Ventas Gathers Momentum, But Proxy Fight Highlights Gaps Left to Close

Activist shareholder Land & Buildings has picked another battle with a major senior living company, with the news breaking this week of a proxy fight with Ventas (NYSE: VTR).

This latest battle comes after Land & Buildings in 2019 was at loggerheads with Brookdale (NYSE: BKD), unsuccessfully pushing a board nominee and a real estate spinoff.

Now, Land & Buildings has put forward the firm’s founder and chief investment officer, Jonathan Litt, as a nominee for Ventas’ board, arguing that a shareholder voice is needed in light of the REITs’ underperformance in producing total shareholder returns (TSR).

Ventas has characterized the proxy fight as “distracting and unnecessary.”

In this week’s exclusive, members-only SHN+ Update, I analyze this news and offer my key takeaways, including:

• Eclipse’s failure is haunting Ventas, the industry must take heed
• Litt threatens to compromise Ventas’ momentum
• A stronger “Ventas vision” would help close the gap with Welltower

Aftermath of Eclipse

In arguing for Litt’s board nomination, Land & Buildings cited several concerns with Ventas, but the failure of Eclipse Senior Living played a large part in stoking the activist’s discontent.

Specifically, Land & Buildings noted that Ventas’ leadership touted a “pivot to growth” in early 2019, but backtracked and lowered senior housing operating portfolio (SHOP) guidance later that year.

“The market’s reaction was swift, with the stock price declining nearly 9% that day and by 24% in the ensuing two months,” Land & Buildings wrote. “This caused not only a massive loss of credibility with the investment community, but the beginning of a sharper divergence between the company’s performance and its closest peer, Welltower’s performance.”

Land & Buildings cited Eclipse’s issues as a “principal driver” of the deterioration in SHOP.

In hindsight, creating a new operating company — Eclipse — to take on the Elmcroft portfolio seems an obvious misstep. But at the time, keeping that portfolio together and tapping an experienced management team for a turnaround was arguably a sound strategy. At the least, there was precedent for it, perhaps most recently with the formation of Enlivant to rescue and reinvent the Assisted Living Concepts portfolio.

But “flying the plane while building the plane” is a huge undertaking, and Eclipse and Enlivant have demonstrated just how long that process can take — and how vulnerable a company is to market shocks during this process.

Eclipse could not survive Covid-19, and Ventas could not complete a sale or JV of the assets, much to Land & Buildings’ displeasure.

With more lead time between its founding and the start of Covid-19, Enlivant has weathered the pandemic. But TPG’s anticipated sale of these assets also has been deferred as the private equity firm awaits improvements, with the fate of the portfolio also hanging over minority owner Sabra (Nasdaq: SBRA).

I don’t mean to diminish the achievements of Enlivant’s management team — after all, its original CEO Jack Callison was impressive enough to move on to the CEO role at Sunrise. But the challenges faced by Enlivant and Eclipse — and the shareholder anger expressed by Land & Buildings — should give owners serious pause over starting or tapping a new operator to execute a large-scale turnaround.

A threat to Ventas’ momentum

In Oct. 2021, Ventas “finally acknowledged defeat” and moved the 90 Eclipse assets to other operators, Land & Buildings wrote this week.

That “finally” strikes me as unfair, given that the issues with Eclipse worsened in the quarters immediately before Covid-19 struck. From my perspective, Ventas moved quickly to resolve the Eclipse situation once infection rates came down and operations stabilized sufficiently.

While those communities still are not contributing positively to earnings, I think it’s reasonable to anticipate that regional operators will be able to realize upside in many of these buildings as the market continues to stabilize.

In fact, Ventas already is benefiting from resilient demand, as reflected in Feb. 2022 numbers released this week.

“Leads were 113% over 2019 whereas move-ins/move-outs were at 108%/94% of 2019, above pre-COVID levels and better than typical seasonal trends,” Stifel analysts noted this week. “1Q22 in-place rate increase was ~8% for U.S. communities, showing the operators’ success in pushing through rent increases for existing customers.”

On the whole, Ventas’ numbers are in line with Stifel’s expectations and Ventas’ guidance.

Furthermore, Ventas touted its year-to-date performance, leading direct peers in sequential and year-over-year same-store SHOP NOI, and “significantly outperforming” industry peers with YTD total shareholder returns of 9.5%.

