Ventas (NYSE: VTR) has evolved over the years. The leading healthcare real estate investment trust (REIT) has made more than $36 billion of investments during the past two decades, building a diversified portfolio of healthcare-related real estate. While the company has focused most of its attention on expanding by developing and acquiring new properties, it has also sold real estate to maintain a solid balance sheet.
This steady evolution seems likely to continue. Here's a look at where this healthcare REIT appears headed in the next three years.
Where Ventas is today
Ventas currently owns or manages a diversified portfolio of about 1,200 healthcare-related properties in the U.S., Canada, and the U.K. This real estate consists of senior housing communities, medical office buildings, research and innovation centers, inpatient rehabilitation and long-term acute care facilities, and health systems. While the company owns a diversified portfolio, it gets a sizable portion (48%) of its net operating income (NOI) from senior housing.
Where Ventas seems headed over the next three years
Ventas has been investing heavily to grow its senior housing business in recent years. For example, last year, one of its largest investments was a $1.8 billion purchase of a high-quality senior housing portfolio in Quebec. Acquisitions like that have enabled the company to build a significant senior housing portfolio, positioning it to benefit from demographic trends as the baby boomer generation grows older.
However, the business is facing some near-term headwinds because of the COVID-19 outbreak. In its senior housing operating portfolio, NOI tumbled 42.7% year over year in the second quarter because of higher costs, reduced occupancy, and fewer new tenants moving into its communities. This weakness could continue for some time, especially since older populations are at higher risk for complications from the virus, which led many of these facilities to limit family visitations.
It's unclear if this will have long-term ramifications on the senior housing industry. For example, it could cause more families to consider a multigenerational living situation instead of senior housing. Because of this uncertainty, Ventas cut its dividend earlier this year to preserve cash. Further, these unknowns could also cause the company to reduce its focus on buying senior housing communities in the near term.
One of the benefits of Ventas' diversification is that it has other ways to grow. An emerging growth market for the company has been developing research and innovation centers for major universities. Last year it moved forward with five research and innovation development projects, totaling nearly $1 billion of investments. These projects are part of a $1.5 billion development pipeline the company expects to complete, which should drive strong growth from this property sector over the next three years.
In addition to continuing to grow its research and innovation portfolio, which currently contributes about 8% of its NOI, Ventas will also likely keep expanding its other business segments. For example, it could buy more medical office buildings -- which already contribute 22% of its NOI -- to help offset some of the headwinds facing its senior living business.
Ventas' near-term future seems to have two possible directions. If senior housing bounces back and the REIT continues to expand its medical office and research and innovation portfolios, it should be able to grow its FFO and start increasing its dividend again over the next three years. However, if the headwinds facing senior housing prove to be much longer term, it might need to reconsider whether it should be such a large portion of its portfolio.
A shift away from senior housing seems likely
Like many of its healthcare-focused peers, Ventas has focused a lot on senior housing in recent years due to demographic trends. However, that came back to bite it this year as COVID-19 had an outsized impact on these communities. Because of that, it seems likely that the company will focus less attention on this property type over the next three years as it shifts its investment strategy toward expanding elsewhere, like developing more research and innovation centers.