It was bound to happen. When the share prices of healthcare REITs plunged by 50% and more, their yields spiked to rates unheard of, with four of them over 15%. Sabra Health Care REIT was one of them, peaking at 30.4%. This was not only absurd, but not sustainable. As Rahm Emanuel famously said, “why let a crisis go to waste?”
We are in a crisis, no doubt about it. And while all the REITs have recovered some of their lost values, investors are not starry-eyed about the near-term future for healthcare REITs and their tenants. No matter how much of a positive spin you try to put on it, such as Tom DeRosa’s well-received remarks a week ago, the reality is a bit different.
So, Sabra’s 30.4% yield was cut in half to 16% as the market, and Sabra’s shares, rallied. That is still way too high, and this week management decided now was the time to cut the dividend. They cut it by 33%, taking the yield from 16% to 11%. Why? Because, we suppose, doing so would not punish a stock that had already been punished more than the others (see quote above).
In addition, they are taking the prudent step to preserve cash since no one really knows where this pandemic will put the senior living industry. Along with the dividend cut announcement, they also disclosed that they are postponing the closing of $150 million in new investments that were announced in February.
There are only two other healthcare REITs in our universe with double-digit yields, Ventas (11%) and Diversified Healthcare Trust (17%). Diversified Healthcare already had a major dividend cut last year when it reorganized its relationship with Five Star Senior Living. Even though it might make sense to do so again, they might wait to see if the price normalizes and to see how its tenants weather the pandemic storm.
Ventas, on the other hand, would lower its dividend as a complete last resort. CEO Debbie Cafaro is very proud of what she has accomplished at the REIT over the past 20+ years, as she should be. But with this pandemic, Ventas is extremely vulnerable to the performance of its various seniors housing portfolios. They had struggled before we ever heard of COVID-19, and it is not going to get better in the second quarter. And as far as liquidity goes, the $2.7 billion draw on its revolver covers any cash needs, including dividends, but we hope it does not come to that.
Meanwhile, instead of cutting its dividend, LTC Properties decided to suspend its share repurchase plan. We wholeheartedly agree with the decision, as in today’s world, despite the drop in values, buying back your shares is really not a prudent use of extra cash. We expect others may follow their lead, despite some previous public announcements.