Ventas, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas First Quarter 2024 Earnings Call. [Operator Instructions] Thank you.
Thank you, Kathleen. Good morning, everyone, and welcome to the Ventas First Quarter Financial Results Conference Call.
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 build.
Kindred and our outpatient medical and research business. First, respecting 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 decisions with Kindred and other parties to optimize Ventas enterprise value and NOI from our property, following the April 2025 lease maturity.
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%. The 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.
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.
[Operator Instructions] Your first question comes from the line of James Kammert of Evercore.
I know it's a bit of a fluid target, obviously. But Justin, you mentioned a couple of times very optimistic about the occupancy potential growth across your core markets, right, if they -- I guess, you're making what sort of assumptions there 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 [indiscernible]?
Yes, sure. So stepping back, obviously, there's 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, I think, nicely in the opening remarks.
And just a sort of a follow-on to that. If you had -- for every 100 basis points of occupancy, is there any algorithm we can use to think about how that improves margin, because there's obviously a fixed component cost that gets levered.
Yes. So there's certainly a lot of margin expansion opportunity for us because we're -- overall, both 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.
Your next question comes from the line of Michael Carroll of RBC Capital Markets.
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 by one extra month? Is this something that Kindred asked for that they needed more time kind of assessing if they wanted to exercise that option or not?
Happy to talk to you about it. I mean, look, we're engaged in active discussions with Kindred and others. And we're really working to get to the right outcome. And so we believe that, that was really in the best interest of everyone to get to a good outcome, which we define as kind of optimizing Ventas value and NOI.
Okay. And then just kind of on that. I know in the past few quarters, you kind of highlighted that Kindred has been putting in new operational efficiency initiatives to deliver, I guess, better results, has those been put in place yet? And are you seeing returns?
I mean you're right on the -- Kindred has initiatives underway to improve both revenue and expense performance, and we are seeing sequential improvement, but the heat map, of course, is a trailing look. And so that's really how you ought to think about it. So you hit the nail on the head.
Your next question comes from the line of Michael Griffin of Citi.
Maybe just following up on Michael's question. Could there be an additional extension for Kindred, or do you think end of May is when we will have a decision.
Yes. So I think that, we're in these active discussions with Kindred and others, and we're really focused on getting the right outcome for Ventas for the enterprise and also for the properties.
I probably should have said this is Nick here with Michael. I guess the second question, just if it is retentive, as you talk to kind of other parties, what would the downtime be for the portfolio, if it goes down that route?
Right. If -- it's interesting to see that well-respected players like Ensign have now entered the LTAC space. It seems to be enjoying a bit of a moment and that's positive. I would say that there would be a transition kind of on day 1, if there were other tenants for some or all of the properties. So that's the way to think about it. I there's no downtime. It's not like outpatient medical or anything. There's a direct operational transfer if that were to occur.
Your next question comes from the line of Tayo Okusanya from Deutsche Bank.
Congrats on a great quarter. In terms of acquisitions, again, you have an interesting page in your deck, just kind of talking about all the upcoming debt maturities in senior housing and how you look at that as a potential opportunity. Should we be thinking about acquisitions purely at 3 simple transactions? Or can we possibly see you doing more on the structured finance side as well?
Primarily 3 simple. That maturity chart really 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.
Okay, that's helpful. And then if I could sneak one more in. In terms of Brookdale, which is the other rent lease that's coming up, again, coverage is great and all that's fine. But curious if structurally that could change from being a triple net portfolio to much more of a [indiscernible] portfolio, just given how well your SHOP portfolio is doing and how strong senior housing fundamentals are generally.
Tayo, thanks for asking that. Brookdale is about 7% of our NOI. And you're right, the coverage has been improving, and it's at about 1.3x on a trailing basis. And again, the trends in those markets also support a lot of intermediate-term occupancy increases. And so there are lots of positive outcomes for Ventas as we think about that, which is as you mentioned, at the end of 2025.
So I guess structurally, you expected to stay the same as a triple net?
So I think when we say we have a lot of positive options. I mean these communities are in markets that also have a tremendous upside from a supply-demand standpoint, the demand metrics are excellent.
Your next question comes from the line of Juan Sanabria of BMO Capital Markets.
I just wanted to just wanted to ask around acquisitions, and it seems like you've got another group of properties maybe you're looking at. How we should think about funding that? And how you think about your cost of capital with leverage still relatively high but definitely improving.
Sure Juan, I'll take that one. Thanks. Starting with the financial returns that we're seeing on these investments, which Justin articulated are really, really attractive even at the current cost of capital. We talked last earnings call about the fact that on balance sheet financing can work given those returns, and in fact, baked that into our guidance. And that's what we executed on in the first quarter. We fully funded those senior housing investments with equity.
