As with its other REIT peers, Ventas’ (NYSE: VTR) senior housing segment continued to lag from the impact of Covid-19 in the second quarter of 2020, but is encouraged from positive trends emerging after the pandemic’s initial disruption.
Its roster of operators achieved sustained intra-quarterly improvements in leads, movements and clinical results after the massive disruption caused by the virus in its early weeks. Move-ins are being accepted across 96% of its total senior housing portfolio. The move of 26 communities operated by Holiday Retirement to its senior housing operating portfolio (SHOP) bore fruit in the quarter. And its Canadian SHOP assets, anchored by Le Groupe Maurice, outperformed its U.S. counterparts by a wide margin.
Ventas’ also addressed its triple-net senior housing segment with actions actions such as its recent lease restructuring with Brookdale Senior Living (NYSE: BKD), but other operators may have problems paying rent moving forward.
Uncertainty over when the outbreak will begin to wane raise questions about when Ventas can reverse course, stabilize occupancy and rebuild rates to pre-pandemic levels, and more restructurings with operators in triple-net leases may be coming, Ventas Executive Vice President, Senior Housing Justin Hutchens said during the Chicago-based REIT’s Q2 2020 earnings call.
“Our underlying triple-net portfolio performance broadly followed the same trends as our SHOP portfolio. As a result, we have been taking actions to proactively address certain leases,” he said.
Ventas reported funds from operations (FFO) of $0.50 per share in the second quarter, a 63-cent decrease, year-over-year. It also reported total quarterly revenues of $943.2 million, a 0.8% decrease from the previous year. Rental income, meanwhile, fell to $369.2 million in the quarter from $398.6 million in Q2 2019.
SHOP bifurcation
Ventas’ diverse portfolio is providing some buffer from the virus. But senior housing remains the outlier in the REIT’s earnings.
The REIT reported $106 million in same-store SHOP net operating income (NOI) for the second quarter, a $59 million dropoff from the previous year. The portfolio consists of 390 communities. Occupancy ended the quarter at 80.6%, a 470 basis point decrease sequentially from the first quarter. Ventas tallied $42 million in Covid-19 expenses, which were mitigated by $15 million in estimated cost savings. Total expenses increased 3.4% in Q2, better than Ventas’ expectations.
SHOP performance showed bifurcation between Ventas’ U.S. and Canadian holdings, which includes 68 communities and generates 30% of total SHOP NOI. The Canadian properties ended the quarter with a 94.2% occupancy rate, a 2.1% decrease sequentially and a far superior performance to Ventas’ U.S. assets.
“It demonstrates both the benefits of our diversification strategy and a well orchestrated public health response,” Hutchens said.
The Holiday restructuring produced over $7 million in NOI in May and June — a 1.1% improvement over the previous year.
Leads and move-ins are trending upward, after their April low point, and the trend is consistent across the country in markets hit hard early in the outbreak such as New York and New Jersey, as well as markets contending with surges in positive cases such as Arizona, California, Florida and Texas. To date, 86% of Ventas’ senior housing communities have loosened restrictions, and are allowing structured family visits, small group dining and activities. This, along with appropriate infection control practices and better testing protocols, brings communities a semblance of the pre-pandemic living experience, Hutchens said.
Triple-net concerns
Ventas reported 100% of triple-net rent collections in the second quarter, July and August, and took steps to shore up its ability to do so in the future. In addition to the Holiday and Brookdale restructurings, it also restructured a lease agreement with Capital Senior Living (NYSE: CSU).
But management also wrote off $53 million of straight-line rents related to collectability concerns on eight tenants that account for $80 million on an annualized basis. This raised concerns among analysts about future rent payments, and more triple-net to SHOP conversions may be forthcoming, Green Street Advisors Analyst Lukas Hartwich told Senior Housing News.
“The reality is that there will continue to be a steady stream of rent cuts and SHOP conversions throughout the industry. These moves will put the sector on a sustainable course, which benefits everyone involved,” he said.
Ventas noted that the eight operators benefiting from the write-offs account for more than 1% of total NOI, and are diverse in geographic location, Covid-19 impact, product type, credit profiles and coverage ratios.
“The key takeaway is the bigger and higher priority leases have been addressed already,” Hutchens said. “We have a track record of taking action, and we have a close eye on [market] dynamics to determine any actions we may take moving forward,” he said.
Ventas stock ended trading Friday up over 5%, to $41.58 per share.
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