Ventas Q2 2024 Earnings Call Transcript

Good morning, Nick. Good to hear from you. The answer to your questions are that we are in advanced discussions. We believe we're close on a transaction that applies to the '23 LTACs whose maturity is April 30, 2025. And, obviously, we're working for multiple goals, which is to improve Ventas enterprise value, to get the most NOI from those properties that we can and also to strengthen the master lease and to support Kindred's future success. So those are all factors in how we're thinking about it.

Justin?

Sure. So we are seeing a number of different opportunities. Where we're leaning in is when the pipeline meets our investment criteria and we're very focused on the market asset operator framework. We're looking for markets that have strong supply-demand fundamentals and support strong net absorption and affordability. We do like applying the Ventas OI platform. We're also underwriting the strong track record in the communities and looking for generally well-invested communities as well. We're primarily expanding with the existing operator relationships, but we have had the opportunity to add some new relationships as well and we're looking for campuses that include independent living, assisted living and memory care, rental campuses. And we're seeing those in the pipeline. The pipeline has been growing throughout the year and we were actively engaged in it, and we like our opportunity to continue to grow.

Thank you.

Yeah. Yeah, it's all non-cash. I mean, it's a pretty simple, but it's a GAAP-related somewhat counterintuitive rule. Like basically, if you have a lease with a tenant and it gets extended, you basically sum up the rent over the years and you divide by the period left and that can pull forward an impact. And that's really all it is.

And that happens from the time you sign the deal.

Yeah.

So it happens immediately.

So it's just a GAAP reflection of the expectations on cash rent that we gave you.

Well, so first of all, on the guidance, it's occupancy led. We've obviously raised our occupancy expectation and we've raised our NOI expectation as well. We did not change the other metrics. RevPOR in this environment where you have a lot of occupancy growth, mix can be more impactful just due to the sheer volume of occupancy growth that we've had. In the second quarter, there's a couple of things impacting RevPOR. We had mix where we had very strong occupancy growth in our mid-price point products. So it just has an impact on the weighted average.

And then there's a year-over-year comp that's affecting it because of the very strong rent increases we had in certain operators in the first half of last year. And as you move forward, we would expect that there's better comps in the second half of the year. We have a large part of the key selling season still ahead of us, a lot of potential volume that as part of that. So mix will remain in focus. And so we thought leaving the tilt aside was appropriate given those facts and look forward to growing NOI.

Hi, Josh. Thanks for your question. We're excited about the opportunities to invest in senior housing and Bob will answer your impact question.

And you're right to say that that started this year in February, including deals that we hadn't closed was unusual for us, but we feel very confident given the pipeline and the team that we can execute on those deals. We started the year at $350 million in our guidance done, closed. We have now $400 million in the forecast to close this year. So doing what we said. The contribution from those is in the $0.25 increased guidance on FFO from SHOP organic and inorganic. I would say the split of those is roughly equal, if not tipped a bit towards the new investments. So they are accretive from the get-go, equity funded and very consistent with the strategy we laid out.

Josh, our capital allocation priority is focused on senior housing, SHOP investments. And Justin will touch on -- there's a series of both qualitative data-driven characteristics we're looking for as well as financial.

Yeah, absolutely. So starting -- I'll just kind of highlight, for example, some metrics around the deal activity that's already closed. In those deals, we underwrote net absorption upside over a three-year period in the markets of around 1,000 basis points. Very strong population growth, near-zero new supply deliveries expected in the next few years within the markets, very attractive investment basis at $250,000 per unit, well below replacement costs. They're about 10 years old on average. They're 124 units, offering independent living, assisted living and memory care. Good margins going in, but a lot of upside going in margin around 28%, a lot of upside as we grow occupancy and rate over time and align management contracts that are rewarding growth both for revenue and NOI outcomes to the manager. And then good operators, most of which are existing relationships, but we're also working with some new operators. And the going-in yields have been really above 8% thus far. We were targeting 7% to 8% overall. The unlevered IRR is low to mid-teens. So that's the characteristics we've seen and continue to see in this next tranche. Very similar characteristics in this $400 million that we have line-of-sight on.

