Ventas (VTR 4.04%) is one of the largest and most diversified healthcare real estate investment trusts (REITs) in the United States. Normally considered a fairly stable sector, it has been anything but since late last year. Now, with COVID-19 quickly spreading across the country, the situation is even worse.

Here's what's going on, and why Ventas still has more rough road ahead of it.

Helping the elderly

Ventas operates three main types of healthcare properties. The first two, medical office and medical research facilities, are going fairly well. They make up around 30% of the real estate investment trust's net operating income (NOI). In 2019, the medical office segment grew NOI by roughly 4.5%, with medical research assets expanding by a lofty 18% (though off of a smaller base). Looking forward, Ventas has partnered with developers in each of these segments to help ensure a solid pipeline of future growth projects. This portion of the business is doing just fine.

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The futures of the rest of Ventas' operations are a little more tentative today. First there's a mixed collection of assets that it leases to others, including hospitals and acute care assets, that should perform OK overall. COVID-19 may lead to some disruption and higher costs, but the long-term hit shouldn't be too terrible because many of these assets are need-based -- you usually don't go to a hospital just because you want to. That said, it's a diverse collection of assets and represents 15% of NOI. It's notable, but not the main driver of the company's financial results.

That's where we come to the big issue for Ventas. Roughly 45% of its NOI should hold up reasonably well, or even grow nicely, even in the current environment. The remaining 55% or so, which is in senior housing assets, is a wild card.

It has been rough 

Ventas' senior housing portfolio is broken into two segments: triple net lease and a senior housing operating portfolio (known as SHOP in the industry). The net lease assets are rented out to others under long-term contracts that require the lessees to pay for most of the costs of the properties they occupy. It's usually a pretty stable business with built-in rent increases. In 2019 the REIT's net lease senior housing assets were able to grow NOI a little bit. 

However, the SHOP portfolio is an entirely different ballgame. Ventas hires operators to run these properties, but it participates in the performance. When times are good, that means higher earnings. But when times are tough, it means Ventas shares in the pain. An oversupply of senior housing assets has left this segment struggling to fill beds. In 2019, the SHOP portfolio saw NOI fall a worrying 4.4%. However, the real showstopper was the fourth quarter, when NOI dropped a massive 7.5% year over year. This shocked the market and led to a swift decline in Ventas' shares. The REIT had to backpedal from a promise that top- and bottom-line growth would tick higher in 2020, saying only that growth would be pushed out to the future. To be fair, others in the sector are facing similar pressures, with Healthpeak and Diversified Healthcare Trust also seeing weak SHOP performance.

But the real concern today is that all this news was from before COVID-19 became an issue

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Overall, the long-term need for senior housing remains intact, because the United States is still expecting to see a massive increase in the number of people over age 65 in the years ahead. That should increase demand for senior housing, including Ventas' SHOP assets. And there has been a slowdown in senior housing construction, which Ventas highlighted during its fourth-quarter 2019 earnings conference call (attempting to accentuate the positives of a bad situation). But it was pretty clear that, despite underlying positives, it would take some time for the industry as a whole to work off the excess supply. And, thus, Ventas' SHOP portfolio was going to struggle for a bit. 

And it'll get worse

And then the coronavirus hit the headlines. This complicates Ventas' life in a big way. For starters, COVID-19 appears to spread easily in group settings -- like senior housing properties. Second, it tends to be more deadly for the age group that would usually live in a senior housing property. This is a massive double whammy. Senior housing operators are responding responsibly to the crisis, upping their cleaning protocols and restricting access to the properties, among other things. But the pain could be notable, and will impact both Ventas' SHOP portfolio and its net lease assets.

Both sides of its senior housing business will be facing higher costs, increased "move outs" (often the result of death or a material downturn in health), and a reduction in demand. The drop in demand will come from two sources: fearful customers, and the fact that tours aren't being conducted in an attempt to limit the spread of COVID-19. Ventas will feel the hit directly in its SHOP portfolio, but will see the impact in an indirect manner in the net lease business. Essentially, its lessees will feel the direct hit, but in a worst-case scenario this means lessees could need rent concessions to avoid serious financial strain. All in all, roughly 55% of Ventas' portfolio is facing very tough times ahead right now. The company has removed full-year 2020 guidance at this point. That's probably a prudent move, but not particularly reassuring for investors. 

Not the end of the world, but...

Ventas is not sitting still. Even before COVID-19 became a national issue Ventas had hired a well-respected outsider to help fix its senior housing woes. His job will be even more difficult now, but at least there's someone with a fresh perspective to deal directly with the senior housing issues the REIT is facing.

The problem for investors is that there is no easy fix, and it is likely to get worse before it gets better as COVID-19 confirmed cases quickly escalate. The REIT should muddle through, but it won't be a pretty trip. If you own the REIT or are thinking about buying it because of its massive 14% dividend yield, make sure to keep a close eye on the senior housing portfolio. That's where the most important action is taking place today.