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Stock Strategist

Healthy Outlook for Undervalued Landlord

Although we think Ventas overpaid for its most recent acquisitions, this doesn't affect our valuation.

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We have a slightly downbeat view of  Ventas' (VTR) recently announced $3.5 billion worth of acquisitions, given the aggressive prices paid and the related dilutive equity issuance at a price below our fair value estimate. However, our skepticism isn't enough to change our overall opinion, so we're maintaining our $76 fair value estimate and our narrow Morningstar Economic Moat Rating. At its current stock price, Ventas appears to be a relative bargain among our overall real estate investment trust coverage.

Ventas' $3.5 billion in deals was spread out over two transactions. The first is a $2.6 billion portfolio acquisition of American Realty Capital Healthcare Trust (HCT), a health-care REIT with property concentrations in medical office buildings and senior housing facilities, both areas we like. We're generally not fans of these types of buyouts, however, because of the premium normally required for control. In this case, Ventas limited the premium to less than 15%, but it is still paying roughly $600 million (30%) more than the target's cost basis in the properties, all of which have been acquired in the past few years. Also, it is issuing shares at a price ($67) below our fair value estimate to help fund the deal, so it looks even costlier to us.

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.