And Ventas’ performance is not only a function of reduced omicron infections and widespread consumer demand; the company can take some credit for setting up the platform for greater success thanks to a number of moves, including:

• Adding an experienced, operationally savvy and well-connected senior housing leader in Justin Hutchens
• Acquiring independent living-focused REIT New Senior, adding a large number of assets with limited exposure to current labor headwinds
• Investing in the Le Groupe Maurice portfolio in Canada (in a deal that slipped away from Welltower), opening up development opportunities for a proven model with reliably high occupancy rates

Also potentially contributing to Ventas’ momentum: Brookdale Senior Living, a significant triple-net tenant, which despite Land & Buildings’ protests held firm to an operational improvement strategy that is now bearing fruit, if Brookdale can deliver on its 2022 guidance.

And Ventas this year launched Ventas OI, its data and operational analytics platform. Welltower has been consistently touting its data analytics capabilities, and so I do think Ventas needed to find a way to highlight and explain its use of data as well.

Sales, pricing and labor management are the three major aspects of operations being informed by Ventas OI, and the platform also will help drive investment and disposition decisions, Hutchens said this week at the Citi Global Property CEO conference.

So, while Land & Buildings is dissatisfied with Ventas’ performance and has apparently lost confidence in the REIT’s board and executives, I think the shareholder — which has less than a 1% stake in the company — threatens to impede progress underway.

For her part, Ventas CEO Debra Cafaro, while emphasizing an openness to hearing out and working with shareholders, expressed confidence that the company will not be sidetracked by the proxy fight, when speaking at the Citi event:

“ … If you think about what this company and this management team has been through since 1999, the great financial crisis, the benefit is experience. Okay, we’re on it, we will manage it, and we will continue to move the business forward.”

With Ventas’ share price rising from $55.79 early on Tuesday to $58.54 early today, investors seem to be drawing confidence from the company’s response.

The Ventas vision

Land & Buildings also critiqued Ventas’ communication with investors. This is an area where Ventas also has made some changes, including additional disclosures and changing the timing of its quarterly earnings releases, as noted at the Citi conference this week.

The REIT also has been more forthcoming with the press recently, if our experience at SHN is any indication. No doubt, company leaders have felt compelled to explain the Eclipse transitions and reassure investors, but I hope for continued greater transparency and access going forward.

And I believe more open communication would benefit Ventas and help close the gap with Welltower.

The contrast between the two REITs was especially striking a few years ago, when Tom DeRosa was leading Welltower. DeRosa was not afraid of being provocative, which sometimes created complications for himself and Welltower; but the upside was that he articulated a large-scale vision for where the U.S. health care system is headed and the role of senior living within that system. Just this week, current CEO Shankh Mitra acknowledged this in his remarks at the Citi conference, saying, “Tom had a grander vision of health care.”

This vision underpinned and helped elucidate Welltower’s strategy, including a focus on how health system and payer integration could bolster low-acuity middle-market product while helping to transform higher-acuity senior living and skilled care, with data driving investment decisions and asset management.

Mitra played a key role in setting this strategy, he noted this week, although he contrasted himself with DeRosa; Mitra said, “I have a more narrow vision of making money for the investors.”

In this regard, he appears to be a kindred spirit with Cafaro. Over the years, she has relentlessly stated her focus on producing shareholder returns, and this week said, “Every day, I wake up and think about how we can move the ball forward for shareholders and create value — that is who we are.”

But my take is that Mitra and DeRosa balanced each other well, and Mitra today is a more well-rounded leader than his comments at Citi suggested, thanks in part to how closely he worked with DeRosa.

Articulating a grand vision for the future of health care or senior living does not seem Cafaro’s style, but perhaps Hutchens can play that balancing role and communicate more robustly about how senior living is changing, how it likely will evolve in the future, and how that is informing Ventas’ strategy in terms of what assets to invest in and what operators to work with. 

I think doing so is more important now than in the past, given that senior living is becoming an increasingly competitive and complicated business as more capital floods the space, a larger and more diverse consumer demographic enters the market, and larger health care systems and payers increase their involvement in the sector.

As it stands, I feel confident in why Ventas has made particular moves — say, exiting skilled nursing, or going bigger on independent living. And I think the REIT has clarified its approach to ownership and manager relationships with a “right asset, right market, right operator” strategy.

But even that explanation of the strategy seems a bit small-ball to me; getting assets, markets and operators right seems a fundamental aspect of how a senior living REIT should be doing business, and does not address some of the bigger-picture upheavals, disruptions and opportunities in the space.

So, while Ventas clearly has heard and responded to calls for greater communication, I am left hungry for a bolder forward-looking vision. Or to use a metaphor that might appeal to Pittsburgh Penguins co-owner Cafaro, I think that when it comes to senior living, Ventas could make a clearer and stronger case for how the company is skating to where the puck is headed rather than where it has been.