Robert F. Probst, executive vice president
and chief financial officer of Ventas.

Ventas executives said Friday that they have high expectations for performance in the real estate investment trust’s U.S. senior living portfolio over the next five years, although they don’t expect occupancy to improve until late next year.

“Our optimism remains,” Robert F. Probst, executive vice president and chief financial officer, said on the Chicago-based real estate investment trust’s second-quarter earnings call.

“Big picture, although we are still in the midst of elevated new openings, we believe strongly in the powerful upside in senior housing and its contribution to our five-year growth,” he said, adding that the REIT expects occupancy to “inflect positively in the second half of 2020.”

“Through our proprietary data analytics, we can look ahead and see that demand is increasing, and that supply is easing. As evidenced by our forecast, new openings across our 194 submarkets should improve by about 15% in 2020 versus 2019 — in fact, reaching the best level of new deliveries since 2015,” Probst said. “Looking further ahead, improving new construction starts, accelerating demand and significant operating leverage underscore our conviction that over the next five years, our senior housing operating portfolio business can grow same-store cash net operating income at a 4% to 6% compound annual growth rate.”

The REIT’s triple-net senior housing portfolio also “will pick up again over time as the senior housing business benefits from demand and we achieve this powerful upside,” Ventas Chairman and CEO Debra A. Cafaro said.

Ventas has identified “the powerful upside in senior housing” as one of four “building blocks that underpin our confidence in Ventas’ future growth and success,” she said.

In the second quarter, however, same-store occupancy was 86.4%, a 40-basis point decrease versus the prior year. “As a reminder, the year-over-year occupancy gap averaged 80 basis points for the full year 2018,” however, Probst said.

Revenue per occupied room in the second quarter increased 60 basis points year over year, he said, and operating expenses grew 1.9%, a rate that he described as “modest.”

“Our leading operators continue to expertly manage staffing and drive efficiencies,” Probst said. “That said, we maintain our view that full-year operating expenses will increase in the 2% to 3% range, given a tight labor market.”

Same-store cash net operating income in the second quarter in the senior housing operating portfolio decreased 2.9% year over year, although Probst said it was within the range of Ventas’ full-year net operating income expectations of flat to down 3%.

“At a market level in the U.S., we continue to see net operating income growth in sub-markets, such as South Orange County in Los Angeles and Eastern Long Island in New York, mitigated by declines in markets such as Chicago and secondary markets,” he said. “That said, even in challenged [metropolitan statistical areas], we see pockets of occupancy and net operating income growth at the submarket level, for example in Northeast Atlanta.”

In the triple-net lease portfolio, same-store cash net operating income increased by 1.5% for the second quarter, driven by annual rent escalators, Probst said. “We continue to estimate that our triple-net portfolio will grow 2019 same-store cash net operating income in the range of 0.5% to 1.5%,” he said.

Canadian market healthier right now

The Canadian senior housing market is stronger than the U.S. market right now, Probst said. Occupancy in the second quarter in Ventas’ Canadian portfolio was 93.5%, he said, and net operating income saw 3.6% growth.

“This performance underscores the health of the Canadian senior housing market and the quality of our portfolio north of the border,” Probst said. It also explains Ventas’ decision to acquire a $1.8 billion portfolio of 31 independent living communities, plus four in progress, in the Quebec market by investing through an 85% / 15% equity partnership with Le Groupe Maurice, he said. That partnership was announced in June.

These 31 large-scale communities provide an active lifestyle for seniors with high-end amenities and a la carte services. As a result, they lease up quickly to a younger demographic,” Cafaro said, adding that the communities are expected to deliver 4% compound annual net operating income growth over the next five years.

“We also have an exclusive partnership with LGM to jointly develop and own additional communities over time to meet the robust needs of the rapidly growing senior population that lives in senior housing in large percentages in Quebec,” she said.

Also during the earnings call:

  • Ventas sold six Brookdale Senior Living communities in its triple-net lease portfolio for approximately $25 million during the quarter, Probst said. That’s of approximately $100 million in Brookdale dispositions included in the REIT’s guidance, he added. “There are a few more assets remaining in our agreement with them that are being marketed for sale,” Cafaro said.
  • Ventas transitioned 10 East Coast assets from a smaller tenant in its triple-net portfolio to Eclipse Senior Living in the second quarter, Probst said.
  • Probst was named Financial Executive of the Year in the public company category of the Financial Executives International Awards, Cafaro announced. Probst joined Ventas in 2014  after working for publicly traded corporations including Beam, Baxter International and United Kingdom-based Diageo. He earned his undergraduate degree in economics and his MBA from the University of Chicago Booth School of Business.
  • Sean Nolan, chairman of gene therapy company Encoded Therapeutics, executive chairman of Istari Oncology and a member of the board of directors of clinical-stage pharmaceutical company Aquinox Pharmaceuticals, has been appointed as an independent member of the Ventas Board of Directors, effective Friday, Ventas announced. The board now contains 10 people, nine of whom serve as independent directors. “With three decades of extensive experience in the biopharmaceutical industry and a proven track record of business accomplishment, Sean will contribute unique and complementary insights to enhance our rapidly expanding research and innovation business and our enterprise growth,” Cafaro said in a press release issued in conjunction with the call. Nolan was CEO of clinical-stage gene therapy company AveXis from 2015 to 2018, when the company was acquired by Novartis for $8.7 billion. Before joining AveXis, he held senior leadership positions at InterMune (acquired by Roche in 2015), Reata Pharmaceuticals, Lundbeck and Abbott Laboratories.

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