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

All right. We can kick it off. Thank you, everyone, for joining. Welcome to the Ventas meeting. My name is Farrell Granath, and I'm the co-lead for Healthcare REITs with Jeff Spector and the BofA REIT team. I'm joined today with the Ventas team, and I'll kick it off and send it over to Debbie to introduce the team. And then we can enter into some Q&A. Please, everyone, raise your hand or just jump in if you have any questions. So Debbie?

Thank you, Farrell. So nice to see everyone here today. It's a pleasure to be with you with my colleague, Justin Hutchens, BJ Grant and Amit, who are doing all the work for us. We're here to talk about the Ventas value creation opportunity. As you know, we're a $45 billion S&P 500 REIT. That's really in the midst of the megatrend of longevity. And our business is really fueled by demographic demand that's strong and getting stronger, principally from the over 80 population that's set to accelerate in 2026 as the baby boomers enter the over 80 population. In the senior housing business, which is a principal part of our business, we have this accelerating demand, coupled with historically low supply, which is creating long and strong tailwinds in our favor. And on top of that, we've really built the company to capitalize on these trends. And so we have built a platform, a team and a portfolio really to meet the moment and capitalize on the trends of demand that we see accelerating. So when you look at the company, our guidance is 8% FFO per share growth this year. We're in the top echelon of REIT growers. And at the same time, we have a multiple that could see expansion. We could see dividend growth in the future. And that really coupled with a strong and getting better balance sheet gives us an important opportunity for value creation for investors. These results are being driven by our 1, 2, 3 strategy. The first is really organic growth from SHOP. We're in the senior housing operating portfolio. We're in the fourth year of double-digit NOI growth, and we're really just getting started because of this acceleration we see in the forward environment for the over 80 population. We've given an update in the deck that we put out yesterday, and that's really on occupancy. We're seeing quarter-to-date estimated year-over-year occupancy increase of 270 basis points, right in line with our full year guidance. And so -- and we're also seeing within our portfolio, the beginning of the transitions of the Brookdale conversions to SHOP, and we'll talk a little bit more about that later. The second part of the strategy is to increase our enterprise growth rate by making external acquisitions that are accretive, that meet our financial and strategic criteria. Our guidance this year is $2 billion. We're $1.8 billion into it with very attractive opportunity set. And we've provided incremental information that we have a line of sight to an additional $0.5 billion of senior housing investments on top of the $2 billion of 2025 guidance. And then lastly, the rest of the portfolio, we're driving performance hard and that the rest of our portfolio is continuing to perform well. And all the while, we have great and improving financial strength and flexibility with leverage in the mid-5s and expected to go lower as we equitize investment activity, and we have strong organic growth. So we're excited about that as well. So again, good value creation opportunity from accelerating demand, limited supply and potential multiple and dividend expansion opportunity on a strong balance sheet. So with that, we're ready for questions.

Well, I think we can kick it off with your occupancy update. I know at the beginning of the year, that was a very big topic in this last quarter, you gave very outsized growth with record move-ins. I was curious in what we have for the balance of the year, we're currently in peak leasing season and for where your guidance is now, you're averaging out about in line. So can you walk us through your confidence in your guidance and what you're seeing today also within your move-ins and move-outs?

Sure. Yes. So we -- during the second quarter, we talked about the acceleration we had throughout the second quarter due to very high move-in activity. And what that did was really set up this strong third quarter that we're experiencing. We've had 130 basis points quarter-to-date of occupancy growth comparing to the second quarter. We're at 270 basis points year-over-year, which is in line with the full year guide. So we had confidence in the second quarter, which is why we stay with the full year guidance number. Now we're pleased to be able to report on the actual results and that we're in line. Move-ins have been really strong all year. They've been broad-based, meaning that we've had contributions across all geographies, and we've had strong contributions in both assisted living and the independent living asset classes.

And so in terms of the acceleration that you were seeing in the second quarter, are you seeing that continue going forward?

We've had a great key selling season. So the key selling season, as we define it, is May to September. And we had a great second quarter and a very good third quarter as well as we've seen this occupancy continue to grow. So, so far, so good in terms of the key selling season.

And is this all or mostly coming in with your U.S. portfolio, given the Canadian portfolio is mostly occupied?

Yes. The 270 is overwhelmingly brought up by -- the average is brought up by the U.S. performance. We do have occupancy growth in Canada, but it fails in comparison to the U.S. contributions.

