Ventas Reveals Low Senior Housing Portfolio Expectations

CHICAGO – Despite Ventas’ strong enterprise level results within the medical office, healthcare and research & innovation sectors, displayed in its third quarter report, the Chicago-based REIT expects to defer its growth through 2020, due to its senior housing portfolio’s unsatisfactory third quarter performance.

During the REIT’s Q3 earnings phone call with its shareholders and participants, the company revealed that its senior housing portfolio fell below expectations; performing inconsistent against historic patterns. The company executives shared that they expect this trend to continue throughout the remainder of the year and into 2020, given the challenging senior housing market conditions.

“We expect our 2019 SHOP (Senior Housing Operating Properties) performance to fall below our original guidance range, mostly because our portfolio did not experience the strong seasonal lift in occupancy that is typical and rate softness continued during the quarter,” Debra Cafaro, CEO and chairman of Ventas, stated on the call. “These trends are continuing into the fourth quarter leading to a reduction in our full year SHOP 2019 guidance. Because we will end 2019 and enter 2020 off a lower base, we’ve also concluded that our enterprise growth will be deferred until after 2020.”

Though the company benefited from its diversified portfolio, driving performance from positive capital markets activity, accelerated investments and office and triple-net business growth, the REIT confidently conveyed that they will not experience rapid, positive growth; fully expecting a weaker SHOP throughout 2020.

Ventas Q3 results showed that 70% of its same-store portfolio, represented by office, triple-net-lease and Canadian senior housing portfolios, grew nearly 3% cash NOI, while its US SHOP business, representing 25% of its enterprise, experienced dynamic operating conditions and decreased occupancy in September. The REIT’s Q3 SHOP same-store cash NOI decreased 5%, compared to its previous year.

Ventas CFO, Bob Probst pointed out that the unfortunate result was led by revenue weakness, due to new openings and an active relative market. Emphasizing three primary drivers against the REIT’s Q3 sector expectations, Probst expressed, “First, though Q3 average occupancy grew sequentially to 86.7%, we did not see the expected typical seasonal occupancy lift. Therefore, the occupancy gap, versus prior year, widened from the second and third quarter by 30 basis points to an average 70 basis point occupancy gap.”

In third quarter, the year-over-year occupancy gap widened, with occupancy at 115 basis points lower than prior year, at September period end.

“I think it’s the cumulative impact of what we’ve been seeing over the last years, which seems to have taken a bigger impact. Made the market tougher particularly on selling. And then within that how our operators and others compete particularly on price,” said Probst.

The REIT also attributes the unforeseen market changes to its competitor’s unexpected actions and geographical footprint; claiming that competitor pricing was a significant second factor in the negative results, as increased supply led to a lack of new residents in select regions.

Probst explained “negative releasing spreads and our portfolio widened in Q3 instead of our expectation that they would tighten relative to prior year. As a result, REVPOR (Revenue Per Occupied Room) growth reduced sequentially from 60 basis points in the second quarter to 40 basis points in the third quarter year-over-year.”

Lastly, due to new supply, the REIT said on the call, that experienced, distinct pricing challenges contributed to the unforeseen challenges.

“The market changed pretty rapidly in the third quarter. And even the boots on the ground as I described, the operators were surprised by the nature of the change,” Probst said, stating that it was primarily “the outlook for the year that changed, and those circumstances (change) pretty rapidly.”

Though a dramatic change in the market did occur in 2019, it did not alter drastically from Q2 to Q3, as one participant pointed out. Though senior housing supply was high in Q3, the REIT claims that it fully expected and planned for the potential levels of supply.

However, considering all of these significant factors within the sector, the REIT confidently expects that its Q3 SHOP same-store NOI performance will improve by more than 100 basis points, excluding ESL, in the future.

Addressing its shareholders, the REIT displayed its mission to make necessary adjustments in efforts to improve performance, as its executive team stated that corrective action plans are already in progress.

While considering the low-occupancy starting point for Q4, the company plans to implement aggressive pricing for its operators, as it prepares to close out the year and set the base for 2020. The REIT additionally laid out evaluation actions, including selective dispositions and capital investments to improve SHOP performance. Indicating a challenging fourth quarter, in light of the Q3 revenue trends, the REIT additionally revised its SHOP full-year 2019 same-store cash NOI guidance to now range from -4% to -5%, given recent technology trends, its decreased occupancy levels and the competitive market.

While acknowledging senior housing’s powerful upside, the company expressed its intentions to optimize its portfolio. At an operational level, the REIT intends to implement “asset-by-asset recovery plans,” by engaging with operators to strongly focus on revenue. The company will additionally evaluate its portfolio for selective, potential dispositions of underperformers. The company will also assess capital investments to compete in select markets by investing in growth-driven opportunities.

“As we’ve talked about in terms of our investment strategy, we are positive on the long-term fundamental outlook for senior housing. We have invested judiciously over the past few years. We’re building our research and innovation business with universities which is our number one priority, and we’ll continue to look at investments on a case by case basis as we see good – what we believe is good risk adjusted return,” said Chris Cummings, Ventas SVP of asset management for seniors housing.

Included in the REIT’s $3.8 billion in consolidated investments year-to-date, is the REIT’s successful, new partnership with Le Groupe Maurice, which closed in the third quarter, comprising 29 senior housing communities and five in-progress developments, valued at $1.8 billion.

Identifying earlier online supply primarily in secondary and tertiary markets, the company saw similar impact and trends within primary markets, as well. Confident that these results are not specific to a select region, the REIT additionally stated that the downfall was not a specific to any one operator or owner.

While acknowledging the record-high level of senior housing demand within the US during Q3, the company did experience significant change across each of its SHOP operators; calling the experience “unprecedented.”

The company discussed its future implications, stating that “only time will tell” as to whether this situation is a capitulation of some kind or a cumulative effect.

Cafaro, whom recently was recognized by Harvard Business Review as a Top 100 Best Performing CEO for the sixth consecutive year, expressed, “while we are very disappointed in this deferral of our growth expectations, the team is resolute and focused on closing out the year by delivering this solid 2019 enterprise results we’ve outlined today.”

The REIT’s leadership consistently reassured shareholders that they plan to further address the report and better-predict future results in January 2020, upon year’s end.

“There are many good aspects of the portfolio in the enterprise that are going very well. And we can obviously continue to build on those strengths while we also address where we are in senior housing,” Cafaro stated. “We remain positive on the fundamental long-term growth in the senior housing business.”