Doesn’t it seem like senior living facilities -- from independent living centers to full-blown nursing homes -- are popping up everywhere? That’s because developers and their investors are responding to the growing demands of a very large aging population for places to live that can accommodate their medical and social needs.
Real estate investment trusts (REITs) like Ventas (NYSE: VTR) are among those heavily committed to that trend and like many others got really hammered when the novel coronavirus came calling.
Nursing homes have proven to be a particularly deadly place to be for a fragile population with limited mobility and often nowhere else to go. Families now considering other options and facing rising costs for staying in such places -- especially for those paying 100% out of pocket -- could make building back occupancy and the bottom line challenging.
But, with its beaten-down stock, a reduced but still respectable yield and a portfolio of 1,200 properties in the U.S., Canada, and United Kingdom, and the apparent wherewithal to withstand growing competition, is this well-established healthcare REIT a buy?
Does Ventas building a diversified portfolio merit its inclusion in yours?
Ventas continues to build a diversified portfolio of healthcare-related investments that should continue diversifying even more because of the outsized impact COVID-19 has had on senior living centers.
That includes expanding investment in medical offices and outpatient clinics, health systems, and research and innovation centers, often in and around university innovation centers.
Those investments should provide some buttressing to the senior living centers that currently account for nearly half of the Chicago-based REIT’s net operating income (NOI) in the next few years.
But what about right now?
Stock price and dividends fall but payouts continue
Ventas stock was trading at close to $45 a share in the first days of October after falling to below $14 in the darkly stunning days of late March. A 52-week high of nearly $75 shows there could be more room to run, but I don’t know that I’d bet on that in the near term.
That spring plunge accompanied by a continuing payout to investors did help drive the yield well above 10% for a time, but that’s now settled to a still respectable 4% or so. And that’s after slashing the dividend from $0.79 a share in the first quarter to $0.45 in the second. That $0.45 payout was just continued into the third quarter.
Those are the lowest payouts in five years, well below its historical norm, and they follow Ventas losing $0.42 a share in net income per share in the second quarter, compared with a gain of $0.58 a share in the second quarter of 2019. Funds from operations also cratered to $0.50 a share, less than half of the $1.13 a share it recorded in the year-ago quarter.
Restructuring leases and cutting costs
Ventas also had to make financial accommodations going forward, such as new lease restructuring to help its tenants that operate those centers, including one with Brookdale Senior Living (NYSE: BKD) for the 121 properties Brookdale leases from Ventas.
Brookdale agreed to give Ventas $235 million in cash, notes, and stock warrants in exchange for rent reductions. It wasn’t a one-sided deal, though. The long-term lease extensions include built-in rent increases and provide the stability expected in REIT investments of this nature.
The company also is tightening its belt. Along with the $130 million or so saved in reduced dividend payouts, corporate staff reductions of 25% should save as much as $30 million a year, and planned capital spending was cut nearly 40% to $500 million.
Ventas says it has also paid down "substantially all" of the borrowings in its $3 billion revolving facility and entered the third quarter with $3.5 billion in liquidity.
Bottom line is that Ventas merits consideration for a buy
So, whether to invest in its stock now depends on whether you’re seeking growth or income, to a degree, and how long you expect to hold it.
Ventas does appear to show some upside going forward given its reduced but still substantial investment in sectors that should add diverse streams of income, and its continued commitment to senior living, which, while battered, remains an essential service for a growing cohort numbering in the millions.
I’d give Ventas serious consideration for a buy but as a longer hold than one you’d commit to with an eye on a runup in stock price soon.