Healthcare real estate investment trust (REIT) Ventas (NYSE: VTR) has been working hard to muddle through the hit from the coronavirus pandemic. It hasn't been easy, but there are signs that an inflection point may be at hand. That's great news, of course, but it doesn't mean business is anywhere near back to normal. Here's what's going on and why you still need to be patient.
A double whammy
One of Ventas' biggest businesses is providing housing to seniors. That was a terrible business to be in during 2020 thanks to the coronavirus pandemic, which impacts older adults more severely and tends to spread easily in group settings. Indeed, the very purpose of senior housing is to bring older people together in groups.
But the problems the REIT faced in 2020 didn't stop at the property-type level. It actually owns senior housing in two different ways. One side of the business is to simply lease a property out to others under long-term contracts. The REIT's net lease business, as it is called, requires the lessee to pay for most of the property's costs (including things like maintenance and taxes). This segment saw net operating income (NOI) fall 12.7% year over year in the first quarter. That sounds terrible until you talk about the other side of Ventas' senior housing portfolio.
The rest of Ventas' senior housing falls into what's called a senior housing operated portfolio (or SHOP). These properties are owned and operated by Ventas. Technically, it hires others to run the day-to-day business of its SHOP portfolio, but the underlying performance of the properties flows through to the REIT’s top and bottom lines. NOI in this business fell 42.5% year over year in the first quarter. That's ugly and it will take a while to dig out of this hole.
Signs of a turn
That said, Ventas is making progress, and while it is still early in the recovery, investors should not discount the improvements. For example, all of the REIT's U.S. properties have had two vaccine clinics, so anyone that wanted a vaccine could get it. Roughly 75% of its Canadian assets are also vaccinated. Vaccinations are an important step in containing the impact of the highly contagious illness. And it helps explain why the number of cases Ventas is experiencing is near the lowest levels since the pandemic began.
So it looks like Ventas is starting to get a handle on the novel illness. In fact, CEO Debra Cafaro believes that the REIT, "reached the cyclical pandemic occupancy bottom in our SHOP portfolio in mid-March." Since that point, the REIT's SHOP occupancy has improved roughly 190 basis points. However, that's not the only positive sign. April move-outs are down 21% compared to December, move-ins are up 39%, and leads have increased 19%. Leads and move-ins are higher than they were in April of 2019. The company's conversion rate, or its ability to turn leads into tenants, was also at pre-pandemic levels. These are very positive trends and suggest that the future for Ventas' senior housing portfolio will be better than the recent past.
Only investors shouldn't get their hopes too high just yet because there's still a lot of work to do. Indeed, management's projection for the second quarter is for adjusted funds from operations (FFO) to be somewhere between $0.67 per share and $0.71. Adjusted FFO in the first quarter was $0.72 per share. And that was down from $0.97 per share in the first quarter of 2020. So the improvements Ventas is seeing at the operating level aren't exactly showing up on its bottom line just yet. There's a long way to go before the REIT's financial results are anywhere near where they were before the pandemic hit in full force.
Ready for more
So the big story for Ventas is that things are still bad, but they're getting better. Meanwhile, the REIT has prepared for this, since its dividend cut in 2020 gave it plenty of wiggle room. Indeed, even with adjusted FFO $0.67 per share, the REIT’s payout ratio would be under 70%. Ventas probably isn't a REIT that risk-averse investors would want to buy today, but if you own it or are looking for a senior housing landlord, the improvement it's starting to see and ample dividend coverage might be enticing. The dividend, meanwhile, is likely to start growing again once the REIT starts to see its financial results improve along with its SHOP results.