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

Josh Dennerlein, Senior Analyst covering the healthcare REITs. [ On the far end ] is Jeff Spector. [indiscernible] Ventas' Senior Chairman, CEO, Debra Cafaro; CFO, Bob Probst; Executive Vice President, Senior Housing, Justin Hutchens; and BJ Grant as well. And with that, I'll turn it over to Deb for opening remarks but also Q&A, and would love to interact with [ Bob ]. Deb, with that, let's start with you.

Thank you, Josh, and Jeff. It is a pleasure to be together with everyone again, and we appreciate the opportunity. And all of you know, Ventas, of course, we are at the intersection of health care and real estate, a diversified business model that is unified really by serving this large and aging -- large and growing aging demographic. And with great opportunity, I look at us at the present time and really see how well positioned we are. As you look forward, we have a great opportunity with the senior housing recovery underway. And that opportunity is really twofold. One is from the recovery from COVID and the second is really a very favorable supply/demand backdrop that is better than we've ever seen with limited new construction and senior housing, and of course, a 23% expected growth rate in over 80 population as we look forward. That is -- that recovery is manifesting itself as we look at the third quarter in very strong pricing power, in revenue, rate and a positive re-leasing spread that we mentioned in our new materials this morning. We do continue to see persistent broad inflationary pressures in the expenses in senior housing. We'll talk a little bit more about that. But in terms of the demand that we're seeing, May to September of this year is outpacing in the net move-in basis, what we saw in the pre-COVID 2019 period, again. So we feel really good about the demand side. We feel good about affordability. We like the fact that seniors are starting to earn on their savings and get significant increases in their social security. And the product, again, is very affordable. I hope some of you had a chance to go on the tour with Justin and BJ of West 86th Street yesterday. The other -- when you go from the macro, really, to the micro, we have the benefit at Ventas of the marriage of Ventas' strong analytics, Justin's operating expertise, and that is translated into something we called Ventas OI. He'll talk a little bit more about it. But it's really executing and making data-based decisions around the assets and the operations that with Justin's background and experience, we used to influence improved performance at the assets. The other points I want to talk about really is our life science business. As you know, we're up to 11 million square feet. We're in 6 of the 7 top cluster markets. We have 75% credit tenancy. And really with Wexford, our exclusive development partner, we have the single-best business in this elite research university space, that top 5% of NIH-funded research institutions. And we are seeing really great opportunities on the development side. We've announced 3 great projects recently, and we're seeing really broad and deep demand from the universities at existing projects as well as new projects to take space for their researchers. And I think most of these universities really see their life science and research arms as a real competitive advantage, and so we love our positioning there. I'll mention a couple of other points. We have new disclosure in the deck about our Ardent investment. We invested back in 2015 or '16, about $1.4 billion, most of that was on the real estate. That investment has gone really well. It's over 3x covered, and it's over a 9% yield at this time. And I really want to focus on the OpCo, which is the operating company, tenant there, where we're a 10% investor with Sam Zell and management. A recent transaction was announced for new investor to come in and make a minority financial investment in the OpCo. That will be over 4x our investment and a very favorable mark-to-market, a multibillion-dollar valuation on the operating company. So we hope that comes to fruition, and we're very positive about the value creation of the Ardent investment, which continues to be demonstrated. On ESG, environmental, social governance, I'm proud to say we've published our corporate sustainability report today. Ventas has invested for a long time in the E, the S and the G, and we are a leader. We've made a net zero commitment by 2040. We're well along in our planning to meet that goal, and we'll be giving updates as we go along. On the governance side, important news that we announced yesterday that we continue to refresh, elevate and diversify our Board, with the addition of Sumit Roy from Realty Income to our Board. We're now 50% diversed, and we continue to drive excellence in governance as we diversify. So very proud of that as well. And we continue to find areas to allocate capital effectively. We're picking our spots. We have some great opportunities, and we've demonstrated that focused really on the development of the university-based life science and then also in selective senior housing investments. So with that, I will close and ask my colleagues to join in, in the Q&A section, and we welcome your questions.

Yes, maybe we could actually start discussing the Ventas OI you kind of -- for those who joined yesterday [Technical Difficulty] a little bit of a deep dive there to benefit [Technical Difficulty] us a little bit of detail on that platform initiative?

