Oversupply, Turnover Take a Bite Out of Ventas

Nearly one-third of Ventas’ (NYSE: VTR) portfolio is exposed to excess supply pressures in specific markets, the health care real estate investment trust (REIT) revealed in its quarterly earnings call on Friday. Results for the third quarter were not poor across the board, but revenue badly missed expectations as supply concerns, along with challenges in occupancy related to a high turnover rate, had some drag on performance for the company.

As the Chicago-based health care real estate investment trust (REIT) fell short of revenue expectations, analysts were quick to ask about oversupply concerns within Ventas’ senior housing portfolio.

“Based on construction, we see 70% of our portfolio that doesn’t have an excess supply situation,” Robert Probst, Ventas chief financial officer and executive vice president, told analysts on a quarterly review call on Friday. “Obviously, that implies that 30% of our markets where there is a supply challenge.”

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However, Probst also noted the issue was limited to a few specific markets within its seniors housing portfolio where excess supply revealed worrisome performance, echoing other industry experts who have said concerns aren’t across the board.

“Atlanta would be one, and there are certainly others,” he said. “But 70% of our portfolio is insulated. It is a market-by-market conversation. There are select markets, and I’ve highlighted as an example Houston, where we have seen an impact and that is affecting our performance. However, as we look at the quarter, the supply issue really doesn’t expand more broadly than that. Roughly 5% of our business has been affected.””

Revenue for the quarter rose 17% to $827.6 million, shy of expectations for revenue to hit $840.7 million. Ventas CEO and Chairman Debra Cafaro noted mergers and acquisitions activity in the third quarter impacted revenue. Ventas completed its acquisition of Ardent Health Services, Inc., one of the largest for-profit hospital companies in the U.S., during the quarter for the price of $1.75 billion. The REIT now has $1.3 billion invested in high quality hospital real estate operated by Ardent.

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Other performance drags stemmed from high turnover among executive directors (EDs). Cafaro emphasized that the industry at large has a turnover rate of around 50%.

“It’s a fact of life of the industry,” Cafaro said of the issue. “We’re working with operators to improve staffing at those buildings.”

This high rate of turnover can have an immediate impact on occupancy levels. Ventas’ quarterly supplemental report revealed unit occupancy within Ventas’ same-store senior housing primary markets declined slightly from the time period in 2014. Probst noted that the overall effect of ED turnover came from just three markets: Chicago, Atlanta and Jacksonville.

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“If [executive directors] are strong, they leave, and that can have an impact in the short-run on occupancy. And indeed we saw that in all three of those markets that I highlighted,” Probst said. “That was a significant driver [of the results]. The overall effect was 150 basis points by the performance in those three markets. The job then is to continue to work to fill those slots with great people and where leading operators like Atria can come to shine.”

Juan Sanabria, an analyst with Bank of America/Merrill Lynch, chimed in during the earnings call that these markets also had some other oversupply in data from the National Investment Center for Seniors Housing and Care (NIC).

“A couple of those markets read as high supply markets from a NIC perspective,” Sanabria said.

However, same-store NOI for the company’s total portfolio rose 4.3% compared to the same quarter last year.

Cafaro was also bullish on the hospital and medical office building sector of the REIT’s portfolio, adding that the decrease in net income per share during the quarter compared to the same quarter in 2014 was resulted from the properties that were spun off to Care Capital Properties (NYSE: CCP), a separate REIT which holds most of Ventas’ former skilled nursing facility (SNF) assets.

“We see Ardent having a very good quarter,” Cafaro said on the quarterly results call. “We believe some of the volatility in one particular case has to do with an acquisition and not really with the underlying fundamentals on the EBITDAR line.”

Ventas reported a normalized funds from operations (FFO) of $365.5 million for the third quarter or $1.09 per diluted share. This beat the $332.8 million reported in the same quarter in 2014, representing 7% growth on a comparable basis.

Written by Amy Baxter

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