Ventas Beats Senior Housing ‘Headwinds,’ With Spin-Off Ready to Roll

Ventas Inc. (NYSE: VTR) posted strong quarterly results Friday and increased its guidance for the year, thanks largely to a senior housing portfolio that — so far — has not suffered from concerns around supply and other potential market challenges.

The Chicago-based real estate investment trust (REIT), one of the largest senior housing owners in the country, beat expectations with the performance of its seniors housing operating portfolio (SHOP).

Its net operating income (NOI) for those 305 assets increased 24% from the comparable 2014 quarter, reaching $155.4 million.


The strength of its seniors housing performance contributed to an overall solid performance from Ventas.

Normalized funds from operations (FFO) for the second quarter of 2015 increased 19%, going from $331.6 million to $394.3 million year-over-year. On a per-share basis, that translated to $1.18. It increased its 2015 normalized FFO projection to $4.70 and $4.76 from the $4.67 to $4.75 range.

Revenue climbed 18.6% year-over-year, hitting $891.3 million. That beat a consensus forecast of $871 million from analysts.


But it was the SHOP numbers that drew particular attention from some analysts reviewing the quarterly performance.

“The rebound in SHOP same-store NOI growth was above expectations, given flu and supply-related headwinds,” Green Street analyst Kevin Tyler told SHN. “However, the second half of ’15 may test the strength of this portfolio, should NIC [National Investment Center for Seniors Housing & Care] data on inventory growth and falling occupancy translate to Ventas’ assets.”

The most recent quarterly figures from NIC showed occupancy has continued to slide overall and there are some indications that an oversupply exists, particularly of assisted living units. However, this is variable from market to market, NIC emphasized in reporting on the data.

Thus far, Ventas is outperforming the sector as a whole with respect to occupancy, and the REIT believes it is in a good position with regard to the overall supply picture, executives said on a call with analysts Friday.

Specifically, Ventas’ total U.S. occupancy in the top 99 markets was at 90.8%, which is 80 basis points higher than the average seniors housing occupancy as reported by NIC, said Executive Vice President and Chief Financial Officer Robert F. Probst.

“Looking at the supply dynamics in the broader landscape, Ventas’ construction as a percentage of inventory in the 3-mile trade radius around our buildings was 3.2% in the second quarter, which compares favorably to the 4.5% as measured by NIC in top 99 markets,” Probst said.

Performance of seniors housing assets in New York was particularly strong, driving growth from the first quarter to the second, Citigroup analyst Smedes Rose noted on the call.
Ventas has an “advantaged position” in that market, thanks largely to its portfolio of Atria Senior Living properties, and occupancy and rate growth both contributed to the “great performance,” Probst said.

While he and other Ventas leaders indeed have observed an “uptick in certain markets,” the oversupply issue is “spotty,” he added. The company is pleased with how its properties are positioned in comparison to where it has seen that potentially problematic growth, and the REIT remains “bullish” on its SHOP assets, he said.

‘Full Steam Ahead’ for Spin-Off

In addition to touting how its senior housing assets are situated, Ventas leaders focused on how the spin-off of Care Capital Properties (CCP) is positioning the company for future success.

The spin-off, announced in April, entailed separating most of Ventas’ skilled nursing properties into the new pure-play REIT, which will target smaller, more regional deals while leaving large portfolios that are national in scope to Ventas.

With the spin-off on track to close in August, the CCP team already is building a pipeline of investment opportunities and is moving “full steam ahead,” said current Ventas president and incoming CEO of CCP Raymond Lewis.

The company is “actively bidding on deals in our strategic footprint,” he said.

CCP also has assembled six leaders to form an independent board of directors with expertise in real estate, finance and health care, and hired an investment professional to help identify opportunities.

The REIT expects to have $1.4 billion in term loans and $500 million of revolver capacity in place when the spin-off is completed.

In terms of what the coming CCP deals might look like, the new REIT is eyeing smaller operators with fewer capital alternatives, for whom CCP can bring better “pricing power,” Lewis said. Cap rates probably will trend toward the 7.5% to 9% range.

That’s in contrast to cap rates in the 5.5% to 6% range for seniors housing, which is what Ventas currently is seeing, said Chairman and CEO Debra Cafaro.

In conjunction with the spinoff, Ventas announced its $1.75 billion acquisition of Ardent Health, one of the nation’s largest for-profit hospital companies.

Ventas continues to target a third-quarter closing for that deal, Cafaro confirmed. The acquisition is meant to be a strategic beachhead for Ventas as it seeks to become a player in hospital consolidation. Hospital assets will account for about 6% of NOI when the Ardent deal closes and that could grow to 10% to 12% over time, Cafaro said on Friday’s call.

Consolidation was a theme sounded a number of times during that discussion, with Cafaro noting that it is occurring across the health care spectrum, including massive deals involving pharmacies and health insurers.

As to how this trend could affect strategy for Ventas and CCP, one outgrowth is its continuing to back operators that are consolidating in local markets, Lewis said. That’s in part because Medicare Advantage and other types of managed care plans are increasingly important payors — whose sway could be increased by the insurance mergers — and they are looking for coordinated care across the continuum.

Kindred Healthcare (NYSE: KND), one of the nation’s largest post-acute and long-term care providers and a key Ventas tenant, is one example of a company adjusting to this environment, Lewis said.

“They have targeted the cluster markets and they are building out the entire post-acute network with home health care, rehab, skilled nursing, LTCHs [long-term care hospitals], and that really positions these operators, whether they are regional operators or national operators, in those markets to line up well with the managed care providers and provide an entire suite of post-acute solutions,” Lewis said.

Overall, Ventas is highly focused on building opportunities with CCP and Ardent and believes that the “innovative” spin-off and entry into the hospital sector will create a “higher quality, faster growing company,” Cafaro said.

Written by Tim Mullaney

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