It would be an understatement to say that the COVID-19 pandemic has altered the world as we know it. At the center of the storm is Ventas (NYSE:VTR), a real estate investment trust (REIT) that owns things like senior housing properties. The stock is roughly 45% below its highs for the year at this point.
But this landlord has something going for it even in these dire times. Here's why long-term investors might want to look at Ventas, even though it is struggling right now.
The core of the portfolio
Ventas is one of the largest and most diversified healthcare-focused real estate investment trusts. It owns three main types of properties: senior housing, medical offices, and medical research facilities. Senior housing is broken into two different categories: properties the REIT leases to others, and properties it manages itself (though it hires operators to handle the day-to-day work), known as a senior housing operated portfolio, or SHOP, in the industry.
Medical office and research properties, which together make up nearly 30% of Ventas' net operating income (NOI), are a growth sector in the healthcare property space. These areas are generally doing just fine.
The problem today is on the senior housing side of the business, which basically makes up the rest of the REIT's business. These assets are purpose-built to bring older people together in one central place. COVID-19 spreads easily in group settings, and older people appear to be at the most risk. This segment of the healthcare property market is not doing well right now. Adding to the trouble is Ventas' SHOP portfolio, which makes up roughly a third of its NOI. Since Ventas directly owns and operates these assets, property-level performance flows through to the REIT. That's good when the assets are doing well, but terrible when they aren't -- like now.
In an effort to protect residents, senior housing operators are facing increased costs for cleaning and safety supplies. Move-ins have fallen off because facilities have slowed down or, in some instances, completely stopped admitting new residents. And move-outs have increased as deaths have risen and some families have decided to bring loved ones home. These issues, which impact Ventas' SHOP portfolio directly and also all of its senior housing lessees, just led the REIT to cut its dividend by nearly 45%. No wonder the stock is down materially for the year.
But don't count Ventas out
One of the interesting things here, however, is that COVID-19 isn't going to change the underlying demographic story backing the healthcare REIT business. The baby boom generation is still cresting into retirement at a rapid clip, and will eventually need housing options specific to their social, mobility, and increasing medical needs. The current industry headwinds, meanwhile, are likely to lead to a reduction in new supply, which could reverse the supply/demand imbalance that exists today and leave the market with too few beds. This long-term view is what should attract investors to Ventas. But there's a bit more to the story.
Ventas' closest peers are Welltower (NYSE:HCN) and Healthpeak (NYSE:PEAK). Welltower would be a better way to play the outlook above, because it generates roughly 70% of its net operating income from senior housing. The rest is outpatient medical facilities and health systems (hospitals), which have also come under pressure. It doesn't have material exposure to medical office and medical research. That makes it more of a pure play on the aging of society, with a material focus on housing. Healthpeak, meanwhile, generates just 20% of its NOI from senior housing, with the rest coming largely from medical offices (42% of NOI) and medical research facilities (32%). Healthpeak would be a better way to invest in a diversified healthcare REIT while limiting the impact of the COVID-19-related senior housing issues.
Ventas falls somewhere in the middle of these two options. Just like diversification is good for your portfolio, it's good for companies to diversify their businesses, too. But how that diversification breaks out can tip the attractiveness of an investment. This is why Healthpeak has performed better than its two closest peers so far in 2020. However, for investors who want to invest while others are fearful, the COVID-19-related troubles hitting Ventas and Welltower could be an opportunity. And since Ventas also has notable exposure to the better-performing office and medical research niches, it has more of a diversification backstop than Welltower. In the end, it could be a solid option for investors looking to find a value play in the diversified healthcare REIT space.
The troubles aren't over
All of that said, investors looking at Ventas need to recognize that the COVID-19 pandemic and its impact on senior housing are not over yet. Ventas and other senior housing landlords are probably not great options for conservative investors looking to start new positions right now. However, if you are willing to keep a close eye on the REIT and can sleep well even when the seas are a bit tumultuous, Ventas and its still-generous 5% dividend yield are worth a close look.