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

Hello, everyone. Thank you for being here. We're delighted to be at NAREIT today and to join you, Tao. As you know, Ventas is an S&P 500, $34 billion company with about $2 billion of NOI. We are focused in our business with over 1,400 assets on the large and growing demand from a senior population. And our assets are focused on senior housing, which is over half of our business. We are advantaged across the commercial real estate space because we do have incredible demographic demand that is really just lifting off, and we expect to see a step function in that over the next 5 to 10 years of both the over 65 and over 80 population against that differentiated and compelling backdrop. We have articulated a very simple strategy, a 1, 2, 3 strategy. It's different from the one we had 25 years ago, but equally value creating. The first is really to capture this compelling organic growth story in senior housing. We have very low supply, a secular low in starts while we have 25% growth projected in the over 80 population over the next 5 years. And so we're very excited about that. It's adding over $100 million of NOI to our business a year, and that's well underway, and it should continue kind of as far as I can see. So the first part of our strategy is executing on that, and we have the platform and the experience to do so in the portfolio, I must say, to do so. I said that the story of organic growth is well underway. 2024 is an occupancy growth story. And I'm happy to say that price is also trending in tandem with our occupancy acceleration. And so from that incredible supply-demand imbalance in our favor, we saw 120 basis points of occupancy growth in our portfolio last year, 170 in the fourth quarter, 240 in Q1. And quarter-to-date, we're over 300 year-over-year. So that nice occupancy acceleration with price growth is what's driving the NOI growth, and we're projecting 12% to 16% same-store year-over-year NOI growth in 2024. So I mentioned this is all being executed on our platform led by Justin and really driven by incredible data analytics that we've developed over the last few years and the platform and the data analytics are also driving the second prong of our strategy, which is to add external growth focused on senior housing to our portfolio. And we're seeing great yields. This is one of the first times in my career where I've seen high going-in cash yields on quality assets in good markets that also has embedded growth that leads to low to mid-teens unlevered IRR expectations and we're very excited about that. Our expectation right now is about $750 million in external growth funded with equity during the year and $350 million of that is already closed, and we have a line of sight near term to an additional incremental $400 million. So excited about that. And the third prong of the strategy is really just to execute and drive cash flow in the rest of our portfolio, and we're doing that. We're 2 points on that. We're in active discussions with Kindred and other parties about the '23 long-term acute care hospitals or LTACs that are up for renewal in 2025. And we hope to give the market more clarity on that in the second quarter. It's about 5% of our NOI, and we're working to achieve a manageable outcome in the near term. So more on that, hopefully, to follow. And then we also announced about $300 million expected disposition proceeds in 2024. We're at 200 already. Last week, we closed a very attractive disposition of skilled nursing facilities at 6 cap on cash NOI, $100,000 a bed. So we're excited as we continue to execute on our disposition strategy and value creation. And so I just want to close, Tao on a couple of points. Our 1, 2, 3 strategy is also -- has a partner and financial strength and flexibility. So it's kind of a silent fourth. So we continue to focus on liquidity, which is great. We've done some great recent bond deals, renewal of our revolver at better pricing. And so we have virtually no maturities left in 2024. So happy about that. And we're reaffirming our guidance, including 6% to 8% year-over-year growth in company same-store cash growth. And -- excuse me, we have a great demand-driven business. And at this moment in time, it's -- Ventas represents a really interesting and I think compelling value creation opportunity in terms of -- and you must agree because you have a buy on the stock, but the growth and the multiple combination is really something that screens incredibly well for investors, and we're just getting going. So with that, I'll stop and turn it over to you for questions.

Excellent. So I will ask one or two quick questions, and then I'll kind of open it up to anyone else that's interested in asking a question. So my first question is around point number one of the 1, 2, 3 strategy, which is this interesting internal growth opportunity you have within your senior housing portfolio. Very curious -- again, you recently hired a Chief Revenue Officer and I'm very curious to understand exactly what she has done so far at the company, how you see that translating into better revenue opportunities within the SHOP portfolio. And also, overall, how one thinks about just how good occupancy can get just given this acceleration you're seeing in the year-over-year occupancy gains.

Well, Justin is a boss to SHOP, so he's going to take all the #1 questions.

All right. Well, so first of all, just to step back, we are pleased to be situated in markets that offer a projected net absorption of 1,000 basis points of upside over the next few years. So really strongly positioned in terms of location. Debbie mentioned the portfolio rate. We have great operators. We've grown from having 10 in 2020 to 24 today. And then the data that really powers our Ventas OI platform is billion data points at this point, and it's overwhelmingly top line driven. So our data as it pertains to driving price to volume is excellent. And so adding somebody that has a very strong top line orientation. Lindsay Cacia started yesterday. So -- she hasn't contributed a lot yet. So I'm expecting big results by tomorrow. But I'm really excited about Lindsay joining the team because she has a good solid background in hospitality. She has -- before that, a solid background in senior housing as well and leading national sales efforts, great track record. So she'll lead the SHOP performance and have a special emphasis on top line growth.

