Senior housing was one of the worst performing niches of the real estate investment trust (REIT) sector early in the pandemic. Ventas (VTR -1.38%) was particularly hard hit, and the REIT was forced to slash its dividend by nearly 45%. The broad weakness, driven by one key business line, has hidden an area of particular strength -- Canada.
A sizable problem
The coronavirus has proven to be most problematic for older adults and spreads most easily in group settings. So it shouldn't be too much of a surprise to find that REITs with a focus on senior housing got hit particularly hard during the early days of 2020 as the pandemic spread across the globe. Ventas, one of the largest healthcare REITs in the U.S., took its lumps, along with its peers.
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One of the key problems for the company, however, was that it owns and operates a significant number of properties. These types of properties are generally called a senior housing operating portfolio, or SHOP, in industry lingo.
While Ventas actually hires outside managers to handle the day-to-day affairs of SHOP assets, the performance of these properties flows through to the top and bottom lines. When the pandemic hit, increasing the number of move outs (a term that includes resident deaths) and reducing the number of move ins, Ventas' financial performance was pretty hard to look at.
That's starting to change, with generally improving performance in recent quarters. In fact, U.S. SHOP occupancy improved from 71.9% at the end of the first quarter of 2021 to 77.8% by the end of the year. The omicron variant of the virus was a new headwind in early 2022, but it didn't appear to have the same level of impact as the earlier phases of pandemic.
However, here's the interesting thing: Ventas' overall SHOP occupancy at the end of 2021 was 83.2%. That's because of the company's Canadian operations.
Oh, Canada!
Some numbers will show just how important Canada has been to Ventas. SHOP occupancy north of the border was 91.8% at the end of the first quarter in 2021. That's almost 20 percentage points higher than in the U.S.
Despite that relative strength, Canada's SHOP occupancy rose to 93.4% at the end of last year. While U.S. SHOP occupancy dipped 10 basis points in January this year thanks to omicron, Canada's SHOP occupancy rose by the same amount.
These are two different countries with two different responses, so there was bound to be some difference in outcome. However, Ventas' Canadian SHOP portfolio has been a saving grace for the company, which otherwise would have been hit even harder by the pandemic.
The most interesting thing here, however, is that Ventas got very lucky with its timing. The deal to acquire the Canadian SHOP portfolio came in mid 2019. That was when the REIT formed a partnership with Canada's Le Groupe Maurice in which Ventas basically bought 31 properties and four development assets for roughly $1.8 billion.
Ventas owns 85% of the partnership, and Le Groupe Maurice owns the remaining 15%. Le Groupe Maurice shifted from ownership of properties to building and managing assets with a partner that's happy to finance new capital projects. It was a win-win, even at that point.
However, in light of the pandemic, Ventas' geographic-diversification effort looks like a genius move. The company couldn't have predicted the pandemic, so it was really just luck. That said, diversification is important for your portfolio, and this timely investment shows just how important it can be for a REIT's portfolio, too.
More to the story
Ventas' recovery from the pandemic has been pretty solid, with a lot of the thanks going to the foundation provided by the strong Canadian business. But investors should note that this isn't the only diversification effort within the portfolio, with the healthcare REIT also working to build up its medical office and medical research portfolios in recent years.
Although Ventas stock has rebounded along with the market and its improved business prospects, it remains an attractive diversified play on the healthcare property market for conservative long-term investors.
