Favorable supply-demand dynamics are creating a “multi-year window” with which to regain occupancy and elongate margins, according to Ventas (NYSE: VTR) CEO Debra Cafaro.
In the fourth quarter of 2022, same-store occupancy for the company’s senior housing operating portfolio (SHOP) segment hit 82.5%, representing the higher end of the company’s previous guidance for growth. That helped net operating income (NOI) for the entire SHOP segment reach 19.1% in 4Q22.
And the Chicago-based real estate investment trust (REIT) believes that occupancy will continue to to ramp up throughout the year, according to its fourth quarter earnings call with investors and analysts Friday.
“In 2022, Ventus began what we believe will be a multi-year growth and recovery cycle led by SHOP and supported by favorable supply demand fundamentals, actions we’ve taken in the portfolio and our post pandemic rebound,” Cafaro said. “Our portfolio has already enjoyed significant occupancy and NOI growth from the Covid trough, and we see even more recapture potential ahead of us in the coming years as we first seek to reach 2019 performance levels, and then hopefully exceed them.”
In fact, Cafaro believes the company has a shot at reaching and potentially exceeding its post-Great-Recession occupancy rate of 92%.
The company’s operating partners have enjoyed strong pricing power, which has helped buoy the REIT’s results in recent quarters, according to BMO Capital Markets’ Juan Sanabria and John Kim.
“Leads remain solid, but conversions appear to be trending down with move-outs also inching up vs. 2019,” their Feb. 9 investor note reads.
The company’s total portfolio spans more than 1,200 properties relating to senior housing, life sciences and medical offices. The company’s senior housing portfolio includes 478 communities.
Ventas’ share price gained +0.87%, landing at $51.15 by the time financial markets closed Friday.
Margin growth shows progress
Ventas made progress in 4Q growing its margins thanks to ground gained in several key areas.
Ventas’ SHOP NOI growth in the fourth quarter of 2022 was fueled by margin expansion as well as same-store revenue growth of about 8%, the company noted. The U.S. was a particularly strong market for NOI growth, with a 22.2% gain thanks to the performance of operators including Sunrise Senior Living and Atria Senior Living.
The company’s Canadian operating partners also posted growth in 4Q, with a gain of 11.7% led by operator Le Groupe Maurice, according to Executive Vice President of Senior Living and newly appointed CIO Justin Hutchens.
“We continue to benefit from operating leverage, even at this relatively low occupancy resulting in margin improvement from 23% in Q3 to 23.6%. In Q4,” he said.
Still elevated were costs related to agency labor, but Hutchens said the company’s operating partners have helped to curb those costs in recent quarters. Among successful operator strategies was to centralize recruiting of frontline staff instead of leaving that task to communities.
Hutchens said Ventas’ SHOP expenses were about $4.7 million per day in 4Q22. The company’s expense growth peaked in the second quarter of 2022 at 11%, and in the fourth quarter of last year had fallen to 6%.
That was offset by rent growth amid the company’s senior housing operating partners. Revenue per occupied room (RevPOR) ticked up 1.4% in the fourth quarter of 2022, and 6.5% for the full year.
The average rate increase in the company’s senior living portfolio in 2022 was about 10%.
“Our SHOP portfolio continues to perform really well,” Hutchens said. “The fourth quarter was ahead of our expectations while delivering excellent year-over-year growth due to pricing power, occupancy growth and moderating expenses.”
2023 expectations
Cafaro noted that in 2022, supply-demand dynamics shifted in Ventas’ favor. And looking ahead, she sees that continuing this year and beyond.
“We believe we have a good multi-year window here where we know the demand profile and can capture that,” She said. “At the same time, deliveries should remain very muted … again, much like we did after the financial crisis, where deliveries were low.”
Looking ahead, she said the company’s “game plan” is to get back to 92% occupancy.
Ventas management also believes rate increases will fuel continued growth into the next four quarters.
“Eighty percent of our revenue growth in 2023 will be driven by RevPOR growth,” Hutchens said on the earnings call.
While normal seasonality had shifted somewhat with the pandemic, Hutchens said he expects to see the industry continue to normalize on that front in the months and years ahead.
“We expect a return to more normal seasonal occupancy patterns, which include typical clinical conditions and slightly elevated financial move-outs in Q1,” he said.
Ventas is currently in the midst of upgrading 100 properties in its SHOP portfolio as part of a $100 million capital expenditure initiative. While Hutchens said there is still more to do on that front, “we picked our highest priorities, and we’ve been executing aggressively,” he added.
“So, we look forward to these projects coming online during the key selling season,” he said.
Looking ahead, the company’s leaders see an opportunity to grow its SHOP segment by an additional $900 million in cash NOI recovery.
Lending Hutchens and the other leaders’ optimism was the fact that the company’s leads had reached historic levels in the fourth quarter of 2022.
“We’re anticipating and hoping to get back to that 2019 level, and margins should settle out, but also should continue to grow because of the strong demand for the senior housing sector,” Hutchens said.
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