Pricing power and demand indicate continued growth toward pre-Covid-19 senior housing margins for Ventas (NYSE: VTR), but with macroeconomic factors impacting the cost of operations, creating a timeline for that return is tricky.
Still, leaders with the Chicago-based real estate investment trust (REIT) believe that the margin expansion seen in 3Q2022 is not a one-off event and that margins will continue to expand in the future – and could be observable as quickly as the fourth quarter.
“This is what we have been waiting for,” Ventas CEO Debra Cafaro said Friday during the company’s Q3 2022 earnings call. She noted that year-over-year cash net operating income (NOI) for the REIT’s senior housing operating portfolio (SHOP) increased 9% in Q2 2022 and 13% in Q3 2022, with expectations of 15% to 21% growth in the fourth quarter.
Ventas reported normalized funds from operations per share of $0.76. Year-over-year same-store cash net operating income (NOI) growth was 4.8% company-wide.
That growth was led by SHOP,which saw same-store cash NOI growth of 13%, which was led by a 9% increase in year-over-year revenue that Cafaro called “outstanding” in the company’s quarterly call with investors and analysts.
“Our strong numbers validate our long-standing commentary that we are at the start of a multiyear recovery and growth period in senior housing, driven by positive and improving supply-demand fundamentals and propelled by the actions and decisions we’ve taken, Justin and the team’s experience, accuracy, insights and credibility and, of course, our operators’ efforts,” Cafaro said, referring to EVP-Senior Housing Justin Hutchens.
Impressive pricing power
Overall, senior living residents are paying more, and they are moving back in.
“Leads are well over 100% of 2019 levels and move-ins are at 109% of 2019 levels, which is very strong,” Cafaro said on the call.
And while Ventas saw move-outs in the third quarter at about 98% of 2019 levels, the pricing power of the street rates has been strong.
“If [a resident] moved in during a period of the pandemic at lower rates, that’s where you start to get this positive momentum on re-leasing,” Cafaro observed.
Chicago-based Ventas reported revenue per occupied room (RevPOR) grew more than 5% in 3Q2022 from the same quarter in 2021, according to Hutchens.
Hutchens attributes the jump in RevPOR to a year-over-year rate increase of 11% despite the U.S. portfolio being only 80% occupied across the board, “which is a real testament to the underlying demand for senior housing and bodes well for future pricing,” he said on the call.
Ventas’ SHOP experienced NOI margin growth at 90 basis points in 3Q2022, driven by revenue growth that outpaced elevated expenses.
“Pricing power continues to impress. SHOP cost growth is expected to stay flat quarter-over-quarter with labor cost pressures stubbornly sticky,” wrote BMO analysts Juan Sanabria and John Kim, who also noted that the lack of acquisitions is not surprising.
As Sanabria and Kim noted, operating a senior living community remains expensive.
For Ventas, year-over-year expenses grew 7.6% and came in at an average of $3.8 million per day, attributable to the impact that inflation had on labor, utilities, maintenance and food costs.
However, moving into the next few quarters, Ventas expects margin growth to continue to expand on the back of further planned rate increases and relatively flat expenses. Resident pushback remains muted on the rate increases, which are supported in part by a spike in Social Security payments. Sunrise Senior Living has successfully pushed through some early in-place rate increases of around 9%.
“Historically, this industry has had a pretty healthy spread in terms of increases over the consumer price index (CPI),” Hutchens said on the call.
EVP and Chief Financial Officer Bob Probst conveyed much the same message.
“Rate growth is a strong contributor to the revenue growth that’s flowing through,” Probst said. “Not only is it offsetting inflationary pressure, but it’s driving margin expansion. And that’s pretty much the playbook for the fourth quarter.”
Ventas stock closed at $39.49 per share at the end of regular trading on Friday, up 6.7% on the day.
Rates and recruits
Ventas plans to further capitalize on rate increases and accelerated demand by honing in on operations and expenses – notably in hiring and retaining new workers.
To further improve returns and inch toward the nearly 30% cash NOI margins the company reported in 2019, Ventas is prioritizing how it will raise rates moving forward and how it will recruit new workers.
“Rate increase this coming year will be our highest on record,” Hutchens said. Normally, rate increases have been around 5% in the U.S., but in 2022 rates increased by 8%. But this year the REIT is expecting rate increases to be around 10%.
In fact, Ventas has operators that have not only already announced rate increases but have implemented them.
“Certain operators, notably Sunrise, have already implemented early in-place rent increase and the results are positive and a good preview of what should be successful execution in the first quarter and beyond,” said Hutchens.
The 10% rate increase is in-line with overall rate increase expectations for the coming year, as reported by Senior Housing News.
And while increasing rates will bump revenue, Ventas is deploying its data analytics to assist operators with hiring new workers. It conducted secret shopper research for more than 50 job titles across 15 of its operators in an effort to evaluate the reputations and processes of applicants and to gauge how effective follow-up was.
“I was pleased to see that our operators scored well relative to industry benchmarks, we came away with several actionable recommendations to attract fresh talent to our communities,” said Hutchens.
Still, Ventas has now reported four consecutive quarters of positive net hiring throughout its portfolio while its reliance on agency-sourced labor continues to trend downward, from 8.7% in Q1 to 5.9% in Q3.
The latest quarterly numbers show Ventas on the rebound from Covid-related headwinds as well as operational challenges that pre-dated the pandemic. Having worked through difficult situations such as the closure of Eclipse Senior Living and the transition of those communities to other operators, the REITs’ leaders now are projecting confidence about how the REIT is positioned for the future.
“We’ve been waiting a long time, as I said, to be looking at such good results, good projections,” Cafaro said.