Thanks.

Well, we're certainly interested in ramping up the activity. We haven't put too many targets out there in terms of volume, but more is the priority for sure, given the fundamentals and the returns that we're seeing in the investments. The types of sellers, there's some -- certainly sellers that have debt maturities and they're having to make a decision even though fundamentals are good, do they put more capital in or do they sell the asset and move on to other priorities? We've been able to take advantage of some of those opportunities. There's other sellers that just quite frankly are dealing with fund maturities and there are just active sellers. And then there's others that are selling senior housing a little bit reluctantly because they have other asset classes that they're dealing with and debt and other aspects of their fund. And so we've had a wide variety. And that's -- what's been consistent though is good fundamentals. We're targeting markets that have really a great upside and then the returns have been excellent.

Thank you.

Hi, Jim.

Great question. And one of the things we care a lot about is that we and the operators are offering residents and their families a really important service, and it's really valuable. Anyone who's gone through it in their families really understands that. And penetration is back at or above, that is utilization by the population is at or above where it was pre-COVID. So that's trending in the right direction. The numbers are gigantic. So that dwarfs the impact even of penetration rate.

And importantly, there are a lot of studies that show not only are seniors more secure and enjoy better lives when they move to senior housing from their homes that it's safer, it's more secure, it's more social, but also it is more expensive to stay in your home. And that the cost of replacing all those services even if you can do it, which in many cases if you live alone in a suburban home, you can't even get those services on a regular basis that it is more economical to move to senior housing. You don't have lawn mowing and maintenance, taxes and insurance, meals, etc. So it really is a replacement for what you're spending anyway or even better if you're requiring in-home health services.

Yeah, Jim, it is a high-quality situation for sure. The conversion price is just below 55. Those get accounted for in the fully diluted shares. It's a really modest impact at this stage and effectively embedded in the guidance. But I put this in the high-quality problem camp. So -- but de-minimis as we think about the numbers this year as it stands now.

Yeah.

Hi, Juan. We do have a successful Ventas Investment Management business, including an open-end fund. It is a great advantage to have that capital available to us. At the present time, because of the REIT's footprint and experience and platform in senior housing, we are focused on capturing those opportunities really at the enterprise level, but we have in selective appropriate circumstances have done a few senior housing assets with our partners. So most should be to the balance sheet and maybe ones that have a little bit less growth could be appropriate for a more core-like investor base.

Yeah. Good question on the timing. So Bob, do you want to take that?

Sure. There's no pool impact, Juan, that's been very consistent since February. There is -- depending on whether you're looking year-over-year or sequentially, there clearly is seasonality in senior housing. Again, the key selling season is Q3, running into Q3, typically through September, could bleed into October. And then typically you'll have some moderation in the fourth on a sequential basis.

Yeah.

For us, what we're seeing again is just this robust year-over-year growth that's driving the improved midpoint. But if you're modeling sequentially, you should factor that in.

Good morning, Omotayo. Thanks for the question. Look, we want to give our shareholders some kind of broad directional guidance of our expectations at this time on what the rent levels will be. Obviously, we have a lot of tools in our toolbox that we've used in connection with leases over the years and that would be equally true here. And remember, our goals, we do want to strengthen the master lease. We do want to capture as much NOI as we can. And we want Kindred to be successful. So we put all those efforts in the basket as we think about structuring and making decisions about a lease extension.

Yeah. Operational alignment is one of Justin's favorite topics, so.

Yeah it is for sure. So Sunrise, we've already that contract we actually updated a few years ago, it's well-aligned. It's really driven through revenue and NOI performance. The fees are driven through great alignment. I'm very happy with that agreement. We have windows in the upcoming few years in the legacy Atria portfolio. That will also be a good opportunity just to improve upon the alignment and that relationship. Everything else in the SHOP portfolio is on our newer agreements.

