While Real Estate Investment Trusts such as Ventas (NYSE: VTR) have been a senior housing industry mainstay over the past several years, enjoying low costs of capital for senior housing investments versus competing alternatives, they may have seen their peak, write two analysts in a Forbes article this week.
With more than half of Ventas’ business involved in the senior living sector, its performance has been helped by a specific set of factors that will no longer exist in the coming months, the authors speculate.
The Forbes column writes:
Over 50% of Ventas’ business is providing senior housing communities, so it has benefited from a rapidly growing demand for elder care. For several years now, the supply of senior living facilities has grown to keep up with current and expected demand. Nevertheless, some supply/demand imbalance has persisted, enabling VTR to enjoy unusually high margins.
Those days are over. First, supply is catching up to demand. In 2011 alone, competitors Brookdale Senior Living (BKD) and Health Care REIT (HCN) both increased their number of units owned by over 16,000, while Elmcroft Senior Living added over 14,000 units. Many other firms, public and private, are jumping into the same businesses as Ventas (VTR) and driving down margins and returns on invested capital (ROIC).
VTR is cannot maintain the high margins that helped it to succeed in the early parts of the decade. VTR’s NOPAT (Net Operating Profit After Tax) margin declined from a peak of 72% in 2003 down to a low of 8% in 2011 before rebounding slightly last year.
These declining margins have hurt VTR’s economic earnings even as it has still managed to grow GAAP net income. VTR’s return on invested capital has been declining for several years now. For the last two years, ROIC has been less than the weighed average cost of capital, causing VTR to have negative economic earnings….
Written by Elizabeth Ecker