Ventas (NYSE: VTR) has repositioned its portfolio in recent years, with a focus on life science and medical office — and now, its senior housing assets are bearing the brunt of negative effects from Covid-19. But, unlike one of its real estate investment trust (REIT) peers, Ventas’ leaders are committed to senior living going forward.
In another example of where Ventas is focused on growth, the Chicago-based real estate investment trust (REIT) announced Friday it had formed a joint venture with GIC on four new university-based research and innovation facilities, as part of a potential development pipeline currently estimated at just shy of $1 billion but could expand up to more than $2 billion.
Executives also reaffirmed their commitment to senior housing, touting recent trends in move-ins and occupancy rates in its senior housing operating portfolio as proof that the product type can weather the Covid-19 pandemic and capture future demand once it ends.
The REIT recently sold or placed some of its senior housing assets under contract for sale, and Ventas leaders see areas where they can recycle that capital into other assets. But the product type has a place in the company, even in the face of strong interest from private capital, according to Ventas CEO Debra A. Cafaro.
“We want to continue making senior housing a key part of our diversified portfolio because of the operational asset class upside post-pandemic, the demographically driven demand that is in front of us and the continued improvement on the supply side,” Cafaro said during the company’s third-quarter earnings call Friday.
Cafaro’s remarks came just days after one of Ventas’ REIT peers, Denver-based Healthpeak Properties (NYSE: PEAK), announced it planned to effectively exit its senior housing operating and triple-net portfolios by offloading as much as $4 billion in assets, and recycle those proceeds into new life science and medical office buildings.
Ventas logged funds from operations (FFO) of 75 cents per share for the third quarter of 2020, beating analysts’ expectations. And there were some bright spots in the REIT’s SHOP segment, which added back some occupancy in October. But it’s too early to tell whether those gains will continue into future quarters, according to Green Street Senior Analyst Lukas Hartwich.
“While year-over-year same-property NOI was down -42%, it’s encouraging to see that 3Q20 NOI was flat sequentially vs. 2Q20, which suggests the sector is finding some footing in a challenging environment,” he added.
Ventas’ share value was down about 3.6%, trading at $39.64 by the time the markets closed Friday.
Senior housing performance
Ventas’ leaderspointed to several trends in its senior housing operating portfolio as evidence that the company ismitigating effects of the Covid-19 pandemic. While average occupancy for the company’s SHOP segment dipped to 79.6% in the third quarter of 2020, that trend did turn positive in October as move-ins eclipsed move-outs. That resulted in a pick-up of about 50 basis points, increasing occupancy to 80.1%.
Ventas’ portfolio in Canada — which represents about a third of its SHOP segment and includes communities operated by JV partner Le Groupe Maurice (LGM) — was another bright spot in the company’s third-quarter earnings. On a same-store basis, the 72 communities in that portfolio logged an average occupancy rate of 93.2% after dropping 50 basis points between the second and third quarters of this year. The portfolio’s cash net operating income (NOI) also grew 10% in that time.
The REIT is also still optimistic about its Battery Park community in New York City, operated by Brookdale Senior Living (NYSE: BKD), despite a spate of new luxury communities opening in the city.
“We have a strong history there of solid performance, [and] we expect there to be demand moving forward,” Hutchens said. “It is a community that we’ve evaluated very closely, and we’ll continue to consider actions that can be taken to help this continue to be positioned competitively moving forward.”
Ventas also collected all of its rent due from its triple-net senior housing partners, such as Brookdale, which in July struck a lease restructuring agreement with the REIT. And, the company is heartened by the fact that a Covid-19 vaccine appears to be on the way, and that the senior housing industry is prioritized to receive it.
Still, despite Ventas’ optimism, Covid-19 continues to substantially drag down the performance of the REIT’s senior housing communities. SHOP same-store NOI lagged 42.2% behind the company’s totals from the third quarter of 2019, and leads and move-ins were still 85% and 94% of the prior year’s 3Q totals, respectively.
About 96% of the company’s senior communities are accepting new resident move-ins, and the company has kept new Covid-19 cases among residents at a diminished rate compared to earlier this year, despite outbreaks spiking among the general population in several parts of the country.
Ventas is also facing pricing competition in some of the markets in which it has communities, as other providers have offered move-in incentives to try and grow occupancy during the pandemic. Other senior housing owners and operators, including Brookdale and Five Star Senior Living (Nasdaq: FVE), have also reported on elevated levels of discounting.
But those pressures have not caused the company to sour on the senior housing business, according to Justin Hutchens, executive vice president of senior living.
“In spite of the near-term pressure on the sector, we remain committed to the senior housing business, and are excited about the supportive underlying supply demand fundamentals that should persist for years to come,” Hutchens said.
While Ventas believes that near-term uncertainty makes it hard to predict what might happen to its SHOP portfolio in the fourth quarter of 2020, the company expects occupancy to further soften, while expenses stay largely flat at current elevated levels of about $15 million, Hutchens added. And looking ahead, the company believes it’s well-positioned to capture demand as demographics shift in the future.
“There are a lot of underlying drivers that support potential revenue growth when we get out of this pandemic,” Hutchens said. “This is a very high-fixed-cost business, so when you get occupancies back up into historical levels in the high 80s, and move in certain markets in the 90s, margins go with it significantly.”
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