While occupancy and resident rates are ascending within Ventas’ (NYSE: VTR) senior living portfolio, the company has yet to reach its pre-pandemic margins.
Although the company’s margins are now higher than they were in 2021, they still lag behind where they were in 2019, when same-store senior housing cash NOI margins were 29.4%.
Still, management for the Chicago-based real estate investment trust (REIT) was optimistic during the company’s second-quarter 2022 earnings call Friday that the company was on the right track to potentially exceed those margins in the future.
And looking ahead, Ventas CEO Debra Cafaro expects current market conditions to fuel more growth in NOI, rates and net operating income.
“With senior housing starts and inventory under construction well below cyclical highs — particularly in independent living — our senior housing business is set up for continued net absorption and pricing power,” she said Friday during the company’s second-quarter call with investors and analysts.
Overall, Ventas’ second-quarter funds from operations (FFO) was 72 cents, which was in line with analysts’ expectations.
Ventas is the second-largest owner of senior housing in the U.S., with 555 SHOP communities and 331 under triple-net management agreements.
‘Everything has been pointing up’
Two bright spots in the REIT’s SHOP portfolio were census and resident fees.
Same-store average occupancy grew to 83.7% in the second quarter 2022, a gain of 390 basis points versus the second quarter of 2021; and a significant increase over the company’s pandemic low occupancy of 78% in March, 2021.
And that was fueled by positive net move-ins in 16 of the last 17 months, according to Ventas Executive Vice President Justin Hutchens.
“Everything has been pointing up, and we’re certainly benefiting from that,” he said during the company’s second quarter earnings call. “And we have a lot of upside ahead of us over time.”
He added that the company’s occupancy growth continues to outperform industry averages reported by NIC MAP Vision.
“We’re growing at a pace we haven’t seen before,” Hutchens said.
The company’s same-store senior housing operating portfolio (SHOP) cash NOI margins registered at 24.4% in the second quarter of 2022, which is just shy of the 24.7% margin the company reported for that segment in the same quarter of last year. Overall cash net operating income (NOI) margins for the company’s total SHOP segment ticked up 100 basis points, landing at 22.9% for the second quarter of 2022.
Although the company’s margins are still a few measures behind where they were in the quarters before the pandemic, Hutchens believes that, assuming the company’s operating partners can drive occupancy up to at least 88%, the REIT can grow rates and reach margins in the “low 30s,” he said in June.
In the second quarter of 2021, same-store revenue per occupied room (RevPOR) also grew 5% over 2Q21 totals, which the company noted was the largest increase in RevPOR in a decade. That was primarily driven by rent increases among the company’s U.S. and Canadian operating partners, which raised rates in 2022 by approximately 8% and 4%, respectively.
Despite that growth and positive outlook, analysts with BMO Capital Markets still saw some hurdles yet to clear in that regard, chief among them expenses.
“Positively, SHOP’s pricing power continues to improve, but margins still declined year-over-year given cost pressures,” wrote BMO analysts Juan Sanabria and John Kim.
Indeed, Ventas reported that its same-store operating expenses grew more than 11% in the second quarter of 2022 versus the same period in 2021. That was driven by cost inflation in labor, utilities and other operating expenses, according to company leadership.
Softening that blow is a $30 million grant from the U.S. Dept. of Health and Human Resources (HHS), which the company expects to realize in the third quarter of the year.
Although Ventas management doesn’t expect expenses and wages to fall anytime soon, Hutchens highlighted efforts among the company’s operating partners to cut costs, including centralized line staff recruiting, applicant tracking technology enhancements and application process improvements.
“We have had 11 months in a row of positive net hiring, and we experienced a double digit reduction in contract labor costs in the second quarter,” Hutchens said. “Net hiring is critical to our ability to stabilize the workforce, and reduce reliance on more costly and less reliable contract labor.”
He was also heartened by the SHOP portfolio’s cash NOI growth of nearly 9% in the second quarter of 2022, which management noted was at the high end of the company’s guidance range.
On the dispositions front, Ventas expects to see $100 million in proceeds during the remainder of 2022, which is about half of what the company expected earlier this year. But Ventas CFO Bob Probst said change that was a “matter of timing” more than anything.
“The theme of looking for opportunities to upgrade the portfolio using those disposition proceeds to reinvest will continue in the back half and into next year,” Probst said.
Ventas OI update
Hutchens during the call noted progress in the company’s Ventas Operating Insights (OI) platform, which the company launched this year.
Specifically, the REIT through its OI platform addressed digital marketing during the quarter by performing audits and evaluations of operating partners’ websites, user experiences and hyperlocal SEO.
“This initiative is meant to optimize our digital lead bank, which is the fastest growing of all our lead sources and now represents over three quarters of all lead volume,” Hutchens said.
He added that management is “pleased” with the platform’s reception among the company’s operating partners, which include Sunrise Senior Living. As part of a new management agreement earlier this year, the McLean, Virginia-based operator is expanding its data collaboration and analytics under Ventas OI.
“We continue to develop it to be a model for mutually beneficial capital partner and operator relationships,” Hutchens said.