And then also with your other update on the acquisitions. I was hoping if we can walk through what was the new incremental and potentially what did that -- what assets of that -- what was made up of, including what you're targeting when you're looking at some of these acquisitions? Are you -- you've been primarily mostly in AL. Is that continuing to be your target?

So we have -- in the deck, we have the page of the $1.8 billion that we've closed in senior housing investments year-to-date, and it's been very consistent. And it really starts with the framework of right market, right asset, right operator. And then the financial criteria have been well established. And what we've closed year-to-date and what we have a line of sight to are very consistent. So unlevered IRRs in the low to mid-teens, going in 7-plus yields, below replacement cost. And so we feel really good about that private to public arbitrage opportunity that we have so that even if it's fully equitized. It's accretive from day 1, and then it increases the enterprise growth rate. And Justin, why don't you touch on some of the deals that there's a case study of what we just closed and the pipeline and characteristics.

Yes, sure. So if we just look at the types of communities, senior housing communities we've been buying in 2025, we tend to prefer, not surprisingly, markets that have strong net absorption or net demand opportunity, and we've entered markets that have about 1,400 basis points of net demand, which means potential occupancy growth over the next few years of 1,400 basis points. And considering we're buying communities that are around 90% occupied, that means we'll probably have markets that will actually be -- will be 100% occupied during that period. There are large campuses. We tend to prefer a continuum of care. We have independent living, assisted living and memory care working together to provide services in a residential setting to seniors, newer, 8 years old on average. We've added -- we have 11 operators involved, including 7 new operators. And when we underwrite the operators, we're looking for a demonstrated track record in the asset class, a strong clustering or experience within the geography. And when you're buying the type of communities we're buying, which are high-performing communities with upside, there's a track record of performance that you're underwriting as well. And so we're happy to add more operators into the platform and have them to continue to operate and drive more growth moving forward in those communities. An example of this type of deal is a recent acquisition we made. It's a Bristol Long Island portfolio. This is Class A senior housing, really good locations on Long Island. It was 6 communities with 856 units, strong -- like very high barrier markets. If you know Long Island, you know that to be true, but also strong price opportunity as the communities will also grow occupancy, we think, and we have price opportunity moving forward. The operator has been in place since the beginning. They've developed all of these communities and have operated them and they have a very, very good track record in New York and a deep management team. And so we look forward to seeing growth in these communities, and we are pleased to really to win this opportunity to own this Class A portfolio.

Great. And you made a comment about in your acquisitions are about 90% occupied. I was hoping you could remind everyone of comments I've heard made before about the operating leverage and the step-ups that you receive as occupancy passes the 90% and as it rises.

Sure. So I'm happy to address operating leverage, some of my favorite topics. It's really one of the most powerful parts of the senior housing business model. And there's a few different ways to address that, and I'll give you some rules of thumb, and then I'm going to repeat something I talked about on the earnings call. The rule of thumb in terms of operating leverage is due to the high fixed cost nature of the business, when you have gone through that journey of being 80% to 90% occupied, you should expect somewhere around a 50% incremental margin. And then it gets only gets better when you go from 90% to 100% occupied, you expect around a 70% incremental margin. So due to the high flow-through at the high occupancies, you have -- you can continue to have very strong NOI growth even when you're starting at 90% occupancy. Another metric I shared on the earnings call is just what the growth rate of the RevPOR was based on occupancy bands. And so pricing opportunity goes up as scarcity goes up, which is very logical and it's absolutely the case in senior housing. And now that we're getting to higher occupancies, it will become even more relevant. So in our portfolio, if you're 90% to 95% occupied, your RevPOR growth was between 6% and 7%. If you're 75% to 90% occupied, your RevPOR growth was between 3% and 5%. And if you're below 75% occupied, you have 1% RevPOR growth. So there's obviously a direct relationship between higher occupancy, less vacant units and price opportunity.

How far can that RevPOR growth go? So say you're in the 98% to 100% occupied market?

So it's unproven because we're in new territory because the demand characteristics in the sector will be the best we've ever seen. Next year, we're entering a year where demand -- we've had a good run of multiyear double-digit NOI growth and strong demand helping to drive that. But next year, the baby boomer population starts to turn 80. So it should only get better and market occupancies are higher and market demand will be stronger. So we'll wait and see and answer that question as we move into this next phase.