Excellent. And then my second quick question, again, is about point #2 of the 1, 2, 3 strategy. And again, the $350 million of transactions that were recently completed, 2 things that I thought were notable about them was: one, kind of exposure to new operators as kind of this new regional operator that's in play. I think historically, we've thought about your portfolio as having to move to these large national operators. So it's kind of curious this approach of going to like regional SHOP shooters, how you hope that contributes to better bottom line? And also with this operator as well, it sounds like you have done something a little bit different with the management contracts as well that's more bottom line focused again in an effort to kind of drive better NOI. So if you just kind of talk about those 2 key things.

So first of all, I mentioned our presence in our markets. And so we've been focused on the past several years to make sure we're positioned in the right markets that have strong affordability and strong absorption projection moving forward. If we were in markets that didn't offer that, they're gone. So we've exited those markets. We want to make sure we have the right assets within the markets that are well positioned, well invested. And then it's -- who's going to operate it? Certainly, we've added a lot of operators as we're making acquisitions, there's a decision to be made. Should we move to an existing operator? Do we go with an in-place operator? And we've had a couple of really good opportunities to pick up new Northeast based regional operators, picked up benchmark last year, LCV this year. But the decision really is not around the size of the company. It's their track record in a specific market. And large companies going to have nice clusters and nice local track records. Regional companies can do the same. And so we've -- we're really just making a judgment call in terms of who's going to create value with that community moving forward, and we have a lot to choose from at this stage.

Great. Before I hog the spotlight, we'd like to kind of open it up for anyone that may have any additional questions. All right. Back to me. All right. So let's talk a little bit about point 3 then. So this driving strong execution and cash flow generation. Again, Debbie, I know you kind of mentioned about better clarity on Kindred towards -- you kind of get closer towards the end of the year. I'm just curious -- again, we've seen other companies kind of go through this process. And some people have decided to transition to a new operator. Some people have decided to do a rent deferral and then when things get better, you can get kind of get picked up on the other end. When you kind of -- but again, and in that process, you don't kind of disrupt things by having to transition to a new operator. So when you think about those 2 kind of opportunity sets of stay with guy A or women A or kind of a transition. How do you kind of think about the better way to kind of handle that?

Well, every one of these situations is bespoke. And of course, we've been dealing with Kindred renewals for 25 years. And so we have a very well-developed playbook. And the way I really think about it is what is our goal. And our goal right now is to kind of optimize enterprise value in the NOI at the assets going forward. We would expect to think about options, both with Kindred and with potential other operators, which we are doing, and that's important to getting to the best outcome. And each -- again, each situation is unique, and I think we're well experienced and kind of well positioned to reach the goal that I outlined.

Got you. That's helpful. And then kind of going back to senior housing, which kind of, again, is like is a critical focus for the company at this point. In terms of the opportunities that you're looking at for external growth, how does international play into that, whether it's the U.K., whether it's Canada or elsewhere?

I mean we have a great portfolio of senior housing in Canada. It's a jewel. It's 96% occupied. So that market has been very good to us. The opportunities for growth in the U.S. are just exceptional right now. And we also have assets in the U.K. and Justin has experience there. So we're open to that, but the dominant thematic is U.S. senior housing with very specific characteristics.

Yes, the characteristics being although just to list a few. So going into yields of 7 to 8 unlevered IRRs of low to mid-teens, buying below replacement costs, buying combination campuses that either offer us assisted living, independent living a member care together or just letting a member care combination need-driven campuses in markets that have strong net absorption as well. Generally, these communities are on the newer side, have occupancies that are mid-80s or so. So lots of runway in terms of occupancy, but also price opportunity and our leaders in their respective markets. It is a unique opportunity to buy in the U.S., have yield and growth combined and it's really leading our pipeline at this stage.

And as we think about this long runway of debt maturities in senior housing that again, everyone is expecting to create opportunities, should we be getting excited about the idea of, I think, this year, you have like $750 million of acquisitions. Do we get excited about hitting the $1 billion mark a year from now, I guess, historically, it's not been unusual for you to have multibillion-dollar years of acquisition.

