a broader sell-off in real estate investment trusts, as well as concerns about an oversupply of senior housing, rather than any unique problems at Ventas, which continues to be one of the most well-run businesses in the healthcare property industry.
Over the past couple months, Ventas shares dropped from over $65 to under $55, which made the dividend yield higher and the overall investment more attractive. In the mid-$50’s, it’s now one of my top investment ideas.
The Industry Faces Headwinds
Over the past month, the entire Vanguard REIT ETF (VNQ) dropped in price from over $85/share to about $78/share, mainly due to rising interest rates by the Federal Reserve.
There are two main reasons why REIT prices and interest rates tend to be inversely correlated. The first is that REITs pay high dividend yields, and so when bond and bank account interest rates start to rise, they give more competition to dividend-paying equities. Investors start to demand higher dividend yields from their equity holdings, which means paying lower share prices. Secondly, the real estate industry requires high levels of leverage to make decent returns on capital, and higher interest rates will eventually translate into higher debt interest for them to pay.
But to put it into perspective, the federal funds rate, set by the U.S. Federal Reserve, has risen by less than 150 basis points (1.50%) over the past two years, and the most recent increase in December was only 25 basis points (0.25%).
