Ventas Faces Stiff Tests in 2018

A newly announced joint venture might bear fruit in the coming years, but more immediately, real estate investment trust Ventas (NYSE: VTR) is facing short-term challenges.

These include supply-demand mismatches in some markets, and the ongoing woes of Brookdale Senior Living (NYSE: BKD), the nation’s largest provider and a significant tenant for the Chicago-based REIT, Mizuho analyst Rich Anderson stated in a note issued Friday, after Ventas announced its third quarter 2017 earnings.

The company saw third quarter funds from operations of $1.04 per share, missing analyst expectations by $0.01, in part due to one-time costs related to the storms that battered Florida and Texas. Its revenue of $899.93 million was a 3.8% year-over-year increase and beat analyst expectations by $30.5 million.


While the quarter was solid overall, the picture on Ventas’ senior housing operation portfolio (SHOP) is mixed, reflecting the tough climate in the United States at the moment; growth for this platform has been “sub-zero” in the U.S., but Ventas is “getting a bailout” from Canada, according to Anderson. Out of 241 total SHOP properties, 41 are in Canada.

On a year-over-year basis, Ventas’ Canadian operations produced 9.5% same-store NOI growth during the third quarter of 2017, buoying the overall SHOP numbers. With supply and demand in equilibrium north of the border, Ventas has high occupancy and is pushing rates on these communities, CFO Bob Probst said on a call with analysts.

However, maintaining such gaudy results from Canada in 2018 will probably be difficult, Anderson believes.


Adding further complications for next year, there have been delays in the anticipated openings of new competition in some U.S. markets, Probst said. This means Ventas will continue to see the effects of new supply coming online into 2018.

Ventas’ exposure to Brookdale Senior Living (NYSE: BKD) is another question mark. The Brentwood, Tennessee-based company is the largest senior living provider nationally, and its share price has plummeted since the mega-merger with rival Emeritus Corp. in 2014.

Currently, Brookdale accounts for about 8% of the Ventas portfolio, and its leases expire in 2019. Rent coverage at the property level could be below 1x, depending on how it is calculated, Anderson stated.

Cafaro said the Brookdale properties generally are in line with average coverage for the triple-net portfolio, which is about 1.3x.

“We’ve gone through lease maturities time and time again, and we’re always open and active in working with all our relationships to find positive outcomes for both sides,” she said on Friday’s call.

Beyond the lease maturities, Brookdale has been the subject of takeout rumors throughout 2017. The ongoing uncertainty around the ultimate fate of Brookdale, and the question of “how much worse it can get” for the operator, will likely make investors wary of Ventas and BKD’s other major REIT landlords, according to Anderson.

All these factors could conspire to make next year “the trough” before Ventas starts to benefit from demographics and better supply-demand dynamics, he wrote.

Written by Tim Mullaney

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