Ventas (NYSE: VTR) hit the ground running in the first quarter 2019 as it entered what CEO Debra Cafaro called a “pivot to growth,” which she anticipates will be fueled by increasingly favorable senior housing supply-demand dynamics.
However, in the meantime, Ventas’ senior housing operating portfolio (SHOP) performance continues to be affected by elevated supply in various markets.
The Chicago-based health care real estate investment trust (REIT) reported funds from operations (FFO) of $0.98 per share in Q1 2019 during an earnings call Friday, April 26. This beat analysts’ predictions by three cents and marked a two-cent increase, year-over-year, mainly due to lower transaction costs.
Ventas reported total Q1 revenue of $942.9 million, a modest decrease from $943.7 million a year ago. Rental income, however, increased from $384.8 million in Q1 2018 to $401.5 million in Q1 2019.
Based on the performance, Ventas reaffirmed its 2019 guidance for FFO per share, first shared in February.
“We are delighted by our strong start to the year,” Cafaro said, and analysts also characterized the quarter as a good one.
“They had a pretty good quarter highlighted by positive P&L reports, and positive commentary on investment moving forward,” RBC Capital Markets Director Michael Carroll told Senior Housing News
Strong portfolio performance
The key to Ventas’ Q1 strong earnings lies in its portfolio performance.
Same-store cash net operating income (NOI) across Ventas’ verticals increased 1.1% overall in the first quarter. The REIT’s medical office portfolio paced the growth with a 3.8% gain, followed by 2.2% NOI improvement in its triple-net lease segment. The overall performance was again tempered, however, by a 2.2% decline in seniors housing operating portfolio (SHOP) performance. This, Ventas Chief Financial Officer Bob Probst noted, was within the range of expectations.
“It is easy to recognize these immense strengths while also acknowledging that we continue to feel the effects of elevated openings of new communities as the industry works its way through the timing mismatch between deliveries and demand,” Cafaro said.
Q1 occupancy across Ventas’ SHOP portfolio was 86.6%, as a result of growing demand and share gains. The year-over-year occupancy gap, however, was a slight 20 basis point drop from the same time frame last year. It also compares favorably to an 80 basis point occupancy gap for all of 2018, Probst said.
Revenue per occupied room (RevPOR) increased 30 basis points in Q1, and Probst expects RevPOR for the remainder of the year to benefit from lapping heightened discounting in 2018’s second half. Operating expenses saw a small 1.2% increase, and Probst saluted Ventas’ operating partners for managing staffing levels and driving operational efficiencies.
On a local level, markets such as Los Angeles and Canada saw the strongest NOI growth, while Chicago, Atlanta and Detroit lagged behind, as these markets dealt with growing competition.
Another factor which tempered performance in the quarter was an extended flu season, and Probst said Ventas is monitoring its impact on the essential Q2 selling season.
Improving operator partnerships
Ventas’ operating partners paced the improvement in its triple-net portfolio, Cafaro said. The 26 properties operated by Winter Park, Florida-based independent living giant Holiday Retirement are stabilizing and showing signs of improvement, with pro forma to fixed charge coverage to be about 1.15 times at year end inclusive of the guarantor.
Louisville-based Atria Senior Living — of which Ventas owns a one-third share — is seeing increasing demand for its services and capabilities including via its partnership with developer Related Companies, to build high-end senior housing in major metropolitan markets. This will build value and sustainability for Ventas over time, Cafaro said.
“We hope to duplicate that success with middle market operator, ESL, over time,” she added, referring to Lake Oswego, Oregon-based Eclipse Senior Living, in which Ventas also owns a stake. Eclipse was formed in late 2017 to take over the portfolio of Elmcroft Senior Living and has since expanded further through acquisitions.
Eclipse’s annualized net operating income was down 15% year-over-year, but Probst noted that there is a lot of “noise” in the Eclipse P&L from this period due to the Elmcroft transition.
Ventas and Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) are moving forward executing the agreements the two came to terms on last year. Ventas committed $36 million in capital for approved projects to enhance the quality and competitiveness of its Brookdale leased communities at a 7% return. The two are jointly marketing and expect to sell over 20 assets in the portfolio for proceeds exceeding $120 million.
“Brookdale’s lease coverage continues to deteriorate, which pushed the company down a tier in Ventas’ lease coverage disclosure into the 1.00-1.09X EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) bucket,” wrote Green Street Advisors analyst Lukas Hartwich in a note to investors.
Cafaro noted Brookdale’s coverage will not change materially because Ventas keeps the net proceeds from the sales, and Brookdale will receive a rent credit equal to 6.25% on the net proceeds.
Upon news of the strong Q1 earnings, Ventas stock ended trading Friday up 1.75%, to $60.52 per share.