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Ventas’ revised management agreement with Sunrise Senior Living is a sign of things to come for other operators in the real estate investment trust’s portfolio, Ventas Executive Vice President of Senior Housing J. Justin Hutchens said Friday during the Chicago-based REIT’s first-quarter earnings call.

The preceding evening, Ventas had announced that it had entered into a revised management agreement with McLean, VA-based Sunrise for the 92 high-end assisted living communities that Sunrise manages for the REIT. Hutchens said that he anticipates similar arrangements with other operators in its portfolio in the future.

The move, he added, represents the company’s latest step to advance its senior housing strategy and to position the portfolio to “capture the upside from the senior housing growth trajectory.”

Sunrise has had a place in the Ventas portfolio since 2007, and Hutchens said the agreement is mutually beneficial to both companies. It includes a new management fee structure with increased weight toward net operating income performance and a reduced emphasis on revenue. Sunrise will earn incentive payments if the company achieves growth targets.

Hutchens said the agreement provides enhanced operating flexibility and consolidates multiple contracts into a single master agreement. Ventas Chairman and CEO Debra Cafaro said that the revised agreement aligns the REIT’s interest toward profitable growth and value creation.

Portfolio at start of sustained improvement

Hutchens described the company’s senior housing operating portfolio as at the start of sustained improvement and said it was experiencing “outstanding” year-over-year revenue and occupancy growth that “overcame meaningful impacts” from COVID-19 and inflationary pressures during the quarter.

Same-store average occupancy grew year-over-year by 420 basis points (4.2%) to 83% in the first quarter. Demand described as “robust” resulted in leads and move-ins trending at more than 100% of pre-pandemic levels in the first quarter, outperforming typical seasonal patterns, he said.

Revenue, Hutchens said, was “very strong,” driven by volume and pricing. Current residents saw an 8% rate hike in January, whereas new resident pricing is expected to increase as well, he said. The result, Hutchens said, is the best year-over-year and sequential revenue performance ever seen in the portfolio. Same-store revenue increased by almost 10% compared with the prior year.

Executive Vice President and Chief Financial Officer Bob Probst said that he expected to see revenue increase by 10% at the midpoint of the year, led by occupancy increasing by 400 basis points (4%).

Same-store operating expenses increased 8% year-over-year, driven by inflationary effects on labor, utilities and other costs. 

Labor expenses remained elevated as operators countered staffing shortages with hiring approaches and targeted wage increases. Those efforts resulted in net hiring improving over seven consecutive months, Probst said. The labor market is the tightest it has been in 50 years, Cafaro said.

‘Powerful’ recovery underway

The CEO said that first-quarter results for the REIT underscore the “powerful” senior housing recovery now underway.

“Our [senior housing operating portfolio] communities benefited from strong demand and pricing power during the quarter, demonstrating the strength, resiliency and potential of the assets and overcoming inflationary impacts and the effects of COVID-19,” she said.

Softening industry growth rates, as well as decreasing labor and other expenses, are expected to improve margins as revenues and occupancy increase, she said.

$500 million in purchases

The REIT reported approximately $500 million of closed or committed new investments year-to-date, primarily in the areas of senior housing, life science and research and innovation. Venta has posted $4 billion in investment activities since the beginning of 2021. 

In February, the company closed on the previously announced acquisition of Mangrove Bay, a Jupiter, FL-based senior living community. Ventas also announced that it expects to break ground on a new $90 million, 362-unit senior housing development project in Montreal, Quebec, with its partner Le Groupe Maurice.

Hutchens said the REIT continues to identify opportunities to improve its portfolio through selective pruning and is targeting $200 million in senior living community sales this year.