Companies in the Ventas senior housing operating portfolio will pursue aggressive pricing plans to increase occupancy, and the real estate investment trust will consider selling some assets and investing in others to try to rebound from lower-than-expected third-quarter performance in the REIT’s senior housing operating portfolio, executives said Friday.
“There is a definite balance here, because the leading indicators in senior housing continue to be very positive. There is a powerful upside in senior housing,” Chairman and CEO Debra Cafaro said during the real estate investment trust’s third-quarter earnings call. “We certainly can always optimize the portfolio and do things to improve performance. We also want to be there and have our shareholders be there to enjoy that powerful upside as it materializes.”
The SHOP represents 25% of the REIT’s enterprise and 33% of net operating income, executives said.
“SHOP same-store cash NOI in Q3 decreased 5% versus prior year, a disappointing result that fell short of our expectations,” Chief Financial Officer Bob Probst said. “This result was led by revenue weakness from the cumulative effect of new openings in a dynamic, competitive market.”
Rapid market changes in the quarter, especially related to occupancy, caught operators in the Ventas portfolio by surprise, he said. The CFO cited three factors that contributed to financial outcomes.
First, although occupancy grew sequentially in the quarter to 86.7%, Probst said, the portfolio did not see the typical seasonal occupancy lift; occupancy was 115 basis points lower in September than it had been last year.
Probst said the occupancy drop within the quarter and especially in September was “significant” and, “at least in my experience, pretty unprecedented,” affecting all operators in the senior housing operating portfolio regardless of geography.
“Secondary and tertiary markets where more supply has come online earlier is where we see the most acute impact, but even in primary markets, you see similar trends,” he said. “So that’s why I keep coming back to this notion of a cumulative effect. Is it a capitulation of some kind, or not? Only time will tell. But it is notable in its consistency as we look at it in different ways.”
Second, that new supply, especially in secondary markets, drove price competition, Probst said.
Thirdly, “ESL [Eclipse Senior Living] experienced discrete pricing challenges, exacerbated by new supply,” Probst said. “Corrective action plans are in progress. I would note that excluding ESL, our Q3 SHOP same-store NOI performance would improve by over 100 basis points.”
ESL’s footprint, concentrated in secondary and tertiary markets, meant that it was more affected by the trends, Cafaro said. Also, she said, ESL is still implementing new models, including a new pricing model, at communities that it has assumed management of, “which … in the context of the tough market, made it even tougher for ESL in particular.”
Ventas has a 34% ownership stake in ESL, according to the REIT’s most recent quarterly report.
Going forward, Cafaro said, Ventas will look at senior housing investments on a case-by-case basis.
“We remain positive on the fundamental long-term growth in the senior housing business, but we have been very judicious about our investments in the senior housing business over the past couple of years,” she said. In an optimal portfolio for the REIT, the CEO added, SHOP would account for 20% to 35% of the enterprise.
“It is very heartening to see that construction starts of new senior living communities this quarter, especially in assisted living, were the lowest they’ve been in nine years and that demand for senior living is growing at its highest level on record,” Cafaro said.
Demographic trends also are “attractive,” Probst said.
