Ventas Inc (VTR) — Q1 2024 Earnings Call Transcript

Thank you, Kathleen. Good morning, everyone, and welcome to the Ventas First Quarter Financial Results Conference Call. Yesterday, we issued our first quarter earnings release, supplemental investor package, and presentation materials which are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of topics may cause actual results to differ materially from those contemplated in such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call, and for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental investor package posted on the Investor Relations website. And with that, I'll turn the call over to the Chairman and CEO of Ventas, Debra A. Cafaro.

Thank you, BJ. On behalf of all of my colleagues, I want to welcome our shareholders and other participants to the Ventas First Quarter 2024 earnings call. Today, I'll discuss our good start to the year, describe the actions we are taking to execute on our strategy and create value for our stakeholders, and share our improved outlook for 2024 as the multiyear growth opportunity in senior housing builds. As a reminder, our 3-pronged Ventas strategy is composed of, first, delivering organic growth in our senior housing portfolio; second, capturing value through investments focused on senior housing; and third, driving cash flow throughout our portfolio. We entered this year with momentum, and in Q1, our enterprise delivered $0.78 of normalized FFO per share and over $2 billion in annualized NOI. Our strong results came from nearly 7% same-store property NOI growth led by SHOP at over 15%. Notably, demand-driven occupancy gains in our SHOP portfolio are accelerating, fueled by favorable supply-demand fundamentals in our markets and the actions we've taken in concert with our care providers. Move-ins across the portfolio were elevated as we gained 240 basis points of occupancy in our same-store SHOP portfolio year-over-year. As the second largest owner of senior housing, we are benefiting from the multiyear senior housing growth opportunity that continues to gain traction from both demand-led occupancy and RevPOR growth. Accelerating demand for our senior housing communities underscores the valuable benefits they provide to residents and their families. The over 80 population is expected to grow by 5 million individuals through 2030, yet new construction starts in senior housing are the lowest in over a decade, as is the percentage of inventory under construction. In our SHOP portfolio, 99% of Ventas' communities are free from competing construction starts. All these trends combine to support a highly favorable long-term runway for growth in the biggest part of Ventas' business, senior housing. We also want to expand our footprint in senior housing by capturing value-creating investments in the space. On this second prong of our strategy, we are making good progress. Year-to-date, we have closed or placed under contract about $350 million of investments that meet our targets of going-in yield, expected unlevered IRRs, occupancy growth potential, affordability, and pricing below replacement cost. Over my career, it has been rare to see such a compelling investment environment where we can acquire attractive assets in favorable markets at high going-in yields and high growth. Due to market conditions, our efforts, and our team's relationships, our pipeline of investment opportunities continues to grow, and we expect to make further progress on our investment plan in the balance of the year. Across Ventas, we are also focused on the third element of our strategy, driving cash flow throughout our portfolio. In addition to SHOP, which is now generating over $800 million in annualized NOI, there are two other areas I'd like to cover: Kindred and our outpatient medical and research business. First, regarding the Kindred lease for 23 LTAC, representing approximately 5% of our NOI. The trailing rent coverage remained stable, and Kindred has projected improving revenue and expense performance trends for 2024. We continue to have active discussions with Kindred and other parties to optimize Ventas enterprise value and NOI from our property, following the April 2025 lease maturity. We and Kindred recently agreed to a 1-month extension for the lease renewal notice date to the end of May. We know you are keenly interested in hearing the outcome of our discussion, and we look forward to providing you with more information as soon as we can. Our competitively advantaged outpatient medical and research business continues to shine and benefit from strong institutional demand. It is delivering complementary compounding contributions to our enterprise. As a leader in senior housing, this portfolio is aligned around serving a large and growing aging population. Ventas is advantaged across commercial real estate because demand for our assets is strong and getting stronger. The Ventas team is focused on the opportunity for value creation right in front of us. On that point, we are pleased to improve our outlook for the full year. We are raising Ventas' 2024 normalized FFO guidance to between $3.10 and $3.18 per share and increasing our full year 2024 total company same-store cash NOI guidance to 7% at the midpoint. And with that, I'm happy to turn the call over to Justin.

