Occupancy, Rate Growth Propel Ventas’ Senior Housing NOI Higher in Q1

Occupancy and rate growth at operators of Ventas’ (NYSE: VTR) senior housing portfolio helped the company achieve “outstanding” net operating income growth in the first quarter of 2022.

The Chicago-based real estate investment trust (REIT) reported a 14.2% increase in net operating income (NOI) for its senior housing operating portfolio (SHOP) in 1Q22, excluding HHS grants. And the company expects a NOI in the SHOP segment of 2% to 10% for the second quarter of 2022.

Ventas CEO Debra Cafaro also noted that the first quarter of 2022 marked the first time since the pandemic began that the REIT grew both normalized FFO and SHOP cash NOI in the same deal.

“Looking ahead, the strength of our well-positioned communities, strong demand evidenced by leads exceeding pre-pandemic levels through April, pricing power and favored markets should contribute to sustained NOI growth through the end of April year,” she said during the company’s first-quarter 2022 conference call with investors and analysts on Friday.

Despite its relatively strong first-quarter performance, Cafaro also noted that the company is grappling with inflationary pressures, signs of a possible looming recession and “the tightest job market we’ve seen in 50 years.”

Nevertheless, Ventas is well positioned, challenges or not, she added.

“Pricing power is strong and has the potential to strengthen further as occupancy continues to recover,” Cafaro said. “A moderation in the growth rate of labor and other expenses should improve our margin, especially as revenue and occupancy increase.”

Ventas reported funds from operations (FFO) of $0.79 per share for the first quarter of 2022, beating Wall Street estimates by two cents.

The REIT’s Senior Housing Operating Portfolio (SHOP) includes 544 communities.

Airstrip for recreation

With many of the company’s indicators trending positive and given the size of its SHOP segment, Ventas is on track to benefit from an upcoming post-Covid recovery.

The process could take many years, however, and utilization is likely to return to pre-pandemic levels a year or two before margins recover, according to Stifel analyst Stephen Manaker.

“Higher labor costs are the key factor delaying margin recovery,” Manaker wrote in a May 5 note to investors.

Although the REIT has moderated its guidance for the SHOP segment for the second quarter of 2022, according to RBC Capital Markets analyst Michael Carroll, this is largely a factor of “ongoing cost pressures that will eventually ease.”

“SHOP sales trend remains healthy and in line with our expectations,” he wrote in a May 5 note.

Ventas stock value fell slightly on Friday, reaching $56.97 at the time the financial markets closed.

Talking shop

According to Justin Hutchens, executive vice president of senior housing, the company’s SHOP NOI earnings in the first quarter point to continued growth. At the same time, occupancy and rate growth helped boost same-store sales by nearly 10% in the first quarter.

“Sales performance is very strong, driven by volume and pricing despite Covid-19… resulting in our best year-over-year and consecutive sales performance we’ve seen in our portfolio,” said Hutchens.

Ventas operating partners increased rates across the board by about 8% while average same-store occupancy increased 420 basis points to 83% in the first quarter of 2022.

According to Hutchens, operating expenses rose 8% in 1Q22 compared to the year-ago quarter due to “macroeconomic factors” and increased labor costs.

At the same time, Hutchens noted that Ventas has increased net hires over the past seven months, although “we have yet to see any impact on the income statement,” he added.

Although Ventas executives were “pleased” with SHOP’s performance in the first quarter, performance was mixed geographically.

Net operating income increased to $72.8 million in Q1 2022 from $57.5 million in Q1 2021, an increase of 26%. But in Ventas’ Canada portfolio, NOI fell to $41.1 million in Q1’22, down 2.4% from the $42.1 million NOI the company recorded a year earlier.

But Hutchens e attributed that difference to ongoing move-in restrictions in Canada, noting that the company expects conditions to improve as the year progresses.

“In Canada … they’ve always shut down much more quickly when there’s a small eruption or threat of an eruption,” he said. “That slowed down the indentations.”

But occupancy in the company’s Canada portfolio has remained at or above 90% over the past decade, and Hutchens noted that “March and April got off to a good start, so we think there’s potential for a recovery.”

Occupancy in Ventas’ 73 Canada-based communities was 91.8% in Q1 2021 and increased to 93.2% in Q1 2022.

“The broader Canadian market tends to exhibit better supply-demand dynamics over time,” Hutchens said.

Looking ahead to the remainder of 2022, Ventas has targeted $200 million in senior housing investments this year to “improve the portfolio through selective pruning,” Hutchens said.

‘Right Operator’

Ventas also spent the quarter strengthening relationships with its existing operator partners as part of its right facility, right market, right operator strategy.

The latest milestone in this strategy is a newly revised management agreement with McLean, Virginia-based operator Sunrise Senior Living, which deepened a partnership that began in 2007 and now spans 92 communities.

As part of the new agreement, the companies consolidated several ongoing contracts into one master agreement, which retains the existing term until 2035. The master agreement also includes incentives for NOI growth – a priority for Ventas.

“What we like about this new arrangement is that it’s pretty simple – if they give us a higher NOI, they get a higher management fee,” Hutchens said, adding that a lower NOI also means a lower management fee.

Ventas is also expanding its relationship with its largest operator in Canada, Le Groupe Maurice (LGM).

Ventas acquired 29 LGM-operated communities in 2019 and has since expanded the portfolio to 34, accounting for more than half of Venta’s entire Canadian portfolio. Ventas has three more communities in development with the operator.

Ventas expects to break ground on a $90 million project in St. Hyacinthe, a suburb of Montreal, later this year. With an expected stable yield of 6%, the community will consist of 362 units and is close to supermarkets, restaurants and entertainment.

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