Sure. So Ventas OI, it really -- let me start with my background, just in case you don't know. I am self-described as a operator to read [indiscernible]. In my 28 years of career, I've had 18 years in operations and I've had 10 in the REIT sector. Within the operations experience, I've had 9 years of either being the Chief Operating Officer or Chief Executive Officer of very large national senior housing companies in the U.S. and in the U.K. So that's been my background. The -- taking that and some team members that we've added and marrying that to data science and [Technical Difficulty], financial analytical capabilities to produce really a few things. One is information that is operationally driven insights so we could help operators to focus where they're going to have the best opportunity to create value in specific markets, specific communities through specific actions. The other is, on the real estate side, we have the opportunity to make big decisions that are data-driven so that might be a decision to transition a community or triple that to shop transition to a new operator, sell something, buy something, invest CapEx or redev. We're starting with the deep analytics. We're driving the process, and then we're bringing them to the manager and insights into it at the end of the process to decile where to create value. And then another area is just areas of kind of specialization. And one recently was digital marketing, where it leads our overwhelmingly derived digitally now. We did analytical review and technical review of our websites. So starting with the technical website review, then we did a UX audit, which was the user experience involving websites. And then we analyzed hyperlocal SEO which is really the ability to source leads from the right neighborhoods in terms of where your website is facing. But what was interesting about that, for instance, is we ranked 25 senior housing companies, some of which we own, some we don't. We included hotels, apartments, included places for aplaceformom.com, caring.com. And one operator, actually, we were very pleased with this that came out on top, it was actually Atria; they're better than everybody. But even Atria, through our interactions, provided a lot of value creation opportunity through hyperlocal SEO approach. And so we've got a lot of follow-up in the refining. The way their website is targeted, other operators had 4 upside, but everyone benefited. What was interesting, too, is that we have the in-house expertise. Both operators, they either have in-house expertise in this regard through digital marketing or they are using a third-party firm, none of these people are used to be unmeasured. And so we brought accountability to an area where usually they are the experts in the room. And so now we bring accountability and focus to it, and they intend us to continue to measure this on a monthly basis. So moving ahead, I'd say someone asked earlier, where have you made impact with this, and I'd say #1 area is absolutely pricing. And we started on this last year with in-house rent increases. You can see there's a page in our deck, where just across the board, whether it's level of care increases, rent increases, re-leasing spreads, we're demonstrating pricing power, and there's got compounding impact with this approach. And what I mean by that is, we're now in the season, again, we're planning the upcoming rent increases. Last year, we had a lot of push, and we are really pushing our analytics and the high standards. This year, we're pushing out an open door because the operators have been through this with us. They're trying to get ahead of us, and we're looking to have even better results next year in terms of pricing.

And about better margin in that [indiscernible] maybe how long -- like maybe walk us through how long this may take us to see that impact?

Well, the big -- the first big impact was pricing in terms of -- and that's already played out. In terms of margin expansion, there's a page in the deck that we pointed to. It's really more of an illustration of operating leverage. It's on Page 26. And what this points to is it separates assisted living and independent living, and we're always talking about that how much we love the operating leverage in the business and how that plays to your favor as you increase occupancy. This is organized by occupancy band. You can see that there's an 89% group that has a 20% margin in assisted living. This illustrative portfolio is each -- it's hundreds of communities in each of these. So it's a really good sample size. And you can see that as your occupancy goes up from 90 to 100, you're getting 900 basis points of margin expansion. And then same with independent living. And as you point out, the absolute margin, too, is 29% in AL, it's 43% in the independent living. So your question is, like, how are we going to know if it's working? Is it getting faster? It's a little bit of a gray area in terms of -- it's not as clear as -- I guess, all wins and losses per se.

Maybe all else equal, will you be able to -- like for the same level occupancy, I think you will get into higher margins as a result of this addition?

It's intended to drive performance, and so yes, we do. The quantification of it is a little bit more of an art but...

Can I a follow-up on that? So I was wondering, first of all, what did you identify in your comps that led you to focus on pricing as they invest in other metric? [indiscernible] suggests that really the lever is occupancy. I'm just wondering how those 2...?

