It was only in 2020, yet it seems like a really long time ago that coronavirus pandemic fears led to social distancing and the closure of non-essential businesses. Indeed, so many things have moved back toward normal that investors now seem to care more about interest rates and inflation growth than vaccination regimes and infection rates.
And yet real estate investment trust (REIT) Ventas (VTR 2.01%), which has a heavy focus on senior housing, is still feeling the pandemic effects and protecting its cash balances. Let's take a look at what happened to Ventas, how its turnaround efforts are going, and what it will take for dividend investors to feel like any turnaround is actually real.
Cutting the dividend was the right move for Ventas
Ventas cut its quarterly dividend in 2020, taking it from $0.7925 per share to $0.45, a hefty cut of nearly 45%. The dividend is still at $0.45 per share more than two years later. Without a doubt, this was a prudent and appropriate move. The REIT's funds from operations (FFO) fell 21% in 2021, leaving Ventas with an FFO payout ratio of roughly 68%. That's not an unreasonable level, but what's more important is that it provided ample room to account for further adversity in a time of great uncertainty.
A big part of the problem for Ventas is the type of properties it owns. The first layer here is that senior housing is a big part of its business, accounting for around 52% of net operating income. However, that's broken into three parts. Roughly 1 percentage point comes from nursing homes, which is insignificant. Around 14 percentage points are derived from triple-net lease assets, where the lessee is responsible for most operating costs of the properties it occupies. Rent has to be paid on those properties regardless of what's going on at the business level. The rest, around 37 percentage points, is tied to senior housing operating assets, or SHOP assets in industry lingo.
SHOP assets are very different because Ventas both owns and operates these properties. Technically, it hires operators to handle the day-to-day issues, but the performance of the properties flows directly through to the REIT's top and bottom lines. Thus, when the pandemic hit and caused occupancy levels to fall throughout the senior housing area, Ventas was directly and quickly impacted. That dividend cut was needed, given the heavy SHOP exposure.
That was then, this is now
That said, the SHOP portfolio has been seeing a lot of positive developments. For example, occupancy rates have been trending steadily higher, recently hitting 84.5%. Leads and move-ins have been fairly strong and move-outs, an industry term that includes deaths, have been relatively modest. The REIT has even been able to pass through material increases in rental rates, thanks to a combination of inflation and strong demand.
The trends aren't expected to slow down, either. For the third quarter of 2022, Ventas is projecting a 2.5- to 3-percentage-point increase in year-over-year occupancy. It expects revenue in its SHOP portfolio to increase by around 8% year over year, and a 9% to 15% year-over-year increase in same-store net operating income for this division. Put simply, Ventas' SHOP business is turning around in a very impressive fashion.
And yet the dividend remains mired at the $0.45 per share level, going nine quarters without a change. While it is pleasing to see the most impacted business turn around, investors who have stuck around through this rough patch are likely starting to feel like a dividend increase is in order.
The FFO payout ratio in the second quarter was 62.5%. While that's not a huge improvement from the 2021 FFO payout ratio, the SHOP upturn suggests that Ventas doesn't need to be quite as cautious as it did when the outlook was more uncertain. Notably, the FFO payout ratio in 2019 was roughly 80%. In fact, until there's a dividend increase, it wouldn't be unreasonable to question the strength of the REIT's business rebound given the longer-term dividend history.
Time for Ventas to put its money where its mouth is
Ventas spent a great deal of time explaining how strong the SHOP turnaround has been. Management clearly believes that strength is set to continue over the near term. Given that the rest of its business, notably offices and medical research assets, held up well through the pandemic, the company should start to increase the dividend again to reward investors for sticking it out with the REIT. It looks like there is ample room to do so right now. Only then will the turnaround in the business be real enough to benefit the owners of the company, its stockholders.
Even a token increase would make a huge statement. And for those who don't own the REIT but are looking at it, a dividend hike might just be the signal that it's time to buy.