Ventas (VTR 0.04%) never actually shut its doors during the coronavirus pandemic, since the healthcare properties it owns are essential businesses. But that doesn't mean it managed to get through the pandemic unscathed, given its exposure to the hard-hit senior housing space. Here's what happened to this real estate investment trust (REIT), why it happened, and why the turnaround is only just beginning. If you're looking for a way to profit as the U.S. begins to emerge from the pandemic, Ventas could be the right play for you.
Bifurcated
In 2020, the properties in the healthcare REIT space split along two lines: Assets focused on senior housing were hit particularly hard, while most other sectors, such as office and research space, generally held up well. This makes sense, since the coronavirus spreads easily in group settings and older adults are at high risk -- and senior housing, to state the obvious, is designed to bring older people together to make it easier for others to provide care.
Ventas has a diversified portfolio in this space, which meant it felt all the effects. While it owns medical office and research properties, some 44% of its net operating income is tied to senior housing. Comparing this year's first quarter to last year's, occupancy in Ventas' two senior housing segments fell more than 10 percentage points. There's no way to sugarcoat it: 2020 was not a good year for Ventas.
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There's another factor here that's important: 26% of Ventas' overall net operating income is related to its senior housing operating portfolio (or SHOP), which has been a huge headwind. Ventas both owns and runs SHOP properties. Thus, property performance directly affects the REIT's top and bottom lines.
In reality, Ventas hires someone to handle the day-to-day business, but SHOP assets are very different from properties leased to third parties. With a lease, the tenant has to pay rent regardless of what's going on in the business and so provides a consistent income stream. Healthcare REITs that avoided the SHOP structure didn't avoid the pandemic headwinds, but, generally speaking, they didn't feel them quite as quickly or deeply. Notably, Ventas cut its dividend 43% in 2020.
That was then, this is now
At this point, with vaccines beginning to help control the spread of the novel coronavirus in the U.S. (where Ventas has more than 80% of its business), the biggest impact appears to be over for Ventas' SHOP assets. Indeed, it has seen more leads developing, more residents moving in, and fewer residents moving out (a category that includes those who die). In fact, this May was the third straight month of positive net move-ins. That suggests that Ventas' SHOP portfolio has turned an important corner.
Only there's still a long way to go before things are anywhere near back to normal. And that's the big opportunity here. An upturn in Ventas' SHOP portfolio will flow directly through to the REIT's revenue statement. That, in turn, will allow Ventas to shift from muddling through the industry downturn to growing out of it. And if history is any guide, that will include a shift back to dividend growth. Indeed, prior to the pandemic, Ventas had a long history of annual dividend increases under its belt.
Don't expect to see an overnight change here. The recovery will likely take a year or two to play out. But there's been a multiyear slowdown in new senior housing construction, and there's soon to be an acceleration in the growth of the population age 85 and up, which most needs these assets. So the upturn could get a boost not only from pandemic recovery but from broader industry trends as well. Meanwhile, Ventas' stock is still around 20% below the highs it reached in 2019.
Still time to jump aboard
While Ventas' stock has bounced back from the worst of the pandemic hit, its business is still just muddling through and well off its most recent high-water mark. As the senior housing sector starts to recover, meanwhile, demographic trends, industry trends, and Ventas' large SHOP portfolio should all come together to push financial results nicely higher. That should lead to a resumption of dividend growth for this industry-leading healthcare REIT. No, Ventas is not as good a deal as it was during the 2020 bear market, but the future is much clearer today, and there's still material recovery potential in the business that you won't want to miss out on.