And a follow-up for Justin on the 1,000 basis points of occupancy upside on the U.S. portfolio. I guess, first, is that a same-store comment or an overall portfolio comment and kind of where is the starting point now. And what do you see as the kind of the structural ceiling for occupancy knowing there's always some churn of customers or seniors in and out of the communities.
Great question. So first of all, it's obviously U.S. focused and it's a total SHOP, and we're running just under 80% occupied in both our independent living and assisted living products in the U.S. It's about 2/3 assisted living in the U.S. in our total SHOP portfolio. We do see a lot of upside. The structural upside opportunity in my view, through experience and philosophically is 100% occupied. And we have several communities that are at 99%, 100% occupancy. And so there's nothing like a completely full community to really demonstrate the operating leverage and also just deliver great care and services. And so that's the goal.
Your next question comes from the line of Ronald Kamdem of Morgan Stanley.
Great. Just two quick ones. So one, trying to connect the dots on the occupancy here. You put a lot of bread crumbs in the presentation, obviously, starting with 1,000 basis points occupancy upside than we're seeing here that you finally hired senior VP and senior housing. The Ventas OI and sort of the occupancy gains you're getting on that CapEx investment. I guess the question to be direct is, is 275 to 300 basis points of occupancy gain a year. Is that the new normal, and if not, like what would be sort of stopping that?
So a couple of comments in response here. So I mentioned that our U.S. is projected to be over 300-basis-points occupancy growth this year. So that's a set to think about. I also mentioned that we're just at the beginning of the key selling season. So we'll be seeing how that plays out. You make a good point. We're optimistic about the trends leading into it. So we'll see where that goes.
Your next question comes from the line of Joshua Dennerlein of Bank of America.
The SHOP occupancy update in 1Q, that was better than you guys were expecting and then you revised the outlook higher for the year. My question revolves around, is that driven by like the market being better, so like the beta being driven from the aging of America? Or is there some kind of like alpha overlay that you guys are doing internally that's driving better customer demand, and that's why you're getting this like uplift. If the latter, could you just maybe elaborate on what you're doing to drive that alpha?
It's both. And I sort of take the macro and then I defer to Justin on all of the kind of OI-driven actions and initiatives to deliver outsized performance within a demand-driven macro.
That's great. And it all starts with the macro for sure. And then within that, we've been working for quite some time to make sure we're well positioned to take advantage of this great opportunity.
On a different note, you guys have the Brookdale warrants. I know they're exercisable through year-end 2025. Just how are you guys thinking about essentially exercising those. I know they're really in the money, which is how do you think about using those as a potential source of capital?
Yes, I'll take that one. You're right. We have 16 million warrants at $3 a share. So clearly deeply in the money. And that is, again, another source of funds as we think about the opportunity to both create value recognized gains and invest behind senior housing real estate. And obviously, about 1.5 years left in terms of duration, but a clear opportunity.
Your next question comes from the line of Nick Yulico of Scotiabank.
Maybe just a bigger picture question on kind of the focus for the company right now in terms of -- there is a lot of opportunity to invest in seniors housing. If we fast forward a year from now, is Ventas going to be a larger company, more assets owned, higher senior housing exposure. How should we think about that sort of investment pipeline, how you could capitalize on it?
Yes. I mean, we're -- again, we're executing on the strategy. The driver of organic growth is obviously driving the bus. We're going to -- as the second largest owner of senior housing with the platform that we have and access to capital, we're layering on external growth focused on senior housing that part of the portfolio is definitely going to grow. And we're committed to taking advantage of this multiyear opportunity and the kind of returns that we're seeing in the market for good assets at high yields with high growth potential, we are going to find a way to make those acquisitions and make senior housing a larger part of our overall portfolio. I mean it's already over half with job at 40% and growing. And I think you're going to see those trends continue.
Okay. Second question is just -- I know you have the slide in there again on the attractive time to invest in senior housing. And talks about year 1 FFO per share neutral/accretive for the investments, realizing that, obviously, there's a long runway here when you're thinking in the long term. But how should we think about your focus on -- at what point is it year 2? How should we think about accretion happening because obviously, earnings growth is important, people focus on that.
Definitely. And we are, too. Bob?
I think going in yields relative to cost of capital, roughly neutral, so not in the immediately accretive. But I would point you to the IRRs and the growth potential in these investments, mid-teens and an example used. That says there's attractive growth in the near term, which would drive accretion.
Yes.
And that's what's so exciting to us.
And it would be near-term accretion.
Near term.
Your next question comes from the line of Vikram Malhotra of Mizuho.
