Ventas: Expect More Deterioration

Summary
  • Ventas REIT has been struggling since the pandemic.
  • Underlying issues include a tenant base with poor rent coverage and an operating portfolio that was struggling even before COVID-19.
  • Industry evidence suggests that the forward outlook is likely too optimistic.
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When we last covered Ventas, Inc. (VTR) we made the case that the fundamentals had warranted a neutral stance, even though the stock had come down significantly this year. With more industry data out and the world moving closer to multiple vaccines for COVID-19, we decided to see whether we could change our rating.

The Trend Is Not Your Friend

While COVID-19-related deaths and hospitalizations peaked some time back, this has not helped the senior housing industry in any way. Occupancies trended down once more with NIC reporting a 2.6% drop quarter over quarter.

Source: NIC

Investors may wonder why a 2.6% drop is getting that much attention from us. The key reason is that this entire industry operates on razor thin margins. Those margins are getting squeezed from the expense side of the equation as COVID-19 has increased costs significantly. They are also getting squeezed from the occupancy side; these drops are rather large when one takes into account their impact on Net Operating Income (NOI).

Assessing Size Of Impact

In Q2-2020, NOI dropped almost 43% in the Senior Housing Operating Portfolio, or SHOP, portfolio.

Source: VTR Q2-2020 press release

Note that in Q2-2020, NIC reported a 2.8% drop in occupancy from Q1-2020.

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