Ventas, Inc. (NYSE:VTR) Q4 2022 Earnings Call Transcript

Ventas, Inc. (NYSE:VTR) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas Fourth Quarter 2022 Earnings Release Conference Call. I would now like to turn the conference over to BJ Grant, Senior Vice President of Investor Relations. Please go ahead.

BJ Grant: Thanks, Regina. Good morning, everyone, and welcome to the Ventas fourth quarter financial results conference call. Yesterday, we issued our fourth 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 factors 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 posted on the Investor Relations website. And with that, I’ll turn the call over to Debra A. Cafaro, Chairman and CEO.

Debra A. Cafaro: Thanks, BJ, and good morning to all of our shareholders and other participants. Welcome to the Ventas fourth quarter and year-end 2022 earnings call. We are pleased to deliver a strong fourth quarter, which reflects the attractive operating and financial results of our diverse portfolio and the benefits of our key strategic initiatives. Fourth quarter normalized FFO was $0.73 per share, fueled by accelerating SHOP growth at 19%, record Medical Office Building performance and profitability from our third-party institutional capital management business, VIM. The demand fundamentals that support our business are strong and getting stronger across all Ventas asset classes, which are unified in serving the nation’s large and growing aging population.

After significant capital recycling and asset management actions, our diverse portfolio of high-quality senior living communities, Medical Office Buildings, R&I labs and other health care assets is well positioned to capitalize on these demand trends. In 2022, Ventas began what we believe will be a multiyear growth and recovery cycle led by SHOP and supported by favorable supply-demand fundamentals, actions we’ve taken in the portfolio and our post-pandemic rebound. In senior housing, there are compelling supply demand tailwinds. The over-80 population will grow at record levels in 2023. Yet, we continue to see construction as a percentage of inventory at its lowest level in five years and substantially better in Ventas markets. Over the last few years, we have taken decisive actions to position our SHOP portfolio to capitalize on this exciting demographically-led demand.

We strengthened our team, enhanced our powerful analytic capabilities, rolled out the Ventas OI platform, sold, transitioned and acquired properties and invested capital in communities with strong market fundamentals, all to win the recovery. Benefiting from these trends and actions, we are well underway to recapturing the post-pandemic SHOP NOI opportunity. Our portfolio has already enjoyed significant occupancy and NOI growth from the COVID trough, and we see even more recapture potential ahead of us in the coming years as we first seek to reach 2019 performance levels and then hopefully exceed them. Bob also took significant steps to maintain our financial strength and flexibility and improve our balance sheet and liquidity. These actions garnered three positive credit rating moves in 2022 and reduced our 2023 maturities to a very manageable level.

In 2022, we also continued our long history of value creation with $1.2 billion of new investments, often with key partners. These include the $425 million Atrium Health/Wake Forest University School of Medicine Development in Charlotte, North Carolina; $200 million in senior housing investments, including the acquisition of Mangrove Bay and a new development with Le Groupe Maurice, both in very attractive markets; and $300 million in MOB investments highlighted by the acquisition of an 18-property MOB portfolio leased to Ardent. Finally, we remain committed to our values, including our ESG leadership. We accelerated our progress in 2022 as we further diversified and elevated our Board and made a bold commitment to achieve net zero operational carbon emissions by 2040.

These efforts will be advanced under the leadership of our General Counsel, Carey Roberts, who has the passion and experience to move us forward. Now, we enter 2023 with strong momentum. Today, we are pleased to introduce full year normalized FFO guidance representing 5% growth at the midpoint. We are projecting unprecedented organic growth in our portfolio, once again driven by SHOP, and complemented by the positive compounding contributions of our office business led by Pete. We also will continue to build out our VIM business, which already has over $5 billion in assets under management, and mine our non-property investments for value as evidenced by both the pending Ardent equity stake sale and our recently completed Atria Glennis software deal while we also seek to optimize the outcome in our Santerre loan.

Finally, we will continue to invest capital wherever we find compelling opportunities to sustain and reinforce our new cycle of success. The macroeconomic assumptions underlying our forecast include some slowing of the economy, moderating inflation, softening labor conditions, and continued, albeit less aggressive Fed tightening. Against that backdrop and in many other likely scenarios, we believe our business is relatively advantaged because demographic demand for our assets is large, growing and resilient, we have demonstrated strong pricing power in SHOP and softening economic conditions should benefit our operations in multiple ways. One final note. In January, Justin assumed the additional role of Chief Investment Officer at Ventas. I know you want to join me in congratulating Justin, and I want to thank him for his continued leadership, which has been instrumental in our success and positive outlook.

