Faced with the realization that a “pivot to growth” of its senior housing operating portfolio (SHOP) will not happen in 2020, Ventas (NYSE: VTR) on Thursday announced a strategic plan to turn around the struggling segment.
Notably, Ventas hired Justin Hutchens to head its senior housing division. The industry veteran stepped down last week as CEO of HC-One, the largest home care provider in the United Kingdom. He will join the REIT in April as executive vice president, senior housing, and report directly to Ventas CEO Debra Cafaro.
“[Hutchens’] operating background will provide a strong compliment to our existing capable team and [his] presence will add to our senior housing bandwidth,” she said Thursday during Ventas’ Q4 2019 earnings call.
Additionally, Ventas is marketing over $600 million in nonstrategic senior housing assets for sale and will recycle the proceeds into its life sciences development pipeline. And it is working closely with its operating partners to increase 2020 capital improvement plans intended to modernize communities in priority markets, improve competitive positions and improve occupancy rates.
Finally, Ventas intends to form a joint venture for its portfolio of communities managed by Lake Oswego, Oregon-based operator Eclipse Senior Living (ESL). Ventas currently maintains a 34% stake in the operator. Some analysts questioned the timing here, given that Ventas explored a JV for Eclipse in 2017 but did not close a deal.
There was interest from potential JV partners at that time but Ventas determined that holding off on a transaction would be the better strategy — a decision that the REIT does not regret, Cafaro said on the call.
Raymond James analyst Jonathan Hughes estimates that if Ventas sold half of its Eclipse assets in a joint venture, it would reduce 2020 FFO per share guidance by -1%, or -$0.04 per share.
Eclipse assumed management of 80 properties formerly operated by Elmcroft Senior Living in early 2018 and has confronted pricing pressures in secondary and tertiary markets. The operator is in the process of implementing a streamlined pricing model to combat these pressures in its transition portfolio. And despite challenges related to the transition portfolio, Ventas is growing its relationship with Eclipse, mostly recently transitioning a portfolio of former Carillon Assisted Living buildings to Eclipse.
While the REIT’s senior housing struggles were reflected in its 2020 guidance, its performance in other sectors buoyed its Q4 earnings. Ventas reported funds from operations (FFO) of $0.93 per share in the fourth quarter, a one-cent improvement year-over-year. It also reported total quarterly revenues of $996 million, a 7.9% increase from the previous year. Rental income, meanwhile, increased from $384.7 million in Q4 2018 to $401.5 million in Q4 2019.
And the company has formed the Ventas Life Science and Healthcare Real Estate Fund. This is a perpetual life vehicle that will invest in core and core-plus life science, medical office and senior housing real estate. Ventas is contributing five life science and medical office assets into the fund, for which it will be the sponsor and general partner, and will earn management fees and a promote based on returns generated.
There are “defined criteria” for which types of assets the fund will invest in, and Ventas will determine on a case-by-case basis whether a property is a better fit for the fund or the REIT portfolio — “making sure, of course, that we treat all of our stakeholders fairly,” Cafaro said.
SHOP struggles continue
Ventas’ SHOP same-store cash net operating income (NOI), which accounts for around 25% of its total real estate assets, continued the downward spiral that began in the second quarter of 2019.
The segment posted a 7.5% loss in same-store cash NOI in Q4, after posting a 5% loss in the third quarter. The dropoff resulted in Ventas’ total blended portfolio cash NOI falling 0.6% in the fourth quarter. For the year, Ventas’ SHOP NOI fell 4.4%, while total portfolio NOI was flat. Both were within 2019 guidance.
Ventas once again cited a confluence of market dynamics, particularly new competition and pricing, as the reason for the poor performance. Those conditions hit the Eclipse properties, which Cafaro said accounts for 8% of Ventas’ SHOP portfolio, especially hard.
Excluding the Eclipse assets, same-store NOI for the remaining portfolio saw a 4% decline in Q4, and 3.1% for the full year.
Occupancy across the SHOP portfolio plummeted by 160 basis points year-over-year, from 87.9% to 86.3%. Ventas’ operators did not experience an expected seasonal lift and the occupancy gap widened materially in September, ending the month approximately 115 basis points lower than a year ago.
