Atria-Holiday Merger, New Senior Deal Has Ventas Positioned for Future Senior Housing Growth

The positive momentum within Ventas’ (NYSE: VTR) senior housing operating portfolio (SHOP) that manifested in the first quarter of 2021 continued into the second quarter and July.

New leads and move-ins in the quarter exceeded Q1 2019 levels, with the former setting a new high. Occupancy has improved sequentially for five straight months.

And the Chicago-based health care REIT’s senior housing assets are poised to experience further growth due to two major deals: Atria Senior Living’s June $1.6 billion acquisition of the management services of Holiday Retirement; and Ventas’ June acquisition of New Senior Investment Group (NYSE: SNR) in a deal valued at $2.3 billion.

The two deals position Ventas to capitalize on future demand and give it a foothold in targeting middle-market seniors entering the space, CEO Debra Cafaro said during the company’s Q2 2021 earnings call Friday.

Ventas reported normalized funds from operations (FFO) of 73 cents per share for the quarter, which beat analysts’ expectations but still marked a 6% decrease over the previous year. Net income was 23 cents per share, compared with a loss of 42 cents per share in the second quarter of 2020 – a 155% increase, year over year.

The REIT issued conservative third-quarter guidance, acknowledging the fluid situation involving the delta variant in some markets. Net income is expected to range between no change and 5 cents per share. Normalized FFO is expected to range between 70 cents per share and 74 cents per share.

Strong senior housing performance

Ventas’ senior housing segment, consisting of 434 communities and 26% of its total blended portfolio, achieved solid sequential improvement in the second quarter of 2021.

Net operating income (NOI) totaled $111 million in the second quarter. Same-store cash NOI in the quarter increased $50 million on an annualized basis, compared to the first quarter of 2021 – excluding the impact of $13.3 million in grants received by the Department of Health and Human Services (HHS) in the first quarter.

Total SHOP occupancy ended the second quarter at 79.4%, and leadership believes there is significant upside to be captured. Notably, leads and move-ins have recovered substantially. Levels for both in June were the highest since the onset of the pandemic, with leads reaching 105% of Q1 2019 pre-pandemic levels, at 21,300, and nearly 2,100 new residents.

Ventas Executive Vice President for Senior Housing Justin Hutchens attributes this to operating partners pivoting to digital sales and marketing strategies during the pandemic. Those remain in place as traditional lead sources such as personal referrals, respite care and professional referrals return.

“The digital footprint of our operators has significantly expanded over the past year, casting a wider net,” he said.

Ventas’ SHOP portfolio experienced a 229-basis-point increase in spot occupancy from March 31 through June 30, and 424 basis points from its mid-March low point to July 31. And the REIT has experienced five consecutive months of occupancy growth, led by its U.S. SHOP segment.

Ventas’ U.S. SHOP communities reported 313 basis points of growth from March 31 to June 30. Its Canadian holdings reported more modest growth owed in part to already high occupancy rates hovering around 90%, along with a slower vaccine rollout,

Among Ventas’ operating partners, Sunrise Senior Living led the way in occupancy gains with 627 basis points of spot occupancy growth from the mid-March nadir to July 31. Hutchens believes the McLean, Virginia-based operator benefited from a rejuvenated management team under new CEO Jack Callison, significantly well-invested communities and a balanced approach, demonstrating very strong occupancy gains and pricing power.

Atria also reported significant occupancy gains, with 529 basis points of spot occupancy growth from mid-March to July 31, and an overall 81.85 occupancy rate. The Louisville, Kentucky-based operator has achieved this through discounting and offering incentives, but anticipates tightening incentives moving forward as occupancy stabilizes and pricing power recovers, Hutchens said.

As the delta variant contributes to rising positive Covid-19 cases across the country, Ventas and its operating partners are cautiously optimistic that the forward momentum will continue. Overall SHOP expenses decreased 2.3% in the quarter, driven by a better-than-expected drop in Covid-19 expenses.

“Our operators have been prioritizing residence safety and weathering several near-term headwinds, including the delta variant and transitory wage pressures from staffing shortages and select markets,” Hutchens said. “Underpinning our leading operating partner relationships and recent sales momentum is our attractive market footprint, which positions us to benefit from the compelling supply-and-demand outlook in the senior housing sector.”

Analysts expect Ventas’ improved performance to continue in the third quarter, tempered somewhat by ongoing pressures.

“Q3 will likely see seasonally higher labor costs, compounded by continued macro pandemic-driven labor pressure,” RBC Capital Markets Equity Analyst Frank Morgan wrote in a note to investors.

Major deals boost optimism

Ventas stands to benefit from both the Atria-Holiday merger and its New Senior acquisition.

New Senior has 102 private-pay independent living communities and one continuing care retirement community (CCRC) in 36 states. The portfolio carried approximately 40% operating margins before the pandemic.

The acquisition price averages between 20% and 30% below replacement costs.

Ventas is acquiring New Senior’s assets at a 5% cap rate, which is expected to grow to a 6% rate on expected 2022 NOI, with further upside as the industry continues to recover. And leadership believes the deal will strengthen its senior housing segment from several strategic perspectives.

First, New Senior will enhance Ventas’ cash flow generation. Margins have remained resilient in the 35% range during the pandemic. Occupancy has weathered Covid-19 headwinds approximately 80 basis points better than the industry averages reported by the National Investment Center for Seniors Housing & Care (NIC). Most recently, New Senior has seen strong sales trends; the portfolio’s occupancy improved 100 basis points in June.

“New Senior has a track record of strong operating performance, benefits from a geographically diverse footprint with favorable exposure to compelling market fundamentals and demographics, and represents a well-invested high-quality portfolio catering to an attractive market segment,” Hutchens said.

The Atria-Holiday merger, which creates the second largest for-profit senior housing company, will also benefit Ventas. The REIT is a one-third owner in Atria’s management platform, and will directly benefit from the increased scale.

Ventas also likes the combination of locations, acuity levels and talent the combined companies bring to the table. Specifically, Cafaro sees opportunities for future growth by leveraging Atria’s data analytics and technology capabilities moving forward.

“It’s much more about that than the scale,” she said.

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