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

Good afternoon, and welcome to Bank of America's Global Real Estate Conference. I'm Josh Dennerlein, and I cover the health care REITs at BofA. We're pleased to have with us Ventas' Chairman and CEO, Deb Cafaro; and EVP and CFO, Bob Probst; and Justin Hutchens, EVP, Senior Housing and CIO. With that, I'll pass it over to Debbie for opening remarks, and we can jump into Q&A. As always, I encourage audience questions. With that, Debbie?

Josh, thank you so much for having us, and thank you for coming to the last meeting of the day. Business is good at Ventas. We are very excited about the execution that we're driving on our strategy. The strategy was articulated at the end of last year and had good momentum coming into this year. Basically, it is capturing the unprecedented upside in our SHOP portfolio through organic growth. We're now in the third year of double-digit year-over-year NOI growth, where it's an occupancy-driven multiyear NOI growth opportunity. And this year, we're showing great results on occupancy. Quarter-to-date, we're at $350 of occupancy growth year-over-year, and it was over 400 in the U.S. And so that is very strong as expected and the combination of rate growth in occupancy growth is leading to 8% year-over-year revenue growth in the SHOP portfolio. So the most important thing I would say is that not only are we in the third year of this multiyear NOI growth opportunity in SHOP, but because of the unprecedented supply/demand imbalance in our favor and all the actions we've taken and the platform we've developed that's both experiential and analytics, we see a really long runway ahead for this NOI growth opportunity in SHOP. So that's prong 1. Prong 2 is really adding external growth focused on SHOP that will drive higher enterprise growth rate going forward, be accretive and overall really expand our SHOP footprint. And right now, we have a line of sight to $1 billion of investments focused on senior housing. The financial and operating criteria are very attractive with 7% to 8% of immediate returns and low- to mid-double-digit unlevered IRR expectations along with below replacement cost basis. So very attractive, and that pipeline is growing, and we're building on the momentum that we established earlier in the year. The third thing we want to do is really just drive the rest of the portfolio. While senior housing is more than half the business, we do have a large other half of the business, and we're spending time making sure that, that part of the portfolio is doing its part to drive performance. And then an equal partner of the 1, 2, 3 noted above is really the balance sheet. And we've been focused on improving leverage and liquidity. We just did a long 10-year bond at 5%. And so we're continuing to improve on that front, and hope to continue to do so. So as a result of all of that, we've been delivering good TSR, and we're very focused as a team on continuing to drive performance. And with that, we'll be happy to take questions.

We could start with prong 1. You mentioned just kind of driving the internal growth and the data analytics capabilities. I guess can you provide the latest on the Ventas OI platform? And maybe where you want to take it from here?

Yes. So yes, we have the micro and the macro working for us. We've talked about the macro in terms of supply and demand, which is strong and getting stronger. And then Justin, of course, leads the SHOP business. And so why don't you talk about the platform you've built and how it's helping us improve performance?

Sure. So Ventas OI, what that is, that's our platform that really drives the active asset management across the senior housing portfolio, and it's driven through our operating experience, combined with best-in-class data analytics. The experience analytics are geared to focus in 3 areas, primarily versus just markets. And a lot of the asset management activity we've had over the past few years has been centered around market selection, and that includes 100 dispositions that we've had, over 100 acquisitions, over 200 refreshes of our assets within our SHOP portfolio, prioritizing the markets that would deliver the best and absorption first, and making sure that we're deploying capital in a way that would give us a really healthy return on the investment and drive performance. Market selection also obviously plays a big role in the external side of capital allocation as well through acquisitions. We can get to that later. Next is the asset selection within the market. Everything starts with the market, have to be the right place where you have strong affordability, strong demand for the asset. Within that, are we well positioned with the right asset to create value. So we focus on the market position of the asset. Is it well invested. Is it delivering appropriate service to meet the demand in that market. If not, we've probably left it. And then finally, the operator selection. We have excellent operators in our SHOP portfolio. We've had -- we've gone from 10 to 25 operators in that portfolio over the past few years. And we -- as we've been curating the operator selection within the portfolio, we've had 160-plus transitions to new operators. We have a platform where we've delivered 1,000-plus sessions where we're interacting with our operators on operating performance and driving improvement in areas around digital marketing, and price volume optimization and just flat-out driving volume. And so the platform is very powerful. It's well established and it's delivering outsized results. And I think the key point is really the last point is that we're outperforming in our markets in terms of occupancy. We have a couple of stats we can share in that regard, one is -- where is it? Thank you Bob? So 1 area is in -- our markets were in the NIC top 99 markets, we have 450 basis points of year-over-year occupancy growth and that compares to the NIC markets of 250. We have another metric I like to share that's related to the assets where we've made investments. We have 133 communities that have benefited from the refresh CapEx and also the new operator selection. Those communities are seasoned now, they've had at least 2 quarters post refresh. They've delivered 530 basis points of occupancy year-over-year, plus 6.5% RevPOR growth. So we're pushing really nice occupancy and RevPOR growth there, and we've outperformed those respective markets by 350 basis points of occupancy. So the platform is really well positioned to take advantage of all the tailwinds, plus drive outperformance, and that's the expectation we have with the -- with our portfolio.