Working with our strong teams, Justin will use his experience and insights to create value by making good investments across our asset classes, enhancing the connection between our investment activity and business operations and deploying the powerful Ventas OI platform across our organization. And now I’m happy to turn the call over to the man himself. Justin?

Justin Hutchens: Thank you, Debbie. I’ll start by noting how excited I am about the execution in our SHOP portfolio. Over the past few years, we have taken many actions to put ourselves in a position to achieve positive performance as we aim to recapture NOI in this multiyear growth and recovery cycle. We have been successful executing portfolio actions, which include over 50 triple-net communities converted to SHOP and over 130 transition to new operators. We’ve acquired over 100 new communities and executed 30 dispositions and 8 new developments. Finally, we have over 100 communities that are in the process of getting refreshed and are expected to complete during the key selling season. I am really proud of our tremendous team that supports our senior housing business and has executed Ventas OI, our approach to collaborative oversight where we leverage our operating expertise and best-in-class data analytics to the benefit of our operating partners to drive positive results, which has gained tremendous momentum.

Our programmatic approach addresses two priorities in parallel: first, timely market, financial and operating insights to influence near-term performance and revenue-enhancing capital expenditures; second, tackling key strategic challenges that will deepen our competitive advantage and maximize the long-term value of our portfolio. Now I’ll cover the fourth quarter SHOP results in our year-over-year same-store pool of 478 communities. Our SHOP portfolio continues to perform really well. The fourth quarter was ahead of our expectations while delivering excellent year-over-year growth due to pricing power, occupancy growth and moderating expenses. NOI in our Q4 year-over-year pool grew 19.1%, which is above the midpoint of our SHOP guidance range and includes 22.2% growth in the U.S., led by Sunrise and Atria, while Canada demonstrated positive growth again with 11.7% led by Le Groupe Maurice.

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I would like to thank all of our operating partners for their significant achievements delivering excellent services and care and financial results. We continue to benefit from operating leverage, even at this relatively low occupancy, resulting in margin improvement from 23% in Q3 to 23.6% in Q4. Same-store average occupancy grew year-over-year by 140 basis points to 82.5%. Revenue in the quarter grew ahead of expectations, increasing 8.3% year-over-year due to continued acceleration in RevPOR growth and positive trends in occupancy. Pricing power continues to impress. At 6.5% year-over-year growth, RevPOR is the strongest we’ve seen in the last 10 years, primarily driven by in-house rent and care increases and improving re-leasing spreads.

As expected, expenses were $4.7 million per day. As a reminder, our year-over-year expense growth peaked in Q2 2022 at 11%. It reduced to 8% in Q3 and was lower again in Q4 at 6%. Leading indicators in the U.S. remain strong as we experience leads as a percentage of 2019 at 120%, move-ins at 101% and outs at 101%. Canada continues to deliver growth and high occupancy at 95%. Demand accelerated in January with move-ins at 104% over 2019 in the U.S. and 111% in Canada. Now I will cover 2023 SHOP guidance and our expanded same-store year-over-year pool, which includes 508 communities representative of 92% of our portfolio. There are three primary drivers of our positive outlook: occupancy growth, rate growth and moderating expenses. SHOP same-store cash NOI is expected to accelerate from 13.4% growth in 2022 to growth in the range of 15% to 21% year-over-year in 2023.

The low and high end of the guidance range is driven by occupancy and expense performance. We expect margin expansion of 200 basis points at our midpoint. We anticipate year-over-year revenue growth of approximately 8% at the midpoint of the same-store cash NOI guidance range driven by continued strong rate growth and occupancy growth of 130 basis points to 170 basis points. With the deployment of our Ventas OI platform and excellent execution by our operators, we are able to achieve substantial rent increases this season of approximately 10%. This in combination with improved care pricing, rising street rates, and typical resident attrition results in about 6% expected RevPOR growth in 2023. It’s important to note that 80% of our revenue growth in 2023 will be driven by the RevPOR growth, much of which has already been realized as over half of our resident population have already received the rent increases.

In regards to occupancy growth, we project that more residents will move into our communities in 2023 compared to prior year. We also project our net move-ins to be higher. However, we expect to return to more normal seasonal occupancy patterns, which include typical clinical conditions and slightly elevated financial move-outs in the first quarter. We expect a significant occupancy ramp throughout the year, supported by an accelerating aging demographic and muted new supply translating to about 150 basis points of year-over-year average occupancy improvements in 2023. We also expect moderating inflationary expense impacts and lower contract labor year-over-year, with overall expense growth expected to be around 5%. Through the execution of initiatives to improve employee recruitment and retention, we have had five consecutive quarters of net hiring, which are providing the tailwinds needed to stabilize the workforce and support the moderation of expenses.

