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Low Occupancy, Revenues to Affect Ventas' (VTR) Q3 Earnings

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Ventas, Inc. (VTR - Free Report) is scheduled to report third-quarter 2020 earnings on Nov 6, before market open. The company’s results are likely to reflect a year-over-year decline in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Chicago, IL-based healthcare real estate investment trust (REIT) delivered a surprise of 5.5% in terms of FFO per share. Results reflected decent performance in its medical office and triple-net lease segment. However, its senior housing operating assets were severely impacted by the coronavirus pandemic.

Ventas outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 5%. The graph below depicts this surprise history:

Ventas, Inc. Price and EPS Surprise

Ventas, Inc. Price and EPS Surprise

Ventas, Inc. price-eps-surprise | Ventas, Inc. Quote

Factors to Note

During third-quarter 2020, the seniors housing industry continued to bear of the brunt of the coronavirus outbreak that resulted in occupancy and rental rate erosions,and higher expenses. In fact, seniors housing occupancy in the third quarter declined 265 basis points (bps) sequentially to 82.1%, per the National Investment Center for Seniors Housing & Care (NIC) data.

Moreover, the annual absorption rate was -3.8% during the quarter compared with -0.5% in the June-end quarter. The decline in occupancy and absorption is expected to have decelerated rent growth. In fact, annual rent growth for the quarter was 1.7%, down from 2.1% observed in the April-June period. This is concerning for REITs like Welltower Inc. (WELL - Free Report) , Healthpeak Properties, Inc. (PEAK - Free Report) and LTC Properties, Inc. (LTC - Free Report) , which have significant senior housing exposure.

In fact, Ventas’ seniors housing operating portfolio and triple-net lease segment have not been immune to the industry setbacks. In fact, occupancy at its owned seniors housing operating portfolio (“SHOP”) assets (394 same-store SHOP assets) witnessed a continued decline throughout the third quarter. Specifically, as of Sep 10, occupancy was 79.8%, which is lower than the 82.2% reported at second-quarter end.

Occupancy erosion might have affected revenue from resident fees and services. Notably, the Zacks Consensus Estimate for third-quarter resident fees and services is pinned at $535 million, indicating a declineof 1.1% year over year and 2.5% sequentially, respectively.

This is likely to have hindered total revenues for the quarter. The Zacks Consensus Estimate for quarterly revenues is currently pegged at $919.3 million, suggesting a 6.5% decrease from the prior-year period.

Additionally, the company is likely to have seen higher expenses in its seniors housing segment due to rising labor costs and procurement costs related to protective-equipment supplies. Consequently, increase in operating expenses and unfavorable revenue trends may have dampened Ventas’ total net operating income (NOI) growth for the quarter under review.

Nevertheless, Ventas has been reaping benefits from its investments in medical office buildings, life-science assets and research and innovation (R&I) development business.

Notably, medical office buildings remained open during the third quarter. This is expected to have driven robust tenant rent payment and stable occupancy at the company’s office portfolio. In fact, the company noted more than 99% of rent collections for July and August, while receipts for September trended at a faster pace compared to second-quarter 2020. Moreover, as of Jul 31, occupancy at this portfolio remained stable at 91.7%.

Further, performance of the company’s R&I centers is anticipated to have been driven by tailwinds such as funding from National Institutes of Health funding and the heightening importance of biotech innovation amid the pandemic.

Further, the consensus estimate for third-quarter rental income from its office buildings stands at $197 million, indicating growth of 2.1% from the prior quarter’s reported figure.

Moreover, revenues from office building and other services that include fees and reimbursement for services offered to its unconsolidated real-estate joint venture entities is pegged at $3.69 million, indicating a marginal sequential rise.

Nevertheless, there is a lack of any solid catalyst to instill optimism regarding the company’s prospects prior to the third-quarter earnings release. The Zacks Consensus Estimate for quarterly FFO per share have remained unchanged at 72 cents over the past month. It also suggests a 25% year-over-year decline.

Here is what our quantitative model predicts:

Ventas has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of a FFO beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Ventas currently carries a Zacks Rank #3 and has an Earnings ESP of +2.03%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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