In June, Ventas cut its dividend by 43% in response to pandemic-driven headwinds impacting its senior housing business (about 50% of net operating income).
Occupancy fell to historic lows as restrictions on community access prevented move-ins, and expenses spiked for labor and personal protective equipment.
The end result was a dividend that was no longer expected to be covered by the REIT's cash flow. Ventas' leverage increased as well, putting its BBB+ credit rating on watch for a downgrade at Standard & Poor's.
While Ventas' rebased dividend improved its payout ratio, we wanted to see signs that a bottom was near for the company's senior housing business before considering a score change for the dividend.
On November 6, Ventas reported earnings and showed signs of stability across its operations, increasing our confidence in the dividend's long-term sustainability.
As a result, we are upgrading Ventas' Dividend Safety Score from Unsafe to Borderline Safe.
We would consider another upgrade if the company achieves a full earnings recovery in its senior housing business and a commensurate reduction in leverage to pre-pandemic levels.
Looking at Ventas' third-quarter results, normalized funds from operations (FFO) slipped less than 3% compared to the second quarter as management was able to partially offset a low single-digit revenue decline by reducing some COVID-related expenses.
This put the REIT's third-quarter payout ratio at about 60%. Based on analysts' cash flow estimates, Ventas' payout ratio in the year ahead is projected to remain at a reasonable level near 70%.
Throughout the quarter, Ventas' senior housing operating properties saw the pace of occupancy decline slow. The REIT even recorded its first net positive move-in month since the start of the pandemic in October.
Source: Ventas Earnings Presentation
While management believes occupancy could soften in the fourth quarter given the recent rise in COVID-19 cases nationwide, senior housing has a much better handle on protecting residents and limiting operational disruption compared to the spring.
In fact, while U.S. cases have hit a new daily record, 93% of Ventas' senior housing properties have either never had a confirmed resident case or have not had a new confirmed case in 14 days.
Across Ventas' medical office buildings (31% of net operating income) and other healthcare properties (18%), rent collection remained at or near 100% in October.
These facilities have also adapted to safely remain open and continue serving patients, improving their rent coverage compared to the second quarter.
Overall, Ventas is optimistic that the worst is behind the company. It's hard to imagine a swift recovery in the senior housing industry (Pfizer's vaccine may help the longer-term outlook), but continued stability is likely good enough to support the dividend as management awaits better times.
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