CEO: Ventas Benefits from REITs’ ‘Goldilocks Era’

Senior housing real estate investment trusts (REITs) are looking at other asset classes with fresh eyes and better footing when it comes to the cost of capital.

Chicago-based Ventas Inc. (NYSE: VTR) is one REIT seizing new opportunities with its recent $1.5 billion grab into the life science space. Fresh off a positive earnings quarter, Ventas executives touted the quality of tenants in its new properties.

“We expected to have a strong first half [of the year], and we did,” Robert F. Probst, executive vice president and chief financial officer, said during a call with analysts Friday. 

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The investment is the company’s first step into life sciences, snapping up 25 class A properties from Wexford Science & Technology LLC (Wexford) leased by universities, academic medical centers and research companies. The stable tenants are some of the top lessors in the asset class, according to Ventas CEO and Chairman Debra Cafaro. 

“These 11 universities that we are already doing business with in the Wexford portfolio, they account for 10% of all university life science R&D spending,” Cafaro said. “Our strategy will be to grow with those leading research universities, then also target the next 20 or so institutions in terms of research and development.”  

Of course, the REIT is still seeing opportunities in its core senior housing business. Despite a slight drop in occupancy across the industry, which also impacted Ventas, the company sees new supply as less of a threat. Similar to other companies like Brookdale Senior Living (NYSE: BKD), Ventas has been implementing aggressive rent escalators over the past few quarters which have boosted earnings, in line with industry trends

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“The big picture is still the value proposition of senior housing,” Probst said. “We are bullish on senior housing in the short, medium and long term. …If you look at the net worth of seniors, affordability is not the negating issue.”

Since the Great Recession, Ventas’ ratio of senior housing has shifted toward more RIDEA structured leases. More than half of the company’s portfolio is made of of senior housing assets—32% of which is senior housing operating and 25% senior housing triple net leased, according to Ventas’ website. Given this ratio, analysts were quick to question whether the REIT was still diversified enough to weather another economic downturn. 

Executives dismissed the possibility, noting the company’s resiliency along with the strong senior housing demographics. 

“We’re in a Goldilocks environment for REITs in general, and Ventas in particular,” Cafaro said while discussing the company’s advantages in the public markets, improved cost of capital and strength of the core businesses. “We have been in this slow-growth economy for while. What I would say is that in the financial crisis and recession, senior housing was the only real estate asset class that continued to show NOI growth.”

Cafaro also saw little downside from the recent Brexit, noting that the company’s exposure in the UK is “small.”

“We have a very small investment in the U.K.,” she said. “The assets are performing as expected. We like our partner there and we continue to look for opportunities in the U.K.”

For the second quarter of the year, Ventas reported income from continuing operations growth of 8% to $0.40 per diluted common share over the same period in 2015. Normalized funds from operations (FFO) grew 7% for the quarter to $1.04 per diluted common share. 

The company’s senior housing operating portfolio (SHOP) same-store net operating income (NOI) grew 2.1%, in line with expectations. Triple net leased same store NOI grew 6.2% during the quarter. The company also saw earnings growth through a $3.5 million cash fee from Kindred Healthcare, Inc. (NSYE: KND). 

Ventas increased its full year guidance following the strong earnings. The REIT estimates same-store NOI will grow between 2% and 3%, up from the previous guidance of 1.5% to 3%. 

Written by Amy Baxter

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