Ventas: Tough Road Ahead To A Growth Trajectory

Summary

• Ventas has delivered consistently poor price performance coupled with low dividends over the past ten years.
• Ventas’ proposed “Pivot of Growth” was undermined by underperforming assets and sale of Life Sciences development.
• Ventas has yet to realize the full potential of its acquisition.
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Ventas, Inc. (NYSE:VTR) is one of the four major real estate investment trusts ((REITs)) which derives most of their earnings from senior housing operated portfolio (SHOP), owning or managing (through unconsolidated joint ventures) approximately 1,200 properties. However, the stock has failed to achieve significant price growth, and when compared to its peers, looks really poor.

When it comes to its dividend, Ventas has been able to pay a steady 3 percent plus yield over the past ten years. Though poor performance over the past three to five years is not unusual for the healthcare REIT industry, the case of Ventas is a little different. In my opinion, certain self-inflicted issues like unfriendly behavior with shareholders, bad faith engagement with Land & Buildings, and balance sheet mismanagement have harmed investors more than the prevailing economic and market condition.

Poor Return Over the Years

Performance of Ventas, Inc. has been really disappointing over the short and medium term. VTR’s total return over the past one year and five years is a measly six percent. Over the past three years, the return was negative. This is despite a steady 3 to 5 percent dividend yield. When compared to its closest competitor, Welltower Inc. (WELL), the company has performed really badly. Not only compared to WELL; its other peers also performed much better.

Performance (Seeking Alpha)

WELL and VTR have for a long time been the leading healthcare REITs with comparable size, asset quality, and valuations, and they operated in the same SHOP segment. While VTR’s share price dropped by almost 14 percent, WELL’s market price grew by 20 percent over the past five years. Another major healthcare REIT, Medical Properties Trust, Inc. (MPW), recorded an astonishing 55.5 percent price growth over the same period. Such a large gap in performance really needs some reflection.

Ventas had been facing issues long before the covid-19 pandemic set in. In June 2019, Ventas promised a pivot to growth, claiming that occupancy growth and improved delivery would lead towards an earnings growth during the years of 2020 and 2021. The Pivot of Growth also forecasted higher than 12 percent compounded return to the shareholders over the next five years.

Pivot to growth (Ventas website)

However, during the subsequent earnings calls in Q2 and Q3 2019, there were clear indications of divergence from its growth target. VTR’s SHOP segment failed miserably due to some regulatory issues pertaining to the reimbursement system and service classification codes. Based on the performance of its SHOP portfolio, Ventas lowered its 2019 guidance for funds from operation (FFO) to between $3.81 and $3.85 per share, from the previous range of between $3.80 and $3.86 per share.

For a REIT, funds from operation is a true indicator of its operating performance. If we want to measure the efficiency of day-to-day operations, we need to add back depreciation, amortization, and losses on sales of assets to the net earnings and then subtract net interest income and gains on sale of assets. For Ventas, FFO depicts a very poor picture for the past five years. Its FFO has recorded a negative CAGR of almost 7 percent, and 11 percent over the past 5 years and 3 years respectively. YoY decline in its FFO is even worse at around 13 percent.

Underperforming Assets & Sale of Life Sciences Development Pipeline

In late 2017, Ventas created a subsidiary named Eclipse Senior Living (ESL) in order to manage about 80 of its underperforming assets. ESL underperformed in subsequent years and failed to manage those assets. ESL considered implementing a new pricing model for them, which did not materialize due to tough market conditions. In October 2021, Ventas shut down ESL and handed over the operations of 90 underperforming assets to eight local operators.

In between came the covid-19 pandemic in 2020 that had a drastic impact on the SHOP segment, due to less occupancy, shorter stays by patients due to cost constraints, lower reimbursements, increased wages, oversupply, and high death rate among the geriatric population. Such an unexpected pressure on its earnings revealed a deep-rooted problem - that of a poor balance sheet.

As a result, with the emergence of vaccines by the end of 2020, Ventas was forced into a $930 million deal in which it sold 45% ownership in its promising life sciences development pipeline. In order to raise huge cash, the pipeline was sold at book value, and Ventas also destroyed shareholder value by raising equity shares at $45 per share – roughly 35% below the shares’ pre-COVID high.

Problem with Stakeholders

In March, 2022, Land & Buildings Investment Management, a significant shareholder of Ventas, issued an open letter to VTR shareholders detailing why the Company needs to take immediate action to address the long-term underperformance shareholders have experienced under the current Board of Directors. Land & Buildings nominated its Founder and CIO Jonathan Litt for election at the upcoming 2022 Annual Meeting of Shareholders.

However, after a detailed discussion with Ventas shareholders, they withdrew the nomination, as they did not sense enough support among shareholders. Such an open letter and aggressive posturing may raise some concerns over VTR’s management. However, this REIT is backed by most renowned investment management firms. 95 percent of the common equities are held by such institutions, and almost one third of this REIT is owned by the three big investment managers - Vanguard Group, Inc., BlackRock Inc., and State Street Corporation.

Returning Back to the Growth Trajectory

A consistent poor price performance coupled with low dividend does not project a very good picture of Ventas, Inc. There has been a series of poor performances over the past five years, which raised concerns among investors, such as Land & Buildings Investment Management. In my opinion, Ventas management must sort out the differences with Land & Buildings.

However, over the long term, Ventas, Inc. had a reasonably strong performance. It has recorded almost 295 percent price growth over the past 25 years since its inception. Its total return over the past 10 years has also been decent in excess of 80 percent. Moreover, this REIT has consistently paid a dividend in the range of 3 to 5 percent.

In addition, Ventas, Inc. is yet to realize the full potential of its acquisition of New Senior Investment Group in an all-stock transaction valued at $2.3 billion, which was completed almost eight months back. As a result Ventas, Inc. got hold of 103 private-pay senior living communities, which includes 102 independent living communities and one continuing care retirement community. The properties, located across 36 states, have a combined total of 12,404 units.

After the covid-19 pandemic occurred, the SHOP segment suffered huge setbacks, and most SHOP focused REITs suffered price loss. I have listed the reasons just above. Most relate to low occupancy during the pandemic. One looming worry is Medicaid’s insolvency. Even today, as one knowledgeable investor told me, Medicaid is not able to provide the “full ride” to beneficiaries. This will only get worse - before, hopefully, the feds do something right and it gets better. So, low occupancy is a problem, and there’s not a lot Ventas or anybody else can do to address the Medicaid problem. However, they still need to figure out ways to attract customers and fill those empty beds - a process I want to term capacity enhancement.

The other process is capacity building. This is part of a long term plan, and it can be done either through acquisitions, or through direct and organic growth.

Some smaller REITs like CareTrust REIT, Inc. (CTRE), LTC Properties, Inc. (LTC), Healthcare Realty Trust Incorporated (HR), and Sabra Health Care (SBRA) have followed the M&A route for growth and have recorded a positive price growth in 2022. Hopefully, VTR’s acquisition of New Senior Investment Group will derive similar results in the coming quarters even as the pandemic’s disruptive effects abate.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.