Ventas to Decide Dividend's Fate in June; We Continue to Expect a Cut
Ventas (VTR) reported earnings on May 8 and opted not to comment on the dividend other than stating on the earnings call that a decision by the Board would be made in June:
As you know, we declared and paid our last quarterly dividend in April. Because we normally pay our next dividend in July, our Board will consider the dividend in mid- to late June. As it always does, our responsible and experienced Board will make a decision using its good faith business judgment, taking into account all of the information available to it at that time.
In a situation like the fast moving, rapidly changing global pandemic, we have the advantage of aggregating and analyzing the best and most current information available in order to make the optimal decision.
The company's latest results didn't change our mind that a dividend cut is likely.
Across Ventas' senior housing operating properties (a little over 30% of net operating income), April move-ins fell 75%. As a result, occupancy fell from 84% in early April to 80.7% as of May 1.
New York and New Jersey are important markets for Ventas' senior housing operations, but they are also the epicenter for COVID-19 infections. The firm could face prolonged restrictions on community access in these areas. (29% of Ventas' communities have already suspended their move-ins.)
Rival senior housing REIT Welltower (WELL) recently projected its occupancy could fall to around 79% to 80% by the end of June, down from 82.7% as of May 1. Given its footprint, Ventas seems likely to face similar pressures going forward.
For perspective, the senior housing industry has never seen occupancy dip below 80%. These are truly unprecedented times.
Meanwhile, as expected, costs are rising. Ventas said that operating expenses are trending around 10% higher, particularly for labor and personal protective equipment (PPE). These trends are expected to continue through at least May.
Approximately 25% of Ventas' communities have had at least one resident test positive for COVID-19, so we wouldn't be surprised if these higher expenses represented a new normal to some degree. Restoring trust for existing and prospective tenants will likely require extra, ongoing precautions.
Management said that financial and operational trends are expected to be "directionally similar" for Ventas' triple-net portfolio this quarter.
About 20% of the firm's net operating income (NOI) is from senior housing properties leased to third-party operators who pay Ventas rent.
Adjusting for a 25% rent deferral program Ventas recently put in place for its senior housing tenants, close to 100% of rents were collected in April, and May remains on track.
The firm also collected 96% of office rents (27% of NOI) and nearly all of its healthcare system rents (15% of NOI). So the triple-net side of the business has fortunately remained fairly steady thus far.
Regardless, continued weakness across Ventas' senior housing operating properties will cause cash flow to fall short of the REIT's dividend for the foreseeable future.
The REIT's liquidity is strong with $3.2 billion in cash on hand and less than $230 million of debt maturing in 2020. But increasing leverage to maintain the current $1.2 billion dividend would be a financially aggressive strategy.
After all, the operating environment is highly uncertain going forward, and a V-shaped recovery seems unlikely to happen in the senior housing sector.
An outright dividend suspension would be surprising since Ventas continues collecting most of its rent and maintains a strong balance sheet (BBB+ credit rating).
However, a substantial dividend cut (30-50%+) would more comfortably align the payout with Ventas' lower cash flow profile until the business finds a bottom and eventually returns to growth.
Therefore, we maintain our Unsafe rating on Ventas' dividend.
Looking ahead, Ventas noted that new construction starts in senior housing continued to decelerate with the first quarter of 2020 having the lowest number of new starts in several years in Ventas' markets.
While that could help the long-term outlook, the issues weighing on the senior housing industry probably won't be resolved any time soon. Confidence in communal living has been shaken, and some of these higher virus-related costs could represent the new norm.
Current shareholders who decide to stay the course should be prepared for a long road ahead.