Thank you, Debbie. I am pleased to report that our SHOP portfolio performance is off to a strong start. Total SHOP same-store cash NOI growth was 15.2%. Our same-store SHOP communities delivered solid results across all key metrics, including occupancy, RevPOR, and OpEx. The first quarter same-store SHOP occupancy grew by 240 basis points year-over-year, led by the U.S., which saw 280 basis points of occupancy gains. We have had a strong start to the year with broad-based contributions across community types, geographies, and operators. In our same-store portfolio in the U.S., move-ins were elevated at 113% versus the prior year, led by independent living move-ins at 127%, outperforming normal seasonal patterns. We have had 9 consecutive months of tours outperforming prior year levels, contributing to the positive move-in momentum we have been experiencing. RevPOR performed in line. Operating expenses were lower than expected due to continued strength in net hiring and cost efficiencies realized by our operators, leveraging insights from our Ventas OI platform. OpExPOR was 1.6%, or 0.5% when adjusted for the leap year. I'm really happy that our operators are delivering excellent care and services and achieving great results. I'd like to highlight Sunrise, Sinceri, Discovery, and Le Groupe Maurice in particular for their superb all-around performance to start the year. As I said, we are experiencing broad-based contributions from our operators, and we continue to leverage Ventas' OI's vast data sets and powerful analytics and insights to drive performance outcomes. Notably, our SHOP portfolio delivered double-digit same-store cash NOI growth for the seventh quarter in a row. Growth in the first quarter was led by our U.S. communities, which grew same-store cash NOI 18%. This strong performance in the U.S. was complemented by our high-quality Canadian portfolio, which is 95% occupied and continues to deliver valuable and stable cash flow with 9% year-over-year growth. Given the strong start to the year, we are happy to raise our full year guidance expectations for our same-store SHOP portfolio, which we now expect to grow 12% to 16% in NOI year-over-year. The key assumptions that drive the midpoint of our range are an average occupancy growth of about 270 basis points, up from 250, led by the U.S. with over 300 basis points, which is higher than we originally anticipated. We still expect RevPOR of about 5%, which puts total revenue growth at around 8%, and OpExPOR growth is expected to be slightly lower than previously forecasted at approximately 2.5%. Our total SHOP expectations were originally to add $118 million of NOI growth, and we have raised that expectation to $130 million. April occupancy is already off to a strong start, driven by both tours and move-ins that are higher than prior year levels. So we're optimistic about our ongoing occupancy performance. Remember that we are just now entering the critical key selling season, so we'll have to see how that plays out. Looking forward, we are energized by the 1,000 basis points of potential occupancy upside in our markets over the course of the next few years. I'm excited about the very strong supply/demand fundamentals combined with well-invested properties and excellent operators supported by our Ventas OI platform to drive growth. Moving on to investments, senior housing is now just over half of the Ventas portfolio NOI, with SHOP representing 40% and growing due to exceptionally strong organic growth, and now we are expanding externally as well. We have been actively capturing value-creating external growth opportunities focused on senior housing. So far, we have closed or are under contract for approximately $330 million of senior housing investments, of which $130 million is already closed. These opportunities are exactly in our sweet spot. I am particularly excited by the unique opportunity to invest in relatively high-yielding, high-quality senior housing communities, coupled with outsized growth. These investments have a blended going-in yield in the high 7s, coupled with mid-teens unlevered IRRs. Additionally, we are investing at an attractive discount to replacement costs with an average cost of $241,000 per unit. Our approach to executing our investment strategy is guided by our right market, right asset, right operator framework. We're investing in markets with a compelling supply/demand profile, strong affordability, and meaningful expected net absorption. We prefer communities that are supported by need-driven demand and offer a combination of services including independent living, assisted living, and memory care. These communities help us employ a strategic expansion of Ventas strengths in our active value-creating asset management playbook driven through the Ventas OI platform supported by our best-in-class data analytics. We are primarily expanding with existing operators with proven performance. Additionally, as part of our data-driven selection process, we welcome new operators with strong track records with capabilities tailored to the service offerings at the community, as we have more than doubled our SHOP operator pool over the past few years. I'll highlight the Magnolia Springs acquisition, which includes 7 communities that are 10 years old on average. They're currently 89% occupied, and our location market is projected to grow around 1,100 basis points over the next few years, supporting more significant revenue growth. The communities average 100 units each and offer a combination of assisted living and memory care services in the Indianapolis, Cincinnati, and Louisville market areas. Affordability is strong on average in the markets at a projected 7x length of stay. The going-in yield is projected to be in the low 7s and the unlevered IRR is projected to be mid-teens. The discount to replacement cost is estimated to be around 40%. The communities will be operated by our Sinceri, who has a proven track record of delivering outstanding care services and performance. Moving ahead, we plan to continue to execute on our growing pipeline of senior housing communities. We are actively evaluating many attractive opportunities. In summary, occupancy momentum is strong and we are off to a strong start to the year. We look forward to continuing SHOP organic growth and executing on our compelling investment pipeline. Bob?

