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

All right. I think we're live. So good afternoon, everyone. I hope everyone is having a great NAREIT Conference. It's definitely great to be here in person. My name is Tayo Okusanya. I'm a Managing Director of Credit Suisse. I am the head of the research franchise over there. And today, I am very excited to be presenting the panel with the management team here at Ventas. I think, again, this is a company where has had a great stock return not just this year, but if you take a look at their 3-year, 5-year and 10-year record, they've been a name that's been a consistent outperformer. And I think once you listen to the story today, you'll understand why this name I expect to continue to outperform on a going-forward basis. I have the pleasure today to introduce Ms. Debbie Cafaro, the CEO of Ventas, along with her team, BJ Grant from Investor Relations; Bob Probst, the CFO; and Justin Hutchens, EVP and Head of the Senior Housing Division. Debbie?

Well, thank you, Tayo. And it's so great to be here with all of you today. I am excited to talk about Ventas. I'm going to make some brief introductory remarks and then turn it over to Justin and Bob. I really think about Ventas. Obviously, we are very performance focused. And as the macro environment has changed, I think we are exceedingly well positioned as we look toward the next 18 months and beyond. What I mean by that is the macro environment is very conducive to the growth that we offer and the positioning of the company at this time. In a slightly slower economic growth environment and, dare I say, even a shallow recession, Ventas will continue to have growth from the senior housing demographic, the double upside that I'll talk about in a minute from the demographic demand right here. And now, for example, the 2023 growth in the over 80 population is going to be the highest on record, and that's going to be followed through the end of the decade by 4.4% compound annual growth in that key customer demographic for our senior housing business. At the same time, I'm very pleased to say supply is also at record lows with starts very, very minimal in all of our senior housing markets. That's obviously a very positive backdrop, and if there is a slowdown in the economy, as most people project, I expect a more favorable labor market, which is one of the key criteria for our NOI growth. Now even without that positive backdrop in the forward macro environment, I am also happy to report that the senior housing recovery post-pandemic is well under way. Occupancy began rising in March of 2021 and has continued. We have an NOI opportunity in front of us that is first to recapture what we lost during the pandemic and get back to pre-pandemic occupancies. And then given this favorable supply/demand backdrop to potentially go beyond that, as we have at certain points in the past. And we think the pattern of supply/demand is even better now than it was in the years leading up to the over 90 occupancy levels. Furthermore, in the micro, Ventas has well positioned itself from a variety of portfolio actions and now through what we call Ventas operational insights led by Justin very exciting initiative that marries Ventas' strong analytic historical horsepower with his significant senior housing, operational experience, and he'll talk a lot more about that. And we're very excited about how that can optimize performance in the portfolio. And in the here and now, our second quarter is on track, in line with what we expected in terms of occupancy, our midpoints 400 basis points of improvement year-over-year and 80 basis points sequentially. And just turning now to the external environment. We continue to have our consistent capital allocation priorities. External growth has always been part of our value proposition to stakeholders. And I would say that we continue to prioritize senior housing, given how positive we are about the future environment as well as our kind of industry-leading university-based life science business. And Bob will talk a little bit more about that business, which has grown to 10 million square feet. And we're on the campus of really many of the top 5% of the research universities in the United States. And that's been a great value creator for our shareholders as well. And the last 2 points I'll make is we're very, very performance focused. We always have been, Tayo knows that, you know that. On a year-to-date basis, we have good TSR momentum, yet our valuation remains attractive. And finally, we have a very skilled management team and a very skilled cohesive board, all of whom are very much committed to shareholders and driving shareholder value. So with that, I'll turn it over to Justin, and he'll start digging deeper into the senior housing environment and prospects.

