Healthcare real estate investment trust (REIT) Ventas (NYSE:VTR) was crippled by the coronavirus pandemic. It got so bad that the company cut its dividend by nearly 45% after a decade of annual dividend increases. But the landlord is still standing and its business is starting to show signs of an upturn. Even if the market tanks again, like it did in 2020, I'm not selling this stock.
The big test
For healthcare REITs that own senior housing, like Ventas, 2020 was a trial by fire. The coronavirus spreads easily in group settings and older adults are more at risk of serious effects of the virus. Given that senior housing is purpose-built to bring older people into a group setting, it is hardly shocking that the pandemic was hard on Ventas and its closest peers.
There was a mix of issues. Move-outs increased (this industry euphemism includes resident deaths), move-ins slowed down, and costs increased because of things like enhanced cleaning regimens. None of that should be particularly surprising, but the effect was lower occupancy and higher costs, which makes covering the rent a lot more difficult. But there's another problem here: Ventas also operates a large number of the senior housing assets it owns.
In the industry this is known as a senior housing operating portfolio, or SHOP. In reality, Ventas hires an operator to do that day-to-day work. However, when all is said and done, the performance of SHOP properties flows through to the real estate investment trust's top and bottom lines. This business was a major headwind for the company and the main reason for the dividend cut. That said, conditions in the industry, and specifically for Ventas' SHOP assets, are improving, and the REIT is highly likely to muddle through to better days, even though business is nowhere near back to normal.
The long term
That brings up the real reasons I'm happy to keep owning Ventas. For starters, while the coronavirus disproportionately impacted older adults, it didn't change the big-picture demographic trends the world is facing. The number of people aged 80 or older is expected to increase by 17% between 2020 and 2025. By 2030 the demographic is projected to increase by roughly 50%. That's a massive increase relative to the rest of the population and will fuel demand for senior housing. Simply put, on the whole, older people need more help than younger ones.
At the same time, there has been a decline in the number of senior housing assets that have been built. Senior housing construction starts are down nearly 80% from the recent high-water mark in the fourth quarter of 2017. That means that there's likely to be a lull in supply right when there is an influx of demand from the increasingly large 80 and over cohort.
These two trends should get occupancy back to historic levels and, perhaps, even higher in time. Pricing should also firm up at some point, giving senior housing operators a top-line boost as well. And since Ventas has a sizable SHOP portfolio, these improvements will flow right through to the REIT's performance and dividend-paying ability. I expect dividend growth to resume once the pandemic impact is a bit further in the rearview mirror.
The market has nothing to do with it
The key thing here is that Ventas is generally considered a well-run healthcare REIT, with a history of winning industry awards for its strong management. There's no particular reason to jump ship, especially as the company's underlying operations look set to begin improving. Moreover, with the demographics underpinning the eventual recovery having little to do with the stock market, the ups and downs of the broader S&P 500 index aren't really the best indicators of success or failure here. In fact, if mercurial investors decide to dump Ventas shares in a market sell-off it might actually be an opportunity to buy some more.
Unless the demographics here change for the worse, Ventas' recovery story remains intact and, in my opinion, worth owning. It was hard to hold on through pandemic-hit 2020, but the future looks like it will be brighter than the recent past.