Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph, here with Michael Griffin with Citi Research, and we're pleased to have with us Ventas CEO Debbie Cafaro. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions. Debbie, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Great. Debbie Cafaro, Chairman and CEO of Ventas. Happy to be joined by my Ventas colleagues, and appreciate being hosted by Citi. Welcome to all the investors and other participants. I'll just start off with some brief opening remarks and then get to your questions. So at Ventas, business is performing exceedingly well.
We had a nice 2023, delivering normalized FFO of $2.99, which was above our original expectations of $2.97. Most importantly, we ended the year on a high note with a strong fourth quarter, particularly in SHOP, where occupancy accelerated and set us up for a nice 2024. In 2024, we are one of the top REIT growers based on our normalized FFO expectations, again driven by our SHOP portfolio, particularly in the U.S. And the year started off well with over 200 basis points of SHOP occupancy year-over-year improvement through February.
Importantly, as we see the year playing out, we expect a nice intra-year ramp in our SHOP portfolio, both same-store and non-same-store, that should provide continued optimism for SHOP growth in 2025 and beyond. So we're excited about the year, and that's really because demand is strong and getting stronger based on demographics. We've been executing on our three-pronged strategy, which is to capture the compelling SHOP organic growth opportunity, adding value-creating external growth focused on U.S. SHOP acquisitions, and then driving compounding cash flow growth from the rest of our portfolio. So with that, we'll be happy to start with your questions, Nick and Griffin.
Great. Thank you. Obviously, I think we want to dive into all of those topics, but there was news yesterday morning, both in terms of the cooperation agreement and some of the board changes as well. So maybe just starting there, you know, how do you think this impacts the business, both in terms of the board changes, the additions to the different committees, and how you think it impacts going forward?
Great. So we had news that Ted Bigman, who's here, welcome, Ted, and Joe Rodriguez from Invesco will be joining the Ventas board, have joined the Ventas board. And we have a very serious, excellent board of directors with a consistent refreshment program. As we thought about going forward back in 2023, based on our own views and shareholder feedback, we thought that a REIT investor would add skills to the skills that we already have on the board, and so we developed that profile. And at the end of the day, we're happy to sit here with two kind of for the price of one, two excellent investors who hopefully will be about driving performance at Ventas, which is what we in the board are all about.
Absolutely. And obviously, you've had a lot of investor meetings yesterday, today, I guess our lunch last week, and throughout everything else. What are you hearing from investors kind of as next steps? Where are you hearing from the investment community of opportunities that they see? And then kind of of those, which do you agree with and which do you think is maybe misunderstood about the company?
So, is this the three top reasons to buy Ventas stock, or are we getting?
No, more just feedback that you're receiving from investors. I mean, we had the new announcement yesterday, and obviously, people, everyone has an opinion. So where are you hearing kind of the most kind of consistent feedback of opportunities for Ventas going forward?
Yeah. I mean, the most consistent feedback, again, is we stand really advantaged as we look at this compelling senior housing growth opportunity. It's playing out. We're adding $100 million a year of NOI to our base. People want us to continue to drive that. And Justin is here and has been effectively doing that with our OI platform.
And so obviously, they want more of that. So this year, we people have really embraced the idea of adding external growth focused on U.S. senior housing to our activity set, particularly because of the kind of returns you can get, which are very unusual when you also have the kind of incredible supply-demand backdrop that we have for the asset class. And that's principally being driven by tightening financial conditions, to oversimplify. So they want us to capture organic growth, add to it with external growth, and really, obviously, drive stock price, which are all the things that we would like to do as well. So we've gotten very positive feedback on that while we've been here in our nice room that you gave us.
Thank you, Debbie. Terrific.
Thanks, Debbie. Why don't we start now on senior housing fundamentals? You know, as you said, they really remain strong, both in terms of rental rate increase and occupancy recovery. How confident are you that this recovery really has legs? And how is Ventas's portfolio, in particular, poised to capitalize on this demand over the coming years?
Good. I'll do the macro briefly, and then Justin will go in-depth because in the U.S., over-80 population supports growth in senior housing. We're facing a step function growth in demand. The last couple of years, we're 200,000 over-80 population growth. Now it's 500,000. When we get to 2027, it's more like 900,000-1,000,000. So that is a fantastic forward environment on a macro basis with no supply.
Great. I would say that the confidence level is very high. The macro backdrop is one of the reasons. We also have some proof points within the portfolio that I'll point out. We've had accelerating occupancy and better than typical seasonal performance in the winter months. The year-end is strong. We mentioned in our disclosures that we're over 200 basis points plus quarter to date or year to date through February of occupancy growth. The guidance is 250. So we're obviously off to a strong start relative to the guidance that we gave for the full year. This is supported by high tours and high move-ins, which is great. Move-outs are relatively normal. Ends are higher. So demand-driven outperformance this season thus far, so off to a strong start. The markets, a little more on that.
You know, when we look out three years in our markets, there's very little to no supply anticipated. The demand is growing, as Debbie described. The markets in which we're situated have strong demand characteristics. If they didn't, we've exited them already. We've taken other actions to make sure that we're well-positioned for this moment in time. Those include many things. You know, we've moved over 150 communities to new managers over the past few years.
We've moved over 85 communities from the triple-net to the SHOP structure so that we can capture the upside. We've by May will have completed 230 refreshes across our portfolio, which are needed when they're coming from triple-net to SHOP primarily, so that we can not only grow to market, where we have that opportunity in all those assets, but then also grow with a growing market.
