Ventas, Inc. (NYSE:VTR) Q1 2024 Earnings Call Transcript

Ventas, Inc. (NYSE:VTR) Q1 2024 Earnings Call Transcript May 2, 2024

Ventas, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Katleen 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] I would now like to turn the call over to BJ Grant, Senior Vice President of Investor Relations. Please go ahead.

Bill Grant: Thank you, Katleen, and 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.ventosread.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 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 Cafaro.

Debra 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 multi-year growth opportunity in senior housing builds. As a reminder, our three-pronged Ventas strategy is composed of first, deliver organic growth in our senior housing portfolio, second, capture value through investments focused on senior housing, and third, drive 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 accelerated, 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 multi-year senior housing growth opportunity that continues to gain traction from both demand-led occupancy and RevPOR growth. Accelerating demand for our senior housing community 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 of 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 yields, expected unlevered IRRs, occupancy growth potential, affordability, and pricing below replacement costs.

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 relationship, 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 portfolios. 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, respecting the Kindred lease for 23 LTACs, representing approximately 5% of our NOI.

The trailing rent coverage remains 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 properties following the April 2025 lease maturity. We and Kindred recently agreed to a one 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 demands, and it’s delivering complementary, compounding contributions to our enterprise.

As a leader in senior housing, whose 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 call over to Justin.

Justin Hutchens: 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 group by 240 basis points year-to-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 prior year led by independent living move-ins at 127%, outperforming normal seasonal patterns. We have had nine 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%, 4.5% when adjusted for the leap year. I’m really happy that our operators are delivering excellent care and services and great results. I’d like to highlight Sunrise, [Indiscernible], Discovery, and Le Groupe Maurice in particular for their superb all-around performance to start the year. Like I said, we are experiencing broad-based contributions from our operators and we continue to leverage Ventas’ OI’s vast datasets 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 complimented by our high-quality Canadian portfolio, which is 95% occupied, and continues to deliver a valuable and stable cash flow with 9% year-to-year growth. Given the strong start to the year, we are happy to raise our full-year guidance expectations on our same-store SHOP portfolio, which we now expect to grow 12% to 16% in NOI year-to-year. The key assumptions that drive the midpoint of our range are average occupancy growth for 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 the 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 the strong start, driven by both tours and move-ins, volumes 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 the 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 our under contract for approximately 330 million of senior housing investments, out of which 130 million has 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 and high sevens coupled with mid-teens on levered IRRs. Additionally, we are investing in attractive discounts for 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 are 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-alive 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 offering 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 seven communities that are 10 years old on average. They’re currently 89% occupied and are located in markets 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 on average in the markets is very strong at a projected seven times length of stay. The going-in yields projected to be low sevens 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 [Indiscernible] 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?

Robert Probst: 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 & Research segment, or OMAR, which reported same-store cash NOI growth of nearly 5% in the quarter. In outpatient medical, Eaton [ph] team executed 900,000 square feet of new and renewal leases in the first quarter, 50% higher than 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 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 range 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.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of James Kammert of Evercore. Please go ahead.

James Kammert: Good morning, thank you. 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 occupancy?

Justin Hutchens: 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. We’ve added a page to our earnings deck, you’ve mentioned 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 testing in those proprietary, but we feel comfortable that’s a good outlook. Clearly we haven’t included pacing, but 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.

James Kammert: 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.

Justin Hutchens: 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 of just under 80%, both in infant living and assisted living. So there’s a lot of occupancy upside ahead. And with that comes the operating leverage that we benefit from in our business. And so there’s really good margin expansion ahead. There are some rules of thumb. Maybe we’ll include that at some upcoming conferences.

James Kammert: All right. Thank you. I’ll leave it there. Thanks.

Debra Cafaro: Thank you.

Operator: Your next question comes from the line of Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll: Yes, thanks. 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?

Debra Cafaro: Good morning, Mike. 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.

Michael Carroll: 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? If you look at like the trailing 12-month EBITDARM coverage ratio on that portfolio for the past three quarters, it’s kind of held steady at that point 9 times. So it doesn’t seem like coverage has yet picked up, but I know that’s a trailing number. So I didn’t know if we have more recent data on the most recent quarter kind of highlighting some upticks there.

Debra Cafaro: 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.

Michael Carroll: Okay, great. Thank you.

Debra Cafaro: Thank you.

Operator: Your next question comes from the line of Michael Griffin of Citi. Please go ahead.

Michael Griffin: Thanks. And 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.

Debra Cafaro: Yes. Good morning. 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. And I would be — we’re working very hard to get to that kind of outcome. And so I’d be less focused on the notice date and just more focused 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 it to get a resolution that as soon as we can, and we look forward to telling you as soon as we can.

Nicholas Joseph: Thanks. And I probably should. So 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?

Debra Cafaro: Right. 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. There’s no downtime. It’s not like outpatient medical or anything. There’s a direct operational transfer if that were to occur.

Nicholas Joseph: Perfect. Thank you very much.

Debra Cafaro: Thank you.

Operator: Your next question comes from the line of Tayo Okusanya from Deutsche Bank. Please go ahead.

Omotayo Okusanya: Hi, good morning everyone. 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 three simple transactions? Or can we possibly see you doing more on the structured finance side as well?

Justin Hutchens: Primarily fee 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. So it’s putting pressure on existing owners. And it creates an opportunity for buyers like us to make high-quality acquisitions but with a better capital stack. And there’s a variety of sellers as well. There’s private equity sellers and operators and multifamily and institutional sellers that we’ve been seeing in our pipeline, including that which we’ve been executing on.