Ventas Preps to Meet Oversupply Challenges

Long-held fears of oversupply in some senior housing markets may be coming to pass, and one of the largest senior housing real estate investment trusts (REITs) is marshaling its forces to meet the challenge in 2016.

Chicago-based Ventas Inc. (NYSE: VTR) on Friday released its quarterly earnings from the final three months of 2015, revealing that new supply is likely going to impact its senior housing operating portfolio (SHOP) and is already starting to have an effect. The company finished 2015 on a strong note, with another quarter of solid operational performance, but the exposure to markets with oversupply pressures remain around 30% within its senior housing assets.

Oversupply Gets (Really) Real

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After emphasizing that oversupply concerns had become real during the third quarter of 2015, Ventas felt the sting even more in the final quarter of the year in certain markets. New supply remains a top concern for the REIT, given the pressures on its SHOP assets. During the fourth quarter of 2015, new supply pressures drove a quarterly decline in certain markets, Ventas executives said during a conference call with investors Friday.

“Q4 performance was affected by new supply coming online within our relevant trade area in a number of markets, notably Houston, Chicago and Sacramento, [which] saw NOI declines in the quarter driven principally by occupancy pressure,” CFO Robert Probst said.

Executives expect the exposure of new supply coming on line in 2016 will continue to weigh on the results from the rest of its senior housing portfolio, though its risk exposure is less than 10% of net operating income of the overall company.

“Thirty percent may be affected by supply challenges,” Probst said. “It’s hard to model what those challenges might be. Overall we think on a blended basis that 30% will bring down the overall average. It will partially offset the other 70%.”

The REIT anticipates same store NOI for is senior housing portfolio to grow between 1% and 3% in 2016, lower than the REIT’s overall same-store cash growth of 3.8% for 2015.

“This growth will be partially offset in markets where we anticipate more supply challenges,” Probst said Friday.

Ventas CEO Deb Cafaro has stated strong demographic tailwinds will keep senior housing an attractive space in the long-term. However, the effect of baby boomers entering the market likely won’t have any meaningful impact until 2025, Green Street analyst Kevin Tyler told SHN.

In response to supply questions from investment analysts Friday, executives repeatedly stated the REIT’s commitment to working with only the top operators sets itself apart from competitors. And Ventas is taking a conservative approach to ensure that it can rise to supply-related challenges.

“We’ve assumed in our methodology that all new supply will compete,” Probst said. “Price point, model, location, operator all matter. We’ve taken a conservative position to assume there will be some level of competition irrespective of those items. The key for us is to drive the operational excellence.”

Ventas appears to be keeping close tabs on new supply coming online in close proximity to its properties. And that activity could be in flux; heading into 2016, it is likely that current trends will shape new developments and acquisitions in certain areas.

“Developers might think twice about sticking a shovel in the ground,” Tyler told SHN.

Strong 2015

Ventas completed its spin off of Care Capital Properties in 2015 and also acquired $1.3 billion of a hospital real estate network from Ardent. The yearly total was $5.2 billion in acquisitions. While the REIT reported solid earnings for shareholders, the net income was slightly below 2014 earnings.

Normalized funds from operations (FFO) per diluted common share was $4.47 for 2015 and reported FFRO for the year was $1.5 billion. For the fourth quarter of 2015, normalized FFO per share was $1.03, or $346.3 million overall. The quarterly FFO beat analysts’ expectations by $0.02.

The REIT expects its 2016 normalized FFO per share to range between $4.07 and $4.15, a 3% to 5% growth over 2015.

Ventas shares dipped only slightly after the latest earnings release, but fell in line with the greater stock market over 2015, dipping below $48 per share on Friday. The 52-week high for the REIT is over $78.

Other major health care REITs, including HCP, Inc. (NYSE: HCP), took major hits in share values this week on earnings reports and stock market volatility.

Written by Amy Baxter

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