The management team at Ventas (NYSE: VTR) is seeing its highest senior housing unit revenue in years as operating partners set rates higher for the coming year — but even that is not enough to get the company back to desired margins as cost pressures continue to eat into the bottom line.
The Chicago-based real estate investment trust (REIT) reported that revenue per occupied room (RevPOR) has grown more than 5% in 2022 — the highest increase in a decade. But management believes that the current environment of expense pressures will force its operating partners to set resident rates even higher in the coming year. And they believe they have the pricing power to do so.
In-place rent increases for those operators’ residents in the first quarter of 2022 were about 8% in the U.S. on average, and about 4% in Canada. Given that resident pushback to those increases was “de minimis,” Ventas CFO Probst sees a potentially bigger year for rate growth ahead with increases for many U.S. operators closer to 10%.
“All this, of course, is necessary in light of the operating expense pressure we’re seeing from an inflation perspective,” Probst said during a presentation at the 2022 Global Real Estate Conference hosted by Bank of America (NYSC: BAC).
Operating expenses for the REIT’s senior housing operating portfolio (SHOP) currently sit at $3.8 million per day. Putting pressure on the company’s bottom lines include a melange of growing costs, chief among them labor expenses. Contract labor use is flattening and the company’s operating partners did see favorable trends in hiring, Probst said.
“Where we are seeing things that are above expectation are things like repairs and maintenance, food utilities — there is pressure across all those buckets,” he added.
In the third quarter of this year, Ventas expects same-store cash NOI growth for its SHOP segment of 9% to 15% thanks to sustained high demand for senior housing, increased move-ins and improving margins.
Already, that has “played out in terms of margin expansion,” Executive Vice President of Senior Housing Justin Hutchens noted. Management also noted that communities that are 90% to fully occupied typically deliver “outsized NOI flow-thru on incremental revenues.”
Another big trend that Ventas management noted was the ongoing shift of lead sources to digital. As of the call, about 90% of the REIT’s operating partners’ leads were from digital sources.
On the whole, CEO Debra Cafaro believes the REIT’s senior housing recovery is well underway and will be sustained by a “very favorable supply and demand backdrop,” citing demographic shifts as the U.S. population ages rapidly.
“That recovery is manifesting itself as we look at the third quarter with very strong pricing power in revenue rate and a positive releasing spread,” Cafaro told listeners during Tuesday’s presentation.
Preliminary 3Q22 occupancy data for Ventas registered at 84.5% occupancy in the U.S. and Canada which is up from 82.1% reported in 3Q21, presentation information provided by the company showed. The REIT expects SHOP occupancy will grow by 250 to 300 basis points in the third quarter.
Net move-ins across its senior housing assets between May and September of this year also have outpaced figures seen pre-pandemic in 2019. Compared to 2019, Ventas reported 436 more net move-ins compared to 2019.
Some macro optimism could come though as the REIT cited the latest market composites by Bloomberg show inflation and wage growth improving over time. Currently the consumer price index (CPI) sits at nearly 9%, but that figure could improve to 5.8% in 1Q23 and later to 2.7% in 4Q23. Wage growth remains over 5% but could drop to 3.9% in 4Q23.