Thanks, Justin. I'll share some highlights of our first quarter performance, provide an update on our balance sheet and capital activities, and close with our increased 2024 guidance. I'll start my first quarter comments with our outpatient medical and research segment, or OMAR, which reported same-store cash NOI growth of nearly 5% in the quarter. In outpatient medical, Pete and the team executed 900,000 square feet of new and renewal leases in the first quarter, which is 50% higher than the prior year. Meanwhile, the outpatient medical assets from the equitized loan portfolio increased occupancy by 300 basis points since taking ownership last year due to the effective asset and property management initiatives from the Ventas team. Our university-based research same-store cash NOI increased over 5% in the first quarter, with occupancy growth across the same-store portfolio. Our overall new leasing pipeline has increased by 30% to 1.4 million square feet, with strong institutional and university demand for university-based life science buildings. In terms of first quarter enterprise results, we reported a net loss attributable to common stockholders of $0.04 per share. Normalized FFO per share in Q1 was strong at $0.78, representing 5% year-over-year growth. Our total company same-store cash NOI grew nearly 7%, led by SHOP, increasing 15%. Strong SHOP organic growth also drove a 20-basis-point sequential improvement in our net debt-to-EBITDA in the first quarter. Further supporting our leverage trajectory was $94 million in equity raised at an average price of $44.04 to fully fund senior housing investments. The SHOP growth included in the balance of the year guidance is expected to drive continuing leverage improvements in 2024. We had some notable capital markets activity so far this year. First, we extended the maturity to 2028 on our $2.75 billion revolving credit facility with improved pricing and strong oversubscription from our banking partners. We thank them for their support of our platform. Second, we raised $650 million in 5-year Canadian senior notes at 5.1% in the first quarter, taking some 2025 maturing debt off the table early at attractive rates. We also used cash on hand to repay a portion of recent maturing debt, leaving us $700 million of 2024 debt maturities left to refinance this year. I'll close with our updated 2024 guidance. We improved our outlook for net income attributable to common stockholders, now ranging from $0.03 to $0.11 per diluted share. We increased the midpoint of our full year normalized FFO guidance to $3.14 per share from the previous midpoint of $3.125. The increase in our midpoint can be explained by a $0.03 per share improvement in organic SHOP NOI, partially offset by higher interest rates. We've also raised both our property NOI and same-store cash NOI year-over-year growth midpoint expectations for each of our segments. Total company same-store cash NOI is now expected to grow 7% year-over-year compared to our prior midpoint of 6.25%. We have not included any incremental investments in our outlook beyond the $350 million closed or on our contract discussed today. We're increasing our full year capital recycling proceeds to $300 million, as we enhance our portfolio and build additional sources to fund an attractive pipeline of senior housing investments. Finally, we expect to spend $250 million in FAD CapEx in 2024. For additional 2024 guidance assumptions, please see our Q1 supplemental and earnings presentation deck posted to our website. With that, I'll turn the call back to the operator.