Yes, that's great. So the analytics we started with last year was cost growth by market, and what price it needed to be to offset that. It was a necessity. And so where operators, typically -- I think everyone knows there's no price transparency in senior housing. So you don't know what your competitors are charging. And there's been a bit of a routine process of putting around a 5% rent increase in place, which is actually, considering where CPI has been, not bad. And the operator's point of view as well, we have a lot of recovery to go after from an NOI standpoint. Maybe I'll do 6%. We said, that's not going to be enough. Look, we're -- look what's happening with the agency? Look what -- read into what's being projected in terms of inflation. We need a lot more. So it has actually started the expenses by market, and that really made the case for the rent issues.

And I think this is where, again, we're -- this environment that we're in is extremely dynamic. And one of the best indicators that we have right now of optimism in the space is what Justin just touched on, which is we're driving these -- and this is what the operators were hesitant to do. They said, "Well, we've never been able to increase rate 8% when we have 80% occupancy." And we were able to demonstrate logically with information about why those rates were appropriate. And even though there was 80% occupancy and why they would be accepted by the customer. And we were right, we actually affected the whole market because we were the first people kind of to come out with that publicly.

And then the second part of it was the reason why we were so comfortable was the demand was so strong and growing. So combining the necessity of what demand in it, it was the right call, and that continues to be.

So the view is in those price increases?

Right.

The occupancy growth, as I mentioned, yes, it has been very strong and continues to -- net move-ins continue to be outpacing 2019 levels. And the in-place increases when you -- are also rising, and that's given the operators confidence to push there as well.

So there's always like, as part of the regular LIE analysis, there's price elasticity. So we look at markets now and say, "Okay, is there -- are there certain markets where we should put pricing as much because is there a volume trade on." There's others that volume and price is just rolling. So we want to keep pushing on those, and that's all part of the analysis and ultimately the execution.

Excellent. Can you elaborate on the digital move-ins? I was surprised to hear that.

Good.

Yes, sure. Let me just pull -- there's a page in here.

18.

Yes. It's Page 18. Okay. So here's the -- in a lot of this -- like a lot of sectors, the pandemic really pushed technology a lot faster. 90% of the total lead volume now is derived digitally in the sector, and that's up 800 basis points from where it was pre-pandemic. So there's been a shift to the digital leads. So the importance of this is, we couldn't find a bigger priority than your lead source. So therefore, what can we do to be sure we'll be most additive from a digital lead standpoint? And it all starts with couple of things. One is -- one source of digital lead is aplaceformom and caring.com, it's through referral agencies. They charge per placement. They have a pretty good market share. Then there's your website. And we've been investing into the websites. We then measured it. And the first thing you do when you do a technical website audit, you're checking to see -- you want to be as appealing to Google search as you possibly can. So when you audit it, you will find discrepancies. Where am I showing duplicates? Is there duplicates? Is there confusion in terms of which page you go to? And we'll identify the errors and will show it to the operators and the third-party managers that manage the digital marketing, and they will beat it up. I was paying for website to be as appealing to people as possible. It will be as competitive as possible. And there's like 140 issues that usually pop up when you do these audits. The second part was how -- what's the experience in actually using this? If I'm a consumer, and I want to pursue a placement, is it easy? Does it have the right information? Is pricing disclosed which we're pushing because we want transparency in the space, and so -- and we know consumers want it. I can't remember ever buying something on Amazon that didn't disclose the price. So we need to move the sector into what the consumer wants, which is transparency around pricing and then all the other aspects of using the website, how did that stack up to other senior housing operators, but also how does this stack up against Marriott and private companies, et cetera? And then the hyperlocal SEO analysis is probably the one that was most powerful because you could have all of this in place and still have a shotgun approach. And what you really want is, like, "I'm sitting here and I'm Googling -- Google searching for a hotel near me. Conrad should show up #1 and probably always will." But who's going to show up second, third and fourth? And if I'm 2 blocks away, am I still in the top 3 or did I fall back down to the top 10? So you want to make sure that your community within that local market is scoring high from every part of the market where you think you have potential customers. And that's a -- it's an art and a science. And so we've assessed that and we've got the feedback back and then we can measure it every month, see where we stand. Well, the net result is more leads, and most importantly, though, higher quality leads. That's the intent and stay competitive and try to get ahead of this.