Thank you, Debbie. Nice to see everyone. I'll just start by mentioning that Ventas has a leading senior housing platform. We're the second largest owner, with 813 properties and over 82,000 units. We are located in 47 states. We have 37 distinct operators. And importantly, 99% of our communities are not exposed to new supply starts in their competitive set within a 5-mile radius. And so if you consider the backdrop that Debbie mentioned, where construction as a percentage of revenue is very low. There is a percentage of inventory is very low, starts have cratered. So we have a runway ahead of net absorption in the sector and net absorption in our portfolio. So as we look to be sure that we're optimizing our performance within that, we do have Ventas OI, which is the Ventas Operational Insights platform, which is really designed to collaborate with operators and to try to help to create value creation opportunities through a number of different avenues, which I'll cover with you. You've probably heard us talk about right markets, right assets, right operators, all the actions that we take through our analytics and through our operational initiatives are designed to really hit those 3 marks. We categorize Ventas OI in 3 categories. The first one is active asset management. And this is where we take operational data, its labor, trending benchmarking, contribution margin analysis, re-leasing spreads, revenue optimization, for instance. And we feed -- instead of pulling from the managers, we push to them. And we're trying to highlight value-creation opportunities within our portfolio in the simplest terms so that we can take immediate action and create value immediately. We have big portfolios that our managers operate. We have competing owners that also have -- where our managers have responsibilities as well. So we want to get to the heart of where the opportunity is and then point the way to create value, and we have a great discussion and dialogue on a monthly basis over where that potential sits. We also focus on comprehensive operating alignment, and we can do this through a number of ways. We use our powerful actionable insights to closely align with our operator partnerships, and we take swift action. One example of this is our focus on digital today, where we have, as we call it, the adult child, that's a decision-maker in senior housing and digital leads, which are 150% of pre-pandemic levels. And so digital leads have become really central to the referral source for senior housing. We use our analytics internally to help our operators to optimize website to evaluate the user interface of their website to really focus on local markets, get away from a shotgun approach on marketing, focus their spend on reaching that local customer, which really typically resides in a 5-mile radius. We use -- we also, in the next category, use our analytics for advanced market selection. This is where we take a number of different criteria, and we use it to make investment decisions, disposition decisions, CapEx investment decisions. We align with the operator, but we're really driving through our platform, the decisions around real estate investment. That's a -- having come from an operating background and run national operating companies, I've never had an analytical team that's as strong as what we have at Ventas. And so we're taking the best of operational experience and analytical abilities through data science, financial analytics and operational analytics and putting it into action. This has really started in 2022, and it's off to a very, very good start and very well received by our managers and operators thus far. We have a curated portfolio, and this portfolio is advantaged, as I alluded to and as Debbie alluded to, where our construction as a percentage of inventory is only 2.4% that compares to the NIC average of over 5% at this stage. And that's in the NIC top 99 markets. So we're sitting in a portfolio that has low construction. We have a backdrop of an 80-plus demographic that is growing significantly. In 2021, the growth rate of the 80-plus-year-old doubled. We've added another 400,000 in 2022, and that jumps to another 600,000 up in 2023. And so this 80-plus demographic is growing at a pace that we've never seen before. And we're well positioned, obviously, to play into that demographic, and we're also well positioned from a macro standpoint as construction and new inventory is not a factor. We think we have a window over the next 2 to 3 years to really experience strong net absorption. We also have very affordable product. We're positioned in markets that have relatively high net worth. We have homeownership and high home values. And so the affordability -- the net worth of our residents on average in our markets is about $500,000. The cost of our service based on our length of stay is about $140,000. So we have 4x coverage in terms of the cost of our service. And so as you think about any kind of change in the economic backdrop, we're well positioned with residents that have significant buying power for our services. And when considering that, if you look back at previous kind of periods throughout the history of the senior housing sector, which I've been around for most of it, the one area I focused on is the financial crisis and the financial crisis had a significant impact on home values. It had a significant impact on really the whole economy and there was a period where occupancies were impacted in senior housing, and you have to think about a very, very deep housing crisis, which I don't think anyone is predicting in the near term. So this is about as bad as it can get from that perspective. But senior housing and health care REITs both recovered and performed very strong relative to other asset classes and particularly senior housing, NOIs. They dipped but then they bounce back and they led and in terms of comparing to other asset classes. And that's really because of the underlying demand for the service is so strong. It's need-driven. And that was during a period where the 80-plus demographic was growing at about half the pace than it is now. So that's just an indicator of the strong demand and also the macro backdrop that we're facing. In terms of the opportunity for Ventas. During the pandemic, we had a dip. We lost some NOI. We have the opportunity now to go recapture that. We have $340 million of NOI to go after. And if we just get back to the 88% occupancy we were pre-pandemic, we're at 83% today. We can improve our margin from the low 20s today to low 30s when we get to that 88% occupancy. That is significant upside, but it's also perhaps not the ceiling. And the reason I say that is because of the backdrop I described. If you look back at similar periods in the past, where we had favorable supply/demand backdrop and strong demographic growth with the 80-plus-year-olds, we've seen 92% occupancy in the Ventas portfolio. Our peak was 92% in the fourth quarter '14. In 2005, the sector was at 92% occupancy and considering the window ahead and the fact that the 80-plus demographic is growing even faster than it ever has, we would expect it to be able to move past the pre-pandemic occupancies benefit from the operating leverage in the business where incremental margin growth is significant. I mentioned on our earnings call that sequentially, Q4 to Q1, we had 56% incremental margin that raised our margin up to 24% overall. When you get up to 88% occupancy, you can get to 70%, 80% incremental margin. And so as we drift past that pre-pandemic occupancy, the NOI upside is significant.

