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

[indiscernible] joining us in our second afternoon session. I'm pleased to be here with the Ventas team. So to my right is Justin Hutchens. To his right is Debra Cafaro. And then on the end is Bob Probst, sorry, long line up. So with that, I'll turn it over to Deb to -- for opening remarks.

Thank you so much. Welcome, everyone. We want to thank our host at BofA for having us here today, giving us the opportunity to talk to Ventas' investors about our business, which I would note at the outset is performing very well. The company posted a business update today to which I will refer and you should all have access to it. Just the overview of course, Ventas is a $30 billion S&P 500 REIT asset classes unified by service to a large and growing aging demographic. In senior housing, as you know, which is half of our business, we are in the midst of a multiyear growth and recovery story that is well underway. And that's really driving our 2023 outlook and expectations, which we affirmed today, we're as a company generating -- expected to generate year-over-year normalized FFO growth. If you step back and at the SHOP business, we expect to add $100 million in NOI in '23 versus '22 in the same-store portfolio. Our same-store SHOP NOI growth expectations are expected to 15% to 21%. Our year-over-year same-store enterprise growth is expected to be 8% in 2023. We've also completed some very successful capital raises year-to-date that I'm very happy about. In a challenging capital markets environment, we've raised almost $3 billion at about 4.8% and are in a very strong net liquidity position that covers our '23 and '24 maturities multiple times over. The performance in the business has continued to be good third quarter to date, and we have provided some updates in our materials. Most importantly in the SHOP business, we're seeing broad-based demand and strong sequential occupancy growth. Spot occupancy from June 30 to August 31, is up in the SHOP business, 110 basis points, led by the U.S. And the fundamental thesis here, of course, as we look forward is that -- is compelling supply-demand fundamentals. New starts in the business are the lowest they've been since 2009, and that's coupled with 3x the over-80 population growth over the next 5 years that we saw following 2009 and occupancies by 2014 had grown to the low 90s. And so we have better supply-demand forward environment than we've ever had in senior housing. And as I said, in this multiyear growth recovery cycle, we're already starting to see the benefits of that. So we have great optimism across our businesses. Our growth is, of course, being complemented by the 1/3 of our business that's outpatient medical and research that is showing nice compounding same-store growth at industry-leading levels. And as a team, I want to comment that we always have been and we always will be focused on delivering fundamental performance and taking every opportunity to deliver value and value creation for stakeholders. And so with that, with all of us, we'll be happy to take your questions.

Yes, happy to keep this as interactive as possible. So if anyone has any questions, feel free to jump in. But maybe we could start just with the transition assets. You transitioned pool the Holiday by Atria assets. Just curious how that transition is going? And also just -- I think there's other Holiday by Atria assets like why did you focus on just these as a transition at this point? And maybe how do you think about potentially transitioning more?

Well, overall in SHOP, we are trying to capture this multiyear growth and recovery story in NOI and occupancy. And Justin really runs that business, Justin, as many of you know, a former operator himself, a very large senior housing businesses here and in the U.K. So why don't you take that away?

Sure. So first of all, I just want to make the point that transitioning to new managers, it's just a regular part of our playbook now. We've actually had 150 -- around 150 communities over the last few years that have transitioned to new management and with a lot of success, and I'll give some examples of that. In regards to Holiday, pleased to see the stabilization so far in the quarter in the portfolio across the 111 communities, which includes 75 of their same-store and 26, they're transitioning to new operators and then the 10 of the 12 redev projects that there are Holiday communities, we've seen sequential occupancy growth of 130 basis points. And that's just from the end of July to the end of August. So really off to a good start. The transition occurred during the month of August and 21 of those are done. As of early September, we have another 5 in California that will transition in early October. The CEOs of the businesses have been touring communities and meeting all the employees, residents, laying out their expectations particularly around customer service and occupancy growth. They've done that in August already. They're literally back in the communities again this week, generating a lot of excitement and focus. And then meanwhile, the group of communities that was performing relatively better that stayed back under Atria's management has stabilized and is showing growth as well.