Moving on to investments. I’m really excited to work with our deeply experienced investments team in my newly expanded responsibilities. I am very pleased to step into a situation where I can work to continue our strong track record and expert capital allocation. We have a wealth of existing relationships across our targeted asset classes of senior housing, life science and R&I and medical office. I look forward to contributing to the ongoing success of our investment platform by combining the advantages embedded in the enterprise with my extensive network and investment experience to drive external growth. I look forward to expanding Ventas OI across the enterprise to drive portfolio optimization, external growth and refresh redev capital across our senior housing and office portfolios.

We will continue to pick our spots in investments and work with our best-in-class partners on attractive opportunities. Moving forward, I am confident in the demand drivers of the business and believe we are well positioned to continue this positive trajectory. Bob?

Bob Probst: Thanks, Justin. I’m going to share some highlights on our fourth quarter performance, touch on our balance sheet and close with our 2023 outlook. To start, we are proud of the fourth quarter results. Throughout 2022, we were accurate in our forecasts and followed our mantra to do what we say. In the fourth quarter, normalized FFO was $0.73, at the higher end of our guidance range. Fourth quarter property growth was particularly strong, with total company and SHOP same-store cash NOI growth of 8.5% and 19.1%, respectively. I’d like to give a shout-out to Pete Bulgarelli and our Office team. Office had a great year, growing same-store cash NOI by 3.8% in fiscal year ’22. And that Office result was led by our MOB business, which posted some outstanding metrics, including strong leasing performance with same-store year-end occupancy of 92%, the highest level since 2017.

Tenant satisfaction measures exceeded 93% of all MOBs. Same-store operating expenses increased just 2.6% year-on-year, well below inflation. And as a result, full year ’22 MOB same-store cash NOI grew 3.4%, the highest on record for the company. R&I also posted attractive organic performance, growing same-store cash NOI by 5.1% in the full year ’22, led by leasing at higher rates and solid expense management. I’d highlight two other items in the fourth quarter. We earned our first promote approximating $0.02 per share as a general partner of the Ventas Fund, which was $0.01 better than our guidance. We’re also eligible to earn further promotes in 2023. Second, we recognized a $20 million noncash CECL allowance on our $486 million mezzanine loan investment to Santerre Health Investors.

Interest coverage on the loan has declined through year-end, but the loan remained fully current through January 2023 and full interest is expected in February. Next, a few comments on our balance sheet. Over the last two years, we enhanced our portfolio and strengthened our balance sheet through $1.3 billion in asset dispositions and loan repayments with proceeds used to reduce near-term debt. We also issued $2.7 billion of new debt in that period, extending duration at attractive pricing before the run-up in interest rates. As a result, we have just 4% of our consolidated debt or under $500 million coming due in 2023. And we’ve made good progress towards this refinancing, having locked in all-in cash rates of 4.2% on nearly 2/3 of this requirement.

Consistent with our long-held risk management approach to maintain 10% to 20% in floating rate debt, 12% of our consolidated debt was floating in the fourth quarter. We have plans to issue $500 million in new secured fixed rate debt with proceeds designated to pay down floating rate debt in 2023, which would bring our floating rate debt to the lower end of our targeted range. We have significant liquidity of $2.4 billion at year-end 2022. And finally, our net debt to adjusted pro forma EBITDA improved by 30 basis points to 6.9x in the fourth quarter, with SHOP NOI growth steadily moving that ratio back toward our pre-pandemic target range. Last but not least, I’m extremely pleased to reintroduce full year 2023 guidance. This is tangible evidence that we are in a post-pandemic world, and our guidance demonstrates the exciting post-pandemic organic property growth opportunity for Ventas.

The key components for our ’23 guidance are as follows: net income attributable to common stockholders is estimated to range between $0.20 and $0.34 per fully diluted share. Normalized FFO is forecast to range from $2.90 to $3.04 per share. We expect our portfolio same-store cash NOI to grow 7.5% at the midpoint, led by SHOP same-store cash NOI growth of 18% at the midpoint. Our ’23 FFO guidance at the midpoint of $2.97 represents growth year-over-year of 5% or $0.13 per share against the rebased 2022. The FFO bridge describing the $0.13 is straightforward with two main drivers: first, we expect $0.29 from outstanding year-over-year organic property growth in SHOP; and second and partially offsetting is a $0.16 reduction, principally from the impact of higher interest rates.

