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Welltower, Brookdale, Ventas Execs: Industry at Occupancy Inflection Point, Could Alter Pricing Dynamics

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Industry heavyweights Welltower (NYSE: WELL), Ventas (NYSE: VTR) and Brookdale (NYSE: BKD) have now reported their Q423 and full-year results, and some themes and trends have emerged.

The news is generally positive for the state of the industry, with leaders from all three companies zeroing in on the significance of meeting and exceeding the 80% occupancy threshold.

For instance, Ventas’ same-store U.S. senior housing operating portfolio achieved a 180-basis point increase in census to reach 80.9% in the fourth quarter.

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“We’re just at the early stage of that occupancy band where margin starts to grow … we’re at an inflection point,” Justin Hutchens, EVP of senior housing and chief investment officer, said on the REIT’s earnings call.

Some providers, including Brookdale, have yet to reach the 80% mark. But given occupancy rates for the two major REITs and the sector as a whole, I think it’s fair to say that the industry stands at the inflection point that Hutchens described, and leaders are considering the implications.

In this week’s exclusive, members-only SHN+ Update, I analyze the recent earnings results from these three companies and share key takeaways, including:

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  • Occupancy expectations and the ramifications of surpassing the 80% mark
  • Pricing power remains strong but dynamics could be shifting
  • Why occupancy laggards are in a particularly precarious situation as 2024 unfolds

Occupancy outlook

Executives with the two big REITs and Brookdale all commented on the momentum around occupancy growth in the fourth quarter, which historically has not been a boom time for move-ins.

Welltower’s 330 basis points of year-over-year growth was the highest level achieved in the fourth quarter in the company’s history. Same-store occupancy in the seniors housing operating (SHO) portfolio reached 83.3% in the fourth quarter. Furthermore, year-over-year occupancy gains accelerated through Q4 among same-store communities in the SHO portfolio, from 310bps in October to 330bps in November to 340bps in December.

This was a “confounding” change from typical seasonality, Welltower CEO Shankh Mitra said, noting that the “unusual pattern” stemmed from a combination of stronger move-ins and fewer move-outs.

“Obviously, we’re not projecting that in the future, but we’ll see how it plays out as we get through the year,” he said.

Like Hutchens, Welltower COO John Burkart emphasized the benefits that accrue as occupancy surges beyond 80%.

“The flow through gets pretty fantastic as you get north of 80%,” he said. “When you talk about staffing up … the positions are in place. You have your head chef, you have your executive director, et cetera, et cetera. So it’s very incremental … this arc of the curve, there’s a lot of money that comes to the bottom line as you increase occupancy.”

Ventas-owned communities also bucked typical seasonal occupancy patterns.

“Momentum ramped at the end of 2023, with fourth quarter occupancy accelerating, while strong pricing and higher move-ins fueled better than typical seasonal results and helped 2024 to get off to a strong start,” Hutchens said.

Ventas’ U.S. same-store SHOP communities posted census growth of 180 basis points, taking the portfolio to 80.9% occupancy. Secondary markets were in better shape, at 82.4% in Q4, but the primary market communities were still on the precipice of breaking the 80% barrier, coming in at 79.9%.

I’m sure Ventas’ U.S. operators are well aware of the need to push census further to achieve the benefits of operating leverage. On the earnings call, Hutchens expressed confidence in their ability to push occupancy through the “key selling season” in 2024. Ventas’ SHOP guidance calls for 250bps of occupancy growth at the midpoint (Welltower anticipates about 290bps of year-over-year occupancy growth in the SHO portfolio). And Ventas is guiding to $0.28 of NOI growth for the entire SHOP portfolio.

“That NOI – the point we’re making is it’s a good launching pad for 2025 growth, when you run that through and then you start adding more occupancy on top of that,” Hutchens said.

Brookdale also bucked typical seasonality to end 2023, achieving 80 basis points of growth in Q4 compared to Q3.

“We are pleased to report that this sequential occupancy growth was meaningfully above normal pre-pandemic seasonality for this period,” said EVP and CFO Dawn Kussow.