I know it's a bit of a fluid target, obviously. But Justin, you mentioned a couple of times you're very optimistic about the occupancy potential growth across your core markets. What sort of assumptions are you making regarding the pace of that in terms of incremental absorption? How many years would that take? I mean, you said about 1,000 points in some of your core markets upside?

Yes, sure. So stepping back, there has been a lot of focus by those of us that participate in the senior housing sector on supply and demand, which has been excellent. Debbie highlighted that nicely in the opening remarks. We've added a page to our earnings deck that articulates 1,000 basis points of upside in our markets over the next few years. We use a variety of data sources to determine and back-test those proprietary metrics, but we feel comfortable that it's a good outlook. Clearly, we haven't included pacing, but we certainly like the opportunity to continue to perform well within those markets and then to expand into new markets through our external activities and capitalize on the exciting upside.

If you had a way to evaluate how a 100 basis point increase in occupancy impacts margins, considering the fixed component costs that are leveraged, how could we approach that analysis?

Yes. There's certainly a lot of margin expansion opportunity for us because we're overall in the mid-80s in the U.S. around 80% occupied. In our total SHOP portfolio, just under 80%, both in independent living and assisted living. So there's a lot of occupancy upside ahead. With that comes the operating leverage that we benefit from in our business. There are some rules of thumb, and maybe we'll include that at some upcoming conferences.

I wanted to touch on Kindred. I know you made some prepared remarks, Debbie, about it. But can you talk about the reason for the extension option for one extra month? Did Kindred ask for more time to assess if they wanted to exercise that option or not?

I'm happy to talk to you about it. Look, we're engaged in active discussions with Kindred and others, and we're really working to get to the right outcome. We believe that it was in everyone's best interest to get to a good outcome, which we define as optimizing Ventas value and NOI.

Okay. And then just kind of on that. I know in the past few quarters, you've highlighted that Kindred has been implementing new operational efficiency initiatives to deliver better results. Have those been put in place yet? Are you seeing returns? If you look at the trailing 12-month EBITDARM coverage ratio on that portfolio for the past 3 quarters, it's held steady at 0.9x. So it doesn't seem like coverage has yet picked up, and I didn't know if we have more recent data on the most recent quarter highlighting some upticks there.

You're right that Kindred has initiatives underway to improve both revenue and expense performance, and we are seeing sequential improvement, but the heat map is a trailing look. That's really how you ought to think about it. So you hit the nail on the head.

Could there be an additional extension for Kindred, or do you think end of May is when we will have a decision?

I believe that we're in these active discussions with Kindred and others, and we're focused on getting the right outcome for Ventas, the enterprise, and also for the properties. I would focus less on the notice date and more on the work that we're doing. We have a great team working on it. We've been working on it for a while. This is very similar to what happened last time, and we're on track to get a resolution as soon as we can. We look forward to sharing that with you.

What would the downtime be for the portfolio if it goes down that route?

It’s interesting to see well-respected players like Ensign entering the LTAC space. It seems to be experiencing a favorable moment, which is positive. I would expect a transition on day one if there were other tenants for some or all of the properties. There would be no downtime; it’s not like outpatient medical. There would be a direct operational transfer if that were to happen.

Congrats on a great quarter. Regarding acquisitions, you have an interesting page in your deck discussing upcoming debt maturities in senior housing and how you look at that as a potential opportunity. Should we be thinking about acquisitions purely at three simple transactions? Or could we possibly see you doing more on the structured finance side as well?

Primarily three simple transactions. That maturity chart articulates the interesting opportunity because we have tremendously good fundamentals, but you have an asset that's refinancing generally at a lower LTV and higher cost. This puts pressure on existing owners and creates an opportunity for buyers like us to make high-quality acquisitions with a better capital stack. There are various types of sellers, including private equity and institutional sellers that we've been seeing in our pipeline.