Ventas is hoping that Hutchens can spearhead a turnaround. In addition to his duties at HC-One, he joined the board of New York City-based REIT New Senior Investment Group (NYSE: SNR) in June 2019.
New Senior did not return a request for comment from SHN inquiring if Hutchens is still on its board.
Hutchens has an extensive resume. He was with Summerville Senior Living when it merged with Emeritus Corp. in 2007, creating the largest assisted living provider in the country at the time. Hutchens would eventually serve as Emeritus’ COO.
He left Emeritus in 2009 to become CEO at National Health Investors (NYSE: NHI) and grew its value from $750 million to over $3.5 billion in six years. From there, Hutchens moved to “Big 3” REIT HCP, now known as Healthpeak Properties (NYSE: PEAK) as chief investment officer of the firm’s senior housing arm, before eventually moving up to president. His tenure at HCP was marked by change, notably the spin-off its HCR ManorCare skilled nursing portfolio into a separate REIT.
Hutchens joined HC-One in 2017, as the company was completing its £300 million acquisition of 122 care homes from London-based company Bupa.
“It’s been an absolute pleasure working with so many amazingly dedicated care home colleagues here in the UK which has given me experiences and exposure to such kind people that I will always cherish,” he wrote in a LinkedIn post on Thursday. “I’m thrilled however to return to my personal and professional home in the US.”
Ventas expects to leverage Hutchens’ experience to deepen its relationships with operating partners, working together to find ways to resist persistent industry headwinds and reverse the course of SHOP performance.
Eclipse Senior Living CEO Kai Hsiao, who worked with Hutchens at HCP for a short period of time in 2016 and 2017, applauded the move. Hutchens will also be joining the Eclipse board of directors.
“He brings great knowledge of operations to the table. He was also one of the reasons I joined HCP back then, so I am excited to be working with him again,” he told SHN.
Building a foundation
Ventas is looking at other avenues to stabilize its SHOP portfolio, as well as provide transparency on how it reports performance.
Last week, both Ventas and Healthpeak announced revamped SHOP reporting policies, in order to be consistent with industry best practices.
First, properties undergoing operator transitions will be removed from same-store results to more closely conform with industry practice and prevent temporary distortions unrelated to property fundamentals. Ventas reserves the right to provide disclosure around future transition properties, if it materially impacts performance.
Second, consolidated and unconsolidated joint ventures will be included at the REIT’s pro rata share in order to most accurately include the interests in its same-store population.
Finally, Ventas will disclose management fees separately from operating expenses so investors can better understand the components of SHOP NOI.
The adoption of the revised policies reduces Ventas’ 2020 same-store SHOP NOI guidance by 50 to 100 basis points because certain SHOP redevelopments that are in a strong lease-up phase will be excluded from the same-store pool in accordance with the revised policies.
For 2020, Ventas projects net income per share in a range of $1.61 to $1.74, and NAREIT funds from operations (FFO) ranging between $3.79 and $3.94 per share.
Same-store cash NOI projections for Ventas’ SHOP portfolio are projected to lag behind the REIT’s other segments throughout 2020. SHOP guidance ranges between minus-4% growth and minus-9% growth. Same-store NOI is expected to be flat at the guidance midpoint with 2019 Q4 same-store SHOP NOI annualized.
There are also signs of distress in Ventas’ triple-net senior housing portfolio. That segment now accounts for 12.6% of NOI from leases with an EBITDARM coverage ratio below 1.0x, RBC Capital Markets Analyst Michael Carroll wrote in a note to investors.
“The trailing twelve month ended 3Q19 EBITDARM ratio held steady at 1.1x, which implies most operators are not making any money on the leased portfolios,” Carroll said. Brookdale Senior Living (NYSE: BKD) and Holiday Retirement Communities are among the major operators that have master triple-net leases with Ventas.
The news of the planned dispositions and Hutchens’ hiring generally were well received by analysts, and investors also seemed on board judging by market activity.
“Time will tell, but management may have threaded the needle between setting guidance that is both beatable, while not overly pessimistic and destined for a valuation trap,” SMBC Nikko Securities America Analyst Richard Anderson wrote in a note to investors.
Ventas stock ended trading Thursday up 5.5%, to $62.40 per share.