Maybe just 1 follow-up from me. Just the portfolio or the transitions you've done on the operator or like the triple end to SHOP conversion level? Like how should we think about like the flow through to earnings growth over time? Like where are those? Because...

Yes. So we've had 160 -- the 133 I just reported on that we've done to refresh CapEx, those have overwhelmingly been transition communities. And so that's a pretty good example of the outperformance we can get. That's one thing that we've always been very clear about. If we're moving a community to a new operator, the expectation is we're going to improve performance. That's the opportunity. It's got a really good opportunity to do that in this period where we have tailwinds behind us as we're making those moves. So that outperformance we've seen. We've had some other transitions that don't sit in the same-store group. There's a pretty big independent living portfolio that transitioned last year. We've reported in our performance on a quarter-to-date basis, independent living growth is up around 400 basis points year-over-year. That group that we transitioned last year still sits in the non-same-store pool is having similar performance in terms of occupancy growth. So we're really pleased with the occupancy performance in those transitioning communities.

I guess thinking about like the next evolution of the platform, where do you like envision like Ventas OI going like customer acquisition, just like producing turnover. I guess like where is kind of the next phase as you think about like the build and how you can build the platform further?

That's a great question. The platform is really geared overwhelmingly towards top line growth. It's [ great ] with the best data. We have a [ building ] data points that we've worked with so far. 60% of those are operational data points, most of which is top line. So it's all things revenue, price volume optimization and volume driven. We have a fully functional sales dashboard across our 25 SHOP operators, that's real time. So that gives us ability with our team's experience to help to drive sales performance and interact with our operators in a way that we couldn't do it before. So the next step really is really to focus in on 2 areas and move to predictive analytics. One is in the area of market selection. So the market analysis that we do, we have -- we pull from over 40 data points to determine the strength of the market. We'd like to get to a place where that's automated and predictive and with the number of the inputs we have plus a learning model. And then on the price volume optimization -- as you know, the senior housing industry does not have price transparency unlike multifamily and hotels, we could all reserve an apartment in our hotel room today know exactly what we're going to pay for the exact unit we're going to get. Senior housing doesn't work that way. We've managed to really threw a variety of data sources, create good transparency in a way that our operators can help use it for guidance for establishing pricing so that when they make that decision, they have all the information available on a per unit, per community, per market basis. That's also an opportunity to automate and make predictive as well. So that's really the next step is to integrate AI learning models, automation, and, ultimately, predictive analytics.

So what do you think about like the senior housing industry, like you'll naturally have like margin expansion as like occupancy comes up. How should we think about the overlay from just like the platform and the potential like additional margin expansion? And is there a way for us to kind of see that and like parse it out?

