As occupancy stabilizes across Ventas’ (NYSE: VTR) senior living portfolio, the company’s management team is confident its operating margin will steadily grow in the next 18 months and beyond.
Currently, the company’s operating margin lies in the “low 20s” with a senior housing operating portfolio (SHOP) occupancy rate of 83%, according to Ventas Executive Vice President Justin Hutchens. But assuming the company’s operating partners can drive occupancy to at least 88%, he believes the Chicago-based real estate investment trust’s (REIT) can grow rates and reach margins in the “low 30s,” which is on the “higher” end of its expectations, he noted.
“I would lean towards potentially higher margins and potentially higher occupancy than we had pre-pandemic,” Hutchens said Wednesday during a panel at Nareit REITweek: 2022 Investor Conference.
Ventas is among the largest owners of senior housing properties nationwide, with a portfolio of 813 communities totaling more than 82,000 units across 47 states in conjunction with 37 operators.
At the minimum, Hutchens said the expectation for the company is to “at least maintain margin” because Ventas can price-in its ongoing expenses. This year, the company enacted an 8% internal rent increase in the U.S. and 4% in Canada.
“When you step back from that, I think what’s really important to focus on is this is a private-pay business,” Hutchens said. “We do have the ability to pass on additional expense exposure to our customers.”
Hutchens added that pricing power within the overall senior housing asset class has “always existed,” referencing rent rate increases that were 200 to 300 basis points above the consumer price index (CPI).
As many senior living CEOs have noted in recent years, demographic growth among older adults will help grow demand in the years ahead.
“The macro environment is very conducive to the growth that we offer and the positioning of the company at this time,” Ventas CEO Debra Cafaro said during the NAREIT panel discussion. “In a slightly slower economic growth environment — and dare I say even a shallow recession — Ventas will continue to have growth from the senior housing demographic.”
Since the beginning of 2021, Ventas has invested $4 billion, of which 70% came in senior housing.
Also giving Ventas’ leaders confidence is the fact that the REIT has made marginal progress in net hiring — a “ step in the right direction,” Hutchens said. And a more favorable labor market will be key to the company’s net operating income growth, Cafaro noted.
In Q2, Ventas reported SHOP occupancy gains of about 400 basis points year-over-year, and 80 basis points between the first and second quarters of 2022.
“Occupancy began rising in March of 2021 and has continued,” Cafaro said. “We have an NOI opportunity in front of us that is first, to recapture what we lost during the pandemic.”
Digital leads have increased to 150% of pre-pandemic levels, with Hutchens calling them “ central” to the company’s occupancy growth plans.To optimize operators’ ability to grow occupancy and margins, Ventas has given them access to robust data, financial analytics and operational analytics.
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