Ventas, Inc. (VTR) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you so much for joining. I'm really excited to be hosting the Ventas team. My name is Vikram Malhotra, I'm a REIT analyst at Morgan Stanley and, as I mentioned, really excited to host the Ventas. I'm sure all of you have had 2 good productive days, and I know a third is yet to come. But hopefully, you'll find this session productive. Joining me today are 3 executives from Ventas: Debra A. Cafaro, Chairman and Chief Executive Officer; Bob Probst, Chief Financial Officer; and Justin Hutchens, EVP of Senior Housing. Maybe just to start off, Debbie, if I can start with you. For those investors that are somewhat unfamiliar with Ventas, if you could give a quick overview of the company and the businesses you're in.

It would be a pleasure to do so. Thank you for hosting. I'm delighted to be here today with our investors and other stakeholders, with my colleagues as well. And it's a great time to be here. We are imbued with both optimism and gratitude for the researchers and scientists and policymakers who've brought us the vaccine and enabled us to reopen the economy and save so many lives and also optimism about both our business and the U.S. economy and where we are going in the future. So many of you are familiar with Ventas, but I'll recap. Ventas is a $32-plus billion enterprise. We are a diversified health care REIT with 5 verticals unified by demographic demand, which drives all of our segments. And those demand drivers have been strong and steady during the last year and look even better as we look to the future. It's been a strategy of Ventas from the beginning, as we've delivered 20% compound annual return for 20 years, to follow a diversification strategy. The reason we believe that benefits our stakeholders is really both on offense and defense. We've seen the benefits on the defensive side over the past year as our health care businesses, our loans and our medical office buildings continued to grow and prosper. And we also see it on the offensive side as we look forward. We're really proud of our team and we're proud of our organization, how resilient our organization has been and how nimble and action-oriented we were both at Ventas as well as our partners during the pandemic. We've taken, we believe, the right actions to position Ventas to win the recovery as we look forward. As we look to offense, I would say, first of all, there is an incredible embedded upside in our senior housing business, which is a very high-quality business. The supply-demand fundamentals are very strong. The over-80 population is expected to grow by 2 million individuals just over the next couple of years, and supply is down by almost 80% from the peak. So we have great trends and an ability, again, to capture that upside looking forward. We also have historically been a consolidator. And one of the value propositions that we've brought at Ventas is really this -- in this large $1 trillion market, both going into verticals like life science and building an incredible business as we have there as we did in medical office and some other areas. We're very proud of that. And we expect this continue to be a value-creating external growth engine looking forward. And when we think about capital allocation within the diversified verticals of Ventas, we really are going to prioritize senior housing. We believe in the recovery story and are prepared to put our money where our mouth is. We also, as I mentioned, have built this great life science business with the leading research universities in the nation as well as in 3 of the top 5 cluster markets. We'll continue to allocate capital there as well. And then we could see ourselves adding in the medical office building arena to our really good platform that we've built on the operating side. So we feel really good about both embedded growth and then the external growth opportunities as we look forward. And finally, I would say we remain committed to principles of ESG, environmental, social and governance, which I believe is really just doing the right things. And we have a long track record of being committed to these principles, whether it's on Board diversification, sustainability practices or diversification and philanthropy in the communities that have been so good to us. And so our great team is ready to come together and support each other and support our stakeholders as we look to win the recovery. With that, I'll turn it over to you for questions.

That was a great overview, Debbie. You alluded to this, but clearly, COVID was very challenging for the operators -- the residents, first of all, the operators and a lot of other people in the community. I guess what are some of the biggest learnings for Ventas that they can glean or take away from COVID for both the management of Ventas and the operators?