Two points I'd like to make, one on the pricing point. So when we underwrite these investments and look at our markets, affordability is very important. And as things stand right now in our portfolio, if a senior living resident lives in the community 2 to 3 years, let's just say 2 years, they can afford to live there for 12 to 14 years. So that shows that there's a lot of headroom in pricing because of -- it is a highly affordable product compared to the wealth and the income of the senior residents. So that's really important to know that, that headroom exists. And then secondly, I would refer you to Page 17 of our deck because we're talking about the investments and the margins that we could get from pricing power. And that's really just a complement to the powerful internal growth that we're in the midst of this multiyear growth opportunity. And the left-hand side of the page really shows that in the U.S. our senior housing portfolio is between 80% and 85% occupied. So we would expect for that even bigger part of our portfolio that we have a near and intermediate and potentially long-term runway for both occupancy and rate growth. And that's really the powerful engine of this multiyear growth opportunity. So they work together.

And if I just add one other, just to finish the whole point. It's important to remember, and we probably don't talk about this enough, what the underlying service is and the importance of it in terms of the care and service delivery to seniors. It's a consumer-driven business. So seniors are writing us checks and to stay in our communities and to have the services delivered to them. And so it's incredibly important that we do a great job. And when we select operators, we're ensuring that the track record is such that they do deliver best-in-class services to their residents. And that's a key component, obviously, in driving the demand to select your community to begin with, but also to retain residents as we're moving pricing throughout their stay.

And I guess, generally, when we're looking at where pre-COVID occupancy and margins were, where do we sit today with margins? And do you think that there is the potential to set a new normal of where margins sit within the senior housing business?

Yes. So I would say the margin opportunity, if you were to step back and look at margins like right around, we'll call it the pre-pandemic era, so the last kind of stabilized number that you could point to, we had around 30% margin, 88% occupancy. And I remember saying 5 years ago that I thought the margin expansion opportunity would be bigger that when we got to around the same occupancy that we would have better margins than we did at that time. And the only thing that got in the way was in 2022, we had a very, very, very high inflation. And so you had assisted living wages needed to catch up with market and then we had inflation on top of that. So there was a little bit of a structural change in the underlying cost in delivering the services. that's way past us now, and now we're at a place where we have that price opportunity that I was describing. And so I would expect all things considered equal, that margin expansion will be better than we've ever seen because we'll have a better relationship between our RevPOR and our OpEx than we have historically. And particularly in this period where we don't have demand entering our new supply entering our markets, there's a pretty good runway really between now and the end of the decade of very strong net demand and net absorption to support my hypothesis.

Okay. And this is kind of a bigger picture question. Looking further out, there's been obviously the SHOP opportunity. I feel like SHOP is the hottest word, and everyone is now trying to grab some of these assets, start their own platforms. I'm curious, in a multiyear looking forward, do you think that there is a potential for a bifurcation when you're looking at the type of assets? And at what point is that inflection point?

When you say bifurcation...

More in -- the potential for further growth versus receiving more of a downside and the ability to either push rate or maintain that rate.

I mean I think it's -- first of all, I'm really happy that SHOP is a hot topic. I've been waiting my whole career for that. Yes, now finally, finally. So I think there is -- given the runway ahead of supply and demand, there's a good run of experiencing -- if it's managed well and you -- like we always talk about the right markets, right assets, right operators, and you have a platform that can manage it at scale the way we do, then you should have -- you should experience growth. And like I said, we've had really good growth over the past 4 years, but we've done it during a period where the supply and demand isn't even as good as what it will be. And our platform capabilities are significantly more advanced than they have been. And one other thing, too, if you're entering the space and you're trying to set up a shop platform, there's a lot of catching up to do. We have -- we've been working on this for years. We have the sophisticated data analytics, the delivery of those analytics. the CapEx management, price volume optimization and the broader platform capability to manage almost 40 operators now and growing. And so there's -- that's -- you don't just flip a switch and put that in place. That's been an evolution of our platform over a number of years.

Maybe just one follow-up on that. Posted [indiscernible] I think he said -- asked about he said housing, he said specifically senior housing. I know we've asked a lot about competition getting growing. I mean trying to enter the space in a big way...

Well, it is a hot asset class, and there's good reason for that because you go where the demand is, right, and particularly where there's incredibly low supply. When we look at our pipeline, our pipeline of -- has been growing, and it's very active. There is -- yes, the acquisition pipeline. There is more competition because people are attracted to the space, but we have significant competitive advantages that should -- and that includes everything from the data analytics that Justin described of the relationships in the market, the experience and the track record that enable us to get in our cost of capital more than, I would say, our fair share or more. And those are all worthy competitors. We've had -- we've been in a competitive environment really our whole careers. And again, we're experts in the space. We have the platform. It is a little bit hard to compete with that. But the main thing is more assets are coming to market. So it's remaining in balance, enabling us to get these really attractive returns and arbitrage and make money for shareholders. So that's continuing.