It's just maybe so we can compare the assets that were left with how like with Atria versus the assets that transitioned has the occupancy diverse, you disclosed like the July through August. But just like is there any kind of drag from that transition or performance?

There's no drag from the transition. We've had occupancy growth quarter-to-date in all of each of these pools. So 75 to 26, the 10 redevs. And like I said, they're off to a good start in the quarter.

The majority transition September 1, and then a handful will transition October 1. So -- and they all -- I think the main point is they all had a good August.

Okay. In 2Q, you mentioned that I think the transition would be where these core assets would be like a $0.04 drag on the SHOP performance. Is this kind of in line with that expectation or maybe some better?

Yes. I think everything -- we predicted a strong third quarter in SHOP, and that's what we're seeing across the Board. If you -- again, if you look at the quarter-to-date performance on the same-store it's up considerably and consistent with our expectations, and that includes the 75. And we're pleased with that.

Okay. And then, Justin, maybe just thinking about like what were you looking for in the new operators when they took over those assets? Like what do you look for? And how do you kind of find that?

Right. So our philosophy is really to focus on right markets, right assets, right operators. Starting with the markets, just to step back a little bit. We spent the last few years really working hard to make sure we're in a position to benefit from this multiyear recovery in senior housing. So we started with the markets. And so we're in a market where we don't like our market position or the market we didn't think was going to provide growth opportunities relative to the rest of our portfolio than we sold communities. And part of that strategies not just ex the market, but also to help operators to become more focused, and Atria was a beneficiary of that, for instance, the legacy portfolio with us is about around 30 or less communities now than it did a few years ago. They're more focused, more concentrated, and they were able to exit markets, their orphan markets, and we were able to get in markets that were going to produce less growth moving forward. And so if you apply to the next step which is the right asset within the markets, we -- once we've decided on the market, then how are we going to be competitive within that market, and you have to have the right asset, and you have to have a well-invested asset, which is why our #1 priority for deploying capital is CapEx within our own real estate. And we'll have 170 communities by year-end that have completed refresh or redev projects that are NOI generating. So that's a good boost. And then from there, ultimately, it's who's the operator. And we want operators that we think will have a track record and experience that will be successful within certain types of communities within certain markets. What we liked about the opportunity to move to the 3 operators we selected in this case was that we had a tremendous track record with them to date. Each of the operators have transitioned more than one time with us. They've had leading performance. They're contributing to that [ T81 ] portfolio. There's a disclosure in our business update that talks about the performance, which is over -- almost 400 basis points of occupancy growth year-over-year, over 8% RevPOR, NOI through the roof. So big contributors, proven track record of transitioning, good management presence within Florida for the Florida portfolio, excellent track record and presence in Texas and California as well. And so we're very comfortable and confident in our ability to execute moving forward.

And sorry, I don't know if I missed this, but did you guys think about transitioning the other Holiday by Atria assets to new operators? Or is it kind of wait and see? And maybe just how is Atria performing, now that they can focus on just maybe more of their core business?

Well, the legacy Atria portfolio continues to deliver excellent results. That's been a consistent performer for a number of years, and it continues to deliver for us that's the legacy assisted-living portfolio primarily as independent living as well. Holiday by Atria, where we've left the 75 communities under their management, those were performing relatively better. So as we evaluated the 3 states, Florida, Texas and California, which did not have as good performance, therefore, needed quicker execution. We decided to move with new operators. We thought that was our best opportunity to create value and to create momentum faster than keeping those with Atria. Those that stayed behind are performing relatively better and as I said, I'm really pleased that they've found stabilization. And in fact, they're growing quarter-to-date, and particularly in August.

Any questions from deals on the transition assets? If not maybe we just move over the centered portfolio, those are a big benefit in 2Q. Just kind of curious like what are you seeing on the ground from that portfolio? And what is your asset management team like working on now that they -- you guys [indiscernible] on it out, right?