Should we turn it over to Bob?

I think we'll turn it over to Bob. Thank you.

Thank you, Justin. Two quick comments for me before Q&A. So one, quickly, just capital allocation. We have a long track record of successful investment over 20 years. Our current priorities today are 70% senior housing, and this is using the framework of the investment of $4 billion since the beginning of last year, 70% of which is senior housing, continue to focus on that for the reasons quoted by Justin, 20% in our university-based life science business and 10% in MOBs. I'd like to just highlight that life science R&I business for a second because it is so unique for us. This is a university-based business. We are on the campus of major research universities, NIH-funded universities. They are conducting research in those buildings that attracts private capital, which spawns new businesses and creates what we call these knowledge communities. And we have examples of these now at Yale and Penn and Duke, to name a few. And the pipeline of opportunity behind that for Ventas, together with our partner, Wexford, the only developer in this space, is very robust. And the credit tenancy of this business in life science is very strong, anchored by these universities. So we have exciting opportunities ahead in that business. Secondly, balance sheet. We've done a lot of work over the last few years to stay strong as a firm through the pandemic. Notably, last year, we sold $1.2 billion of assets and collected on loan investments, and we used those proceeds to reduce near-term debt. The result of which is a very clean near-term maturity profile, 90% fixed-rate debt in a rising rate environment and very strong financial metrics, such that S&P recently gave us a positive credit move on our BBB+ rating. So we're very pleased with where we sit on the balance sheet, which gives us lots of optionality. So with that, Tayo to you.

So I'll actually kick it off with the first question, and then I'll open it up because I know everyone's dying to ask questions. But my question really is on the SHOP side. And again, Justin, you mentioned getting back to pre-pandemic levels of 88% occupancy, you kind of have kind of low-30s-type margins. I mean, there's a lot of concern right now just around labor cost. So I think if you do get back to that occupancy, what are the chances that the margins are not as robust as they used to be pre-pandemic? And on the flip side, what are the probability that the margins could actually be higher given some of what you are doing on the VOI side?

