Ventas (NYSE: VTR) is seeking to further ramp up its investments in senior living in the months ahead as it continues to push margins and occupancy higher in its senior housing operating segment.
In the third quarter of 2024, Chicago-based real estate investment trust (REIT) invested nearly $937 million to acquire 26 properties for its senior housing operating portfolio (SHOP), with a price point at about $263,000 per unit, according to the company’s 3Q24 financial disclosure. The company also has an additional $300 million of senior housing investments under contract and expected to close by the end of the year.
That brings the company’s year-to-date senior housing investment total to almost $1.7 billion in 2024.
Senior housing investments in the year so far have spanned 43 senior housing communities in 16 transactions with an average investment per transaction of $47 million. For now the company is mostly targeting high-performing communities that have “demonstrated market-leading performance to continue to grow NOI due to the strong market fundamentals, increased operating leverage and competitive pricing,” noted Ventas Executive Vice President Justin Hutchens.
“Communities we have purchased are generally large-scale, offering a variety of services, including independent living, assisted living and memory care,” he said. “We are purchasing communities at an attractive investment basis – $250,000 per unit – which is a significant discount to replacement.
Currently, the company’s overall holdings include over 800 senior living communities. By the year’s end, CEO Debra Cafaro told investors and analysts on Thursday that Ventas’ senior housing assets will grow to “well over half of our business.”
“We’re definitely prioritizing investing in senior housing and that’s really foundational to the strategy that we’re executing,” Cafaro said, adding that senior housing investment would remain a’ “key focus” for the REIT.
At the same time, the company’s SHOP segment continues to grow occupancy and NOI margins, with the segment’s average occupancy growing to 85.3% in the third quarter and NOI margins growing to 25.6%.
“We truly are seeing momentum in the business,” Hutchens added.
Ventas reported normalized funds from operations (FFO) of $0.80 per share in the third quarter of 2024. Additionally, the company raised its 2024 FFO guidance to $3.16.
Ventas stock on Thursday fell 1.49% to rest at $65.49 per share at market close.
Construction lows, debt challenges drive investment activity
Future opportunities for investment in senior housing assets remain appealing, Cafaro noted on the call Thursday. A currently low rate of newly built communities and better lending conditions are helping to provide a favorable landscape for occupancy and margins growth, and in tandem new investments.
“We can and are acquiring assets with highly attractive financial return expectations at accretive year one yield that expand our senior housing footprint, increase our enterprise growth rate and strengthen our balance sheet,” Cafaro said. “We rarely see this powerful combination of organic and external growth opportunities, and we are dedicating our resources to seize them.”
Cafaro said there’s a long runway for owners to work with operating partners to grow occupancy at existing communities, citing the demand upside ahead in the form of millions of baby boomers about to reach average senior housing age.
“It is a long runway and we feel really good about it and that’s why we feel that this combination of organic and external growth is a co-winner,” Cafaro said in response to an analyst question on when market conditions on development could improve.
Of the 16 transactions completed by Ventas highlighted in the third quarter, nine deals are from developers that are “cashing in,” according to Hutchens. The company also worked with repeat sellers that it was already familiar with. The company’s most recent investments stemmed from private equity firms that were selling for “a variety of reasons,” Hutchens said.
“It’s clear that fundamentals are really good and that’s great given the backdrop and the long runway,” Hutchens said. “It also has created a selling opportunity for certain players as well so the opportunities have been certainly growing in our pipeline.”
He added that conditions over the past year really haven’t been supportive of private capital, due to the availability and cost of debt.”
“That puts us in a really advanced position, but I would expect that given the fundamentals that we will see the competition again,” Hutchens said.
NOI margins expand, occupancy growth continues
Hutchens highlighted the success of operators including Atria Senior Living, Discovery Senior Living, Sinceri Senior Living and Sunrise Senior Living; and in Canada, Le Groupe Maurice; as top drivers of occupancy growth. In the third quarter, Ventas reported its ninth consecutive quarter of double-digit NOI growth at over 15% with an overall operating margin of 26.3%, which is up 150 basis points from this period last year.
Atria, Ventas’ largest senior living operating partner, is now viewed by the REIT as a “super regional” due to community density and ongoing operating performance.
Atria’s legacy portfolio, formerly Holiday Retirement communities, remains a “work in progress” as occupancy in that portfolio has increased by 400 basis points compared to last year, Hutchens said. New Atria CEO Holly Belter-Chesser, who was appointed in March, has brought “a lot of enthusiasm and experience and direction” to Atria that Ventas is “really pleased about.”
Eight communities that Ventas owns in September had no “lost revenue days” and were fully occupied every day of the month.
“These properties saw a 440 basis point occupancy increase over the last year, a 7% RevPOR for improvement, 12% revenue growth and over 25% NOI growth,” he said. “These communities all deliver market leading quality care and services, which is essential to attracting and retaining residents and employees.”
Hutchens said Ventas is using the company’s Operational Insights (OI) platform, along with its “right market, right asset, right operator” approach, to help operators improve while identifying potential opportunities for future investment.
Looking ahead, the REIT believes its SHOP operating partners can regain the company’s prior occupancy peak of 92% in late 2014, “when conditions weren’t nearly as favorable as they are now.”
“Our goal is to shoot for and exceed prior peaks of occupancy and NOI over time as surging demand outpaces senior housing construction, which sits at record low levels and inflation moderates,” she said. “Our markets show particularly favorable conditions, and we expect to continue to drive significant upside.”
Hutchens noted approximate penetration rates in senior housing of 11% in the markets it operates, which is about on par with the rest of the industry.
“Penetration tends to follow affordability,” Hutchens said. “It’s one of the reasons why we tend to prefer markets that have very strong affordability because you’re gonna have a higher utilization of senior housing in those markets.”
‘Variety of outcomes’ for expiring Brookdale master lease
In 2020, Ventas entered into a master lease agreement with Brookdale Senior Living (NYSE: BKD) spanning 121 communities.
On Thursday’s earnings call, questions regarding the status of the Brookdale lease arose, with leaders noting that Brookdale does have the option to renew its lease with Ventas baked into the contract by November 30, 2025.
With a “variety of outcomes” that are positive for Ventas, a few options lie ahead, including: a full renewal by Brookdale, full transition of communities in the Ventas senior housing operating portfolio (SHOP), or “something in between,” Hutchens said.
“If there’s some kind of hybrid deal, that’d be mutually agreed upon,” Hutchens said. “If they don’t [renew], then it becomes a SHOP opportunity and we do like the opportunity to run the playbook.”
If negotiations go past the contractual notice date, Cafaro said Brookdale’s renewal option would be voided. If a lion’s share or all of the communities under the lease are transitioned to the Ventas SHOP, Cafaro said Ventas was “well-covered” from an earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITAR) or NOI standpoint to rent.
“That would have to be taken into account as you consider what the impact would be of a conversion of the whole Brookdale lease to SHOP and that’s a favorable pattern,” Cafaro said.