Brookdale has been on an upward trajectory in many respects, with the company strongly focused on not sacrificing rate in the quest for occupancy. The provider’s full-year revenue per available room (RevPAR) of 11.4% “significantly outpaced our peers,” CEO Cindy Baier said. And in its presentation on full-year results, Ventas noted that its Brookdale triple-net portfolio “has reported a strongly improved organic operating performance.”

Baier and her team have shown discipline in building margin, which reached a post-pandemic high of 26.3% for same-store communities in Q4. And I appreciate the leadership team’s stated “top priority” is “providing high-quality care and services to residents and their families,” as Baier put it. That might sound like a platitude coming from a senior living executive, but I hope this means that the company is being cautious about not driving occupancy beyond staffing capabilities. This is always crucial but especially so in light of the heightened Congressional scrutiny of the industry.

But while there are many good reasons why Brookdale has not gone all-out simply to drive census, the fact remains that the company is still reaching for the key 80% threshold.

“Senior living communities operate most effectively at that 80-plus percent occupancy rate. So that is still ahead of us,” Baier said.

Brookdale’s weighted average occupancy in Q423 was 78.4%, and the company did see a return to normal seasonality in January, with occupancy dipping back to 78%. On the earnings call, analysts pressed for a timeline on occupancy recovery, but Baier and Kussow remained cagey. Baier offered a list of factors that should drive occupancy growth, including the dearth of new supply and the market differentiation that the Brookdale HealthPlus program is creating, but she said that “it’s too soon to comment on exactly how long that full [occupancy] recovery is going to take.”

This might be true, but with NIC reporting that the industry’s overall primary market occupancy rate reached 85.1% in Q423, I expect Brookdale’s leaders will face intensifying questions about the company’s census in the coming quarters, and at some point they are going to have to accelerate growth.

Pricing dynamics shifting

The delta between Brookdale’s occupancy rate and that of the industry as a whole could present a growing risk to the provider, if market dynamics start to compromise Brookdale’s pricing power.

Providers have pushed rate incredibly aggressively – and successfully – in response to the soaring inflation and rising interest rates of the last few years. But chatter has started to build about concessions coming back into play, and this topic did come up on the Brookdale earnings call.

In fact, Q4 revenue per occupied room (RevPOR) came in “slightly below” Brookdale’s expectations in part due to the company’s “competitive response on pricing,” Kussow noted. Baier was quick to say she is “pleased with the way that our pricing strategy has worked out for 2023,” and the company did implement a January in-place resident rate increase that was “higher than historic norms” (though lower than the increase in 2023).

Certainly, concessions are not an overriding concern at the moment, with leaders from Ventas and Welltower commenting on the durability of operators’ pricing power. However, Welltower’s Mitra made interesting comments when asked by BMO Capital Markets Analyst Juan Sanabria about the interplay between occupancy and pricing.

Calling it a “brilliant question” and a “very important one,” Mitra noted that it was difficult to answer in full on a conference call. His short answer circled back to how incremental margins work once occupancy hits the mid-80s.

“While it is in the late 70s, early 80s, it is obvious that you should go after the rate, not the occupancy; that may not be true in the mid-80s, where your optimized level could be some occupancy, some rates,” Mitra said.

Welltower’s best guess is that operators in 2024 will be “in the ballpark” of the double-digit revenue growth they achieved last year, but Mitra said, “We’ll see how this plays out.”

I interpret this to mean that at some point – though the exact timing is hard to predict – providers with strong census will compete more on rate than they have been, to push occupancy and achieve the operating leverage that all the public company execs described on their calls. I think it stands to reason that laggards on occupancy will find themselves struggling even more at that juncture, if they are forced to adjust pricing while still trying to build census toward that 85%-plus mark.

This scenario makes it all the more critical for operators to keep the pedal to the metal on move-ins, and not become complacent while counting on high demand and low supply to keep the flow of new residents steady.

In other words, the earnings calls provided plenty of reasons for optimism about how occupancy and margin recovery will play out in 2024, but the calls also contained indications that the gap between the best operators and the rest will widen this year and beyond. If this comes to pass, expect a lot of tough workouts and operator acquisitions, mergers and transitions, particularly in light of another major factor that came up on the Welltower and Ventas calls: About $16 billion to $18 billion worth of senior housing loans are maturing through 2025, with capital markets – and agency lending in particular – tight.

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