Senior Housing Performance Tempers Ventas’ Strong Q2 Earnings

Ventas (NYSE: VTR) continues to deal with the realities of senior housing supply and demand dynamics, even as the company prepares for what it believes will be a reversal of fortune in that segment of its portfolio over the next five years.

The Chicago-based health care real estate investment trust (REIT) reported funds from operations (FFO) of $0.97 per share in Q2 2019 during an earnings call Friday, July 26. This beat analysts’ predictions by one cent.

Ventas reported total Q2 revenue of $950.7 million, a modest increase from $942.3 million a year ago. Rental income of $398.6 million was a 9.6% increase, year-over year.

Based on its performance, Ventas increased its 2019 guidance for FFO per share by three cents at the midpoint, to between $3.80 and $3.86 per share.

“We remain committed to and focused on pivoting to growth in 2020,” Ventas CEO Deb Cafaro said.

Senior housing sluggishness

Same-store cash net operating income (NOI) across Ventas’ verticals increased 0.3% overall in the second quarter. The REIT’s medical office portfolio paced the growth with a 2.9% gain, followed by 1.5% NOI improvement in its triple-net lease segment.

Ventas’ senior housing operating portfolio (SHOP) performance continued to be the outlier, and actually trended downward in Q2 with a 2.2% decline. Occupancy across the portfolio declined by 40 basis points versus Q2 2018, to 86.4%.

Same-store cash NOI, meanwhile, fell 2.9% versus the prior year, which Ventas CFO Bob Probst said was within its full-year expectations of flat to minus 3% growth.

Revenue per occupied room (RevPOR) increased by 60 basis points, and Probst is confident that RevPOR will continue to rise in 2019’s final months as Ventas’ SHOP portfolio will benefit from lapping price discounting that accelerated in the second half of last year.

Operating expenses grew a modest 1.9% in the second quarter, and Ventas’ operators continue to manage staffing and drive efficiencies. The REIT reaffirmed its view that full-year operating expenses will increase in the 2% to 3% range, given a tight labor market.

On a local level, Ventas experienced significant NOI growth in submarkets such as south Orange County, Los Angeles and eastern Long Island in New York, mitigated by declines in markets such as Chicago and secondary markets.

“That said, even in challenged MSAs, we see pockets of occupancy in NOI growth at the submarket level: for example, northeast Atlanta,” Probst said.

As for Ventas’ triple-net portfolio, the REIT sold six communities operated by Brookdale Senior Living (NYSE: BKD) during the second quarter, for about $25 million. Ventas has previously stated its intention to shed about $100 million worth of Brookdale properties. And Ventas transitioned 10 assets on the East Coast from from another operator to Eclipse Senior Living — part of $10 million worth of total anticipated restructurings for 2019.

Lease coverage declined slightly in the quarter, but Cafaro emphasized on Friday’s earnings call that coverage is a trailing indicator and will gradually improve as the senior housing cycle turns positive in the years ahead.

Confident in a SHOP turnaround

Despite the sluggish performance of Ventas’ SHOP portfolio, Cafaro and Probst expressed optimism that a turnaround is around the corner. Market trends such as construction starts continue to slow, and Probst believes a sustained growth period could start as early as the second half of 2020. Ventas predicts a 15% improvement in new deliveries over this year, which would be the lowest levels since 2015.

This should translate to a 46% compound annual growth rate over the next five years.

“We remain steadfast on that point,” Probst said.

Analysts noted the lagging SHOP performance in otherwise strong investor notes.

“The quarter was helped by a $9M warrant income offset by SHOP weakness,” Stifel Analyst Chad Vanacore wrote in a note to investors. “Overall, it was a positive quarter.”

Exceptional Canadian performance

Cafaro and Probst had good things to say about the performance of Ventas’ Canadian assets. Its portfolio north of the border boasted a 93.5% occupancy rate and 3.6% NOI growth in Q2.

“This performance underscores the health of the Canadian senior housing Senior Housing market, and the quality of our portfolio north of the border,” Probst said.

The strong Canadian performance was one of the key drivers behind Ventas’ decision last month to acquire an 85% stake in the portfolio of Quebec senior housing developer-operator Le Groupe Maurice. LGM has a portfolio of 31 properties with another four under development. The portfolio is valued at $1.8 billion.

The stabilized portfolio offers an active lifestyle for Quebec seniors, with best-in-market amenities, strong and quick leasing to a younger demographic and is expected to generate a 4% compounded annual NOI growth over the next five years. Ventas closed the first phase of the deal last month and expects to complete the transaction in the third quarter.