Ventas shares plan to counter 'policy whiplash'

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Ventas Chairman and CEO Debra Cafaro
Ventas Chairman and CEO Debra Cafaro

“A little bit of policy whiplash” at the federal level is affecting the business world, Ventas Chairman and CEO Debra Cafaro told analysts and others participating in a first-quarter earnings call on Friday.

“As we look at the macro environment, we continue to see volatility and uncertainty in the markets, in public policy and in the geopolitical sphere,” the real estate investment trust leader said. The U.S. and other Western economies are growing slowly, Cafaro added, although employment and inflation indicators are trending positively.

“While the new administration is attempting to jumpstart the U.S. growth trajectory with its policies, it is unclear yet whether its proposals on taxes, regulations, trade or healthcare will do so, or whether there is sufficient support in Congress to pass the administration's agenda,” she continued.

Given these factors, Cafaro said, Chicago-based Ventas plans to remain liquid, maintain diversification and balance in its portfolio, drive cash flow and efficiency in its businesses, allocate capital carefully and make selective investments in future growth.

The REIT's $883.44 million in revenues reported Friday topped analysts' expectations by $13.37 million, and earnings per share were $1.03, a penny more than expected.

The coming year

A “wider occupancy gap” and new supply coming online will mean 0 to 2% net operating income growth for Ventas' seniors housing operating portfolio for 2017, Chief Financial Officer Bob Probst said.

“Despite near-term challenges, we remain encouraged by the resiliency of our high-quality senior housing operating portfolio, operated by the nation's leading care providers,” he said. “The strength in our core markets reflects the continued long-term opportunity in senior housing.”

The REIT saw same-store cash NOI growth of 2.9% in the first quarter and is “quite happy with that,” Probst said.

Ventas expects wage pressure of approximately 4 to 5% for the year, Probst said, adding that the REIT plans to mitigate the effects by “flexing” labor and trying to control nonlabor costs.

First quarter

During the first quarter, Cafaros said, Ventas acquired 11 triple-net leased seniors housing communities with an unnamed existing customer for $200 million.

Atria Senior Living was 62% of the REIT's seniors housing operating portfolio as of the end of 2016, and Sunrise Senior Living was 32%, according to a company presentation. Of triple-net leased properties, Brookdale Senior Living is one of the REIT's largest tenants.

Going forward, she added, “We expect to fund an Atria ground-up senior housing development in the greater Philadelphia [metropolitan statistical area].”

First-quarter occupancy was affected by typical seasonal patterns, new units coming online and a more-severe flu season that occurred later in the quarter than in 2016, Probst said.

“The flu impacts both move-outs and move-ins, as communities are closed to tours and new sales as a result of flu quarantine,” he added.

Operating expenses rose approximately 2%, in line with revenue, Probst said. “Ongoing wage pressure in the 4% range was mitigated by effectively flexing labor versus occupancy while controlling nonlabor-related costs, a benefit of our senior housing scale with leading operators and efficient operating platforms,” he said.

Momentum continued in high-barrier-to-entry markets such as New York, Los Angeles and San Francisco, he said. “These communities grew Q1 same-store NOI by mid-single digits on very strong rate growth exceeding 5%,” he said.

Building openings in Atlanta, Denver and Chicago continued at an elevated level in the first quarter, Probst said. “Our same-store NOI performance in these communities declined by mid-single digits as a result of the cumulative impact of new deliveries,” he said.

Increasing base rents and care costs in high-barrier-to-entry markets, he said, did not result in move-outs. “Where we clearly see pricing pressure is in the markets where new supply is coming online, and that's no surprise,” he said. Those markets include Atlanta, Dallas, Detroit and Chicago, although Boston, New York, Los Angeles and San Francisco are “powering along and very strong,” Probst said.

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