Senior Housing REITs Send Mixed Signals on Oversupply

Discussion around oversupply in senior housing is nothing new, including back and forth about the reality of the situation. There still is no clear consensus regarding oversupply concerns in the year ahead as health care real estate investment trusts (REITs) report their earnings for the fourth quarter of 2015.

Chicago-based Ventas Inc. (NYSE: Ventas) set the stage for fourth-quarter earnings calls with a charge to combat oversupply challenges, but other REITs aren’t fearing quite the same sting.

“We continue to believe the fear of supply in the U.S. is overblown,” Thomas J. DeRosa, CEO of Toledo, Ohio-based Welltower, Inc. (NYSE: HCN) said during the company’s call with analysts last week. “There’s no doubt that certain markets are oversupplied, but we are primarily in markets where it is difficult to build, and hence believe our performance will be resilient.”


Of Welltower’s 1,215 U.S. facilities in all asset classes, 93% are based in top metropolitan service areas. Across the country, 12.6% of the REIT’s senior housing operating NOI came from Los Angeles, 10.2% from Boston and 5.2% from Chicago.

Meanwhile, Ventas originally pointed to new supply pressures in certain markets in the third quarter of 2015, and the final three months of 2015 were no different.

“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,” Ventas CFO Robert Probst said.


Simply being in the same market doesn’t necessarily mean that different companies face similar supply pressures, though. Ventas and Welltower are both established in Chicago, for example, and the former indicated feeling supply pressures while the latter said it largely isn’t. The discrepancy alludes to the idea that perhaps they’re not subject to the same market forces.

“I think each operator is responding to its own unique portfolio and the level of direct competition each is or is not seeing,” Beth Mace, chief economist and director of capital markets outreach at the National Investment Center for Seniors Housing & Care, told Senior Housing News. “Not all new properties will directly compete with existing product, and individual properties may be oriented toward or catering to different resident profiles—the market may have some natural segmentation in it that will prevent all operators from being competitive with each other due to the mix of offerings provided, the site location, the income demographics, and the design elements.”

By its own admission, Ventas is being very conservative and considering every single new development to be potential competitors. To analyze supply, Ventas introduced a new methodology in the third quarter to identify new construction within seven-mile and three-mile radii around its assets based on population density.

“Our methodology assumes 3% absorption and is arguably conservative as it assumes that all new supply within the relevant trade area is competitive regardless of care model [or] price point,” Probst said. “Using this methodology, construction as a percentage of inventory across our [senior housing operating portfolio] stands at 4.5% in Q4, a 40 basis point increase from Q3, principally driven by markets such as Atlanta, Sacramento and Denver. Against this backdrop, Ventas and our focus leading [senior housing operating portfolio] operators are working to drive operational excellence to gain share and grow even in the context of new supply.”

HCP, Inc. (NYSE: HCP) indicated that it remains aware of supply pressures, but likes how it stacks up against the competition. The REIT measures new supply using a five-mile radius, revealing that 23% of its RIDEA and continuing care retirement community (CCRC) portfolio and 2.6% of its total portfolio income faces new construction or expansion of similar care types based on NIC construction data, most of which is slated to open in 2016.

“We are mindful of the potential pressure on pricing and occupancy that the new supply could cause in these markets,” HCP CEO Lauralee Martin said. “However, we like our market position relative to the new higher-cost competitors.”

A few REITS and other operators still have yet to weigh in, but so far, Ventas appears to be the outlier in its detailed focus on supply pressures this earnings season.

For Sabra Health Care REIT (Nasdaq: SBRA), the quarter ahead likely won’t bring significant supply pressures to properties in its current markets, said Chairman and CEO Rick Matros.

“Things are pretty stable,” he said. “We may have one market with a new entry that’s causing a problem for one facility, but that’s about it.”

Senior Housing Properties Trust (NYSE: SNH), as well, said 20% of the REIT’s properties will see a new facility open its doors within the next year, but any pressure they bring would be minimal.

“Pretty much, in every case, it’s one facility, so I think we’ll be fine,” SNH’s President and CEO David Hegarty said. “We could be impacted a little, but I don’t expect anything significant.”

From an operational standpoint, Brookdale Senior Living (NYSE: BKD)—a significant tenant of the “Big Three” REITs—has seen new construction in its sub-markets at about half the rate of the overall market, CEO Andy Smith said, but the company has plans in place, including investments in its communities, to address this supply.

“We believe that we will see positive absorption in most of our sub-markets over the next year as the number of potential residents who can afford our services grows faster than the new supplier,” he said.

On the other side of the coin, National Health Investors (NYSE: NHI) proclaimed itself a contributor to such oversupply fears.

“It’s kind of darkly humorous—everyone is worried about oversupply,” NHI President and CEO Eric Mendelsohn said. “But in so far as our RIDEA is concerned, we are the new construction and we are the buildings that are shiny and new and fill up quickly.”

Written by Kourtney Liepelt

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