But one thing I want to say is that Atria, given a lot of the transition they've gone through, there's not a question in my mind in terms of the level of focus they have on operations, particularly on ours. There's been a number of actions that have led to a much tighter footprint, some that we've taken, some that they've taken and other owners. And so the level of focus that we've seen with them under the new leadership and the contributions they've made to the occupancy, across the board that I mentioned and especially in independent living, where we've had 340 basis-points of occupancy growth year-over-year, we have their full attention and they have our full support. So we'll look forward to ongoing good performance with them.

Thanks.

So one of the things that's happened is we are off to a really strong start. So we've actually raised guidance twice now, and that's due to the outperformance we've had early in the year. As you get into later in the year Bob mentioned some of the seasonality you can see in occupancy. You can also see some seasonality in expenses.

We've assumed kind of regular inflation in the expenses. That's what's driving that 2.5% opeX for growth. Metrics that you see is part of the guidance page. And there is utilities and other seasonal impacts you can have in the second half. So you might accuse of being more conservative on the expense side but we are just anticipating kind of normal seasonality.

I like your words mid-teens because the first half, we grew 15%. Our guidance for the year is 14.5%, so pretty darn consistent, I would say.

Well, so we have a page and if you have our earnings deck, page 10 will -- articulates the performance of Canada. Canada grew 12% in the second quarter year-over-year. And that was driven by really good rate growth, which was also mix-driven. We had a higher price point product that outperformed Canada and drove the RevPOR up and their occupancy is still growing 170 basis points. Canada is 96% occupied now and they keep growing occupancy. And so it's just a good performer and we wouldn't expect it to continue to be a double-digit performer going forward, but it's been a good year in Canada.

Thank you, Austin.

Good. Bob is going to take that.

Vikram. I think the key thing to note, as you'll recall is the contract labor or agency labor profile last year, which as we were staffing up, really came down from first half to second half. And so on a year-over-year basis in the first half, on opex, that's a good guy. You don't have that same dynamic in the back half of the year. So that's a really important part of the answer to your question.

Yeah. So we've seen really broad-based growth. We've had better occupancy growth in our products that are closer to like a mid or mid-high price point. We've seen better growth in the West, which is a relatively lower price point than the East. There's been better growth in lower acuity assisted living and independent living than the higher acuity product but very strong occupancy growth. And so there's -- the mix is really just a combination of reasons why our lower-price point product is outperforming. It also happens to be the recipient of a lot of the NOI-generating capex. And so within that group, we had over 500 basis points of occupancy growth but also had 6.5% of RevPOR growth.

So within it, it's a strong contributor to both occupancy and to REIT, but as it's a big part of the growth story and the growth profile, it brings the weighted average down from a RevPOR standpoint. So I think that the reality is like I said earlier, the volume is so high, mix becomes a bigger factor in the metrics. But key takeaway is 8% revenue growth and 14.5% NOI and really strong occupancy performance.

Hi. So it's Justin again. So Brookdale, I'll start here. So it's a well-covered lease. You'll probably notice that if you look at the supplemental that they've moved up a row, and so good coverage, good performer. We've had growth in our portfolio. They're in markets that we project around 1,000 basis points of net absorption upside. So really strong growth profile opportunities ahead of it. So really, if this portfolio were to make its way to our SHOP portfolio, we would be very happy. So we're really not concerned about an extension. Brookdale has the opportunity to extend the lease. And if they do that, they have to decide by the end of November. It's an all-or-nothing extension. If they do extend, then the lease will escalate in '26 at least 3% and as high as 10% based on a fair market value review. Considering the performance and the coverage that I've mentioned and the upside opportunity of the markets, we would expect that it could be on the better end of that, but we'll have to wait and see. But we love the optionality we have here and in kind of worst-case, Brookdale extends and you have a well-covered lease.

Thank you.

Thanks, Richard.

So Debbie is referring to it, my passion project, which is encouraging our operators and communities to get to where they're achieving zero loss revenue days. We benchmark this and we report on it every month and --

Commonly known as 100% occupancy.