Right. So I'd like to remind everyone that this 1, 2, 3 strategy that Debbie is mentioning. Clearly, we've been getting our SHOP platform in order and ready for this for over a period of time, and it's -- we're really well positioned to be one of the very best owners of senior housing. But the growth part really just started recently. We announced the opportunity externally in February. We've been executing quickly, having close $350 million. We see another $400 million coming. And so -- and the debt maturities as you mentioned, is $19 billion over the next 2 years that are facing the senior housing sector. So there's pressure on existing owners. And although fundamentals are great, they are facing a debt maturity, which could cause a lower LTV, higher debt costs, more capital to be put in. And so that is creating opportunities. And so it seems early with the $750 million, and we'll look to try to do more over time.

Got you. Opening up to the audience again, if there any additional questions?

I mean one other thing I'd like to touch on, too, in looking at the investment criteria is affordability. And I think what is often misunderstood about senior housing is, a, how affordable it is and how similar the cost is to living at the window or widower in a suburban home where you have to pay taxes and insurance and upkeep and meals and insurance. And so affordability is really high particularly as you get to the baby boomer generation that is the wealthiest generation in history. And so that is one of the investment criteria we use, but again, I think, surprisingly, the product is very consumer-driven. It provides an incredible value to seniors and their families, and it is highly affordable. And so we're continuing to focus on that as we continue to invest.

Yes, we have a question.

[indiscernible] services. How are you thinking about the technology budget over the coming years. When you're thinking about such tremendous growth in the seniors population, but also tremendously promising technology, right? And clearly, we'll call on the labor side, but how do you think about underwriting that expense line?

Yes. So the technology in our setting is one of the big opportunities, senior housing has not really been on the forefront. Typically, in that regard. I do believe that's changing. I was walking down the hallway of our new -- one of our new communities couple of weeks ago next to the robot that was vacuuming. That's a good indicator. There's really good safety monitoring that's predictive. It's used in our communities. Energy savings, that's huge investment for us, and that pays back, but you're using AI to just to manage the energy consumption really across the board in the communities. So it's a big area of opportunity. And I do -- in some ways think we're at the beginning, but it's been a priority investment.

If I could just follow up. Do you think that becomes a differentiator for you as a large company between the have's and the have not's that they just won't be able to keep up on that rate or [indiscernible] sellers.

I definitely -- so we are certainly a great owner of this type of asset because we do invest in it. We invest into the operations. We've invested in the real estate, a big part of our business plan has been to make sure we're competing at market to reposition the communities. We have over communities have had a refresh over the last 2 years. And obviously, they're performing really well. They're outperforming market. But you have to have the financial strength of the company that we have and the platform we have to be able to do that. So it's certainly a competitive advantage.

Thank you for your question.

Yes, there.

[indiscernible].

Well, we've a net zero by 2040 at Ventas. So we're very proud of that. And we have invested a lot in energy savings, as Justin just talked about across our 1,400 assets, and it has been good for business and good for the environment, and we believe that we can and should do both.

Physical risk?

Physical risk. We spend a lot of time on -- we have a grid, obviously, and it helps be a decision -- one of the decision factors in our investment in our disposition criteria. And the challenge that all of us face in real estate is the frequency and severity of events that are more broad-based than they used to be. And so we have to be somewhere, and our biggest mitigant is that we're in 48 states. So we don't have any market or any building that poses outsized risk to the company, and we are spread out, so that we -- that is the biggest way that we manage that risk because like I said, you have to be somewhere and we're everywhere. So I hope that answers your question.

Yes, if I could just stick with the ESG theme. Again, you do have 2 new board members now, one board member joined the Investment Committee, another board member joined the Nominating Governance and Corporate Responsibility Committee. Just curious to get about the addition of these 2 new Board members, what you ultimately hope they kind of bring to Ventas in regards to improving the overall ESG policies.

Well, let's take that as a G question right? On governance. And at Ventas, we have a history of very good governance, very rigorous, independence and other aspects of selection, creation of the Board, which works on behalf of shareholders really to deliver long-term returns. And we have delivered 18% annual returns for 24 years, so they're doing something right. Hopefully, the 2 new guys, don't mess it up. No, in all seriousness, and then we added 2 well-respected REIT investors to our Board this year. They bring a new perspective, and again, all aligned with the Board and management to create value for shareholders, and we believe they're going to be contributors.

Excellent. Any further questions? Let's talk outside of SHOP for a quick second, if you don't mind. So there's still a piece of your business, the medical office business and also your life sciences portfolio.

We've rebranded those, outpatient medical and research.

Outpatient medical and research, O&R. Just curious, again, if you could talk a little bit about fundamentals in that space, how you kind of see that also contributing towards your bottom line, does O&R become a source of capital if you kind of really are much more focused on SHOP going forward.

