Ventas Earnings: Large Sequential Occupancy Gain for the Senior Housing Portfolio

Third-quarter results for Ventas VTR were slightly better than our estimates, giving us confidence in our $72 fair value estimate for the no-moat company. Same-store occupancy for the senior housing portfolio improved 130 basis points sequentially to 83.6%. Senior housing rental rates increased 6.2% year over year, leading to same-store revenue growth of 7.5% that beat our estimate of 6.0% growth. Senior housing operating expenses were only up 4.0% in the third quarter, leading to operating margins improving 230 basis points to 25.1% and same-store net operating income growing 18.2%, well ahead of our estimate of 11.8% growth. The company reported same-store NOI growth of 1.7% for the triple-net senior housing portfolio, 3.0% growth for the medical office portfolio, and 3.6% growth for the life science portfolio. Combined, total company same-store NOI grew 7.9% in the third quarter, ahead of our 6.4% estimate. Ventas reported normalized funds from operations of $0.75 per share, in line with our estimate for the third quarter.

Total senior housing occupancy saw even higher sequential growth in the quarter, up 180 basis points to 81.8%. The occupancy level for the total portfolio is lower due to the inclusion of recently developed properties that are still leasing up and properties that are undergoing operator transitions. However, that means that the total portfolio still has more upside than the same-store portfolio, meaning the company should achieve even higher growth than suggested by its reported same-store metrics. Management stated that demand growth should continue to exceed supply growth for the next several quarters, which is in line with our thesis for the sector. Therefore, we believe that the company should be able to return to 2019 occupancy levels by 2025 and eventually reach occupancies in the low 90s as the aging baby boomer population continues to drive demand growth above supply growth.