Exactly, but it's truly 100%. So one thing I love about senior housing business is that you can truly be 100%. We do have communities already in our portfolio that literally are turning units. They might have four or five out. They're turning all of them with new move-ins within the same month and having zero frictional vacancy.

So my point of view, Rich, is it's actually easier the higher occupied you get. And the reason for that is because you've established yourself as a strong market participant or market leader. Usually, there's an opportunity to fill the last unit or two with just a -- with extra effort. I'm not going to say it's easy, but it's much easier to fill a unit or two than to look upward at 20 units. So I like the opportunity in our communities that are over 90% to push all the way to 100% or as close as they can get to it. And the other thing that comes with that, obviously is scarcity value and price goes with it. So that's the big opportunity. So I don't think I agree with you.

Yeah. Good question. I mean one thing that's good about the way we're showing our shop results is that the vast majority of our communities are in our same-store results. And so those -- most of those projects stay in during the redevelopment process and we take the downs to the extent there are any during that time and then they remain in now, and that's true for almost all. Right, Justin?

Yeah, that's right. So when we're reporting on 133 season projects, those are all same-store. And they never came out. They were in during the construction period. And so there's a little disruption we've absorbed already and now we're experiencing the benefits of the upside opportunity from the investment. There's some projects that are a bigger redev that do come out. Those are more intrusive and there's a lot of criteria around defining which projects qualify for that to be in the non-same store pool. But these that we're reporting on are definitely in the pool.

I think it's a net gainer, Rich. There is some disruption, but honestly, you can sell the redev in many cases to the residents. You can show the plans, they can see the opportunity and so you see in advance of the completion, you see occupancy and price lift. So there is some disruption net-net, definitely a positive.

And you're trying to get them done so that you're meeting this intensive demand that's present at this time, so.

Thank you, Rich.

Thank you.

So we haven't -- really everything we've bought has had a combination of services. And so I really wouldn't be able to comment on a freestanding independent living cap rate, for instance, versus a freestanding assisted living. Most of what we're buying has both independent living and assisted living on the campus along with memory care services. I know historically, there's been a spread because of the longer length of stay to independent living, little less volatility. There's been like a 50 basis-point spread in the past. I don't know that I can really confirm that exists today just based on the activity that we have in our pipeline.

Thanks for the question. This is Pete. Happy to answer. We don't expect additional assets to go into redevelopment in the next -- in the foreseeable future. The return aspects will be substantial. These buildings are in really good markets. They're well-located in these markets. They're quality buildings and they just need a bit of upgrade to compete in the marketplace itself. And one good example is 3711 market in Philadelphia. It's a great market for us, performing really well. It's a healthy life sciences market.

The building has about 50% office tenants. Some of those office tenants have left. We have an opportunity to turn it into research space, which will dramatically increase the rental rate that we can achieve in that building. And we're looking forward to really strong rate growth and rent growth in the next year or so from that asset.

Thanks.

Yeah. I mean, there could be some conservatism in that metric. We have tilled those around everything. We were very explicit around two metrics, one being occupancy, the other being NOI. The others, RevPOR has some mixed considerations and then opexPOR and they both have year-over-year comp considerations and the opexPOR we have some comp considerations as well as just an expectation of normal inflation. So we'll just have to see how it plays out. But the labor market has been very favorable.

Yeah, you're right. You're right. Today's report may influence that and we'll continue to monitor and make sure we have a healthy spread between the two key metrics to drive revenue and NOI growth?

Again, we should distinguish between year-over-year and sequential. I do think that what Bob said is important in the year-over-year comparisons. And then as we look forward, again, the labor market is pretty dynamic right now. And so we're assuming kind of steady-as-she-goes. But as you point out, especially based on today's report, we may see a little improvement in that going forward. But it's too early to say.