Congrats on a strong quarter. Just two questions. Maybe Justin one for you. I guess I wanted to be clear, the acceleration trends you've mentioned last quarter and at prior conferences in SHOP. Is that occupancy? Or is that same-store NOI growth as you go through the year? Because you had a really strong 1Q, but the midpoint of the guide still suggests some decel through the year. I know you're being conservative, but I just want to understand the mechanics behind. Is it occupancy acceleration or SHOP acceleration or both?
Well, first of all, occupancy is accelerating. That's -- it's been underway, and that's part of the guidance expectations that we gave. Good point. We had a real strong start to the first quarter from an NOI standpoint. So that kind of changes the trajectory of what we're expecting in terms of stepping up throughout the year. And also another good point, key selling season starts right now. So we'll give ourselves time to see how that plays out and go from there.
So just to clarify, are you still -- like you said last quarter, just -- I want to make sure, is it same-store NOI growth acceleration? Or is it the occupancy acceleration. You just said the trajectory change, but are you still anticipating accelerating same-store NOI growth?
Yes. I would point you to, first off, occupancy. We posted 240 so far year-to-date. We've got 270 year-over-year. So clearly, there's going to be incremental year-over-year occupancy growth embedded in the forecast. Our range has gone up at the midpoint to 14% on NOI. We posted 15% in the first quarter, pretty close. I think we keep coming back to this key selling season notion. We're just starting that. We want to see how that one plays out.
Got it. Okay. And then Debbie, if I don't know if you can maybe throw us some more tealeaves here just on the Kindred outcome. I guess, is it fair to assume the fact that you've extended by 1 month, and you've mentioned there are potentially other parties. It's unlikely that -- or it's more likely that Kindred is part of the solution, meaning it's like an all renewal or partial with other players and them just not renewing at all is off the table, just given the fact that you extended it by another month.
Well, again, happy to give as many tealeaves and more as soon as we can. I would say that we are in active discussions with Kindred and others. It's more likely that Kindred would be part of a solution going forward. But we're continuing to keep working on every alternative so that we can reach the goal, which, again, is optimizing value for Ventas shareholders and the NOI from these properties. So we're very focused, and we're very on it.
Your next question comes from the line of Richard Anderson of Wedbush Securities.
So Justin, you talked a little bit about what you do with assets once you own them price optimization, investing in the properties. And also perhaps transitioning to other operators that are proving themselves to be worthy. If you do $1 billion, how much do you think will fall in the transition category? And would you be expecting any meaningful downtime whereas you get the full benefit, maybe not this year, but a year from now?
Good question. So I'm going to step back and just talk a little bit about the [ pressure tick ]. So obviously, we've talked a lot about markets and first step is always to make sure we're entering the right markets to support upside opportunity and affordability. And then from there, we focus on the particular asset. We're focused on need-driven assisted living and memory care, and a lot of the campus is also including independent living, high-growth, need-driven product.
Okay. And then second question, I think, Bob, you mentioned a lot of what's -- or everything that's been done so far has been funded with equity. Just back of the envelope, I'm looking at like an AFFO yield of about 6%. But then when you talk about dispositions, and I think you called it OMAR, which is a new one. What -- how much how comparable are disposition cap rates to your equity cost in your view and how much of it comes out of OM and how much comes out of AR, like I'm curious...
Yes. It's a memorable acronym OMAR, outpatient medical and research.
The A is for and.
Yes, an. OMAR. Easier to remember. So step back, the guide of dispose of $300 million includes OMAR, but is also across asset classes, including senior housing and others. So I would say the blended cap rate is roughly mid-single digits on that, not dissimilar to the number you quoted. So again, as we think about reinvesting maybe neutral in the short run, but again, upgrading the portfolio and with the growth potential in the investments really accretive over time. So hence, capital recycling increase is another source of funds that we're very focused on.
Our next question comes from the line of Michael Mueller of JPMorgan.
I was wondering, can you give us some high-level color on how the SHOP outlook varies maybe from the AL to the IL segment.
Yes, sure. So most of our NOI growth is coming from AL. We have -- that's going to be on the much higher end of the average, particularly in the U.S. So the IL growth really -- there'll be some growth and some contribution this year, but really more of a 2025 opportunity that we see it in terms of big contributions in the U.S.
Your next question comes from the line of Wes Golladay of Baird.
I just want to follow up on that last question regarding the IL picking up next year. Is that just more so operating leverage kicking in next year?
Yes, exactly. So IL is a high-margin business. It has relatively high fixed costs because you're not delivering care, you're offering more limited services. So the operating leverage is very, very high. And the higher the occupancy, the more you benefit from that, and we have a long runway in terms of occupancy upside. So we look forward to some continued growth there and then see how that plays out, driving NOI moving forward.