So at this point, let's say [indiscernible] to keep the pace.

Because we have this opportunity for value creation, we have our foot on the accelerator because we know that opportunities never last forever for a variety of reasons, and we're experienced enough to know that, and we know that we're going to capitalize on those opportunities that are present. But I do think we -- in this business, we can compete and win. And we'll continue to do that as long as the criteria that we've -- the relationship between cost of capital, returns, risk, et cetera, remains in a positive space, and we're going to continue to harvest this opportunity aggressively.

[indiscernible] the pension money.

Absolutely. We do have a fund and we have a joint venture, our VIM Ventas Investment Management platform has over $5 billion of assets under management. It's been a big success. Our issue is not finding money because everybody is knocking at our door to give us money. It's more we want to make sure we're aggressively pursuing the right opportunities for value creation.

[indiscernible] because everything you describing sounds pretty positive and the total return is pretty positive.

It is.

[indiscernible] quite an attractive way buying how is that loss in [indiscernible] how do you [indiscernible].

Well, so we've got -- so 80% of our transactions have had some kind of relationship orientation to them. And the way that works is we'll have -- we do have some off-market opportunities that we've had half of our $3.8 billion that we've closed was really 3 deals. One was totally off market. The other 2, one was kind of quasi off market. And the other one, we had an advantage where the operator was influential in staying in the process and wanted to work with Ventas in the long term. So all things considered equal, we were going to win that deal. That does help. It plays a big role because you have to think about the sellers here in the kind of assets we're buying, we're buying high performing with upside. And therefore, the operator that's in place is really important. They've been creating that value to date. they want to stay in place, and they're concerned about who their next capital partner is. And it's a long-term decision. I mean we hold for the long term, and they're well aware of that. And so they're very focused on who that player is going to be. We've established a reputation amongst the senior housing community as being influential in performance through our Ventas OI platform, collaborative and also we deliver on and execute on transactions and with no surprises and on time and with no financing contingencies. So between the relationships with the operators and our repeat transactions we've had with sellers, that relationship component has played well for us. So that's a big part of it.

Yes. Okay.

Specifically monetizing some or all of that [indiscernible].

So did everyone hear the question? The question is about the outpatient medical. So outpatient medical is about, call it, 20% of our NOI. It's a core like asset that is a reliable compounding growth asset class. We have a competitively advantaged property management and leasing company within Ventas that manages that portfolio. And we are growing around it. So through the internal growth and external growth we described, that's all focused on senior housing. we -- that by definition, that part of our portfolio is becoming a smaller part of the overall business. We're more than open to selling assets when it makes sense to do so. The overall economic impact to us of disposing of those assets is kind of a push. And so we have a business that's working and delivering what it's supposed to deliver. We're growing around it in a way that's increasing our enterprise growth rate. And we certainly would be willing to sell assets from time to time as we've proven in the past should really compelling opportunities present themselves.

[indiscernible].

It's a good -- no, it's a very important question that we consider all the time and continue to monitor. Right now, again, we've been over-equitizing investments in a way that is initially accretive. And remember, these acquisitions are intended to deliver low to mid-teens unlevered returns. So it makes sense, particularly when debt costs are relatively high by comparison. As we continue to improve leverage towards 5 and as debt rates change and so on, the whole -- the calculus remains subject to kind of review. But so far, it's been working to create value.

Fixed income [indiscernible] equity issuance.

And I'll turn it back over to the -- your pipeline. And I'm curious, can you give us a little bit more color and maybe compare to 2024, what you're seeing in terms of deal flow and what's crossing your desk and how much you're actually evaluating? Is there potential for that to pick up?

Right. So our pipeline has been -- I'll start with this, we're pretty much buying very similar communities to what we did last year. They're actually just a little newer this year, quite frankly, slightly newer, slightly stronger markets. So there's -- that's been great. We're really happy with what we bought last year, and we're even happy with what we've been buying this year so far. So pretty consistent outcome overall, though, in terms of all the qualities I described earlier in terms of the pipeline. We own about, what, 5% of the market, and we're getting more than 5% of our pipeline that we're seeing in terms of senior housing each year and what we think the broader pipeline is in the sector. So we're punching above our weight in that regard. We should be #1 or #2 in the U.S. in senior housing investments, U.S.-focused senior housing. That's a good place to be. We had the $3.7 billion we closed over the last 18 months from a standing start. We already gave guidance that we closed another $2 billion. So that puts at $4 billion plus we have line of sight to another $500 million. And so we've been really on a role in accelerating our investment volume. And there's a lot of activity in the pipeline. So the goal is to continue to run that playbook.

