Occupancy and NOI fell, but there’s more to the data than meets the eye, REIT officials say
By Murray W. Wolf
The largest of Ventas’ under-development projects is a $525.6 million, 1.089 million square foot project in Sacramento, Calif., which is 60 percent pre-leased by the University of California (UC) Davis. (Rendering courtesy of Wexford)
CHICAGO – During the past two weeks, BREI has taken a look at the first quarter (Q1) 2023 earnings reports from five of the top 10 owners of life sciences real estate (LSRE).
In our April 28 edition, we took a closer look at the Q1 earnings from the three largest owners of LSRE, which all happen to be public companies:
■ Alexandria Real Estate Equities Inc. (NYSE: ARE), the largest healthcare real estate investment trust (REIT), with about 47 million square feet as of the end of 2022, according to Statistica;
■ Blackstone Group Inc. (NYSE: BX), the owner of BioMed Realty, with 14.9 million square feet; and
■ Healthpeak Properties Inc. (NYSE: PEAK), with 12.2 million square feet.
Last week, we dug into the earnings reports from the seventh and eighth largest owners of LSRE, the diversified REITs Boston Properties Inc. (NYSE: BXP) and Diversified Healthcare Trust (Nasdaq: DHC), which is being acquired by Office Properties Income Trust (Nasdaq: OPI).
This week, we take a closer look at the fourth largest owner of LSRE, Ventas Inc. (NYSE: VTR), a Chicago-based diversified healthcare REIT that released its Q1 earnings report Monday (May 8).
Ventas invests in four healthcare-related segments: its Senior Housing Operating Portfolio (SHOP); office, which includes medical office buildings (MOBs) as well as what it refers to as its Life Sciences, Research and Innovation (LSR&I) portfolio; triple-net-leased senior housing and post-acute properties; and loans.
Overall, Ventas reported better-than-expected Q1 revenue and earnings, primarily due to an increase in net operating income (NOI) from its SHOP segment.
During the firm’s Q1 earnings conference call with securities analysts, which was held Tuesday (May 9), Chairman and CEO Debra Cafaro said, “I’m excited to speak with you today as we recap an outstanding first quarter underscore the momentum we have across our large and diverse enterprise and reaffirm our full-year normalized FFO (fund from operations) guidance of $2.90 to $3.04 per share.
“Our diversified business is unified in serving a large and growing aging population. Within commercial real estate, we are highly advantaged due to favorable demographic demand; the unprecedented organic growth opportunity we are already starting to realize; and our scale, liquidity and access to capital. As a team, we are enthusiastic about the future and focused on delivering superior performance.
“The success we achieved in the first quarter was powered by our high-quality SHOP business, where the U.S. communities grew 22 percent, bolstered by the growth of our highly-occupied Canadian communities.”
Ms. Cafaro continued, “Our other asset classes are also contributing reliable compounding growth, with MOBs outperforming and our university-centered (LSR&I) business benefiting from strong tenant mix, with significant demand from universities, health systems, investment-grade companies and government institutions.
On its website, Ventas says it owns or has investments totaling 10 million square feet in its LSR&I portfolio. That includes properties “on the campuses of over 17 top-tier research universities collectively ranking in the top 5 percent of all NIH (National Institutes of Health) funding and conducting over 10 percent of all university life science research and development (R&D) in the United States.”
Ventas has a presence “in five of the top six life sciences clusters”, including: the San Francisco Bay Area; Boston/Cambridge, Mass.; Maryland-Washington, D.C.; Raleigh-Durham, N.C.; and Greater Philadelphia.
The firm says it has 43 operating LSR&I properties totaling 8 million square feet, plus four in-progress developments totaling more than 2 million square feet.
The largest of those under-development projects is a $525.6 million, 1.089 million square foot, 50 percent owned project in Sacramento, Calif., which is scheduled to be completed in 2027, according to the REIT’s Q1 Supplemental Information. The project, which is 60 percent pre-leased by the University of California (UC) Davis, is a joint venture (JV) of Ventas and the Baltimore-based LSRE developer Wexford Science & Technology.
Most of Ventas’ Q1 earnings report, supplemental report and conference call focused on the SHOP segment. The REIT didn’t have much to say about the LSR&I segment, reporting no new property acquisitions, divestitures or developments.
In a year-over-year (YOY) comparison of the properties in its LSR&I segment, the REIT reported in its supplemental report that the occupancy rate was down and the average rental rate was up through the end of Q1 2023.
As noted above, Ventas says it has 43 properties totaling 8 million square feet in its LSR&I portfolio. However, in its YOY comparison, it looked at only 32 properties because the analysis excluded sold assets, assets held for sale, loan repayments, development properties not yet operational, and land parcels.
Those 32 properties totaled about 5.6 million square feet and had an occupancy rate of 84 percent at the end of Q1 2023, compared with 85 percent at the end of Q4 2022 and 89.9 percent at the end of Q2 2022. Annualized average rent per occupied square foot was $43, compared with $42 the previous quarter and $40 the previous year.
The cash net operating income (NOI) from the LSR&I segment was $32.4 million through the end of Q1 2023, down from $32.8 million in Q4 2022 and $34 million in Q2 2022.
Ventas was asked during the earnings conference call about the declines in occupancy and NOI in the LSR&I segment. Peter J. Bulgarelli, executive VP, Office, for Ventas, and president and CEO of its Lillibridge Healthcare Services unit, took the question. He explained that the Q1 2022 NOI numbers were boosted by “holdover rent” from the previous year, as well as some other adjustments. If you exclude those issues, same-store Q1 2023 NOI increased by 5 percent.
“And I’m pretty happy with 5 percent NOI growth in this environment for life sciences,” Mr. Bulgarelli said.
“But what I’m actually even more happy about is really our leasing momentum right now. Leasing in the first quarter of ‘23 was well over twice what it was in the first quarter of ‘22 – substantially ahead of fourth quarter ‘22 as well.
“And what’s interesting about our leasing pipeline is that it’s 60 percent institutional. And it’s really because our focus is on the university-based life sciences markets. So they’re dominated typically by government entities, universities, health systems, so on and so forth. And so they don’t move very quickly, but they do move and is kind of regardless of inflation either way or life industry conditions, and so we feel very good about our pipeline, and we think it bodes well for the future.”
Ventas reported that its annualized base rent from the LSR&I segment was $140.2 million through the end of Q1. The REIT’s top tenants were the University of Pennsylvania ($12.1 million, or about 9 percent), Yale University ($10.8 million, 8 percent), Wake Forest University ($9.1 million, 7 percent) and Brown University ($5.5 million, 4 percent).
Mr. Bulgarelli later added, “And we have had some office tenants decide either not to renew their lease, or downsize. As we said in previous calls, it’s an opportunity in some cases for us to transition to lab space, and we’re seeing good momentum in those lab conversions. So we’re optimistic about that.”
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