Yes. I mean some of the big takeaways are that we really do hold a very special place within the overall real estate universe. And in some ways, we are a mixture of health care, finance and real estate. And what really has struck us over the years is how nimble we and the operators were in all of our various businesses, whether they be hospitals, senior living, medical office, where we came together with a passion to keep people safe and we were able to use all the resources and relationships and knowledge that we've built over the last 20 years to do so. And what really has struck me is how -- first of all, the value proposition that we offer to physicians in our medical office, to residents in our senior living communities, and really to our employees, and we think we can really build on what we learn. The other thing is we are demographically a demand-based business and we saw that demand continue. It was different in the different segments, which is why you have a diversified business. The robust and resilient demand for senior housing has now been proven. We said it before but, over the past year, we have seen it is a business that provides an incredible value to residents and their families, and that demand continued throughout the pandemic and, frankly, is coming back even stronger than ever. And the last point I'll make is we learn again the importance of research and science in the pandemic. We invested in life science because we believe that all these capital flows toward research and innovation are going to continue, be they public or private. And we also believe that scientists are going to help this population live longer and healthier and ultimately keep down health care costs across the system when over half the U.S. population is going to have one or more chronic conditions. So we believe in that story. But the pandemic put an exclamation point on just how important this research is and how much of a growth area this will continue to be as researchers and scientists race to find a vaccine for COVID in record time.

That makes sense. Maybe Justin, I can turn to you and build on some of Debbie's comments. Can you talk about the trajectory of senior housing from here towards maybe pre-COVID levels? And give us some thoughts around -- or the puts and takes between occupancy, rent growth and how we should think maybe about pent-up demand, a topic that's come up at NAREIT the last 2 days?

Sure. First of all, I just want to say that senior housing is going really well and the operating fundamentals are really strong. And it's been a while since we've been able to say that, and we're really thrilled to be able to report on that. We've had 3 months in a row of positive occupancy gains. We've had 260 basis points of occupancy growth since the low point in March across the portfolio. And the U.S. has just crushed it with 370 basis points of growth. So really strong performance. Move-ins, leads are performing above the pre-pandemic levels, and we're off to a really good start in this recovery. And so to your question, where does this go, and the billion-dollar question is how long does it take to get back to pre-pandemic NOIs. I'm not going to answer that part of the question, what I want to do is give you the building blocks to consider today. And we'll start with the leading indicators. It's wonderful that we're not even really talking about the clinical trends anymore because the vaccine came into play and has really, basically, wiped out the COVID exposure within our communities. Vaccine adoption rate in residents have been super high. So we've moved on to talking about leads and move-ins and conversion rates, all of which are really at where we would expect it to be if they're in more of a normal circumstance. And like it was pre-pandemic and where we are today, that the macro environment supporting the demand for the service is excellent. Debbie mentioned the 2 million-plus 80-plus year-olds that are a growing, aging demographic. The deliveries are down. They're down 1/2 from the high point, and starts are also down like 80% from the high point. And they're the lowest they've been in a decade. And so we have a runway ahead where we should see absorption within the sector. So I'd say occupancy has good support, rent increases that are given on an annual basis are being pushed through at mid-single digit like they normally have been. We have a lot of ours that occurred within January. So we would expect those to continue. And then you have NOI growth that's really driven through the incremental revenue, most of which is really dropping to the bottom line. And then ultimately, when we get to a stabilized occupancy -- and for us, we were at 87% before the pandemic, we would expect to see that again, plus some, because of the runway ahead. I mentioned from a macro standpoint, the next 3 to 5 years just look really compelling to support absorption and sector occupancy growth and then ultimately pushing pricing. And when we push pricing, that's the last stage really to fully recover the margin that we were seeing. Pre-pandemic, for us, that was around 30%. And we're at the beginning of this recovery. And like I said, it started out very strong, and we have -- we look forward to the road ahead.

Before I -- Debbie, I wanted to turn to capital allocation. But Justin, I'll just weave in a question that one of the listeners just asked about, sort of the appropriate structure within senior housing and the balance between RIDEA and triple-net. Of course, no one can go back and undo things. But maybe I'll ask the question in a different way. As you look forward, given the opportunity, how do you think about the balance between senior housing under a RIDEA structure versus a triple-net structure for Ventas?

Well, as far as structures are concerned, that's one thing, I think what's most important is really the alignment. And that's the alignment among the capital provider and the managers. There's really good alignment in the shop structure where we're able to invest in the real estate and own operation and align with our operating partners. The triple-net structure has its merits as well. And certainly, we have a well-covered portfolio. The market tends to lean more towards the management side. So shop tends to see most of the growth. There are triple-net deals that are more -- but usually not of scale in this market. But what we'll look forward to, as we invest into the market, make sure that, first and foremost, we have the right operator, in the right communities, in the right market. Structure is secondary. And as we consider structure, we just want to make sure that we're aligned well with the operator to create value within those respective communities.

