Ventas Delivers ‘Warning Shot’ Over Continued Oversupply Pressures

After breaking into the hospital and life science sector last year with a $1.5 billion splash, Chicago-based real estate investment trust (REIT) Ventas Inc. (NYSE: VTR) appears to be poised for a slower year for its senior living business.

Citing more new supply expected to hit the market in 2017, Ventas executives said during a year-end earnings call Friday they were anticipating a significant hit in occupancy and a dip in net operating income within nearly one-third of its senior housing operating portfolio. 

At the same time, the REIT announced it was only deploying capital within its life science and acute care hospital sectors, staying quiet on any new senior living transactions.  

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Oversupply ‘Warning Shot’ 

After sounding alarm bells last year that a considerable chunk of its senior housing operating portfolio (SHOP) was at risk of being affected by new supply coming on line, Ventas announced it’s expecting an even bigger impact in 2017, and likely 2018, as well. 

Ventas’ exposure to oversupply in its SHOP portfolio remained at 30% of NOI in 2016. In 2017, the REIT is expecting “single-digit declines” in SHOP NOI “as a result of occupancy pressures from cumulative new deliveries,” CFO Bob Probst said during an earnings call Friday.

The news was not surprising, given Ventas’ previous statements.

“Their forecast for 2017 is little bit, tiny bit worse than what we had forecast,” Michael Knott, analyst with Green Street Advisors, told Senior Housing News. “It’s not hugely surprising, but does hint at the bifurcation between the supply laden markets and those that have a little more protection from new competition. …What we have said is that 2017 and 2018 will be the cyclical low point for NOI growth.”

Despite these headwinds, the company expects 0%-2% growth in its SHOP portfolio in its guidance for all of 2017, with the markets affected by new supply offset by rent escalators and growth within the other 70% of its SHOP portfolio, which is in high barrier markets.

There was another bright spot in this 70%: During the fourth quarter, the company saw strong NOI growth of nearly 7% in its Canadian senior living assets, and anticipates continued strength in this area. 

Citing data from the National Investment Center for Seniors Housing & Care (NIC), executives noted that supply deliveries will likely escalate above 2016 levels, further pressuring occupancy trends.

With diverse portfolios and only roughly 10% of its overall NOI at exposure to oversupply, Ventas—and other health care REITS—may be in decent position to withstand the cyclical, near-term headwinds. 

“The fact that Ventas has a majority of its portfolio in markets that will still deliver, that they expect to deliver mid-single digit NOI growth next year is a striking contrast to markets where they expect to see declines in 2017,” Knott said. “It is a warning shot for the senior housing industry overall, but shouldn’t be that surprising for those who have been observing for a while.”

In addition, there are some signs that construction starts are slowing, according to Probst. Senior living construction starts hovered at 5.7% as a proportion of inventory in the latest quarterly data from NIC. Occupancy dropped slightly to 89.6%.

“That’s the big question—how quickly will the new construction slow down?” Knott said. “We do expect it will slow. The recent high will mark a peak with the lag delivery of that new supply in 2018. If new construction does recede a little bit, hopefully that can give the industry a little reprieve starting in 2019 and 2020 in terms of less new competing supply.”

With these trends in context, Ventas did not mention any plans to acquire or dispose of senior living assets in 2017 on the call Friday. Executives also were mum on a potential takeover of Brookdale Senior Living (NYSE: BKD), one of Ventas’ major senior living tenants, representing about 5% of the portfolio’s overall NOI, according to fourth quarter supplemental data. 

Keep Calm and Carry On

Despite these challenges, the REIT announced strong quarterly and end-of-year returns. Normalized FFO for the full year grew 5% to $4.13 per diluted common share. Same-store NOI growth reached 2.7% compared to 2015, within previous guidance. 

Ventas will be looking for growth in its newer sectors, including acute care hospitals and life science assets. Last year, Ventas entered the life science sector with a $1.5 billion investment in the real estate assets of Wexford Science & Technology LLC. 

In 2017, the REIT will continue to invest in this sector with its institutional tenants to the tune of $300 million, including development sites with Duke University and Wake Forest University. 

Ventas will also deploy $700 million in capital to fund its acute care hospital partner Ardent Health Systems as it acquires LHP Hospital Group.

Executives largely brushed off uncertainties around big-picture issues, such as major tax reform, modification of the health care system, interest rates and unknown contours of trade barriers or immigration trends.

Acute care hospitals are planning to go about their usual business, as many of the health system changes in the last few years are already deeply embedded in their operations, CEO Debra Cafaro commented.

“The hospital acute care providers are going about the business of driving efficiency, quality improvement, M&A, etc.,” Cafaro said. “…While uncertainty generally can delay decision making—and we may see some of that this year—I do think we are well-positioned to continue stable growth in our portfolio.”

Ventas’ shares were down a slight 0.05% to $61.77 as of market close on Friday, following the earnings data and call.

Written by Amy Baxter

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