Okay, that's helpful. If I could sneak in one more. Regarding Brookdale, which is another rent lease coming up, coverage is solid, but curious if structurally that could change from being a triple net portfolio to a more flexible portfolio, given how well your SHOP portfolio is performing and how strong senior housing fundamentals are generally.

Brookdale is about 7% of our NOI. The coverage has been improving; it's currently at about 1.3x on a trailing basis. The trends in those markets support a lot of intermediate-term occupancy increases, which present many positive outcomes for Ventas as we consider that. This will be at the end of 2025.

So structurally, you expect it to remain as a triple net?

We have many positive options. These communities are in markets that also have significant upside. The demand metrics are excellent. To the same point, the trailing coverage is always a little outdated. There's even better performance to come, so we appreciate the opportunity in any structure to own these communities.

I just wanted to ask about acquisitions. It seems you have another group of properties that you're possibly looking at. How should we think about funding that? How do you view your cost of capital with leverage still relatively high but definitely improving?

Thanks, Juan. Starting with the financial returns we're seeing on these investments, which Justin articulated, are really attractive even at the current cost of capital. We discussed last earnings call that on balance sheet financing can work, given those returns, and we baked that into our guidance. That's what we executed on in the first quarter, fully funding those senior housing investments with equity. As we look forward, based on the pipeline, we've incrementally added more disposition proceeds as an additional source of funds because we see the opportunity in front of us.

And a follow-up for Justin on the 1,000 basis points of occupancy upside on the U.S. portfolio. Is that a same-store comment or an overall portfolio comment? Where is the starting point now, and what do you view as the structural ceiling for occupancy?

It's U.S.-focused and refers to the total SHOP portfolio, which is running just under 80% occupied in both independent living and assisted living products. The structural upside opportunity, through experience, is effectively 100% occupancy. We have several communities that are at 99%, or 100% occupied. Nothing compares to a completely full community in demonstrating operating leverage and delivering great care and services. That’s the goal for us.

Just two quick ones. Trying to connect the dots on the occupancy here. You put a lot of breadcrumbs in the presentation, starting with 1,000 basis points of occupancy upside. You also mentioned that you hired a senior VP for senior housing and the Ventas OI and the occupancy gains you're seeing from that CapEx investment. My question is, is 275 to 300 basis points of occupancy gain a year the new normal? If not, what could stop that?

Our U.S. projection is over 300 basis point occupancy growth this year, which is something to consider. I also highlighted how we are just at the beginning of the key selling season, and we will see how that plays out. We are optimistic about the trends leading into it.

The SHOP occupancy update in Q1 was better than expected, and you've revised the outlook higher for the year. Is this driven by the market improving due to the aging of America, or is there some kind of alpha overlay you're implementing internally that’s driving better customer demand?

It's both. I take the macro perspective and then defer to Justin on the OI-driven actions and initiatives delivering outsized performance amid a demand-driven macro.

Absolutely. It all starts with the macro for sure. Additionally, we've been positioning ourselves well to take advantage of this great opportunity. Price volume optimization is one example, where we ensure that we maintain our market position. A good example is Sunrise and Atria as well-established operators in local markets. We've back-tested this, and over the past year, we've seen significant increases in average move-ins in those companies.

On another note, you have Brookdale warrants exercisable through year-end 2025. How are you looking at exercising those as a potential source of capital?

We have 16 million warrants at $3 a share, which are currently deeply in the money. That provides another source of funds as we consider opportunities to create value, recognize gains, and invest in senior housing.

Looking at the bigger picture, there seems to be a lot of opportunities to invest in seniors housing. If we fast forward a year, will Ventas be a larger company with more assets, higher senior housing exposure? What is your investment pipeline like, and how do you plan to capitalize on it?