That makes sense. Debbie, can you just maybe give us some thoughts on how the company is thinking about capital allocation? Maybe compare and contrast pre-COVID versus today.

Good. I would say I'm happy to do that as we've been good capital allocators over time, and it's an important value-creating opportunity for our shareholders. Right now, as I mentioned, we believe in the sustainability of the senior housing recovery and the supply-demand fundamentals. And we would expect to allocate capital if we can find opportunities that have the right risk-reward for that. At the same time, remember, Justin came here a year ago before we knew we had a pandemic, and his job was to really put his experience and judgment around reshaping the portfolio. And so we would expect to invest in senior housing assets and maybe even cull some senior housing assets where we can reshape the portfolio, which is already very high quality into a portfolio that we think will be the best portfolio for Ventas going forward. So we will invest in senior housing and because we believe in the recovery. Secondarily, we are also investing in ground-up development in senior housing with our partners in Montreal, Le Groupe Maurice, that's been incredible. They have a secret sauce up there where they build these beautiful communities that are larger-scale communities and yet they fill up in the 80% within months after opening. So that has been another way, a slightly diversified way, frankly, that we've been investing in senior housing, and that's gone very well. On the life science side, you've seen us really advance our strategic objectives even during the pandemic by investing in South San Francisco as well as the D.C., Baltimore market with Johns Hopkins, very excited about that. We have $1 billion pipeline that's underway and another $1 billion in ground-up development with the leading research universities in the nation. We'll continue to put capital there and that has created a lot of value. It is amazing to go from 0 to almost 10 million square feet really in the short time that we've been in this business, and we're proud of that. And then finally, as I mentioned, medical office has really performed very well during the pandemic. It's a Steady Eddy. We believe it's a very nice piece of the portfolio. We have a great platform, with Pete Bulgarelli and his team running it. And we could see adding and/or subtracting very similar to the way we talked about senior housing. So that's -- those are really the priorities as we look to the near term on capital allocation.

That's great color. Bob, maybe I'll turn to you on the office side. Obviously, Debbie mentioned a lot of investment on the life science side, on the MOB side as well. But maybe you can elaborate what are some of the biggest opportunities for Ventas in the broader office segment?

Well, I'll build on Debbie's commentary, specifically on R&I. You have a great industry, tremendous tailwinds. We're all feeling the benefit of the fruit of that through the vaccine, of course. But our position in that market, I think, is very unique. And it really was anchored initially by this university-based, leading universities, conducting research as our anchor tenant, that bringing in private capital, spawning new businesses, driving employment and creating these knowledge communities. And that is something we and Wexford now have case studies across the country, with over 16 universities now showing the success of that model. And the opportunity, therefore, is to grow that model either within the existing knowledge communities or building new ones. And we have 2 different $1 billion pipelines we talk about within that segment. One, that first $1 billion is already underway, 4 projects, one of which just opened in Arizona and Arizona State. The second $1 billion, though, is new. And that is the active pipeline that we're working, yet to be fleshed out in more detail. We've given, in our presentation materials, a bit more information around 3 example projects. What they share common themes around though are this anchor university, conducting life science research, leading NIH-funded universities and the ability to really play to their strategy and mission while delivering value to our shareholders. So we'll continue to invest behind that and we have a really attractive pipeline ahead.

That's great. And then just -- and maybe I'll stick with you. If it continues to be fairly competitive on the medical office side, is this a good time to recycle assets? I mean I've heard high-quality assets and they're now -- cap rate's in the 4s. So I'm just wondering, do you see this as an opportunity to recycle certain assets and use the proceeds elsewhere?

I characterize it very similarly to the way Debbie described senior housing, which is, first of all, we have an outstanding portfolio in what we think is a very advantaged market with lots of tailwinds driven by the demographic demand, 19 million square feet, relationships with many leading health systems, a very steady and predictable performance on campus, et cetera, et cetera. That's the core of the portfolio. The ability, though, to optimize that, both through buy and sell, look, for example, to a new health system relationship or grow a market or a geography, those types of opportunities we'll continue to pursue while enjoying the benefits of having one of the largest scale MOB portfolios among REITs.