Yes. So margin expansion is one of the big opportunities in our portfolio. Our total SHOP portfolio sits around low 80% occupancy. The margin -- because of the high operating leverage, the margin expansion between 80% and 90% will be about 50% incremental margin. From 90 to 100, we'll have 70% incremental margin. And that's just a function simply of operating leverage kicking in and then revenues layering on as you're filling the communities. Where we've been particularly good in driving margin, one area was episodic, which is really reducing agency spend within our communities. And that's been a big focus, and we've basically accomplished that, but the bigger opportunity really is to drive occupancy and rate together. And so the example I gave of the 133 communities have been transitioned and have refreshes, when you get -- when you're driving 500 basis points of occupancy and 6.5% RevPOR, margin is significantly expanding. And I think that's where really our best skill set is, is driving that top line to drive -- ultimately drive margin.

Questions from the field. And then maybe just like switching gears a little bit, just you gave the operating update on, I guess, the quarter to date -- update on the SHOP same-store growth. I guess just kind of walk us through that, like what are you seeing in the field? Like I mean we know demand is like accelerating stuff, but like maybe how is that just -- maybe is there any way to kind of quantify that from just the demand profile versus like maybe what you're doing on the platform side is driving customers and occupancy?

Do you want to talk about the accelerating?

Yes, let me kind of give you some sense of the occupancy performance, which has been really strong. It really started this time last year where we saw acceleration in occupancy, and that has continued through till today. And the 350 basis points year-over-year quarter-to-date reflects that. And when you look at that 350 basis points, 400 basis points year-over-year in the U.S. Canada, which is 96% occupied is the other piece of that equation. And within the U.S., IL and AL both growing very, very strongly. And when we talked about the first half performance, for example, the net move-ins were 13x the level of what we saw in the prior year same period. And so that is just the demand at the doorstep together with the initiatives that Justin just described. Another data point I would give you is sequentially, we're growing 110 basis points quarter-to-date versus last quarter average. Again, this is the key selling season. So you would expect to see a nice sequential performance, but that is, I would suggest, your outperformance from the market. So broad-based and continuing.

How should I think about the occupancy increase of 350 bps versus like your full year guide of 280 bps. Is there a slowing that you're expecting in the back half of the year on a year-over-year basis? Or is that just not updated?

It's really lapping that prior year acceleration I mentioned that started this time last year. You see in the balance of the year, right. That's really the key. But we continue to see -- we expect to continue to see strong demand, strong occupancy growth.

Yes. Yes. Last year, we outperformed normal seasonal patterns and occupancy really started taking off as Bob said, in September. So that's your year-over-year comparison. I would say that our projection for this year is obviously really strong, continued strong occupancy and a return to a more typical seasonal pattern. So that creates the year-over-year that Bob is talking about.

And it's a different dynamic on the [ REIT ] front, if I recall correctly, from a prior discussion?

Yes. Bob?

So again, the acceleration last year this time on occupancy was in part because we really started driving the price volume optimization initiative. And so our strongest rate was first half of last year, and second half of last year, therefore, is an easier comparable under RevPOR. And so occupancy, tougher comp in the second -- really effectively from here on. And the opposite is true on RevPOR. They go together. The key thing to kind of step back and say, they're both driving revenue growth, right? And that 8% revenue growth this year, we think is very strong.

Okay. Any questions?

[indiscernible]

Well, there's 2 questions there. So the first one is our labor, our labor market is good. It's really the best we've seen in 5 years in terms of hiring. So that really brings less stability to the cost of operating the business. The comp is a different part of the question because what we're lapping this year and even we're lapping last year, was a reduction in agency spend, which is 3x the amount of a regular staff person per hour. So as that's been coming out of the system, it's given us a very favorable year-over-year comparison. Next year, we expect to go back to just normal expense growth and really at just kind of a normal wage rate moving forward given the favorable backdrop that you have from a labor standpoint.

But as you think about a macro where there may be a softer economy, our business is very favorably advantaged because we have demand that is strong and getting stronger, demographically driven, in elastic. And if you have a softer labor market in senior housing, and in health care more broadly, that is the vast majority of the expense load. And so to have that be a softer environment after we've taken out all the agency labor is a very favorable backdrop for our business.