I tend to lean towards the higher. I'll tell you why. So if you step back from kind of the here and now, there's labor pressures that we're working through. We've seen progress in net hiring modestly, and that's a good step in the right direction, and the macro backdrop is also showing some signs of improvement as well. But if you step back from that, I think what's really important to focus on this is a private pay business. So we do have the ability to pass on additional expense exposure to our customer. And if you think about the margins, we're at low 20s now, we get to low 30s at 88%. The expectation would be that we can at least maintain margin because we can price in expenses. We're really backed in an asset that has significant pricing power. We're 83% occupied today. We have passed along 8% internal rent increases in the U.S., 4% in Canada. Our re-leasing spread is narrowing. It's the best it's been. It's better than it was pre-pandemic at low negative single digits. We expect that to improve. And to do this at such a low occupancy is really another indicator of that strong demand at the doorstep that I've been speaking to. So when you consider that, the upside from a demand standpoint, the ability to price this -- the -- price that into our -- price in expense increases, plus considering the history of the asset class, even during more competitive times, we're able to have in-house rent increases that are 200 or 300 basis points above CPI. So the pricing power has always existed. Now we have street rates complementing that as well. So I would lean towards potential higher margin. And as I said earlier, potential higher occupancy than we had pre-pandemic.

Great. I'd like to open it up for any questions.

Don't be shy.

Great. What steps did [indiscernible] [ to the A rating ]?

Well, we're not pursuing a rating per se, [ Brad ]. But what is important, clearly, is a strong balance sheet. And I mentioned a few of the stats where we stand today. The clear impact of the pandemic on our balance sheet was on EBITDA through the NOI impact of senior housing. We lost $340 million that we talk about recovering. The recovery of that alone gets our net debt-to-EBITDA leverage ratio right back to where we want it to be. And we've always made the case with a diversified balance sheet and diversified portfolio, multiple sources of capital, we should be A rated, right? And given the demographic demand for our businesses, we compare very favorably to other A-rated credits. We've made that case, and we'll continue to make the case to the agencies over time. But for now, the focus is really on that NOI recovery.

Next question?

I think that's you.

All right. That's me then. Great. So we really haven't talked much about medical office buildings as part of the conversation, and that's still a significant part of your portfolio. Again, fairly steady business, but I think it is notable that your same-store NOI growth has been improving pretty dramatically in the past few quarters. Very curious again what are you doing differently now really to have driven up that same-store NOI growth? And how sustainable is that going forward?

Yes. So medical office buildings has been a good part of our portfolio. It's about 20%. We have a leading franchise on the campuses of the leading hospitals around the country, and I'm going to say the words operational excellence and then turn it over to Bob to talk a little bit. I wish our partner, Pete Bulgarelli was here because he leads the whole office business, and he's brought some great discipline and experience and pricing expertise to the table. So...

Yes. And he's done a great job. A few areas of focus. The first is leasing. He's done a lot of work. First of all, in creating a centralized leasing team, disciplined leasing processes and really driving great new leasing through that initiative together at the same time, secondly, driving great tenant satisfaction. I mean that was an initial significant area of focus. Happy tenants renew their leases. And indeed, that's what we've done through capital and other ways of enhancing their experience. And now we're in the top quartile, and we measure every year customer set, and that's through his efforts. And now have 90%-ish retention rates. So together, those new leasing plus retention is driving occupancy up. Secondly is managing the expense base and principally through procurement initiatives. We've seen outperformance relative to the peers in that regard. And the net result is closer to 3% or 3% plus sort of annual growth in that business, which is our performance. And it's just through great blocking and tackling, great execution.

And we've also made significant and continue to make significant investments in energy-saving technology. They were the #1 MOB and #1 senior housing ENERGY STAR partners because of those investments, which we're very proud of. It's better for our tenants, better for our business and also better for the environment. So we've been a leader in that. And Pete's been right with us making those investments, and we'll continue to find areas where we can pursue energy efficiency and other ESG-type initiatives.

That's actually a great lead into ESG.

Oh, is it?

Yes, it is. So let's talk a little bit about that again. I think, again, you guys have won a whole bunch of awards in the area of ESG, have great GRESB ratings in that -- from that perspective. Just talk a little bit about again broader ESG goals at Ventas, kind of some of the milestones you're looking at to kind of hit those goals?

