Ventas (NYSE: VTR), a venerable member of the family of healthcare real estate investment trusts (REITs), has seen its stock tumble and payouts shrink because of the coronavirus pandemic -- not surprising for a REIT that gets about half its business from senior living housing.
But is Ventas poised for a sustained comeback that will see a sustainable return to profitability and the kind of yields that make it suitable for a retirement portfolio?
The boss thinks so.
A well-positioned company in a well-positioned industry, but those headwinds…
"Healthcare real estate continues to offer compelling, demographically driven growth potential, and Ventas is well positioned to benefit from these powerful tailwinds. However, the near-term clinical, financial, operational, and economic environment remains dynamic and highly uncertain," chairman and CEO Debra Cafaro said in the company's second-quarter report.
"We are confident that we have the experience, team, operators, and diverse portfolio to manage through these uncertainties," Cafaro added.
Millionacres' Matthew DiLallo examines where Ventas might be in three years. Below, we'll take a look at how this $17 billion, 500-employee REIT might fit into a retirement portfolio.
Cutting the dividend and new deals with its tenants
Like other big operators in the competitive senior living market, Ventas has been hit hard by the economic fallout of COVID-19 and has had to accommodate the needs of its investment partners.
That includes cutting its dividend -- the raison d'etre for REITs in the eyes of many investors -- to $0.45 a share after paying out $0.79 per share in the first quarter. That allowed it to save $130 million in cash compared to the previous quarter, but it's also the lowest payout in five years and well below its historical norm. (That's still a yield of about 4% with its current stock price.)
Other accommodations include new lease restructuring to help its partners cope with the coronavirus, including one with Brookdale Senior Living (NYSE: BKD) for the 121 properties Brookdale leases from Ventas.
That deal gives Ventas $235 million in cash, notes, and stock warrants in exchange for rent reductions. But long-term lease extensions with built-in rent increases also are part of the package, which speaks to the resilience of this kind of business and investment in the long run.
A rough ride in the second quarter, but the rents get paid
But there's no doubt the second quarter was bloody. Ventas reported a net income loss of $0.42 a share, compared with a gain of $0.58 a share in the second quarter of 2019. The company's Nareit-reported funds from operations (FFO) also plunged, from $1.13 a share last year to $0.50 a share this time around.
In its second-quarter report, the company also said it had cut 25% of its corporate positions, reducing costs by $25 million to $30 million year over year.
It also cut planned capital expenditures by $300 million, from the originally planned $800 million for 2020, and boosted liquidity by issuing a $500 million note in March and paying down "substantially all" its borrowings in its $3 billion revolving credit facility.
That leaves Ventas with $3.5 billion in liquidity entering the third quarter, comprising $2.9 billion undrawn in its credit facility and $600 million in cash and cash equivalents.
The company also reported collecting nearly all its rent, and it has a diversified set of investments to help it provide a nice ROI for buyers of its stock going forward, it would seem.
What it holds now, sector by sector
Chicago-based Ventas currently has a portfolio of approximately 1,200 properties in the U.S., Canada, and the United Kingdom.
Here's how the company lists them and the percentage of net operating income (NOI) each represents:
The other 7% comes from other sources such as loans, investments, and service revenues. Here's a quick look at some of those sectors:
Ventas works with major names like Brookdale, Atria Senior Living, Sunrise Senior Living (NYSE: SRZ), and Quebec's Le Groupe Maurice.
More than 60,000 senior citizens now occupy those properties, Ventas says, adding, "our seniors housing portfolio is well-positioned to capture the powerful seniors housing upside."
Ventas calls itself one of the leading owners of medical office/outpatient buildings (MOB), with approximately 20 million square feet of MOB space across 32 states, serving about 15,000 physicians and supporting more than 40 million patient visits each year.
Through its wholly owned subsidiary, Lillibridge Healthcare Services, Ventas provides MOB property management, marketing, leasing, and advisory services nationwide.
"With the 65+ cohort expected to increase to about 22% of the total population by 2039 and outpatient visits on the rise, particularly for specialty care, strong healthcare market fundamentals will continue to fuel consistent occupancy and NOI growth," the company says.
Ventas says it invests in a variety of general acute hospitals and cancer centers. That includes Ardent Health Services, which operates 30 hospitals in seven states and has more than doubled its revenues and presence since Ventas made its first investment in 2015.
"We focus on partnering with healthcare providers who have significant market share, a favorable payer mix, exceptional management teams and financial strength, and who deliver excellent quality care," Ventas says.
Research and innovation
Interestingly, the company says, "Ventas is the leading owner of university-based Research & Innovation (R&I) real estate. With demand in the $140+ billion life science real estate market expected to rise to more than $170 billion within five years, the R&I portfolio has been the company's top capital allocation, with more than $2 billion invested in R&I since 2016."
More than 95% of that part of its portfolio is anchored by leading research universities. Other tenants include start-ups, established innovation incubators, and biopharma companies, along with corporate giants like Microsoft (NASDAQ: MSFT), Boeing (NASDAQ: BA), and Aon (NASDAQ: AON).
The company says its R&I holdings include 36 properties in 13 hub markets. Ventas calls them Knowledge Communities and says they are amenity-rich, mixed-use settings "well-positioned for long-term growth supported by the economic drivers of reliable tenants, long-term lease commitments, and sustained occupancy."
The bottom line: Ventas could be a nice fit in a retirement portfolio
Ventas stock has taken a serious beating. In early September, it was trading in the mid-$40s after plunging to as low as $13.34 in the first days of the pandemic shutdowns. That's not anywhere near its 52-week high of $75.16, but that's a start.
Each of those investment sectors have different outlooks, meanwhile, and perhaps none so murky as the senior living portfolio that represents so much of this company's business. New safety protocols and restoring public trust will take money and time.
But the demand for what Ventas tenants and partners do is only going to grow as the population ages, and it seems like Ventas has the experience and versatility to respond to market opportunities and demands.
I'd say, based on its current portfolio, its long record and response to the current conditions, and its investment in the future, Ventas is worth strong consideration for a retirement portfolio.