Okay. And then I want to go back to that slide. You have about the $19 billion of loans. How much of those loans do you think will have some issues on the refinancing front? And has your view on the amount of distress changed over the last, call it, 6 months. On one hand, you have rates just continue to grind higher, but then the recovery is also accelerating.
Right. I would say that there are -- there is a large percentage of those loans that have some difficulty in refinancing without additional equity contributions. The assets are good, the markets can be good, the growth can be good. But because LTVs are lower, and as you say, rates are higher and the NOIs, many of them have not recovered to pre-COVID levels or they were newly constructed assets that really were delivered in COVID and therefore, aren't meeting their original pro formas. There's really good upside, but the refinancing mass doesn't necessarily work without significant paydowns.
Your next question comes from the line of Michael Stroyeck of Green Street.
Maybe one on the outpatient medical business. What drove the sequential occupancy decline during the quarter, whether in terms of tenant credit, asset quality or anything you can provide? And then what were the consistent themes with those move-outs, if any, compared with the recent tenant move-outs we saw second half of last year.
Yes. Yes. Thanks for the question. We're actually really happy with our leasing. We've -- in the first quarter, we did 900,000 square feet of leasing, 50% more than prior year, which is terrific. And what I'm also happy to talk about is health system health has really come back. If you look at the [ COPPENHALL data ], the financials for the health systems are almost 40% higher than what they were a year ago. So they're back. They're executing on their strategy, and they're upgrading their facilities and converting nonclinical space to clinical space.
Okay. That's helpful. Maybe a second question, if I may. Going back to that IL versus AL discussion. So IL meaningfully outperformed in terms of occupancy gains during the quarter. Is that a reflection of just greater demand for the IL product are more attributable to an improvement in the operations of that Holiday by Atria portfolio.
Yes. So we've had -- we definitely have had good recent momentum in our independent living portfolio that includes some Holiday communities, it includes -- former Holiday communities and include some of our existing mostly -- most of our other ILs operated by our legacy Atria within our legacy Atria portfolio. So there's been an intense effort to work with our operators to ensure that we're getting the best performance within those communities, and that continues.
So just to clarify, it's pretty broad-based across the IL portfolio.
Yes, it is broad-based across IL portfolio.
Yes.
Your next question comes from the line of Austin Wurschmidt of KeyBanc Capital Markets.
I just wanted to hit on RevPOR. You guys assumed a firm, the RevPOR growth for the year which does imply acceleration similar to occupancy in the quarters ahead, just kind of what gives you that confidence? And is that acceleration coming from primary markets that have kind of lagged the overall portfolio? Or is it other buckets that are driving that improvement?
Yes. One thing I just want to point out is when we gave the metrics that are supporting the SHOP guidance, you'll notice a lot of [indiscernible]. So it's approximately 8% revenue, approximately 5% RevPOR approximately 270 of occupancy lift. And then we have an NOI range. And so we left a little room for movement amongst those metrics and see how the key selling season plays out. So I don't think we're necessarily saying we're going from 4.7% to 5%. We're just saying we expect to be around 5% and which was consistent with what we saw in the first quarter.
Got it. That's helpful. And then just on the street rate growth, broad-based for overall same-store portfolio. I mean, given some of the leading indicators you've pointed to showing strength, the occupancy acceleration. I mean what would lead you to kind of lean into that and maybe kind of test the waters on pushing that a little harder if you continue to see the strength in the demand that you see now for the last couple of quarters?
Yes. So the part of the price volume optimization is really making sure we're priced right and where there's more demand in a market, an opportunity to move with market pricing more aggressively, we do that. So there's certain markets and certain highly occupied communities that are attracting a higher street rate, higher move-in rate. So that's definitely part of the plan. Now having said that, we have a lot of occupancy upside, and that's the big opportunity for us is to continue to play into the demand drive volume. Balance it so that we're getting the best out of just total revenue growth and then drive NOI.
And the guidance -- I was just thinking that the guidance assumes that, that 7% kind of stays steady to your point on kind of the occupancy upside?
I mean it's a year-over-year stat. So I think you'll probably see a little bit of movement within the metric. But what we're expecting to see is growth in street rates, growth in move-in rents and growth in occupancy.
That concludes our Q&A session. I will now turn the conference back over to Debra Cafaro, Chairman and CEO of Ventas for closing remarks.
Great. Great. I want to thank all my colleagues and also all of our shareholders, analysts and other participants today. We very much appreciate your attention and your interest in Ventas and look forward to seeing you soon.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.