Ventas is one of the largest owners of seniors housing communities, so it is a REIT always worthwhile to watch. It owns 544 communities with 61,794 units in its SHOP portfolio, plus another 267 communities with 20,149 units that it owns and leases to operators.
We usually focus on the larger SHOP portfolio, mostly because there is much more detailed information on it. And this portfolio includes both the 463 U.S. communities and the 81 in Canada. This is important because the Canadian portfolio has a much higher average occupancy rate, 93.2% compared with 77.6% in the U.S., even though the U.S. is seeing more significant improvements. But how do you really improve on 93.2%? The Canadian portfolio has 15% of the SHOP properties, but just under 26% of the net operating income.
On a same-community basis, the 321 communities posted a year-over-year increase in occupancy of 420 basis points, a 14.2% increase in cash NOI (excluding HHS grants) and a 90-basis point increase in operating margin to 23.7% (again, excluding HHS grants).
On a sequential basis, with 435 same communities, occupancy dipped by 30 basis points to 81.9% in the first quarter, which is typical in the always difficult first quarter every year. But NOI increased by 5.1% from last year’s fourth quarter, and the NOI margin increased by 50 basis points to 24.9% (excluding HHS grants). The NOI and margin were helped by a $10 million decrease in operating expenses sequentially, which is unusual in this environment with escalating costs. Maybe Justin got to work having their managers sharpen their pencils, and manage costs better.
While this is all good news, and a good base to start the year on, the U.S. portfolio is still operating below 80% in their primary markets, secondary markets and other U.S. markets. However, their year-over-year increases have been substantial, increasing by 570 basis points in the aggregate on a same-community basis in the U.S., compared with a much smaller increase of 140 basis points in Canada. To be fair, with occupancy in Canada above 90% in last year’s first quarter, it is much more difficult to post huge census gains.
Average monthly revenue per occupied room (REVPOR) in the U.S. markets are more than double the rents in Canada, so in theory Canada needs the higher census numbers. But the SHOP communities in the U.S. really need breakout second and third quarters. April numbers are ahead of both April 2021 and April 2019, and May and June are the primary selling seasons to boost occupancy, so they seemed to be poised. This would all be good for the industry. By the way, in the table on page 14 of the Q:1 Supplemental Report that breaks out Canada, there is a typo in the header for one of the columns. It says First Quarter 2021, but it should read 2022. Someone has to keep them honest.
To that end, Ventas and Sunrise Senior Living, which operates 92 communities in the Ventas portfolio and represents a $3 billion investment and annualized NOI in excess of $100 million, have revised their management contracts to align their interests a little better. We have been saying for a long time that alignment of interests across the REIT sector has not been that great. There must be a greater incentive for operators to perform better, and the new agreements are a great step in that direction. The fee structure will have an increased weighting toward NOI performance and reduced emphasis on revenue, with mutually agreed upon NOI growth targets.
This is a good time to do this since we are coming out of the pandemic-induced problems, but Sunrise was having census and NOI problems before the pandemic. There will also be “enhanced operating flexibility to optimize the go-forward portfolio through selective dispositions.” That is a formal way of saying there will be more flexibility to sell off the dogs, err, underperformers, stragglers, geographic outliers, or whatever you want to call them. Portfolios should always be looked at to see what needs to be pruned. Justin Hutchens took over the huge seniors housing portfolio at Ventas in March 2020, and the timing could not have been worse (for him). Now, emerging from the depths of the pandemic, he can focus on growth and not survival. He is up for the job.
