Ventas (NYSE: VTR) saw its senior housing occupancy tumble in the first quarter of 2020 as a similar story played out across industry. But the company is hopeful that a new financial structure with one of its large tenants will help create value and preserve operational flexibility in its portfolio going forward.
Like its other REIT peers, Ventas saw significant Covid-19 disruptions to its senior housing occupancy. In April, same-store SHOP occupancy declined by 330 basis points to 80.7% by May 1. That, plus rising expenses, helped lead to a same-store net operating income (NOI) decline of 10.4% for the SHOP in the first quarter of 2020.
A quarter of the 400 communities in Ventas’ SHOP reported at least one resident testing positive for Covid-19, with 942 residents residing in those communities testing positive overall. On the triple-net side, there were 261 cumulative confirmed Covid-19 cases among residents who live in 48 communities, or 14% of Ventas’ triple-net portfolio.
But other recent moves — including steps to maintain liquidity, a Covid-19 testing effort with the Mayo Clinic, and the hiring of industry veteran Justin Hutchens — gives Cafaro confidence that the company is doing all it can to prepare itself now for an uncertain future fraught with new challenges. And despite grim numbers and prognostications, there are also moves toward reopening businesses in some states and a sense of “optimism” — it’s a situation that Cafaro dubbed the “Covid-19 paradox.”
“We don’t have to know how these opposing trends will play out,” Cafaro said. “Our job is to preserve and protect our company and our stakeholders and be ready for a variety of scenarios and opportunities.”
Holiday restructure removes overhang
Ventas’ SHOPentered the quarter “on its heels” due to oversupply, and challenges surrounding the Covid-19 pandemic only amplified that position, according to Green Street Analyst Lukas Hartwich. But the REIT delivered results that were largely as expected, and the Holiday restructuring was a positive move.
That restructure involves a new management agreement and terminated a lease agreement governing 26 independent living communities managed by Holiday Retirement. The properties, which previously operated under a triple-net lease structure, are now part of the company’s senior housing operating portfolio (SHOP).
And Ventas is not alone in striking new management agreements with Holiday. Other REIT landlords that have done so include Sabra Health Care REIT (Nasdaq: SBRA) and New Senior Investment Group Inc. (NYSE: SNR).
“Ventas followed in the footsteps of many of its peers in converting its [triple-net] Holiday portfolio to SHOP effective 2Q20,” Hartwich wrote. “The conversion was inevitable given poor rent coverage and was the right long-term decision.”
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Under the new management agreement, Ventas will pay Holiday a management fee equal to 5% of the communities’ gross revenues. And Holiday paid the REIT a $100 million payment in the form of $34 million in cash and $66 million in secured notes. The Winter Park, Florida-based senior living operator also paid all of its rent due under its original lease between 2013 and March 2020, cash rent totaling $15 million in the first quarter of 2020.
“This management structure retains our upside in our 26 communities, and provides us operational flexibility,” Ventas CEO Debra Cafaro said during a Friday earnings call with investors and analysts.
The Holiday portfolio comprises about 3,184 units and makes up about 3% of Ventas’ NOI, with $15 million in cash rent paid in the first quarter of 2020.
Though the Covid-19 pandemic did not spare Ventas from widespread disruptions, the REIT’s financial position appears healthy for now, according to RBC Capital Markets Analyst Michael Carroll.
“Positively, April rent collections were healthy, and management took steps to resolve the Holiday overhang,” Carroll wrote. “Negatively, the seniors housing market remains challenged, and trends are set to noticeably weaken in 2Q20 and beyond.”
As is the case throughout the rest of the industry, move-ins fell across Ventas’ senior housing portfolios as communities locked down during the first quarter of 2020 and beyond.
By April, move-ins were only a quarter of what they would usually be in the REIT’s SHOP, while move-outs were largely in line with normal patterns, according to Ventas. And same-store SHOP occupancy dropped at a rate of about 70 basis points per week after states enacted widespread shelter in place orders in mid-March.
At the same time, expenses grew. Same-store operating costs were 5.1% higher in the first quarter of 2020, year-over-year, including $6 million in costs related to Covid-19. SHOP operating expenses for the company averaged around $125 million per month during that time, according to Ventas. Going forward, Covid-19 is expected to push operating costs 10% higher due to pressure on labor and supplies.
Similar trends played out in Ventas’ triple-net portfolio, which included 339 properties as of March 31. Ventas enacted a 25% rent deferral program in April to aid its triple-net tenants, which ultimately reduced the REIT’s April cash rent by $3 million. When adjusting for the program, Ventas’ triple-net tenants paid nearly all of their rent due for the month.
The company is offering a similar program to its triple-net tenants this month, according to Hutchens, who is leading the REIT’s North America senior housing operations as executive vice president.
“For the month of May, the company offered qualified senior housing tenants the opportunity to pay up to 25% of their rent with cash escrows and security deposits,” Hutchens said on Friday’s call. “And based on participating tenants, we expect about $2 million of our rent to be paid this way.”
On the whole, Ventas’ leadership is heartened by the fact that some states are trying to find a path back to normalcy. But Cafaro also likened the current situation to a “Covid-19 paradox,” with many unknowns.
“On the one side, reputable models and even certain government projections show an expected increase in Covid-19 confirmed cases and mortality numbers in many jurisdictions,” Cafaro said. “On the other hand, there is palpable optimism in the air as most states plan staged reopenings of their economies and businesses.”
‘Many tools in the bag’
Ventas has enacted multiple programs intended to support its operating partners throughout the Covid-19 pandemic. For example, the company is providing access to Covid-19 test kits and analysis from the Mayo Clinic Laboratories at no charge to some of its senior housing operators. The move is meant initially to accelerate testing of employees.
The effort is in conjunction with a program underway at Atria Senior Living, a major Ventas operating partner which was able to secure 30,000 Covid-19 testing kits from Mayo Clinic Laboratories. The company so far has tested 9,000 residents and 14,000 workers.
Next to receive help through the effort is Eclipse Senior Living, Cafaro said.
“Once we see how that goes … we’ll determine if we want to re-up, or if we want to take a different step moving forward,” she added. “But we think this is a great opportunity to do the right thing and really have a differentiated partnership with our operators.”
Ventas is also working to assist its tenants and operators in procuring personal protective equipment (PPE) through its sourcing platform, and is helping them secure financial relief from the federal government.
And while Ventas celebrated its new management agreement with Holiday as a good move for both the operator and the REIT, Cafaro hasn’t soured on triple-net leases, either. She compared the leases to mortgages in the sense that they magnify ups and downs.
“I think there’s many tools in the bag … and the triple net lease, I think, will continue to be one,” Cafaro said. “We think we’ll continue to be creative and collaborative on how we work with our operators, be they tenants or managers, in optimizing our portfolio.”
While senior housing was a sore spot for Ventas, its other portfolios performed well in the first quarter of 2020. The company’s university-based research and innovation portfolio, for instance, grew NOI 22% on strong lease-ups in the quarter. And the company’s Medical Office Building portfolio grew NOI by 1.9% during the same period.