Ventas Dividend Cut Could Portend Pressure on Payouts of Senior Living REITs (original) (raw)

Covid-19 is inflicting its greatest toll on the elderly, and that is impacting companies that care for older adults.

Ventas Inc. (VTR) , a real estate investment trust (REIT) that focuses on senior housing and healthcare properties across the U.S., Canada and the U.K. managed by Brookdale Senior Living (BKD) , Ardent, Kindred and other third-party firms, recently cut its quarterly dividend to 0.45fromtheprior0.45 from the prior 0.45fromtheprior0.7925. As we've discussed more than a few times, the cutting of a company's dividend is a serious signal investors need to heed, for it not only shrinks expected dividend income as a company looks to shore up its cash flow but also means a rethinking of how the company's shares are valued is likely at hand. In the case of Ventas, its dividend cut plus the ensuing 10% drop in its share price on that news reduced the yield of VTR shares to roughly 5%, down from the prior 8.1%.

The thing that is interesting is that Ventas' balance sheet had 3.2billionincashasofMayandexitingtheMarchquarterVentashad373.1millionsharesoutstanding.I′dnotethatduringMarch,accordingtothecompany′sregulatoryfilings,Ventasdrewdown3.2 billion in cash as of May and exiting the March quarter Ventas had 373.1 million shares outstanding. I'd note that during March, according to the company's regulatory filings, Ventas drew down 3.2billionincashasofMayandexitingtheMarchquarterVentashad373.1millionsharesoutstanding.I′dnotethatduringMarch,accordingtothecompany′sregulatoryfilings,Ventasdrewdown2.75 billion under its $3.0 billion unsecured revolving credit facility to "increase liquidity and preserve financial flexibility" as a result of the Covid-19 pandemic.

On the one hand, the dividend cut would save Ventas all of 511millionoverthecomingyearinreduceddividendpaymentstoshareholders.ThethingthatmakesthisevenmoreintriguingisthatVentasgeneratedoperatingcashflowof511 million over the coming year in reduced dividend payments to shareholders. The thing that makes this even more intriguing is that Ventas generated operating cash flow of 511millionoverthecomingyearinreduceddividendpaymentstoshareholders.ThethingthatmakesthisevenmoreintriguingisthatVentasgeneratedoperatingcashflowof314.5 million in the March quarter, which would suggest it was on pace once again to generate 1.3billionto1.3 billion to 1.3billionto1.4 billion in operating cash flow as it did in the last several years.

When we scan the company's most recent 10-Q, we have an idea of what's underfoot. The phrase Covid-19 was cited 49 times in that filing with the Securities and Exchange Commission (SEC), beginning with "various legal actions, regulatory proceedings and claims arising in connection with our businesses" and ending with Ventas sharing it "reduced expected capital expenditures for 2020 by $0.3 billion" and is reviewing other areas of cost savings. The "why" behind this is that as a result of the pandemic the company's operating costs have risen while its revenue and cash flow, which hinge significantly on property occupancy levels, decreased materially as move-ins slowed while the pandemic boosted potential resident illness and move-outs.

In short, the pandemic was going to squeeze the Ventas business model from a few sides and the company slashed expenses and dividends in preparation for what was expected to come. To be blunt, this should not be surprising. I say that given reports that in the state of Virginia, where I reside, roughly 76% of deaths related to Covid-19 were of people 70 years and older. According to the Centers for Disease Control and Prevention (CDC), eight out of 10 reported deaths related to Covid-19 in the U.S. have involved adults 65 years and older.

While we haven't heard of dividend cuts at other REITs focused on senior living, such as Omega Healthcare Advisors (OHI) , Brookdale Senior Living is requesting $5 billion in federal aid, which tells me Ventas won't be the only senior living REIT to cut its dividend.

Dividend-seeking investors who are looking for tangential plays on the aging population should check out Physicians Realty Trust (DOC) , which manages healthcare properties for physicians, hospitals and healthcare delivery systems. The company just declared its latest quarterly dividend of $0.23 per share that will be paid July 17 to shareholders of record on July 2. At the current share price, the yield on DOC shares is a healthy 5.2%