In the last few months, Ventas (VTR) has suffered because the coronavirus pandemic has impacted it with across-the-board hREIT specific problems, as well as with problems specific to Ventas and its business model. The broad problems affecting hREITs are, one the one hand, drastically reduced new admissions, and on the other hand, higher costs of sanitisations and so on. On top of that, there are Ventas-specific problems. These mainly consist of the fact the Ventas operates on a SHOP model. SHOP means Senior House Operating Portfolio, which implies that instead of leasing out properties and securing an income irrespective of market conditions, Ventas operates its own facilities all by itself. Thus, it is more exposed to market conditions, both good and bad – and in the last 6 months, it has only been bad.
However, not all is lost for Ventas. It is among the biggest REITs in the healthcare sector and there are many positives going for it, with interests spanning senior housing properties and medical offices segments. The REIT is also invested in medical research facilities, adding diversification to its overall portfolio. While the REIT has strong fundamentals, its stock has taken tough beating in the past couple of months. However, the downward spiral shown by the stock is mainly owing to macro factors including the pandemic outbreak. Now that the REIT stock is currently trading significantly lower than its 52 weeks high, it offers a value entry point at this price.
Ventas is a well-diversified REIT with 739 senior housing communities and 348 medical office buildings under its management. Apart from these, the company also holds interest in medical research segment as it also manages 36 research and innovation centers. The REIT has added a dash of geographic diversity to its portfolio as well since it holds properties spanning the United States, Canada and the UK.
In order to fully assess the potential of this REIT, it is important to look at the current and future scenario for the segments it works in. This is especially important as COVID-19 outbreak has put unprecedented strain on hREITs. The company’s senior housing properties are home to over 70,000 residents. The segment accounts for a little more than half of the Ventas’s net operating income, and thus is of immense importance.
COVID-19 pandemic has impacted senior housing in a many ways, as seniors are deemed particularly vulnerable to the outbreak. The infectious nature of COVID-19 forced the senior housing operators to take drastic steps for containing the spread. The pandemic has affected the segment in a variety of ways. On one hand, it almost halted new admissions, and on the other hand, it drastically increased the operating costs due to undertaking of preventive measures including extra sanitization and safety gears.
While the impact of COVID-19 has been bad for nearly all the REITs, Ventas’s business model compounded some of the issues. Apart from its major exposure to highly vulnerable senior housing segment, Ventas is also mainly engaged in SHOP or Senior House Operating Portfolio. This implies that instead of renting out its senior housing properties on net lease basis, the REIT ‘operates’ them on its own. The SHOP portfolio accounts for nearly a third of its net operating income. This model makes the REIT more exposed to fluctuations in the segment.
Financial Impact of COVID-19
While Ventas had been one of the most hard-hit REIT firms due to its high exposure to the senior housing segment, the company has shown resilience in the past and also has a strong foundation to lean upon. It draws a major part of its NOI from senior housing but its exposure to other sectors helped Ventas in blunting the blow a bit.
The impact of the pandemic can be assessed from the company’s first quarter earnings report. However, it needs to be noted that the impact is expected to be more visible on the earnings of second quarter, which is scheduled to be announced on August 7, 2020. As per the first quarter results, the company reported mild decline in its quarterly normalized FFO. The decline was mainly attributed to higher operating costs due to the pandemic and the increase in interest obligations as the company chose to avail some of its revolving credit facility for bridging the liquidity gap.
Ventas took the opportunity to boost its liquidity and Balance Sheet. Consequently, the REIT has nearly $3.2 billion in cash and cash equivalents as of May 6, 2020. The company also managed to improve its Net Debt to EBITDA ratio sequentially by 40 basis points. However, it needs to be noted that Ventas tapped $2.75 billion from its $3 billion Revolving Credit Facility. It further added to its debt liability by raising $0.5 billion through senior notes.
Another major step taken by Ventas was to streamline its expenses. The REIT slashed its anticipated 2020 capital expenditures by $0.3 billion. It also put a couple of its developments on hold. It is also carrying out extensive review of its General and Administrative expenses for further optimizing the costs. The REIT also decided to withdraw its previously announced financial guidance for the year, on account of the pandemic outbreak.
Investment in REITs is generally inspired by two main factors, Dividend and stock performance. Ventas has robust track record of making regular dividend payments. The REIT maintained the streak in the first quarter. However, in the second quarter, it resorted to dividend cut in the wake of pandemic impact. It is quite clear that the dividend cut is temporary in nature as Ventas keeps its fundamentals intact.
The move to slash the dividend led to conservation of nearly $130 million in cash per quarter as the company moves ahead to fight coronavirus issue. An analysis of the company’s quarterly performance showed that the REIT is in robust position to sail through the current pandemic scenario. But it is quite likely that Ventas may stick to slashed dividend for quite some time.
On the stock market front, Ventas stock suffered as did most of its peers. The stock is currently trading nearly 50 percent below its 52 weeks high. The stock plunged with the onset of the pandemic, following broader markets. However, since then it has stabilized its position and has shown gentle upward slant.
The current price point seems attractive for long term investors as the company has proved its mettle through its first quarter performance. The financial position of Ventas is conducive to its survival and growth ahead. However, it needs to be kept in mind that the REIT will take substantial time to recover from the losses caused by the pandemic. The company’s upcoming earnings announcement may serve as the short term catalyst, though the performance is most likely already built in the stock’s prevailing price. This is, therefore, an investment with a long term view.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.