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What's in the Cards for Ventas (VTR) This Earnings Season?

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Ventas, Inc. (VTR - Free Report) is scheduled to report second-quarter 2021 earnings on Aug 6, before market open. The company’s results are expected to reflect year-over-year declines in revenues and funds from operations (FFO) per share.

In the previous quarter, this Chicago, IL-based healthcare real estate investment trust (REIT) delivered a surprise of 2.9% in terms of normalized FFO per share. The result reflected growth in office building and other services’ revenues. However, same-store cash net operating income (NOI) at the senior living operations and the triple-net leased portfolio were adversely impacted by the coronavirus pandemic.

Ventas surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 6.55%. 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 second-quarter 2021, vaccine distribution witnessed acceleration and pandemic-related restrictions relaxed.

Since restriction on non-essential visits has been a major bummer for occupancy at senior housing facilities, the latest relaxation is likely to have been a breather for healthcare REITs like Ventas, Welltower, Inc. (WELL - Free Report) , Diversified Healthcare Trust (DHC - Free Report) and New Senior Investment Group , which have seniors housing exposures.

While vaccination has gradually brought down the COVID-19 case counts to some extent, it did not translate to occupancy revival due to new inventory coming online in the second quarter. Per NIC-MAP’s senior housing data, seniors housing occupancy remained flat at 78.8% during the quarter, while demand for the same improved.

The NIC MAP also reported the first positive quarterly absorption since the first quarter of 2020 and the most positive absorption since 2019.
During the second quarter, annual rent growth sequentially expanded 10 basis points (bps) to 1.2%, while annual absorption shrunk 320 bps to a negative 4.3%.

As for Ventas, we note that a significant portion of its NOI is dependent on seniors housing communities. Senior citizens constitute the major customer base of healthcare services and end up spending more on healthcare services compared with the average population. With a rising senior citizens’ population, Ventas has a strong upside potential, being well poised to capitalize on this expenditure trend of senior citizens on healthcare services.

In light of effective vaccine roll-outs, the company is expected to have seen move-in activity exceeding both the pre-pandemic levels and move-outs in March, April and May. In fact, quarter-to-date through May 31, approximate spot occupancy has expanded 140 bps.  Management expects second-quarter 2021 occupancy to rebound and spot occupancy in its sequential same-store SHOP business (434 assets) to expand 150-250 bps from the prior quarter.

Such occupancy gain is expected to have affected revenues from resident fees and services. The Zacks Consensus Estimate for second-quarter resident fees and services is pegged at $537 million, indicating a sequential rise of 1.5%.

However, operating expenses might have remained elevated due to increased occupancy activities.

The company has been making efforts to unlock the value of its assets through disposals of non-core assets, primarily across senior housing and MOBs verticals.

Although such efforts enable it to optimize its portfolio, better manage financial obligations and reinvest in attractive opportunities; dilution in earnings and reduced cash flows from the sale of assets is expected to have been unavoidable.

Asset sales done in the first quarter (Ventas sold two MOBs and one triple-net leased property) are expected to have resulted in lost revenues, thereby, hindering top-line growth in the second. The Zacks Consensus Estimate for quarterly revenues is currently pegged at $919.9 million, suggesting a 2.5% decrease from the prior-year reported figure.

The consensus mark for second-quarter rental income from its office buildings is pinned at $197 million, flat sequentially.

Prior to the second-quarter earnings release, there is a lack of any solid catalyst for becoming optimistic about the company’s prospects. The Zacks Consensus Estimate for FFO per share has remained unchanged at 72 cents over the past week and suggests a 6.5% year-over-year decline.

Ventas’ second-quarter normalized FFO per share is projected at 67-71 cents, indicating a year-over-year decline of 13% at the lower end and 8% at the upper end.

In a separate development, Ventas entered into a definitive merger agreement to acquire New Senior Investment Group for $2.3 billion in June. The all-stock deal is expected to be roughly 9-11 cents accretive to Ventas’ normalized FFO per share on a full-year basis. The transaction will significantly enhance the company’s property base, adding New Senior Investment’s high-quality, geographically-diversified portfolio of 103 private pay senior living communities, including 102 independent living communities, located across 36 states in the United States

Here is what our quantitative model predicts:

Ventas does not have 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 #2 (Buy) and an Earnings ESP of -0.93%. 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 represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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