And is that coming from -- or I guess what I'm more getting at, are you seeing more things come to market? And is that giving you a broader opportunity set? Or has it been a consistent level?

I think there's -- it's been -- the pipeline has grown. The pipeline this year was bigger than last year. There are more deals coming to market or coming to us if they're off market. And there's been -- we just had an industry conference, the NIC conference that a lot of participants attend. And I would say the buzz there is that there's a lot more coming.

Yes, deals beget deals.

Exactly.

Good to hear. And I know we mentioned it right in the beginning about the update with the triple net conversions and Brookdale. So I was hoping if we can address that also in terms of the CapEx that's required for some of these conversions and some of the building blocks of what we can expect for 2026 in terms of NOI and ramping online.

So the Brookdale portfolio is being bifurcated into a lease portfolio that Brookdale is retaining, where rent is going up, call it, 35%. So we're taking advantage of the growth opportunity on that part of the portfolio that way. Then Justin and the team identified 45 assets that we're going to take and convert to SHOP. And the key point there is that over time, we would expect to get over $100 million of NOI from those 45 assets. There's a lot of work to get from here to there. So Justin is in charge of that work and has started -- we're happy to report we did first 11 transitions in September. And Justin, why don't you talk about what the intermediate-term plan is for the assets and kind of getting from here to there?

Yes. So first of all, because we've had so much transition activity over the past several years, we've had 260 transitions from 2 new managers. And we have 5 operators that have done multiple transitions with us. Those operators were selected for these Brookdale transitions. They've all been engaged in the assets already, met with the families and residents and employees and management. We've already started transitioning. We've had 11 that transitioned already on September 1. My team has been engaged in the CapEx assessment already. So we're ready to hit the ground running when the operators start management and the goal is to have as much of that redev refresh work done by the beginning of the key selling season in 2026. We're planning to spend around $2 million per asset on average. And we're planning on taking a $50 million NOI number to over $100 million over time. So really good return on that spend. These communities are high 70% occupancy, and they're in markets that have very strong net absorption, similar to what I described earlier. So we like the opportunity to improve the operation with new operators, improve the asset to make it more competitive, drive occupancy and then ultimately deliver a better service, but deliver financial returns that are attractive.

And I also want to ask also a little bit bigger picture for where we sit today, if you were to look back a year ago, what's the most surprising item across senior housing?

Surprised question there.

Yes. What's the most surprising?

From a performance or investment or...

You can go any avenue.

You can go wherever you want to go.

I'm going to say the biggest surprise in senior housing probably has to do with the net demand versus net absorption opportunity. And so we track net absorption, and that's just simply considering the supply-demand characteristics over the next few years. And we had to add the metric net demand because we have markets that several of them we've underwritten that will go -- that will be 100% occupied. And so the demand actually will exceed the net absorption opportunity for our communities and what we're seeing in the market. And although we knew the demographics were strong, you can see it coming. But when you literally get to that place where we're at now where we're saying, okay, there may not be any vacant units in these markets within kind of the midterm, that's a bit of a surprising stat to consider.

And Justin, we call that uncapped net demand, right?

Yes.

Exactly. Speaks to the pricing power.

Biggest surprise is you can still buy Ventas at less than a 20x multiple.

And to conclude, we have 3 rapid-fire questions. So number one, when the Fed starts to cut, do you expect borrowing rates for long-term debt to decline, stay flat or potentially rise? Choose one, please.

When short-term rates decline.

For the long term.

What's going to happen on the long side? I'm going to just go with relatively stable.

Okay. Last year, the majority of companies stated that they are ramping up spending on AI initiatives. How would you characterize your plans over the next year, higher, flat or lower?

Say it again.

For spending for AI, spend more....

For AI?

Yes.

Higher.

Okay. Do you believe that same-store NOI for your whole sector, not just sector, will be higher, lower or the same next year?

So we have a policy of deferring on that question until we provide guidance. Look, the main -- I know, I know, this is...

It's for a big industry participant.

Yes, I do want to close on that, though, because it's exactly where we started. We're 4 years into a multiyear growth opportunity. We have a great runway ahead, we believe, and it's fueled by demand that's strong and getting stronger. And that's where investors really want to be, and we've built a great company to take advantage of it. So thank you for having us.

Great. Thank you so much.