Healthcare REIT Ventas (VTR) continues to search for its footing and has declined ~22% in the last month. Investors didn’t like the October 25th earnings call as the company lowered its senior housing (“SHOP”) guidance. We warned of this danger facing Ventas back in late June, and have avoided investing in the stock. However, we’re now sharing an attractive, new, income-generating, Ventas options trade. We believe this is an attractive trade to place today, and potentially over the next few days, as long as the share price doesn’t move too dramatically before then.
The Trade:
Sell PUT Options on Ventas (VTR) with a strike price of $55 (5.7% out of the money), and expiration date of December 20, 2019, and for a premium of $0.35. That’s an extra 7.6% income for us on an annualized basis (0.35 / 55) x 12 months). If the shares get put to us before the options contract expires then we're happy to buy the shares of this big dividend yield (5.4%) healthcare REIT at the lower price of $55. And if the shares don't get put to us, we still get to keep the extra income we generated no matter what.
Your Opportunity:
We believe this is an attractive trade to place today and potentially tomorrow as long as the price of Ventas doesn’t move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 6-8%, or greater.
Note: If you are feeling aggressive, an what a higher probability of Ventas shares actually get put to you, consider the $57.50 strike price for annualized income of 18.8% (($0.90 premium / $57.5 strike) x 12 months). And as a reminder, the reason the premium income is unuaully high for Ventas is because the uncertainty and investor fear is higher than normal (that volatility drives up the premium income available).
Our Thesis:
As we wrote in our full report on Ventas back in June, the shares had gotten ahead of themselves as the company worked through a multi-year transformation, and still hadn’t turned the quarter. And according to CEO Debra Cafaro during the most recent quarterly conference call:
“we expect our 2019 shop performance to fall below our original guidance range, mostly because our portfolio did not experience the strong seasonal lift in occupancy that is typical and rate softness continued during the quarter.”
In our view, now that the share price has fallen, Ventas is priced more reasonably based on the uncertainties of the business. And for more perspective, Wall Street analysts generally agree with us as per their recent price targets as shown in the following graph and table.
Important Trade Considerations:
Two important considerations when placing options trades are upcoming earnings announcements and dividend dates because they can increase volatility and dramatically impact the value of your options contract in unexpected ways. And in the case of Ventas, both are largely non-issues. Specifically, VTR isn’t expected to go ex-dividend again until the end of December (after this contract expires), and it isn’t expected to announce earnings again until early February (also after this options contract expires).
Cash Secured Or Margin:
If you're going to place this trade, you'll need to keep enough cash in your account to cover the cost of the shares if they do get put to you. Options trade in lots of 100, so you'll need to keep at least $5,500+ of cash on hand for each contract trades ($55 strike price times 100 shares). The other alternative, if your account is approved for margin, you don't need to keep the cash on hand, but if the shares do get put to you then you'll buy them with borrowed money (on margin), and there is a cost to that (currently around 2.7% annual interest charge at Interactive Brokers, for example).
Conclusion:
Over the long-term, Ventas is an attractive business thanks to demographics and its REIT business model. However, in the near term it faces significant uncertainty as it works through its senior housing challenges. In our view, the shares are now much more reasonably priced after the 22% sell off, but more uncertainty and fear remains. Important to mention, the dividend is not in jeopardy in our view, but the price stability is. If you’d like to buy the shares straight up—that’s probably not a horrible idea. However, if you’re nervous about near-term volatility, and you’d prefer to pick up shares at an even lower price, then selling these income-generating put options is currently attractive. Specifically, selling the puts allows you to generate big attractive upfront income now (that you get to keep no matter what), and the big risk is that the shares will be put to you (you’ll have to buy them) at $55 (or $57.50, depending on which strike you choose), which is lower than the current market price. And we’d be happy to own shares of this attractive big-dividend healthcare REIT, as a long-term investment, especially at a lower price of $55 per share.