Yeah, I'll take that one. So just some numbers. We sold about $230 odd million. We've got a full-year guide of $300 million. So the majority is cash in the bank. It's a very low cap-rate kind of in the 2 to 3 range, which is great and that's led by senior housing. And then your other question was, is this capital recycling, upgrading the portfolio, exiting non-strategic markets? Yes. And using the data analytics that we have to identify those markets that may not have that opportunity to grow like the rest of the portfolio. The buyer may see that opportunity and therein lies the transaction. And so we're pleased with that growth rate clearly. That's another source of capital for us while upgrading the portfolio. So we're happy with the results.

And in senior housing with the data analytics, we're curating the portfolio on the buy and the sell side.

Same, yes, same approach.

Yeah.

Thank you.

Yeah. I mean our whole strategy is designed to increase our enterprise growth rate, expand our SHOP footprint and because of the way we are funding the assets, continue to improve our balance sheet and you saw that year-to-date.

Yeah, the playbook has been, first and foremost, the organic growth in SHOP is going to be the key driver of leverage improvement. And if you just look at numbers on that $130 million or so organic growth this year, that by itself is 40 basis points of leverage improvement, net debt to EBITDA. And then in addition to that equity funded investments is the gravy on top. And indeed, we've been able to do both this year. We're 50 basis points lower so far from the start of this year to now. And that same playbook is going to continue to run out. And it provides financial flexibility and opportunity to go on offense and that's why we like the 5 times to 6 times range and we'll continue to execute on the strategy to get there.

I mean, right now our overarching capital allocation priority is to invest in cash-flowing senior housing assets that meet the characteristics that Justin outlined and provide a near-term accretion even when equity funded and immediate near-term growth that enhances our enterprise value. That could change over time. But right now, we're very, very focused in that area.

Thank you.

Yes. We can talk about those and there are quite a few that are well underway. And Pete, can you take that?

Sure. Sure. There's -- so for outpatient medical, we have really a fairly minor list of assets that are under redevelopment. We have sub-redevelopments, which are development. Okay. So let me just finish what I was going to say. So redevelopment, many times we're looking to do is upgrade the buildings, create spec suites and so forth, and those have been very good returns for us.

On medical office buildings we have in outpatient medical we have one asset with Sutter that is 100% leased. It just came online, we are complete and we're really excited about that asset. On the -- we talked a bit about development and life sciences redevelopment, but on the development assets themselves, you have to think about it in really two different tranches. We have a set of assets that are online, they're operating and they're largely full. Examples would be PIT 1 and PIT 2 where they're 100% occupied.

You've got our asset in Phoenix with the Arizona State, which has attracted National Institute of Health as a major tenant. It's under construction, they are tenant improvements. In Philadelphia, you've got One City which is 93% and Drexel which is 100%. We have another tranche of assets that are under development, still under construction that we're optimistic about, one associated with UC Davis, two that are with Atrium Health in Charlotte and form okay and they're under construction. They have good pre-leasing, 60%, 70% pre-leasing, and we're optimistic about those assets going forward.

What I can tell you is that I mentioned in the prepared remarks that the key selling season is off to a strong start, including July. And that's what we have for now.

Well, they operate their own portfolios for one, but I think what Justin said is a good data point for now.

Yeah. Say that again, Nick. I think I --

Got it. I mean it gets into our underwriting, obviously. We look at the last years, we look at pre-COVID numbers, we look at trailing three and where it is kind of at the time of acquisition and we model what our expectations are going forward. Given the fundamentals you would expect that there would be some growth from, say, the trailing three or in-place in that number, typically a modest amount. And in some cases, if occupancy is 100%, we may actually diminish it a little bit. So it really depends on the asset and most of them will have, as we talked about, given the template for the investments, 7% to 8% yields going in with significant near-term growth, you'll see some elevation from the at closing NOI number, but it's modest, but it's ramping.

Yeah.

Bailey, thank you so much. And I want to thank all the participants on today's call for your interest and support of Ventas. We hope you have a great rest of the summer, and we look forward to seeing you in person soon. Thank you.