After several years of living across the pond, Justin Hutchens has decided to return home. Following a successful stint as CEO of HC-One, the UK’s largest senior care provider with more than 300 facilities, Hutchens will be moving to Chicago to be EVP, Senior Housing, North America at Ventas. We have known Justin for almost his entire career in senior living, and not only like him, but have a lot of respect for what he has accomplished. However (isn’t there always a however?), this will be the second CEO position he has left (National Health Investors was the other), and our gut tells us there must be something else because he will be one of four EVPs at Ventas.
Yes, the North American seniors housing portfolio dwarfs that of HC-One in properties and revenues, but he has been the king of his own castle (twice) and it is never that easy to start reporting to another person, even though she is the queen of healthcare REITdom, no matter how big your portfolio is. He was expected to return to California after his time in the UK, so a move to Chicago seems to be out of character. Unless something else is going on.
The only two things that make sense, and this is pure speculation, is that his move is the start of a succession plan for CEO Debbie Cafaro, who has been at the helm longer than any other healthcare REIT CEO. While she obviously has a great track record, shareholders have not been too happy these past few years, mostly with regard to the REIT’s seniors housing operating portfolio (SHOP), which has been underperforming and dragging down earnings.
The other possibility would be a plan to split Ventas in two, putting the North American seniors housing assets into a new REIT with Justin as the CEO. That could be worth the move to Chicago, but we don’t think he will become a Bears fan. Again, this is just speculation because we believe something bigger would have had to have been offered to cause him to leave HC-One well before his expected departure date. Unless his family had had enough of the English food.
But he will have his hands full. The SHOP portfolio at Ventas turned in another ugly quarter when elsewhere in the industry there appears to be the start of a turnaround. The two largest companies are Atria Senior Living and Sunrise Senior Living. With 169 communities in the last three quarters, Atria’s annualized NOI declined from $362 million in the second quarter to $340 million in the fourth quarter on a small drop in revenues. At Sunrise, with the number of communities increasing from 89 in the first quarter to 93 in the third and fourth quarters, annualized NOI has declined from $173 million to $160 million. That doesn’t help in covering the dividend.
Oddly, Ventas’s share price immediately jumped after the earnings release. Whether this could be attributed to the “Justin effect” is unclear, and while he is good, he does not start until April and we can’t see him having a major impact on the financial performance of these operating portfolios until late in 2020 at the earliest. After all, he is one person and he is not running Atria or Sunrise, at least not yet (there we go again, but just kidding). The bigger problem in the SHOP portfolio, however, continues to be Eclipse Senior Living (ESL).
The same-community SHOP NOI declined 7.5% year over year in the fourth quarter but would have been a decline of 4% excluding the ESL portfolio. For the full fiscal year, the decline was 4.4%, but a lower drop of 3.1% excluding ESL. By our calculations, that means that ESL, which represents just 8% of the SHOP NOI, posted an NOI decline of about $4 million to $5 million year over year. Ventas management stated that ESL “experienced unique performance issues,” whatever that means. Everyone has had performance issues, but maybe not unique ones.
We guess the problem was not Pat Mulloy and Tim Wesley, who used to run it when it was called Elmcroft Senior Living, and who got the boot a couple of years ago by Ventas (at the time, we called it being “Mulloyed”). Management is now going to try to find a joint venture partner to take some of the ESL risk off its balance sheet, but we would not be surprised if they sold the entire portfolio if someone offered a decent price.
The market for assisted living has been hot, but not that hot, and investors are paying up for “A” quality, newer assets with high levels of cash flow, not struggling “B” portfolios with declining cash flow and unique performance issues. They apparently see upside over time, and we hope so, because if it gets much worse, they will have a bigger problem on their hands.
Ventas stated they’ll sell $600 million of its SHOP portfolio but did not provide details about which parts. They spent about $2,500 per unit on capex for their SHOP portfolio (hear that lenders and appraisers), because that is what is needed to compete against the new developments. Ventas has been a great REIT over the years, and these problems will pass, but investors still worry about the dividend coverage and when there will finally be another increase, which used to be annually. From the discussion on the earnings call, the first quarter will not be much prettier, but they do believe they are at a bottom for the first half of this year, with maybe a slow rebound the second half. Are you listening, Justin? No pressure.