So we took ownership of a portfolio where we had a Mezz loan. It's a portfolio valued at $1.566 billion. We took ownership May 1, which I believe was at a trough of operational performance and has some really good operational and sector kind of tailwinds to it. So far, we've realized some of that already. It's off to a fast start. It's obviously quite early, but we -- on the Mezz loan, we have -- we achieved an 11% unlevered return that -- on the loan that we had made to taking it over. Now since taking it over, we've received -- we've kind of enjoyed additional upside. That portfolio is over 40% outpatient medical. It's very consistent with the rest of our outpatient medical portfolio other than it has much lower occupancy. So we've put it in the hands of our outpatient medical property management group. They've been doing an outstanding job. They've been doing a lot of leasing, and we continue to expect significant NOI upside over time and occupancy upside from that portfolio. And we'll probably call kind of some of the lower 5% of the portfolio. But overall, it's a good quality, and it's already off to a good start. In senior housing, which is 15% to 20% of it, it's also benefiting from these tailwinds that we've described in senior housing. And in addition, now we'll have the benefit of Justin's group's OI and active asset management. We -- so we expect that to grow as well, and we have a CapEx program underway with that portfolio to optimize performance. And then on the health care triple-net side of things, we've already sold a couple of the SNFs for $60 million before you get another gain, $135,000 a bed. We are intensively working on the balance of the portfolio and some of the upside has come from NOI in that portfolio, and we'll continue to work on NOI optimization and asset management plans that will help us maximize value as we move forward.

Great. On the SNF side, you mentioned the asset sales and that there was a cap rate that you disclosed in the update. Is that representative of the yields in that SNF portfolio for those like that are out there.

So most -- the yield on the assets we sold was a very attractive 8.4% cash yield. And as I mentioned, a gain even on the value that we had when we took over on [ 5/1 ]. So that's significant. I would say on the other ones, it's really more of a per bed valuation based upon principally the states where those assets are situated. This is something we happen to have many good states in the sense that they have very favorable current Medicaid environment. And obviously, the expense side of the equation has been improving as well. And so there are some positive trends at the moment in those businesses.

So is the plan to fully sell all the SNFs you inherited or do you want to keep some?

Well, we're evaluating that now. We want to make sure that we fully understand the income-producing capabilities of the assets, get to know the operators better and then make a decision going forward.

Okay. And are they all...

We've obviously had good success so far with the asset sales we've made.

Are they all paying rent? Like I guess people are trying to figure out if there's like dilution or how to think about like potential sales like they're penciling in to this [ model ].

One is its own set of analysis, but the -- as you mentioned, our guidance for NOI on annualized basis for the total portfolio is $104 million, which is up from the original [ ex patient ] and that's principally because the outpatient medical is doing better. And we are, in fact, getting more NOI from the health care triple-net portfolio.

Okay. And then you mentioned occupancy on the outpatient medical facility is lower than your portfolio. I guess what do you think drove that occupancy to the current levels in there? And then kind of what's the timeframe that you're expecting to kind of get the -- to get it up to your portfolio?

Yes. I mean I really will tell you, it's operational. The assets are, by and large, good quality. They share many characteristics of the portfolio that we have. There is, in fact, significant market overlap with our existing portfolio, which enables the on-site teams and the teams in the markets to have good insight. And all I can tell you is right now, with our team in there, we are seeing very good early results, and we'll continue to work toward getting that occupancy towards the level where we have it in our existing outpatient medical portfolio. It will take some time. But again, the early returns are very favorable.

What about the overall CapEx, like maintenance CapEx needs in the portfolio? Was it -- were they maintaining it to like the Ventas standards? Or was it -- does it need some CapEx?

