Ventas (VTR) Dividend Cut

Ventas Inc (VTR) recently announced a major dividend cut. This was not surprising since many real estate investment trusts or ‘REITs’ are struggling during the COVID-19 pandemic. Ventas is a giant in the commercial healthcare REIT space. It is also a favorite of many REIT investors. The REIT has over 48,000 followers on Seeking Alpha.

A primary reason for this is probably because the dividend was not suspended or cut during the last recession unlike many other REITs. But the COVID-19 pandemic and resulting economic downturn is different. It is hitting many ‘blue chip’ companies. The pandemic is also affecting many companies thought of as ‘Sleep Well at Night’ or ‘SWAN’ investments. The major challenge from Ventas is its exposure to senior housing operating properties. Occupancy is declining and costs are rising. Despite the strengths of Ventas, the REIT had to cut the dividend.

Overview of Ventas

Ventas is one of the largest healthcare REITs in the U.S. The REIT has been in operation for over 20 years. Today, Ventas owns approximately 1,200 properties in the U.S., Canada, and the UK. This list includes 739 Senior Housing Communities, 348 Medical Office Buildings, 36 Research & Innovations Centers, 37 Inpatient Rehabilitations Facilities and Long-Term Acute Care Facilities, 9 Health Systems, 16 Skilled Nursing Facilities, and 3 International Hospitals. So, the property portfolio is fairly well diversified. The REIT also owns some mortgages and loans. From the perspective of geography, Ventas’ properties tend to be concentrated east of the Mississippi River and along the west coast. Currently, the REIT has a BBB+ or equivalent investment grade credit rating.

What is a Real Estate Investment Trust Anyway?

A real estate investment trust or ‘REIT’ is a corporation that owns, operates, or finances income-generating real estate. A REIT’s stock is usually publicly traded on stock exchanges. So, in this way, small investors are able to invest in the commercial real estate market without having large amounts of their own capital.

To qualify as a REIT, a company must own real estate that generates income and is distributed to shareholders. Specifically, according to Investopedia, a REIT must

• Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
• Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
• Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
• Be an entity that’s taxable as a corporation
• Be managed by a board of directors or trustees
• Have at least 100 shareholders after its first year of existence 
• Have no more than 50% of its shares held by five or fewer individuals

Additionally, healthcare REITs acquire, or develop and own healthcare properties. These include senior housing properties, medical office buildings, skilled nursing facilities, hospitals, and life science laboratory space. Healthcare REITs generally do not operate the properties they own. Hence, the tend to have established long-term relationships or partnerships with their tenants. This can sometimes lead to a small number of tenants leasing a relatively large percentage of properties.

Ventas Dividend Cut

Ventas has paid a dividend since 1999 according to Seeking Alpha. The has generally increased with time. Ventas also maintained its dividend during the Great Recession from 2008 to 2009. This is in contrast to many other REITs that struggled during that time period and cut their dividends due to lower income.

With that said, COVID-19 is arguably much more stressful for REITs in general. Many of their tenants are facing significant challenges and reduction in revenue. In turn, this translates into lower income for REITs. Ventas is no exception even though it does not have a commercial retail focus, as we discuss below.

The REIT announced an approximately 43% dividend cut on June 19, 2020. The regular quarterly cash dividend was cut from $0.7925 per share to $0.45 per share. The specific statement from the CEO was:

To further our commitment to maintaining a strong balance sheet, liquidity and financial flexibility, the Ventas Board has declared a second quarter dividend of 45 cents per share. Today’s announcement continues the proactive, prudent and transparent actions the Company has taken, including conserving capital and reducing organizational costs, in response to the COVID-19 pandemic and associated macro uncertainty

In the June 2020 update, Ventas stated,

The Ventas Board has declared a second quarter 2020 dividend of $0.45/share, enabling the Company, as a prudent measure, to conserve approximately $130M of cash per quarter compared to the prior dividend level. This action is responsive to the impact the COVID-19 pandemic is having on the Company’s business, particularly senior housing, and continued macro uncertainty.

So, clearly the main concern at the moment is maintaining liquidity. Further, the company highlighted the fact the senior housing properties are the main challenge.

Impact of COVID-19 on Senior Housing Properties

Notably, the company did not cut the dividend after Q1 2020. At this point though COVID-19 was just starting to impact the U.S. In fact, it was around mid-March that COVID-19 started to have a large impact on the U.S. businesses. Ventas reported flat cash net operating income or ‘NOI’ at that time in comparable periods. However, there were warning signs even by then in that the senior housing operating properties category had a decrease of (10.4%) in cash NOI. This was due to lower occupancy and higher labor and supply costs due to COVID-19.

Since the first quarter earnings release the situation likely deteriorated. The number of cases grew in April and May in the U.S. One does not need to look far in the news to realize that the elderly as a group are being affected by COVID-19 at a rate greater than the young. Further, there are have been well publicized news reports of outbreaks in nursing homes. New infections dropped across the U.S. for several weeks. However, the number of new infections has increased in the U.S. rapidly since mid-June.

In Ventas’ June update, the REIT shows a chart that the number of new resident cases in its properties peaked the week of April 22^nd. The decline since then was 78% until the week of June 10^th. 

Despite the improvement in new infections it is apparent that Q2 2020 will be difficult for Ventas. The average occupancy rate has dropped 390 bps. Additionally, operating expenses have increased to deal with COVID-19. This has resulted in average estimated monthly NOI to drop by $20 million in the second quarter.

Final Thoughts on Ventas Dividend Cut

Ventas will clearly have a tough second quarter. The challenges with COVID-19 will likely extend through 2020. A resurgence of new infections is occurring in states across the south and west coast. Ventas has senior housing properties in Florida, Texas, and California. All three states are experiencing rising new infections albeit in younger people. However, a rollback of business openings and maintaining social restrictions for longer time periods will have some impact on business operations. With that said, Ventas is well led and is conservatively run. But still, occupancy rates will need to rise in senior housing before the dividend is increased again.

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