And does this program help with making capital decisions at all?

Yes, it definitely does. And so if you think about the evolution of real estate management from the standpoint of senior housing, the old way in triple net is that really the operators are responsible for deploying capital to the asset. Now it's our asset. It's our P&L. It's our licensed operation. We invest the real estate. And we want the operators feedback, but we want to make sure we're making good capital allocation decisions. And so we have a -- just picture a funnel, all these different screening criteria to say where can we put capital to have the best impact. We saw West 86 yesterday, great example. You have a good asset, really strong historical performer, faces new supply, higher price supply which actually raised the ceiling in the market. We invested into the units in the common area of corridors and the units are getting 20% more, and it's a 2-year payback on the capital set. And we're taking the same approach and same decision across our Holiday portfolio, our other Atrias, [indiscernible], like around the country where we can put capital and make the most impact [indiscernible]. And then we bring the operator in and we said, "Tell us. Give us advice on how to design it. Give us advise on what improvement is going to be most competitive." And so they certainly play a role, but we're driving it first through this analytical process and avoiding the kind of the subjective decisions.

My last question. And so do you have your team in place? Are you still -- is this platform, you still think will go down?

It is in place. We have a fabulous team. There are some investors that came through. We had a meeting in Chicago and got a flavor, I think some were actually in the room today, but we had -- we were able to showcase our team. Our data scientists and our Head of the Senior Housing Analytics and then a couple of other resources and -- everyone is really impressed. And so the goal is to try to get a little bit more exposure so that you can see the depth of the talent, and then we'll talk more about this moving forward because it's a big part of what we focused on.

[Technical Difficulty] We try to sort of put that in perspective. Does this shift to digital leads change the competitive landscape for you guys that may be big operators to small operators, which doesn't change the customer acquisition possibly?

Almost like self-storage.

Yes. There is the -- so that -- and that's come up a lot. I mean, ideally, you want to actually -- you want to take market share from the referral agencies. And there's -- but the reality is, you still need them. And so what we recommend is just cast the lighter net, get more from your website and continue to get from them. If you can ever truly take their market share, then it's going to reduce your costs for acquiring a customer, but that's really not the goal. The goal here is to drive volume and then -- and also make sure that we're paying market rate when they move in, that's the pricing side.

It sounds like you are pretty excited about the Ardent OpCo transaction? Kind of provide a section of Ardent's [Technical Difficulty] the cash out that you are investing or it is something else [Technical Difficulty]?

Okay. So happy to do that because it's been a really good story on both real estate and on the OpCo side. The short answer is, we do have a monetization. We have an opportunity to kind of mark the investment to over 4x what we invested in, but we also have a monetization opportunity for a portion of the stake. And if it goes forward, realize a gain, then we structure the deal in a way where we would have the option to participate in any kind of monetization opportunity on a pro rata basis. And so that's a good structure for us and one where we can achieve some liquidity, some gain and basically retain a 7.5% interest in a multibillion-dollar valued organization. So very good. And then as I mentioned, the real estate, which is where the lion's share of our capital was invested, is continuing to perform very well in the triple net basis, and Ardent has just generally done well.

[Technical Difficulty] continue to grow? And I guess it's the hospital sector that [Technical Difficulty]?

Well, we definitely have thought that a good hospital that has market share and pricing power with commercial payers is kind of at the top of the food chain in health care, and they're not plentiful, frankly. And so we seized the opportunity with Ardent and are really happy with it. And we certainly would add to it if we found something of the similar risk-reward profile because you kind of have to get it right. And so in this case, I'm glad to say that so far we have and would certainly invest additional capital if we had the opportunity to do so, either with Ardent, as they grow, or with others who have a similar quality and risk return profile.

[Technical Difficulty] Ardent. Can you just talk about broadly I guess the transaction [Technical Difficulty]?

