Ventas (NYSE: VTR) management sees a long runway ahead to recapture $300 million in net operating income (NOI) as the company returns to pre-pandemic margins and occupancy.

But getting there will first require some retooling of its independent living portfolio, part of which lagged on the company’s second-quarter earnings, management noted Friday during a call with investors and analysts.

Specifically, there is a segment of legacy Holiday communities, now operated by Atria Senior Living, that has struggled regaining occupancy lost during the pandemic. Occupancy for the senior housing operating portfolio’s (SHOP) independent living segment grew only 10 basis points in the second quarter of 2023 as compared with the same period in 2022.

That “disappointing” result was driven by “softness” in 38 communities belonging to Ventas’ Holiday by Atria U.S. independent living portfolio, according to Ventas Chief Investment Officer and Executive VP of Senior Housing Justin Hutchens.

“These communities will benefit from executing the more aggressive measures in our OI playbook, including operator transitions and comprehensive redevelopment,” Hutchens said during the call. “And these plans are already underway.”

Overall, Chicago-based Ventas reported SHOP same-store cash NOI growth of 14% compared to the second quarter of 2022 and increased margins by 160 basis points. That result was driven by an increase in revenue per occupied room (RevPOR) growth of 6.6% and lower quarterly expenses.

Ventas CEO Debra Cafaro said that while the near-term still has some challenges left to solve, the future looks bright given the demographic and supply trends at hand. She also noted that the industry is perched at the beginning of “peak years for senior housing loan maturities” through 2025, a period when she said she expects more than $20 billion in debt coming due.

And with “occupancy still about 500 basis points below pre-pandemic levels and rising interest rates, we’re beginning to see significant opportunities to generate higher returns on quality senior housing assets,” she added.

Ventas’ share value fell almost 7% Friday, ending the day at $44.93.

‘Right market, right asset, right operator’

Although the Holiday by Atria communities grappled with occupancy issues in the second quarter, Hutchens noted that the real estate investment trust (REIT) has a lot of moves left in its playbook to improve the 38-community portfolio segment.

First, the company plans to transition the management of 26 communities to existing operating partners in Florida, Texas and California.

“These regional operators have demonstrated strong performance, robust sales management and they have had solid geographic overlap with the transition asset markets,” Hutchens said.

He also said the company would continue its NOI-generating CapEx program, which has in the past helped deliver “very good results” elsewhere in the Holiday by Atria portfolio. Hutchens added that the REIT has another round of similar projects for the portfolio that are slated to wrap up by the end of the year.

The company also is implementing its slate of “best-in-class data analytics” and leveraging “aligned management agreements” with strong local operators to improve the portfolio, a core part of its “right markets, right operators” strategy.

Hutchens noted that the company took a similar approach in 2021 when it successfully transitioned 90 communities formerly operated by now-defunct operator Eclipse Senior Living to seven other operators.

Since then, the portfolio has experienced net move-in growth in 13 of the past 15 months, and delivered year-over-year occupancy improvement of 370 basis points in the second quarter, Hutchens said.

“This is a prime example of performing on our ‘right market, right asset, right operator’ philosophy,” Hutchens said.

He later added: “We’re confident we’re putting them in good hands, and we have an action plan in place to get those on track.”

‘Key selling season’ still underway

Outside of the 38-community segment, Hutchens noted that the company’s independent living communities were “doing great” with double-digit NOI growth. He also said that operating partners including Atria and Sunrise Senior Living were still driving good results elsewhere in the portfolio — particularly in assisted living in the U.S., where NOI grew 32% in Q2 thanks to those and other regional operators.

He also noted that “the demand story remains strong,” with leads and move-ins “consistently performing above per-pandemic and prior-year levels.” The company’s re-leasing spreads are also “as good as they’ve ever been historically,” even as operating partners raise rates, he said. And overall, he said he is confident that the company’s “key selling season” of May, June, July and August will result in more growth to come.

Hutchens reaffirmed a same-store growth range of 15% to 21% for the company’s SHOP segment, minus the 38 Holiday by Atria assets. The company also expects full-year occupancy growth of 80 to 120 basis points, “which is approximately consistent with the first half of the year performance.”

“We remain very confident in the multi-year recovery and senior housing as the table is set for net absorption across the sector,” Hutchens said.