Well, ESG, of course, is environmental, social and governance. And it's a fancy way, I think, of saying, you're going to do the right thing. You're going to think of more broadly about your place in the world and in your communities. So we have a deep commitment to all areas of ESG. We have been a leader for more than a decade. We think it's synergistic with good shareholder performance. On the environmental side, we recently made a net 0 commitment by 2040. We've made these energy efficiency investments. We continue to do so. In the social way, we support our employees in their development, in benefits and training. And we support our communities philanthropically. We have a huge investment in Philadelphia between Penn and Drexel and the university-based life science business. We've invested in a school there, and that's just one example of the many things that we have done in the social arena. We also support causes for seniors who are in need. We have an initiative in Chicago to end senior hunger. Obviously, senior living has been good to us as far as profitability, and we think it's important to reflect that and give back. And then on the governance front, we have been a leader as well. We have an incredible board, independent, refreshed, 45% diverse, women leading 2 of our main committees, and just excellent and just proving the thesis that you can have excellence and diversity side by side. And that's been really important to us. And obviously, we have a great cohort of women and diverse leaders at Ventas. So we're very proud of that, and we'll continue to try to make progress very consistently with our commitment to shareholder value creation.

Great. One other question, just again with rising interest rates, again, cost of capital now kind of being clearly on everyone's minds. Could you just talk a little bit again when you kind of think about your best uses of capital and your best sources of capital today?

I'm going to -- Bob, do you want to take that one?

Well, I mentioned the priorities for uses, namely senior housing first and foremost. We've had a few recent examples of great smaller-type portfolios or assets that we've bought, but nice yields, high-quality assets that really upgrade the portfolio, one in Jupiter, Florida, for example, most recently. And it's a good example how we funded that because the source for that was actually selling some of the nonstrategic assets in senior housing, upgrading the portfolio and improving our growth profile. And the backbone of that is OI, as Justin was describing, the analytics around which assets do we want to exit, which ones do we want to enter and how to bring the portfolio up in total. So I think that's a good example of the playbook.

And then on the university-based life science, we announced a $0.5 billion project with UC Davis, our first project with them. And that that's going to be an incredible project, and we're breaking ground on that shortly. We just finished a life science project for the immunotherapy research at Pitt with UPMC. And we have a $1 billion pipeline of opportunities that we can either do on balance sheet or we -- we have a fund. By the way, we have a third-party investment management business. It's grown from $0 to $5 billion of assets under management. That's another club in our bag to fund investments, and we also have partnerships with some of the leading capital global institutional capital, if we wish to do some of the life science developments in a partnership with them. So we have lots of sources as well as continued asset dispositions, and that's how we'll fund and recycle capital.

Good. Sounds good. Any other questions for the team at Ventas. We have 45 seconds.

Go ahead.

Let's -- sorry, please.

Just could you talk about coming out of pandemic, anything operationally, structurally that you did different regaining confidence from some [indiscernible]?

Yes. So we -- here's what's amazing. We have 111% leads of what we had since -- at the same time of the year pre-pandemic. So what has been so encouraging is that, that as soon as we've been able to open the doors and accept residents, there has been incredible kind of resilient demand. So that's been great. Operationally, masks?

Yes. I mean the -- honestly, nothing like a crisis to learn some new things. Infection control is going to improve dramatically in our setting and probably across all of health care, quite frankly. The flu will be a lot easier to battle than COVID when that comes back again. Centralized recruiting, where the workforce has obviously been a challenge and the labor market has started to be more supportive, but we've significantly advanced in our ability to improve line staff within our markets. And then I mentioned Ventas OI, which is just the comprehensive approach to optimize performance within our portfolio.

Thanks, Justin.

Sure.

Excellent. And I think maybe Brad will give you one more and then we'll cut it off.

It's been 10 months since new senior, I think, acquisition-wise. Can you kind of touch on that? Validate the success of that deal with integration of the last 10 months.

Well, yes, one of our investments last year was the new senior portfolio. It's over 100, mostly independent living assets in very advantaged markets and with high margins and low labor component, and we're in the midst of basically that's been fully integrated. We have high expectations for it. It had a good 5% yield going in that we expect to grow to 6% and then beyond as we roll out a capital program, and we continue to be excited about that investment.

Excellent. So with that, we'll wrap it up. And again, thank you very much for being here.

Thanks for being here.