Yes. Yes. Well, we're in a dynamic market across the board. And obviously, capital costs for public and private real estate companies are changing by the minute, as we saw this morning. And meanwhile, as we know from long decades of experience, cap rates take longer to adjust, right? And so we are -- our focus is really on picking our spots where we -- this Life Science University business, where we have a huge competitive advantage. We can buy cluster market life science with our fund that has kind of a lower cost of capital. We're really -- that's been a big success story as well. And then really on senior housing, selective investments. We just acquired something at a 6 cap cash going in with growth potential, that still works. And then, of course, we're finding ways to fund things through dispositions, through lower pockets of -- lower cost pockets of capital that make these transactions work.

Where do you think you've seen the most [Technical Difficulty] so far?

There hasn't been a lot of transaction data points. And that typically kind of will take a while to really get enough data to say this is really where it has moved.

[Technical Difficulty].

Yes. Bob loves that page.

On Page 7?

A question for Bob. Go ahead.

Is there a question? So this one is mine, really?

That's great.

Yes, there's a green bar on the re-leasing spread.

[Technical Difficulty] re-leasing spreads [Technical Difficulty] be positive and where do you expect them to go and overall breakthrough?

There hasn't been a positive re-leasing spread in at least a decade. Justin will tell you from history lesson, over 2 times in his career in the last 20-odd years that we saw that. One was just coming out of the financial crisis and one was earlier in 2000 where you had this really positive supply-demand dynamic, a positive backdrop. Relative to that, we are light years better in terms of the fundamentals. So we would, therefore, expect that there is more opportunity here. And some examples of that clearly are the in-place increases. We mentioned we took 8% in the U.S. last year. Our move-outs, "financial move-outs" with 8% were de minimis. So clearly, back to price discovery, there's an opportunity there as we think about the coming in-place increases. Care is the second area, not only in terms of the amount of the increase, which we're seeing 10%, but also the frequency of that increase. And then, of course, street rates. All of those are working together in driving the REVPOR to over 5%, the highest we've seen again in years. And all of this, of course, necessary in light of the operating expense pressure we're seeing from an inflation perspective, but we have the pricing power, there's no question.

And then adjusted rent expenses, I guess how should we thinking about that going forward and find us where you are on agency [Technical Difficulty]?

Maybe I'll throw that to Bob as well?

Expenses, sure, which is Page 12. Look, we're seeing inflation, no surprise there across the operating expense base. Let's just start with labor, and there's a lot of discussion around labor. In our guidance, our expectations was continued inflationary pressure in labor. We are seeing that as we look at our performance thus far in the quarter. The mix within the labor bucket, which we look at overall is changing a little bit. We had expected continued improvement in contract labor, i.e., lower, that was the trend we were seeing. That seems to have flattened out, i.e., these expenses have stayed higher. But meanwhile, the in-house labor has been slightly favorable. The net of those things effectively is putting us back in the same place versus our expectation, which, again, was to be higher due to inflation. But where we are seeing things that are above expectation are things like repairs and maintenance, food, utilities. There is pressure really across all those buckets. So again, back to both the macro picture as we think about labor, where is the market going in terms of the labor market, that will strongly influence the labor component and the inflation generally for the rest of the cost base.

[Technical Difficulty]

You should. Yes, there was a down arrow. If you looked at the last one.

Yes. Yes, but the main takeaway, as Bob said, is that labor in total and the vast majority of the labor expense is outside of that line. It's in the installed base. That labor, in total, is consistent with our expectations, which was growing because we know we have wage inflation in the United States. So the mix is a little bit different between that installed base and the contract side.

With that, we're actually right out of time.

Oh my goodness. We're just getting started.

But we do have rapid-fire questions that we've been asking all the management teams to get a response. So the first one is, which of the following is the greatest [indiscernible] challenge facing the U.S. public today? A, risk of higher rates? B, risk of a recession? Or C, the rise in private equity and nontraded REITs?

Higher rates.

Second question is, which of the following is the great sectors' specific grid? One, labor issues; two, supply; or three, capital market?

I mean capital markets for us and our customer base is an opportunity. And otherwise, I would say, within senior housing and health care providers, I would say, it's labor.

Final thoughts there, are you seeing any signs of weakening demand, yes or no?

Our demand is above pre-pandemic levels may continue.

Awesome.

Thank you. Thank you very much, Josh and Jeff.