The healthcare Real Estate Investment Trusts have been the hardest hit in our sector during the recent stock market plunge. Many are worried about their own liquidity and drew down on their credit facilities, even if they didn’t need the funds now. Some just went and raised new debt to bolster their liquidity. They are obviously worried about their tenants’ future financial performance, and they know that wages, utilities and food bills have to be paid before rent. One REIT, Ventas (NYSE: VTR), has already offered to defer 25% of April’s rent until October. They had the largest credit facility drawdown of $2.7 billion. May is just a month away, and the environment will surely be worse. No REIT really wants to offer rent deferrals before absolutely necessary, but we don’t believe Ventas will be the only one.
In addition to rent deferrals, so far, two REITs have lowered their dividend payout. Sabra Health Care REIT (NASDAQ: SBRA), which at one point in March had a yield of 30%, cut its dividend by one-third. This was followed by Diversified Healthcare Trust (NYSE: DHC), which was yielding 28% at the depth of the plunge. They cut their quarterly payout to just one penny, from 15 cents, lowering the yield to 1.5%. DHC had already cut its dividend significantly last year. With Five Star Senior Living (NYSE: FVE) representing close to 50% of its income, perhaps they are seeing things that the public has not seen yet. We suspect these two REITs will not be alone, and for some of the others, a dividend cut is most likely already embedded in their current price. If that is the case, cutting the dividend will have minimal impact on their share price, much like with Sabra and DHC. It is the last thing REITs ever want to do, but it may be the best time to do so.