That makes sense. Just -- a question just came in on senior housing and potentially a headwind. The question's around the use of technology, home health and how that may impact demand for senior housing. We all know the demographics are really strong. But are there themes or factors you're considering that may change the long-term demand for senior housing, whether it's technology, home health, maybe somewhat of a hesitancy to move into senior housing post-COVID, if you could elaborate, that would be great.

Well, as I mentioned, we have been very surprised to the upside about the demand that has already manifested itself so close on the heels of the vaccine. And so that is the evidence that we have, which is real, that there is a value being provided to seniors and their families that has been reaffirmed, frankly, over the past year. So I feel really, really good about that, and it's the best evidence that we've had. As it relates to the other part of the question around technology and home-based care, I will turn it over to Justin because he has, I think, a really, really compelling answer to the question.

Thanks, Debbie. So as it pertains to technology and home-based care, one thing I'll point to, at least within Ventas, half of our portfolio is independent living. Independent living accesses home health care. So that's really not a threat to that part of the portfolio. In terms of impacting assisted living or memory care, home health has an important role and people generally want to stay in their homes. I mean, certainly, that will continue. But what should also continue is all the other benefits that senior housing offers, which is socialization and meals and housekeeping and security, that really home health can't provide. And that's the value proposition that Debbie is mentioning. In terms of technology, one of my favorites to point to is telemedicine. That's very supportive of keeping residents that are seniors in our communities don't always transition well. You can deliver health care and assessment through telemedicine, which is supportive. Anything that really -- that benefits the health and well-being of seniors is welcome. And as demand plays out, I would expect the market to rationalize it. One thing that's interesting about the timing, as I mentioned earlier, as we think about it, this window we have where there'll be absorption in the space and so we're facing this massive demographic wave, there'll be a lot of offerings for seniors, which will be really wonderful. We'll play into that, and the market will kind of sort itself out in terms of where the needs will be delivered.

And I would just close with this, home health does have a role to play, senior housing is so much more than an hour visit, 3 days a week to deliver some kind of medicine or procedure. And if you were thinking about your parent, as I was mine, living at home, in a home with snow and grass and all kinds of other things that have to happen, a visit 3 days a week from a nurse really doesn't address that. It may address an acute medical need that is episodic. But over a longer period of time, as I thought about my mother and many Americans think about their parents, a more inclusive 24/7 setting is where people feel safer and more socialized, which is an extremely important value that's provided in the senior living communities.

Yes, I totally agree. I think you both said it really well. If the pandemic has taught us anything, community is very important, especially for the seniors. And I think people forget when seniors move in, it's usually after one of their partners, unfortunately, passed away, and they're single. So community becomes a really important aspect, very hard to replicate in the home. Debbie, maybe I'll stick with you. For the new generalist investor looking at senior housing or health care, can you give us sort of the high-level Ventas pitch? Like, what should they think about long-term growth for the company? What's unique about the company versus peers?

Well, they should think about it's a high-quality diversified portfolio that is designed to deliver reliable growing cash flows through cycles with a reliable growing dividend and then increased by an external growth capacity and track record. And really, that is what our story is supposed to be and will continue to be. Obviously, over decades and through cycles, there are ups and downs in that story, but we have still been able to get back to that demographically driven story that drives the reliable cash flow growth over time. And we also have, and this is what distinguishes us, our team and our long-standing commitment to work as hard as we have to, to benefit our stakeholders. And we just have and have had over the years, an incredible team and a really distinguished Board that's been a competitive advantage for our company as well.

That's great. Bob, maybe we'll close with you just on the balance sheet. Can you give us an update on liquidity? And where would you like to see leverage going forward?

Sure. So we're in good shape on liquidity. Good news there, plenty of liquidity available to us and, therefore, flexibility that liquidity offers. In terms of the go-forward growth opportunities, we have multiple clubs in our bag to fund those growth opportunities, we have access to multiple forms of capital. And so we're excited about being able to report more out on that hopefully soon. So we're in a good position.

Great. Well, I think we're almost out of time. This was really helpful. Thank you, everyone, again, for joining and for giving a great presentation. And obviously, if there are any questions investors have, feel free to reach out to Sarah and team. Thanks again. Have a great rest of the NAREIT, and we look forward to seeing all of you soon.

Thank you.

We want to thank everyone who's listening, and we look forward to seeing you in person soon. Thank you, Vikram.

Thank you. Bye-bye.

Bye.