Ventas has the second largest SHOP portfolio among the healthcare REITs, so it is always a decent barometer for what is actually happening in the seniors housing market. The REIT’s portfolio has performed exceptionally well since the bottom of the market in mid-March 2021, as have most of the providers across the country. The easing of restrictions as well as the vaccine combined for a robust turnaround that we all knew would come at some point.
However, we all knew (well, some of us) that the unprecedented net gains in the second and third quarters last year were not sustainable, as much as we would have liked them to be. Call it the pent-up demand or anything else, with portfolios increasing by 200 and 300 basis points per quarter, and sometimes even more. One could have concluded that our October 2020 prediction, that a full census recovery might have to wait until 2024, was about to be blown out of the water. We would like nothing more than to be wrong on that front, but not so fast.
Take the U.S portfolio of Ventas. Same-community occupancy increased from a first quarter 2021 average low of 71.9% to a preliminary fourth quarter average of 77.8%. Prior to 2021 there had never been such a huge increase in census for anyone in three quarters. That’s the good news. The bad news is that the increase is slowing, as it seems to be doing for others as well. Obviously, the Omicron variant had its impact, but it is also seasonal.
The third quarter increase in average occupancy was 290 basis points, up from 190 basis points in the second quarter. Historically, the industry always posted a third quarter increase, but nothing like this. But the fourth quarter slowed to “just” a 110-basis point increase. We say “just” because in any other normal fourth quarter that would have been a phenomenal result. According to NIC MAP data going back 10 years, half of the fourth quarters posted an increase in occupancy nationwide, and half a decrease. The third-quarter bounce was the result of normal seasonal reasons compounded by the vaccine surge and a return to some sort of normalcy.
To put these increases in perspective, the Ventas SHOP portfolio would have to produce 200-basis point census increases in each and every quarter this year to reach 85.8% occupancy. While that looks like a worthy goal in this environment, prior to the pandemic 85% was never considered to be stabilized; that may change. But a more realistic 100-basis point net quarterly increase would take the U.S. portfolio to 85.8% by January 2024. While our 2024 full recovery prediction was a national one, it would be great if Ventas could beat it.
There is a strong possibility that they will, since one 90-property portfolio (Eclipse) that had struggled mightily has been portioned off to seven separate operators, including one of our favorites (you know who you are). The prior management company was dissolved, which says boatloads about what Ventas thought of their performance. Presumably, the seven operators have been properly incentivized to significantly increase the performance, which we expect will happen.
The one potential obstacle is that many of these communities are old and not in great markets, not to mention the management turmoil of the past few years, but hands on management from 14 new hands should go a long way. Unfortunately, sometime in 2022 the disclosures and transparency that we have become so accustomed to during the pandemic may start to dissipate, and we may not know for sure what happened.
Getting back to Ventas and its slowing occupancy growth, its spot occupancy growth for the U.S. portfolio was just 18 basis points, 2 basis points and 4 basis points in October, November and December, respectively. That is a true slowdown going into the historically terrible first quarter. The reason is that leads peaked in July and August, while move-ins peaked in June and declined by nearly 300 monthly move-ins by November.
The Delta variant followed by Omicron certainly did not help. The lead conversion rate, however, at 10.4% was the highest since June 2021. The additional problem was that total move-outs at 1,308 in December was the highest since last January. So, 39 net move-ins in December compared to well over 200 in each month from April through September. Once we get past Omicron, and the first quarter, we expect things to be back on track. And talk about on track, the SHOP portfolio in Canada is now at a preliminary 93.5%. Not too shabby.