Yes. I'm glad you asked that. I mean one thing in the third-party valuations that we got, they already deducted kind of additional capital kind of off the top to get to that valuation. And we are in fact committed to bringing all the assets up to our standards. I mean, Justin's doing -- maybe you can touch on the senior housing assets and what you're doing there to drive performance.

Yes. We have a mix of very high-quality. I like to call them irreplaceable rental CCRCs. And the case there was there was a number of projects that were started, but not completed. So we made an immediate priority just to complete the front of house kind of first impression CapEx and refresh and make sure we're more competitive and continue the trend towards recovery in that portfolio, much like we do in the rest of our portfolio. And then we have a selection of mid-market assisted living communities, and we're putting a similar refresh into those that we did across our T90 portfolio.

And then maybe just since we're talking about the senior housing, just can you go over the latest on the operating OI platform that you're working on and kind of maybe what initiatives you're really focused on for the next 12 months?

Yes, sure. So just to remind everybody, that's also why, that's how we describe really our asset management umbrella over senior housing. It stands for operational insights, and it's powered by our data analytics platform and our management team and relative operating experience. There's been a number of priorities that we've had over time. We focused on focus on agency labor. We focused on in-house rent increases. We focused on contribution margin analysis and performance plans around those. My favorite topic is one that's disclosed in the business update. We have a good case study, it's Sunrise Senior Living, who is really having very strong occupancy growth. We've been working with them over the last couple of years on revenue management. They have a learning model in place to help determine pricing within their portfolio. Late last year, they had a fairly aggressive in-house rent increase program where they pulled forward their increases and went fairly high in terms of their increases. In conjunction with that, they raised market pricing. And so it did slow down the volume a bit in the fourth quarter of last year. We analyzed through our new data analytics approach to [ become ] a favorite new approach, the price elasticity. And what we found is there's a lot of opportunity to find better alignment in terms of volume and rate, and we've worked with Sunrise over the past 2 quarters to execute on that. And the result has been in the second quarter, they're producing 111% of prior year move-in levels, and that was up from 95% in the first quarter and 80% in the fourth quarter. And then the third quarter to date, they're at a 124%. So an acceleration in move-in volume, better alignment in terms of pricing. They've also been putting a great management team in place and improving their regional oversight from a sales perspective, optimize our call center. There's a lot of action that Sunrise is taking in collaboration with our OI platform. So really good results there. That's the favorite new initiatives. As we look forward and the point of the platform is to drive performance. And it really informs all of our decisions around the market asset operator, whether we're going to buy something or sell something or improve an asset, place an operator and then do deep dives on various operational initiatives. That's what OI does. And so looking forward, that's planning around OI is going to be geared towards the best opportunity to drive performance.

And it is driving performance. I mean when we look even at the third quarter-to-date move-ins, they're at 115% of 2019 levels. And so Sunrise is a great example. They're outperforming last year, but I would even take you to a pre-COVID period and say, for the whole portfolio in the U.S., we're seeing 115% of the move-ins quarter-to-date compared to the 2019 period. So it's a robust demand, and we're trying to make the most of it through the OI platform in our portfolio.

Maybe just switching over to the investment pipeline. Just what are you seeing in the market today? What are the opportunities out there? And maybe just a little bit involved in the conversation, just like using sourcing capital today and how it compares.

Justin, do you want to talk about your favorite investment opportunities and what we've done also.

Yes, absolutely. So we've had -- it won't surprise anyone to hear that senior housing is probably our preferred asset class moving forward as we make investments. To date, we've utilized our fund, which is a core fund to really stay active and invest in very high-quality real estate. We bought 2 communities that are managed by benchmark senior living, which is the largest senior housing operator in the Northeast of the U.S., very high-quality, long-standing management team, stabilized assets in Massachusetts and Connecticut, great markets, strong performing, good fit for a core fund. And then also bought 2 MOBs that are part of the Banner Health System, has a AA- credit, backing a 12-year lease. So again, very stable, strong cash flow streams, perfect fit for the core fund. And then as we look into the pipeline that the investment activity across senior housing is the lowest, it's been since 2020. And we've been monitoring a number of potential opportunities. We've really been looking for the bid-ask disconnect to improve. We saw that early in the year. We're starting to see that improve now where we can hit our targeted low double-digit unlevered IRR by investing into senior housing, and that could include lower cap rate assets growing, it could include something that's closer to stable with less upside but a higher initial yield. And those opportunities are starting to materialize in the pipeline.

