Ventas Earnings: Despite Small Occupancy Decline, Senior Housing Drives Total Company Growth

Ventas VTR reported second-quarter results that were slightly below our expectations, though we didn’t see anything in the quarter that would materially change our $68 fair value estimate. Same-store occupancy for the senior housing portfolio declined 10 basis points sequentially to 81.3% in the second quarter, below our estimate of a 90-basis-point sequential gain. Senior housing rental rates increased 6.6% year over year, in line with our estimate of 6.4% growth. Same-store operating expenses were only up 3.7%, leading to margins improving 160 basis points to 25.4% and same-store net operating income growing 14.0%, though that is slightly below our estimate of 16.0% growth. In the second quarter, same-store NOI grew 2.0% for the triple-net senior housing segment, 3.8% for the medical office segment, and 3.8% for the life science segment. Combined, Ventas reported total company same-store NOI growth of 7.0% in the second quarter, which was slightly below our estimate of 7.4% growth. As a result, normalized funds from operations grew 4.5% to $0.75 per share, though that came in $0.03 below our $0.78 estimate for the quarter.

Management provided an update on senior housing demand and supply growth. Similar to our own forecasts, management anticipates that demand growth for senior housing will be 2 times higher over the next four years compared with the prior economic cycle and then will double again over the four-year period. Meanwhile, Ventas said construction as a percentage of overall inventory is at its lowest level since 2011, with the national senior housing construction pipeline at just 4.6% of inventory, while the construction pipeline in Ventas’ markets is at 3.2% of inventory. These figures reinforce our prediction that occupancy and thus NOI for the senior housing industry will see significant growth over the next several years.