Ventas Optimistic Despite Oversupply Challenges

Chicago-based real estate investment trust (REIT) Ventas Inc. (NYSE: VTR) feels the wind is at its back despite some issues related to senior housing occupancy in light of a big surge in new supply opening.

Ventas Chairman and CEO Debra Cafaro struck an optimistic tone during the company’s second-quarter 2017 earnings call on July 28.

“We should in all events remain financially strong and liquid, maintain diversification and balance in our portfolio, continue to drive cash flow and efficiency in our enterprise, allocate capital wisely, stay nimble and opportunistic, and continue to elevate the mix and quality of our portfolio,” Cafaro said.

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And there’s plenty in the financials to be optimistic about. The company logged robust financial results for the first quarter of 2017, with a total revenue of $895.4 million. The earnings exceeded analysts’ expectations by $14.77 million, while the company’s earnings per share of $1.06 beat analysts’ expectations by 1 cent.

Optimism amid occupancy issues, oversupply

The company’s senior housing portfolio grew 0.4% when compared with the second quarter of 2016. But the company’s senior occupancy declined 200 basis points, year-over-year.

“A late and severe flu season, together with the impact of new deliveries, resulted in a widening of the occupancy gap in the quarter,” Ventas CFO Bob Probst said during the call. “Overall, expenses were contained in the quarter, increasing by 3%. Our operators continue to control non-labor costs and to flex labor versus occupancy.”

Another sore spot had to do with the high rate of new community openings in some cities.

“Despite the strength in certain high barrier markets [such as California and Canada], elevated levels of new building openings in select markets constrained our portfolio growth,” Probst said. “The second quarter saw the highest number of new units coming online in recent experience, with overall deliveries of new units in our trade areas up 50% sequentially from Q1 of 2017.”

Dallas, Salt Lake City, Atlanta and Denver were particularly hot places for new construction, he said.

Still, Ventas expects to grow its senior housing portfolio’s NOI by up to 2% for the full year, which is in line with its previous expectations, Probst said.

“With our premium real estate located in high-quality markets, we are well-positioned to take advantage of the coming demographic tailwind,” he added.

Another place where the company stands to gain is through the anticipated sale of 36 skilled nursing facilities managed by Kindred Healthcare. When all is said and done, Ventas expects to generate $700 million from the transaction, which will reduce the company’s SNF holdings to just around 1% of its NOI.

‘Roller coaster ride’ ahead

Cafaro, who warned about a coming “policy whiplash” last quarter, said that although there are signs things might be getting slightly less turbulent, there could be a “tax reform roller coaster ride” on the way in Washington.

“Washington has been wildly unpredictable, although this morning’s early morning vote should restore some stability to the health care environment, as the majority leader of the Senate concluded that it is ‘time to move on’ from the efforts to repeal some or all of the Affordable Care Act,” Cafaro said. “Now, the real estate community can buckle up for the tax reform roller coaster ride as major changes to the tax code are proposed, many of which would have significant consequences for all public and private real estate companies.” 

As of Friday afternoon, Ventas’s share price had fallen 29 cents to $67.12.

Written by Tim Regan

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