And I think you asked me a question there on capital raising?

Yes, just what's the environment...

I thought I heard that. Yes, I just want to be able to answer that one because I'm quite proud of what we've been able to do. We raised $2.7 billion so far at 4.8%, which in this current environment is something I'm very proud of. And it really is the proof point in my mind of the scale that benefit and the advantage that we have because that capital has come from the U.S., Canada, secured, unsecured, hybrid equity, straight equity and asset sales as well as taking advantage of the drop in rates post SVB to put in hedges at attractive points in time. So having scale really matters in this environment and we've been able to tap into that.

And then I just wanted to touch base on the triple-net portfolio. There's, I guess, like 7.1% portfolio is under 1x coverage. Just curious like just kind of expectations going forward because it looks like it comes up for renewal in 2 years. Just curious what's going on there? Is there any disclosure you can provide?

Yes. We've actually given some incremental disclosure to investors in the materials about we have 2 triple net leases where the renewal date is in 2025. The first is with Brookdale and Brookdale has been doing very well. They announced some positive occupancy numbers this week. And we want them to do well for a lot of different reasons, including the 16 million warrants that we have at $3. And so they -- Brookdale has a 10-year renewal option at the greater of contract or market in 2025. We always draft the leases. So we'll have at least a year to understand what the outcome is and be able to optimize the outcome. I would say that we're very happy about the way the portfolio has been trending. And we look forward to continue to have operating performance go up. In terms of the other one, there's a Kindred LTAC. We have 29 LTACs with Kindred. I've had these assets since 1999, so I know them well. And there are 2 parts of them. One pool of 6 was renewed through 2028, and the other pool of 23 is 2025. Again, a year to now. So it's very early in the game. I would say that the market for all providers was tough, all providers across health care, which was tough in 2022, a little bit on volume, but principally on expenses. That market has improved in 2023, including for LTACs, most notably the public company Select and saw EBITDA grow in the second quarter over 200%. I think Kindred is behind them in terms of attacking the opportunities, and these assets made about $200 million of EBITDAR in 2021, performance has been -- has declined in the period since then. We've provided coverage through [ 6/30 ]. And what I would expect and have been told is that Kindred has initiatives underway to mimic the performance of Select in improving the expense load as well as their census upside as well. There's contract labor improvement opportunities. And so we would hope to see that performance improve over the coming couple of years, as you mentioned, that we have between now and the renewal date. And so we're very experienced at this and have lots of ideas and plans about how to optimize the outcomes, and that's where we're headed.

And to put it in context as kind of like how is the coverage pre-pandemic? It sounds like you got a [ hole ] and then has come off of that...

Yes. I mean I think the performance was very solid prior to the pandemic. All of the numbers I've quoted are without any kind of HHS funds in it. I think that's an important item to note. There was a lot of utilization of LTACs during COVID, which was an enhancement, I guess, to the revenue side. And again, I think the opportunity to have EBITDAR go up is shown by Select, and I think Kindred has the opportunity to do that mostly on the expense side.

Okay. There was news article about land and buildings, very little like kind of shake up, I suppose. Just kind of curious, you've had any discussions with the Board? Or just kind of any early thoughts on what they kind of grow?

Yes. Thank you. We have a really outstanding Board at Ventas as most of you know because they do outreach regularly with our shareholders. We have not talked land and buildings that they have not reached out to us for over a year. But we are very interested in performance. We -- there's nobody in the world more interested in outperformance and value creation and the people you see here at this table, and that's really what we're focused on. And we are -- as all of very engaged with our shareholders and very interested in their feedback and very -- again that what we care about is performance and value creation.