Thank you, Tao. I was getting a little up here. Yes, OMR is 30% of our business, outpatient medical about 20% of the NOI, our research business 10%. What we love about that business is the steady compounding growth that we get out of that portfolio. Our customers in both cases are highly rated health systems or universities with long-term leases. On-campus in both cases, and they attract tenancy that fills out our buildings. It's quite simple. And so we have an in-house property management and leasing group called Lillibridge that manages these assets, a leader in Pete Bulgarelli, who joined us 5 or so years ago, who's been driving outstanding performance. And so as if you call it, complement to the senior housing growth, that nice 3% every year is a nice, I feel like balancing part of the portfolio. It could also be a source on the margin for capital recycling to reinvest in senior housing, which is something we've been doing this year. But we like the portfolio as it stands.

Got you. Back to senior housing then. So just strongest fundamentals have kind of been in the past kind of year or two. I think, again, we're still at a point where again occupancy is not back to where it was pre-pandemic. We're still not at a point where NOI margins were back to pre-pandemic levels. I guess when you look at your crystal ball, do you see that happening where we can kind of get back to those highs? Do you see us going beyond those highs and why?

So let's take the last part first. There is -- because of the supply demand, there is a very long runway to reach. The first milestone would be pre-pandemic occupancy and margin then as Justin said, we think there's 1,000 basis points of market potential for net absorption or 10 percentage points of occupancy upside in the next few years. And so we believe that we can meet and potentially exceed the low 90s occupancy, which is what the last peak was in 2014, which you and I enjoyed together. And that was after a period of time in the financial crisis where starts were very low, but the senior population only grew 7% in total in those next 5 years. Now we have starts being similarly low or lower, and we have the over 80 population growing 25% in the next 5 years. So Justin, do you want to elaborate really on your expectations?

Yes, there's a few stats. So one, in 2027, we expect another 800,000 plus 80-year-old to be the fastest growth we've had. It's on the baby boomer population. It starts turning 80.

Next month my mom turns 80.

Okay. Well, welcome her.

1946-1947.

So the highest number of deliveries we've ever had in terms of units is 26,000. So we're at 16x the highest number of units delivered in terms of 80-plus population now in '27. So really compelling demand. And so when I'm talking about the next few years, that hasn't even gotten to that point yet. One other stat that Nick just put out National Investment Center for senior housing is that senior housing communities -- so first of all, starts at an all-time low. Secondly, those that are starting, very few, are taking 3 years from groundbreaking to opening. So they're slower than they have been in the past. And so they were talking about a 3-, 4-year window in terms of this great net absorption opportunity, it's probably longer in light of that. So we were really excited about the tailwinds. Clearly, we're already seeing evidence of that with our occupancy of 300 basis points year-over-year, 360 in the U.S. And -- but there's a long way to go and a lot of upside ahead.

Got you. On anything that investors should be thinking about from a regulatory perspective, again, senior housing is private pay, but I think, again, we've kind of seen on the skilled nursing side, a lot of kind of concern about quality of care, minimum staffing rules. This is also a care setting as well. So how should we kind of think through about any potential regulatory changes that could happen?

Well, senior housing is a consumer-driven, consumer-paid product. And it attracts residents from the value that it provides for care, longevity, socialization. It is state regulated and has been since inception. And that's one reason it trades at attractive cap rates, it's more real estate part of the health care continuum. And I would say that we feel good about the current regulatory regime that's a state-by-state regime that has been effective, frankly, in regulating senior living since inception, very low likelihood of federal regulation over -- coming over the top of that, very hard to do. And so the one point I would like to emphasize, though, is that as long-term players and participants and investors in the space, quality of care and the quality of operators and making sure that we are delivering the kind of care that seniors and their families expect is a very high value for us. And that's true regardless of regulation. And it leads to better financial results as well.

Excellent. Any other questions?

You're so shy today, putting all the work on Tao.

That's okay. I think to close out, we're going to play a really quick game. When I'm going to ask you 3 yes or no questions. Number one, by the end of the year, will rates be higher or lower? Anyone on the panel.

Lower.

Higher.

You think rates will be higher, Debbie?

Rates or REITs?

Rates, rates, rates.

Rates, lower. I thought you said REITs too.

And by the end of the year, do you actually expect your SHOP occupancy to be higher or lower?

Higher, higher.

By the end of the year, do you expect your NOI margin in the SHOP portfolio to be higher or lower?

To be higher.

Excellent. I guess the last question, I can answer that [indiscernible]. And then I guess to kind of wrap things up, I just wanted to kind of say thank you all very much for being here today. Thank you for the insightful presentation. And again, it's -- we have a buyer rating on the name. And again, my yes or no, we definitely think we expect the stock to be higher by the end of the year.

Well, we appreciate you and thank you all for being here. We appreciate your interest in Ventas.

Excellent. Thank you.