‘What We’ve Been Expecting’: Ventas Executives See Tides Turning on Senior Housing, Share Bullish Projections
Pricing power and demand point to continued growth toward pre-Covid-19 senior housing margins for Ventas (NYSE: VTR), but with macro factors impacting the cost of operations, it’s difficult to create a timetable for this return.
Still, executives at the Chicago-based real estate investment trust (REIT) believe the margin expansion seen in 3Q2022 is not a one-time event and that margins will continue to rise going forward – and may be observable. from the fourth trimester.
“This is what we expected,” Ventas CEO Debra Cafaro said Friday during the company’s third quarter 2022 earnings call. She noted that the year-over-year cash net operating income (NOI) of the REIT’s senior housing operating portfolio (SHOP) increased 9% in the second quarter of 2022 and 13 % in the third quarter of 2022, with growth expectations of 15% to 21% in the fourth quarter.
Ventas reported normalized operating funds per share of $0.76. Year-over-year comparable store NOI (NOI) growth was 4.8% company-wide.
This growth was led by SHOP, which saw same-store cash NOI growth of 13%, which was led by a 9% increase in year-over-year revenue that Cafaro called a “outstanding” on the company’s quarterly call with investors and analysts.
“Our strong numbers validate our long-standing comment that we are at the start of a multi-year period of recovery and growth in senior housing, driven by positive fundamentals and improving supply and demand and propelled by the actions and decisions we have made, Justin and the experience, precision, insight and credibility of the team and, of course, the efforts of our operators,” Cafaro said, referring to Justin Hutchens, EVP-Senior Housing.
Impressive pricing power
Overall, residents of seniors’ residences pay more and they come back.
“Prospects are well over 100% of 2019 levels and move-ins are 109% of 2019 levels, which is very strong,” Cafaro said on the call.
And while Ventas saw third-quarter moves to around 98% of 2019 levels, street rate pricing power has been strong.
“Whether [a resident] moved in during a pandemic period at lower rates, that’s where you start to get that positive momentum when relocating,” Cafaro observed.
Chicago-based Ventas said revenue per room occupied (RevPOR) increased more than 5% in 3Q2022 compared to the same quarter in 2021, according to Hutchens.
Hutchens attributes the jump in RevPOR to an 11% year-over-year rate increase despite the US portfolio being only 80% occupied across the board, “which is a real testament underlying demand for senior housing and bodes well for future prices,” he said on the call.
Ventas’ SHOP saw NOI margin growth of 90 basis points in 3Q2022, driven by revenue growth that outpaced strong expenses.
“Pricing power continues to impress. SHOP cost growth is expected to remain flat quarter-over-quarter with labor cost pressures stubbornly lingering,” wrote BMO analysts Juan Sanabria and John Kim, who also noted that the lack of acquisitions is not surprising.
As Sanabria and Kim noted, operating an elderly community remains expensive.
For Ventas, year-over-year expenses increased 7.6% and averaged $3.8 million per day, due to the impact of inflation on labour, utilities, maintenance and food.
However, in the coming quarters, Ventas expects margin growth to continue to build on the back of further planned rate increases and relatively stable expenses. Residents’ pushback remains moderate on rate increases, which are supported in part by a surge in Social Security payments. Sunrise Senior Living managed to push through some early onsite price increases of around 9%.
“Historically, this industry has had a pretty healthy spread in terms of increases to the consumer price index (CPI),” Hutchens said on the call.
Executive Vice President and Chief Financial Officer Bob Probst conveyed much the same message.
“Rate growth is a strong contributor to the revenue growth that’s occurring,” Probst said. “Not only does this offset inflationary pressures, but it stimulates margin expansion. And that’s pretty much the playbook for the fourth quarter.
Ventas stock closed at $39.49 per share at the end of regular trading on Friday, up 6.7% on the day.
Rates and recruits
Ventas plans to further capitalize on rate increases and accelerating demand by focusing on operations and expenses, including hiring and retaining new workers.
To further improve returns and close in on the nearly 30% NOI cash margins the company announced in 2019, Ventas is prioritizing how it will raise rates going forward and how it will recruit new new workers.
“The rate increase this coming year will be the highest on record,” Hutchens said. Normally, rate increases have been around 5% in the US, but in 2022 rates have increased by 8%. But this year, the REIT expects rate hikes of around 10%.
In fact, Ventas has carriers that not only have already announced price increases, but have implemented them.
“Some operators, including Sunrise, have already implemented an early on-site rent increase and the results are positive and a good preview of what should be successful execution in the first quarter and beyond,” Hutchens said.
The 10% rate increase is in line with overall rate increase expectations for the coming year, as reported by Senior Housing News.
And while higher fares will boost revenue, Ventas is rolling out its data analytics to help operators hire new workers. It conducted research on secret buyers for more than 50 job titles across 15 of its operators in an effort to assess candidate reputations and processes and gauge follow-up effectiveness.
“I was pleased to see that our operators performed well against industry benchmarks, we came away with several actionable recommendations to attract new talent to our communities,” said Hutchens.
Yet Ventas has now reported four consecutive quarters of positive net hires across its portfolio, while its reliance on agency labor continues to fall from 8.7% in the first quarter to 5.9% in the third quarter.
The latest quarterly figures show Ventas on the rebound from Covid-related headwinds as well as pre-pandemic operational challenges. After going through difficult situations such as the closure of Eclipse Senior Living and the transition of these communities to other operators, REIT executives are now confident about the REIT’s position going forward.
“We’ve been waiting for a long time, like I said, to see such good results, good projections,” Cafaro said.