We are executing on our strategy. The driver of organic growth is clearly the priority. As the second-largest owner of senior housing with a solid platform and access to capital, we are layering on external growth focused on senior housing. That part of our portfolio is definitely going to grow, as we aim to take advantage of this multiyear opportunity in the high yields and growth potential our market offers.

How do we think about the timeline for the accretion happening, given the long-term runway?

We consistently strive for near-term accretion through our investments. Bob?

Going-in yields relative to our cost of capital are roughly neutral. However, the mid-teens IRRs indicate attractive growth potential, driving expected near-term accretion.

I wanted to clarify the acceleration trends you've mentioned last quarter in SHOP. Is that occupancy acceleration or same-store NOI growth going through the year? You had a strong Q1, but the midpoint of the guidance implies some deceleration. Is it occupancy acceleration or SHOP acceleration?

Occupancy is accelerating as expected. The strong start in Q1 from an NOI standpoint changes the trajectory for the year. Also, we are entering the key selling season; we want to see how that plays out.

Just a little more context on the Kindred outcome. Given the extension, it’s more likely that Kindred is part of the solution, suggesting potential renewals. We're focused on optimizing value for Ventas and the NOI from these properties.

Justin, you talked about what you do with assets after acquisition, such as price optimization and transitioning operators. If you pursued $1 billion in acquisitions, how much of that would involve operator transitions? Should we expect downtime as you fully realize benefits even next year?

Our approach is to ensure we're entering the right markets to support upside opportunities. We work to put ourselves in the best position for better performance sooner. We have successfully transitioned over 150 communities in the past few years with positive outcomes.

Bob, you mentioned that everything so far has been funded with equity. I'm interested in how comparable cap rates are for dispositions relative to your equity cost. How much comes out of OM and how much comes from AR?

The blended cap rate on dispositions is roughly mid-single digits, not terribly different from your quoted yield. This implies we've positioned ourselves for overall growth while maintaining a strong portfolio ahead.

Can you provide high-level color on how the SHOP outlook varies, maybe between the AL and IL segments?

Most of our NOI growth is coming from the assisted living segment. While there's growth in the independent living segment as well, we anticipate the significant contributions in 2025. Occupancy trends in independent living are improving with promising indicators. April looks positive, and further growth is expected.

On the independent living observing improvement in occupancy, is that mainly reflective of operational leverage kicking in next year?

Yes, exactly. Independent living is a high-margin business. As occupancy increases, we benefit significantly from operating leverage, which creates room for continued growth. The occupancy upside is substantial, and we expect progress moving forward.

A large percentage of those loans may face difficulties refinancing without additional equity contributions. Although the assets have potential upside, LTVs are lower due to higher rates and some NOIs have not yet recovered to their pre-COVID levels. The refinancing environment could pressure owners to sell or be in a position to invest further.

What drove the sequential occupancy decline during the quarter in your outpatient medical business? Were there qualitative themes with those move-outs?

We executed well on our leasing, doing 900,000 square feet of leasing, 50% more than the prior year. Despite a 40-basis-point decline, we immediately re-leased 55,000 square feet of lost occupancy. It's essentially a repositioning and re-leasing process, and repricing resulting in an improved setup for better rents later.

Is IL outperforming due to just greater demand, or is it attributable to improved operations within the portfolio?

We have seen solid performance in both our independent living and assisted living portfolios, aided by targeted efforts with operators to ensure we achieve optimal performance. The improvements are broad-based across our independent living portfolio.

On RevPOR, you’ve set a firm target indicating acceleration similar to occupancy in the upcoming quarters, so what is fueling that confidence?

When providing the metrics supporting the SHOP guidance, we did leave room for movement among those metrics based on how the key selling season plays out. We’re not definitively saying we go from 4.7% to 5% but rather expect to be around 5%, consistent with Q1 performance.

Does the guidance assume that the 7% remains steady based on the occupancy upside in mind?

It's a year-over-year statistic, so we may see minor movement. However, growth in street rates, move-in rents, and occupancy is still expected.

Thank you all for your attention and interest in Ventas. We look forward to seeing you soon.