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Morningstar | Ventas Reports Beats on All Fronts in 1Q

Ventas reported a strong quarter that beat our expectations on both the top and bottom lines. However, since management didn't update their 2019 guidance, we don't expect to make any material changes to our $64 fair value estimate and no-moat rating. Occupancy in the senior housing portfolio fell 20 basis points to 86.6%, and rates were only up 0.3%, both below our estimates for the quarter. However, Ventas controlled costs better than we anticipated, with margins dropping only 70 basis points, leading to net operating income falling 2.2% compared with our assumption of down 4.6% for the quarter. The triple-net portfolio outperformed our 0.5% NOI growth assumption with 2.2% growth in the first quarter. Medical office occupancies dropped 50 basis points to 90.8% but still managed to produce 1.1% NOI growth, ahead of our 0.6% assumption. Life science, while only 8% of the total NOI for the company, saw big gains, with 12.7% NOI growth in the quarter, well ahead of our lofty 5.7% assumption. The NOI beats across the board led to Ventas reporting a $0.03 normalized funds from operation beat with a $0.99 number for the first quarter. We think management did a great job executing on all fronts this quarter to produce a solid beat against our estimates.

However, management decided not to raise either NOI or FFO guidance for 2019 despite the big beats. While the senior housing NOI number is in the full year range, both the triple-net and the office segments are above the high end of 2019 expectations. Similarly, annualizing the first-quarter normalized FFO result would imply a figure that is 3% above the high end of management's current FFO guidance, implying that the rest of 2019 will be weaker or that management set conservative guidance and is reluctant to change it after just one quarter. Management noted on the earnings call that the first quarter had $0.01 of nonrecurring gains (particularly in the life science sector), and they expect $0.02 of negative impact from dispositions to fund continued development activity and another $0.02 of lower results due to senior housing seasonality. While we think that there is potential upside to management's guidance range given their history of conservative expectations at the start of the year and waiting until at least the second quarter to revise their estimates, the 2019 road map management provided that suggests a slowdown gives us pause on what is an otherwise great first quarter.