Ventas (VTR 1.74%) cut its dividend in 2020, which is something that no real estate investment trust (REIT) ever wants to do. The problem was the mixture of a pandemic and the company's exposure to the senior housing sector. Today, however, the senior housing business is starting to look up on a number of key metrics. Here's what you need to know as Ventas' turnaround gets under way.
When occupancy falls, so does revenue
The nearly 45% dividend reduction in 2020 basically goes back to one thing and one thing only for Ventas. The REIT has a sizable portfolio of senior housing assets that it both owns and operates. In the industry, these are known as senior housing operating assets, or SHOP. In practice, Ventas hires property managers to handle day-to-day operations. But the big takeaway is that the performance of these assets flows directly to the REIT's top and bottom lines. That's very different from a leased property, in which the tenant has to pay rent no matter how the property is performing.
This is not a trivial issue, because property-level performance of senior housing assets plunged during the early days of the coronavirus pandemic. Move-outs increased (a number that includes resident deaths), move-ins decreased, and, thus, occupancy fell. That meant less revenue for Ventas and lower funds from operations (FFO). Even today, as the company works back from the hit, the SHOP portfolio represents 37% of the REIT's net operating income. This is an important business.
The road to recovery
That's the bad news, which helps explain the swift dividend cut to preserve liquidity. It was, unfortunately, the right move for the REIT. The good news, however, is that the SHOP business is now starting to turn around. And since the results from SHOP assets flow quickly to the top and bottom lines, Ventas overall results are likely to see a material turnaround. Some numbers will help.
In the second quarter, occupancy in the SHOP portfolio increased 3.9 percentage points, to 83.7%. The REIT's U.S. assets, which were hit particularly hard, saw occupancy increase from 73.8% a year ago to 78.5% in the second quarter, a lofty 4.7 percentage-point jump. Canadian assets, which have held up comparatively well, went from 91.1% occupancy to 93.6%. Ventas' SHOP business looks like it is soundly back on track as far as occupancy goes, though there's clearly even more room to run on the U.S. side of the business.
The higher occupancy levels, coupled with higher rents spurred by the lofty inflation rates today, led to a 10% increase in SHOP revenues. That's a huge number for what has traditionally been a slow and boring business. Same-store net operating income (NOI) rose a modest 0.9% in Canada, which isn't shocking given the region's strength during the pandemic. But same-store NOI jumped an almost shocking 13.6% in the United States. There's likely more U.S. growth to come, as well, as occupancy continues to rise.
Ventas is currently looking for SHOP occupancy to increase another 2.5 to 3 percentage points in the third quarter. Revenue growth is projected to come in at around 8%, with SHOP NOI increasing 9% at the low end and 15% at the high end. Meanwhile, costs, which have been elevated, are expected to moderate. That's not great, but it isn't bad, either, as it suggests that there's another lever to pull on the growth front. Indeed, if Ventas can lower its costs, that will improve its margins, perhaps allowing the good news to keep going even after occupancy has fully recovered.
Things are just starting to improve
Ventas has muddled through a few tough years, and so have long-term shareholders. However, it looks very clearly like a business upturn is solidly in place in the company's most troubled division. That said, this recovery doesn't look like it is over just yet, noting the vast divide between U.S. occupancy levels and those in Canada. Add in the materially increasing number of seniors, thanks to the aging of the baby boom generation, and this REIT turnaround play looks very well positioned right now.