Maybe just -- are there any other expenses that we should be watching out for? I know labor is like one of the biggest ones, but kind of any -- of the kind of moving pieces within the expense stack? Great. Okay. Maybe just switching to the prong 2, the external growth. Like you mentioned the -- did you say it was $1 billion pipeline or [indiscernible]?

Thank you for asking. We have a line of sight to $1 billion of investments. Our pipeline is larger than that and growing. And that's been continuing since the beginning of the year. But our expectation is that we have $1 billion of transactions that we expect to close -- and the pipeline is bigger, as I said, and continuing to grow.

Is that $1 billion by end of this year or $1 billion that you expect to close over...

It's -- I'll call it, a near-term line of sight. Timing is always a little bit suspect. And so -- but it's near term, I would say.

Our guidance [ has ] $750 million to close this year. So today, we talked about an incremental $250 million with near-term line of sight, but haven't quantified yet when that's going to happen.

Exactly the date. And we hope to build on that. And so -- and there are very -- I mean, Justin, really, maybe you can touch on like the -- what type of assets and financial returns we're expecting from?

Yes, you bet. So consistent with the volume that we've already closed, which is $350 million plus the $400 million additional million that we've already announced and had included in the guidance, and now another $250 million coming, they all line up with the attributes I'm going to share. So starting with the -- going in yields of 7% to 8% plus growth, and so unlevered IRRs in low- to mid-teens. And if I characterize this -- the assets we're buying, they're high-performing, high-quality communities with upside. So these are communities that have already established themselves as market leaders. They've been around 10 years old on average to date. They have high -- mid-high 80% occupancy, somewhere over 90%. So very strong performers, but in markets that have strong net absorption expectations from a projection standpoint, they have very strong affordability. Operators that are appropriate to really drive that value creation. And therefore, we have expectations for strong growth as well, both in occupancy and then rate over time. So it's a pretty unique opportunity to buy this high-performing asset at a strong yield and to deliver growth. A couple of other things about these. There are over 100 units in size. So large communities, they have offer a continuum of care, including independent living, assisted living and memory care, some just have assisted living and memory care. And they're just well established strong performers within their markets.

Talking about [ capitalizing ] the sales, it sounds like a pretty exciting opportunity for good initial yield plus growth, why don't sellers try to [ recap ] completely a [ loan-term ]?

So most of the sellers -- well, really in every case, you have either large institutional private equity or small private equity firms or friends of family investors that have really held an asset for 3 to 5 years or longer, and they -- some of them have went through the whole pandemic period and delayed their exit. And so now they're at a place where you have strong fundamentals behind the asset. Sometimes there's debt maturities that are having to be dealt with. And these days with the debt maturities, you have a lower LTV available, so you put more capital in. The cost of debt is a little bit more than they would have anticipated in their modeling. And so the opportunity is really just to sell the asset. We've had some assets that came back to us there for sale last year. We couldn't -- there's a bid-ask disconnect that occurred, now the NOI has grown. We have another year of NOI of growth under the asset, so it lined up for us. But these are the kind of typical sellers and the timing is right for them, the timing is right for us.

Onever $250 million incremental in the near-term, how would they come again with the [indiscernible] individual assets, [ market ] assets and how the markets are evolving?

It's a mixture. I mean it's everything from a single asset to what I would characterize as portfolios of a handful or fewer and then some larger transactions, and they come in through a variety of channels. They could be brokered transactions. They could be off-market transactions or kind of something in between, where there's a smaller process and people know, look, deals, we get deals. People know that we're active in the market. They know we're a sophisticated buyer and owner, operators like to work with Justin and value the insights that the platform is providing. And so through all those different channels, we're seeing different profiles of investment opportunities.

Are you seeing any differences in pricing [indiscernible] small or bigger purchases [indiscernible]. How is the placement [indiscernible]?

Well the pricing, yes. Yes. I mean, there hasn't really been like a price differential in terms of size, and we're using our investment criteria on transactions of all sizes.