A stronger U.S. dollar against the Canadian dollar and the pound is also a contributor. Other guidance items include receipt of over $300 million in capital recycling proceeds, no additional promote revenue, G&A approximating $151 million at the midpoint and 404 million weighted average fully diluted shares. The low and high end of our FFO guidance range are largely described by changes in the macro environment, including potential changes in inflation expectations and interest rates. A few thoughts on phasing of our normalized FFO through the year. We expect FFO in the first quarter of ’23 to be roughly flat to the fourth quarter of ’22 of $0.71 when adjusted for the $0.02 promote received in the fourth quarter, with the first quarter of ’23 is the seasonal low point for SHOP.

As the key selling season in SHOP kicks in and interest rates plateau, FFO growth is expected to pick up in the balance of ’23. A more fulsome discussion of our ’23 guidance can be found in the earnings and outlook presentation posted to our website. To close, we entered 2023 with momentum. The entire Ventas team is fully engaged and excited to deliver on our ’23 plans and to reignite a new cycle of success for the company and our shareholders. And that concludes our prepared remarks. For Q&A, we ask each caller to stick to one question to be respectful to everyone on the line. With that, I’ll turn the call back to the operator.

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Q&A Session

Operator: Our first question will come from the line of Joshua Dennerlein with Bank of America.

Joshua Dennerlein : I just want to ask about that Santerre Health Investors loan. Could you just provide more background why the allowance? And then, Debbie, I think you mentioned you’re looking to optimize the outcome. So kind of just help us think through like the outcomes that you’re expecting.

Debra A. Cafaro : Sure. The loan is part of our normal business. Over the last five years, I think we’ve collected about $1.7 billion in loans that we’ve made on health care properties or to health care operators. This particular loan took a $20 million allowance in the quarter. And we continue to be current in terms of interest, receipt of interest payments. And it’s under some compression of coverage because some of the assets haven’t recovered from COVID while interest rates have been increasing. And so it’s really a timing issue if you want to think about it that way. And so we would expect to work through that, and we have a lot of experience and tools and rights at our disposal to do that.

Operator: Our next question will come from the line of Vikram Malhotra with Mizuho.

Vikram Malhotra : I just wanted to understand in your deck, you outlined potential CapEx investments, I guess, in SHOP and maybe triple-net to position the portfolio. I’m wondering, the CapEx was a little elevated in the fourth quarter. So I’m wondering if you can give us a sense of just like the magnitude of these investments over the next, call it, two or three years to achieve what you want with the portfolio and perhaps tie those CapEx to the bridge you’ve outlined in terms of the SHOP NOI growth.

Justin Hutchens : It’s Justin. I’ll start, and Bob you probably want to jump in. First of all, it is a large initiative. We have 100 communities that are in the process of being refreshed. We do believe that it will be impactful. It’s about $1 million of pop. It should help improve performance. Certainly, we’ve considered that when we gave our guidance for 2023. And there’s more to do. But at this stage, we picked our highest priorities and we’ve been executing aggressively. So we look forward to these projects coming online during the key selling season.

Bob Probst : I’d add, the $1 million of pop, we’ve mentioned 100 properties, that’s obviously $100 million. The timing of that clearly isn’t all in one quarter. It will be spread over the course of time. But these are NOI-generating opportunities. ROI-generating opportunities are indeed embedded in the forecast we’ve given you in terms of the NOI growth. And I believe top use of our cash, best use of our cash is to reinvest in these assets, given the backdrop of SHOP and in senior housing.

Vikram Malhotra : And sorry, could you just clarify this $100 million, is that this year or is it spread out? I’m just trying to tie it back to ultimately the FAD growth coming through because if these are multiple years of $100 million, then maybe the FAD growth gets depressed.

Bob Probst : Well, first of all, we started this last year. So you mentioned the fourth quarter seeing some acceleration. That clearly is part of it. Second point to make is just in terms of classification of the CapEx spend. This is ROI generating a redev. So you’ll see that acceleration in readout. At the same time, FAD CapEx will increase. Again, the top priority is investing behind our SHOP assets. So you’ll see that increase at the same time. But it’s a multiyear program.

Debra A. Cafaro : And it’s a multiyear NOI impact as well we will see going forward. We’ll be investing into this multiyear recovery in senior housing and the supply-demand fundamentals in our market.