With year-over-year margin growth of 200 basis points in its senior housing operating portfolio (SHOP), Ventas (NYSE: VTR) is taking advantage of market forces to grow beyond a strongfirst quarter.
“We believe that above 90% occupancy and higher margins are also attainable because current supply-demand conditions are materially more favorable than they were during the last peak period,” Ventas CEO Debra Cafaro said Tuesday on the company’s Q1 2023 earnings call.
On the back of large in-place rate increases and an emphasis on reducing costs – namely agency-sourced labor – Ventas reported 17.4% year-over-year growth in same-store cash net operating income (NOI) in 1Q2023 for SHOP.
“The success we achieved in the first quarter was powered by our high-quality senior housing operating portfolio (SHOP) business where U.S. communities grew 22%,” Cafaro said.
Ventas – like many in the industry – benefited in the early parts of 2023 from high in-place rent increases, with the REIT’s operators putting through increases of about 11%. To go along with increased rates, the company reported a drastic decrease in its usage of agency-sourced labor, according to Ventas Chief Investment Officer and Executive VP of Senior Housing Justin Hutchens.
Ventas in the past year reduced its usage of agency labor by 59% and net hiring has trended positive for six straight quarters, Hutchens said.
Normalized funds from operations (FFO) per share were $0.74 in Q1 and the company reaffirmed the previous 2023 normalized FFO guidance of $2.90 – $3.04 per share.
Cafaro added that the company projects that there is as much as $300 million in additional NOI on the table “from simply re-reaching pre-pandemic margins and occupancy of 88% in the portfolio,” she said.
The 22% overall year-over-year SHOP growth combines the results for the company’s legacy portfolio and its transaction portfolio. The legacy SHOP portfolio is made up of 234 communities with 79% overall occupancy and about 20% year-over-year growth and the transition portfolio includes 200 communities with an average occupancy of 75% and about 30% year-over-year NOI growth.
And while senior living is making strides toward overall recovery, macroeconomic factors are making growth complicated for some in the industry. Those factors create an opportunity for Ventas, according to Cafao.
“With 99% of our SHOP communities located in markets without competing new supply, barriers to new construction starts, and our team using Operational Insights to drive results – these conditions present a compelling multi-year growth opportunity,” Cafaro said.
Data from construction company Weitz in April suggested that new starts from construction could slow even further in 2023.
Still, there is a long way to go. Occupancy dipped in the first quarter in the SHOP portfolio, but that was not surprising to Hutchens.
“First quarter occupancy was exactly as expected,” Hutchens said on the call.
Quarter-over-quarter overall SHOP occupancy may have dipped from 82.5% to 81.3% but Hutchens said that can be explained by a return to seasonal sales cycles in senior living. Indeed, year-over-year occupancy grew 80 basis points from 4Q2022.
“We have an aggressive occupancy ramp that we’re expecting,” Hutchens said. “The key selling season starts now.”
Ventas shares closed at $46.86, down 1.22% on the day.
Future of Santerre properties
Ventas on May 1 completed its plan to take ownership of Santerre, an investment portfolio made up of medical office buildings (MOB), senior living communities and triple net leased health care facilities, mostly skilled nursing.
As announced earlier this quarter, the plan to take over would land Ventas complete ownership of 16 senior living communities with approximately 1,900 units.
In the deal, Ventas would convert its $486 million mezzanine loan into equity. And while Ventas believes the move will strengthen its position in the long run, some investors aren’t so sure.
Activist investor Jonathan Litt, founder of Land & Buildings, wrote an open letter questioning the direction of the company and calling for action that included replacing members of the board and removing Cafaro from her position as chief executive. But Litt’s concerns did not come up on Tuesday’s call, and Ventas leadership was focused on their plans to maximize the NOI and value of these assets, including the large senior living communities
“Those are rental continuing care retirement communities (CCRC),” Cafaro said. “They are very large communities with high replacement costs in good markets with a pre-existing operator.”
And demand for life plan communities/CCRCs has been a boon to operators looking to recover from Covid-19–ear lows, besting the rest of the industry in occupancy, according to 4Q2023 data from NIC MAP Vision.
Beyond the communities in its legacy portfolio, Ventas is looking to ramp up CapEx in the coming months to take advantage of the market factors Cafaro described.
“We are pleased to announce that we are delivering over 100 NOI-generating CapEx projects in our SHOP portfolio,” Hutchens said.
As to the allocation of the CapEx, the legacy portfolio will require much less investment to improve the operations and therefore NOI compared with the transition portfolio.
“I don’t think it’s a really big number,” Hutchens said. “I think we’re spending about $1 million per community.”
While Ventas’ leaders are bullish on the benefits of these investments, as well as the supply-demand fundamentals, Stifel analysts remain cautious about how quickly the senior housing recovery will proceed. Although conceding that Ventas’ “big margin beat” in Q1 might portend further outsized performance, they wrote, “We continue to believe the occupancy recovery to pre-COVID levels will take 2-3 years from here, and margins will follow afterwards.”
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