There's probably -- there's -- I can think of some larger deals that haven't traded yet in the market where the price expectation just -- was the cap rate was low market cap rates, and so it hasn't traded. So if you want to call that a comp, I don't know if you can, if it hasn't actually traded. So sometimes there's a portfolio premium or some expectations that there's a bid-ask disconnect still on some of the larger deals. But we have a largely growing pipeline that are really meeting the criteria that I've outlined.

Any other questions from the field?

Yes. What is the average age of the near-term investment. How does that compare to your existing SHOP [ portfolio ]?

So existing -- the effective age of our existing SHOP portfolio is give or take, around 17 years. That's about probably where we're investing. And the actual age of the -- where we're making acquisitions is newer, but we've done a good job of investing in our existing portfolio, so the economic ages is at 17. So so far, it's been around 10 years on average, some range between 10 and 20 years is where we would expect to see the acquisitions that we're targeting.

Other questions from the field?

[indiscernible] other side of the [ total ] business?

So the medical office business is doing well. Our operation medical, as we describe it, reliable 3% grower. Similar to the research portfolio, which is really university-based anchored by universities also in that same ZIP code. So reliable growing cash flows and a nice, if you like, complement to the growth we're seeing in senior housing.

[indiscernible].

Our exposure to traditional life science cluster markets is quite small. We do have some, but it's through the fund. So it's pretty small. It's really our university-based business is the majority of our business, which is itself 80% of our NOI, so relatively small, about 80% of our NOI.

Maybe sticking with like other areas of the business. Just -- is there any incremental needs or any kindred to report or...

There's a bit of incremental news, which is that we're very close to being done. And along the same lines with respect to the lease that we outlined previously. So we feel good about that.

Okay. And then any kind of color on any timing? Like is it closer to year-end or like the next earnings cycle or just kind of just out of your control at this point? Just trying to think through like catalysts and stuff?

Very close to being done.

Okay. Next time we'll schedule this on Thursday. And then the other kind of optionality you have is on Brookfield. I guess just kind of what's your latest thinking on that? I guess on a two-pronged approach, just like the Brookdale warrants, you have the optionality there. But I think the lease, like when I did some work on that, it seems like a lot of good things could potentially fall your way, just kind of thinking about how you're thinking about it?

Yes. So it's the Brookdale lease. It's senior housing, obviously. And you're right, it is a situation where there are multiple positive outcomes for Ventas. And we can talk about specifically 2 easy directions to talk about, both of which, Justin, why don't you do [ share ]...

Sure. Yes. So there's quite simply 2 positive -- potential positive outcomes. First 1 is Brookdale extending. Brookdale has the right to do this. They can -- it's all enough an extension. They can decide to do it by November 30. If they do it, they're extending the lease on the entire portfolio. And then in 2026, rent will increase by somewhere between 3% and 10%. We can either agree upon it together or it will be a fair market value review to determine the new lease rate. It will be a 10-year renewal. This is 20% of the business. There's -- it's -- these are assets that are in markets that have 1,000 basis points of upside in their markets. They've been good performers with good coverage and improving coverage. So there's a case to be made that perhaps they do that. Should they not extend, then we have the proven playbook. We've articulated the strength of our platform -- OI platform and the results we get where we can outperform market, and we like the opportunity to do this in markets that have 1,000 basis points of upside and in communities that we're familiar with and with operators that we've established through the growth of the SHOP portfolio. So that would be a good opportunity as well. So we could go SHOP with it. We could do the extension. We like both opportunities, and we'll see where that plays out.

Any last questions? If not, we're at time, but we do have 3 rapid fire questions we've been asking everyone. The first 1 is, do you expect real estate transactions to increase once the Fed starts to cut, yes or no?

Yes.

Multiple choice. And then if yes, when do you expect them to pick up; a, 4Q '24; b, first half '25 or c, second half '25?

I think the evidence of it will be the first half of '25.

How would you characterize demand for space today, improving, steady or weakening?

Unprecedentedly positive.

I will mark it down, how is that? Last year, the majority of companies at our conference stated they expect to ramp up spending on AI initiatives in 2024. How would you characterize your plans over the next year? a, higher; b, flat or c, lower?

Higher. [ Rapid ] fire questions.

You got it. Thank you.

Thank you for having us.