Wall Street analysts upgrade and downgrade stocks all the time. You don't need to do anything at all with your portfolio just because one of them adjusts their view about a stock you own or have on your watch list. However, it can make a great deal of sense to find out why they made those changes and factor those points into your investment thesis. Wedbush's recent upgrade of healthcare real estate investment trust (REIT) Ventas(NYSE: VTR) is a case in point.
Ventas rises, but peer Welltower stays the same
As it turns out, the big upgrade for Ventas was couched against a review of healthcare REIT peer Welltower(NYSE: WELL). While Wedbush didn't change its rating on Welltower, a neutral rating on Wall Street is anything but a ringing endorsement. So, basically, Wedbush decided to push Ventas with an upgrade to outperform Welltower.
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The paired consideration of these two REITs isn't at all unusual. They are two of the largest and most diversified healthcare landlords you can buy. And they both have large senior housing operating portfolios, which are called "SHOP assets" in the industry. Although these properties are owned and operated by the REITs, they typically hire other companies to run those assets on a day-to-day basis. But the performance of those properties flows through to the top and bottom lines of the REIT. That's a very different situation than a lease, where the REIT gets a set amount of rent regardless of how the property being leased performs from a business standpoint.
During the health crisis of the coronavirus pandemic, having large SHOP exposure was not a good thing. The volume of "move outs" from senior housing properties rose, and "move ins" slowed, which led to declines in occupancy. It has taken a while for the industry to recover from that, and some operators continue to perform relatively poorly.
Data source: YCharts.
On the whole, Welltower has been viewed much more positively of late by investors than Ventas. While Ventas is up just 8% over the past year, Welltower's stock has risen by nearly 40%.
Ventas is starting to get more traction
The big difference here is that Ventas has faced quarter after quarter of additional SHOP problems. While the business overall has done fairly well, there always seemed to be a pocket of weakness that needed to be addressed. Investors were displeased. The most recent issue arose in the second quarter, when Ventas announced it was switching a collection of underperforming SHOP properties to new operators in hopes of improving property-level results.
The REIT's third-quarter results showed that there had been quick improvements in the performances of the assets that were transitioned. That was good news, and was the impetus for Wedbush's upgrade of Ventas, because the analyst believed it proved the company was executing well. Still, the analyst believes both Ventas and Welltower are transitioning into a new growth phase now that the pandemic is increasingly in the rear-view mirror.
This is where the graph comparing the performance of these two competitors comes back into play. Wedbush kept its rating the same (neutral) on Welltower because it has done so well relative to Ventas. That leaves a lot of room for Ventas to catch up now that it is starting to execute a little better. That makes it a more attractive buy for investors now, earning it an outperform rating.
Having an analyst highlight this story should make long-suffering Ventas shareholders at least a little pleased, assuming that the performance improvements continue. That said, if you own Welltower, the neutral rating versus Ventas' outperform rating might lead you to consider switching between the two REITs to take advantage of the short-term discrepancies in their performance. Still, if Wedbush is right, both REITs are poised to benefit from continuing improvements in their businesses, so you don't need to make a change at all. But if you have a value bias, Ventas may look more appealing.
There's something to consider
You can ignore analyst upgrades and downgrades and still live a happy investing life. They represent opinions and nothing more. However, sometimes it makes sense to listen to those opinions and see how they compare and contrast to your own thoughts on a topic. You can incorporate what makes sense to you and ignore the rest.
Wedbush's upgrade of Ventas to outperform offers an interesting valuation comparison between that REIT and its peer Welltower, which remained unchanged at neutral. If you own either of these REITs, rethinking their relative performances and their broader business prospects could lead to some interesting investment thesis updates.
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Reuben Gregg Brewer has positions in Ventas. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