Any questions from the [ deal ]? Maybe just curiously, it is in the second half of the year. I know can't really give guidance about 2024. But just what should we kind of look for from a fundamental perspective next year? Like curious on like kind of thinking on like renewal rates, just like operating expenses. It's just kind of like thinking through it. I know in apartments, I cover, there's a lot of pain pressures on real estate taxes, insurance. And then yes, just kind of curious on general thoughts at this point is there anything we should be watching for?

And this is across the enterprise or it's top of the SHOP in particular or...

Yes, yes. I guess mostly SHOP [indiscernible] what the variability is going to be?

Right. So in SHOP, just kind of starting with where we're -- what we put out for the second half of this year, which is 15% to 21% NOI growth, we talked about 6% RevPOR and occupancy 80 to 120 growth and kind of right on track for around 100 quarter-to-date. And then the 4.5% expense growth. So relatively lower expense growth. And as we look into next year, we'll be very focused on CPI. We'll be using our analytics to really determine where should we price internally, which is a tried true practice we put in place last year. We look for a spread over CPI, can be 300 basis points, can be more in some cases. Right now, our anniversary increases that are underway that occur each month around 7%. You probably know we were double digits earlier in the year in the first quarter. So that gives some perspective. Ultimately, we'll look for a spread between RevPOR and [indiscernible] and then look for occupancy growth as well as we backdrop is excellent.

Is the 7% first double digits at the beginning of the year? Is the slowdown driven by base effects like where the [ data ] kind of captured some of that growth kind of calendar year increase is like -- there's an actual slowing or if it's just more OpEx?

It's an actual slowing. It's a little -- it's just a lower relative internal rent increase. Another thing I should say is that most of our anniversary increases are independent living products, a mid-market independent living. So we went out relatively lower in that product early in the year. So it's going -- in that case, it's going from like 9% to 7%, and it's just in response to really inflation being lower.

Okay. So there is a slowing if you compare apples-to-apples, like [ AO versus AO and IO versus IO ]?

Yes. And I mean it's in conjunction with expenses being lower as well. So you have -- you just have inflation is lower, so pricing is a little bit lower, expenses are lower. We're focused on the spread between the two. And that's what we'll be focused on as we go into next year.

And in the OI, I mean the focus is price volume optimization. And so occupancy having strong occupancy growth is a significant focus and so again, the portfolio is delivering $100 million of incremental NOI, '23 versus '22 . It's a multiyear growth and recovery story. There's a long way to go to get back to the 88% occupancy and 30% margin, but that's a several hundred million dollar opportunity right in front of us.

And we're out of time, and I've been asking everyone 3 rapid fire questions. There are surprises. So the first question on the Fed. Do you believe the Fed is done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no? Multipart.

If the Fed done hiking maybe, so I expect the Fed [ hike ] in '24, probably not.

Do you believe real estate transactions will meaningfully pick up by the fourth quarter of 2023, b, the first half of 2024 or c, the second half of 2024?

I would say, the end of this year and into early 2024. And that's going to be driven, I think, somewhat by reality checks and maturities. There's of [ $1.5 trillion ] of real estate maturities coming over the next couple of years. And that will drive the reality check and the transaction volume, in my opinion, to people who can raise capital and deploy capital like us.

And are you using AI today to help you run your business, yes or no? And do you plan to ramp up spending on AI initiatives over the next year?

Yes. So we do have -- we are using AI selectively. We do plan to move into predictive analytics and that work has begun certainly, assessments begun, and we're putting a plan in place to take this enormous amount of data we have, both from an operational -- with really 3 things; operational, market and financial data and put it to good use help us to better predict performance and with our decision-making. And in senior housing, primarily and also across the enterprise.

Awesome. We'll leave it there. Thank you.

Thank you for hosting us. Thank you for being here.