So we call that the double upside growth opportunity. The U.S. is really where the growth opportunity is. Canada is highly occupied, high quality, highly stabilized. And most importantly, you know, with the backdrop being as strong as it is and the asset being well-positioned now, the managers are now hitting their stride.
You know, they've been in place for either a long time because they're in the legacy portfolio or they're relatively newer and they've been in place for a couple of years, and we're liking the results we're seeing and the execution we're seeing on the ground. And then the ramp we expect throughout the year in the same-store and the non-same-store pools is to be driven by occupancy throughout the year, leading to a strong jumping-off point in Q4, which should support more growth out in 2025.
Just on that occupancy ramp, Justin, is the expectation for kind of outsized occupancy growth to kind of buck the historical seasonal trends that we've seen in the past? And also, is it a function of greater expense controls?
So, I'll start with the expense part first. We've had; we're coming off a year where we had, you know, expense reduction as agency was coming out of the system. We're anticipating in 2024, on an OpEx POR basis, expenses in line with inflation. So now, really, we continue to be top-line focused, and we're focused on optimizing price and volume together to drive occupancy. Occupancy, based on the projections to support that 250 basis points occupancy growth, will be, yeah, amongst the strongest years. You know, we've had in recent years other months that are similarly strong, but this will be amongst the strongest and supported by, you know, all the facts I just shared.
Just talking more about the labor availability and wage pressures, which continue to ease. I think you've done a good job highlighting the growth opportunity within your Ventas OI initiative. How can you best apply these best practices across your portfolio in order to optimize in order to maximize operator performance?
Well, the first thing I want to remind everybody is that when we're talking about senior housing, we're talking about delivering care and services to seniors. So the highest priority is always to deliver high-quality care and services and make sure that we have all the adequate resources available to do so. And we took steps a couple of years ago to help our operators to position themselves to reduce agency, and they've done that. The U.S. is almost completely out of agency. Net hiring has been very positive. The macro environment has supported net hiring as well.
As we move forward, the next opportunity in terms of efficiency is as we're now seeing communities that are 90%, 95%, even 100% occupied, which we have some with wait lists and others that have been maintaining on 100% average, that's a good time to find opportunities to be efficient. And so while we're focused on price volume optimization, where we have a lot of upside across the broader portfolio, we're also now focusing in on margin expansion as well. And the best opportunity to do that is where you have the highest operating leverage, the highest fixed cost, and that's in the highly occupied communities.
We had a couple of questions come in through live QA, so I'm going to try to lump these together. Just on the occupancy side, wouldn't you expect expenses to grow as occupancy grows? And can you help us understand the incremental margins as it relates to the top line?
Sure. So as occupancy grows, total expense grows. So the OpEx POR metric neutralizes the volume impact. So if you are talking about just total revenue, yeah, we'll expect a, you know, a spread between total revenue and total expense, and expenses will be relatively elevated due to the volume that we're achieving throughout the year. So the answer is yes, that's true. And then what was the second question?
Can you just help us understand how that flows through to incremental margins on the top line?
Right. So in the U.S., we're just now around 80% occupied. We're just at the beginning of the really the best part of margin expansion in our business. Why is that? Because we're closer to being fully staffed. The operating leverage is getting close to being where we need to be to be, like, fully optimized. So we would expect right now, I mean, we've been achieving, you know, around 50% flow-through as it is in the last couple of years. Now we'll move into a period where that's more like 60%. You get over 90% occupied, and then you're at 70%+ . And that's one of the great things about the business, you know, on the upside is that the growth is supported by the operating leverage.
At what point does that kind of forward growth get priced in and development starts to come back, as we saw kind of pre-COVID with obviously a lot of building ahead of the demographics?
Oh, my God. So I'll start, and then Debbie might have some to add on the macro. So first of all, there will be new development, and it's just a matter of when. And, you know, the fundamentals are so strong, there's no question that there's going to be, you know there's going to need to be supply to meet the demand. And we have a page in our deck that if you get a chance to look at it, that our deck we created for the Citi Conference, that highlights the highest amount of deliveries that we've ever seen relative to the 80+ population growth.
And there's a huge gap forming. And that's really supporting that net absorption projection that we're focused on over the next few years. We feel like the next few years are really good. And then, as Debbie mentioned, when 2027 comes, the 80+ population doubles again. So you have 1 million people coming in that and a portion of which will need our services. And so we're optimistic over the near, mid, you know, next five to 10 years in terms of a great supply-demand balance, but there'll be supply.
Tightening financial conditions are limiting supply, and those should continue for a period of time. You have to remember, in senior housing, most even good assets don't have NOIs that are back to their pre-COVID levels. So they're facing a wall of refinancings of $18 million over the next couple of years, where NOIs aren't totally back, debt service is high because of rates, and it's very hard for banks then, while they're in the midst of all of this because they're lagging indicators, to then start underwriting new development loans.
So it always takes a while. If you remember back in the Great Financial Crisis, for those of you who are old enough, supply really came to a halt. Development came to a halt. And then by 2014, occupancies were in the 92+% , and there was a third of the senior growth in population that there is now. So there's 3x more growth and very limited supply now. So that gives us optimism, certainly, in the three to five years. And as Justin said, following that, there are just it will be dwarfed by the additions to the over-80 population.
That's very helpful. I guess just from a build-out perspective, and I recognize every single market's different, but how long does it typically, you know, from a shovel in the ground to a property typically take?
Well, I think we look at it from a permitting stage because we track permitting, and that's more like a three year time horizon.
So you feel very confident, obviously, supply over the next three years, and it sounds like more three to five, given the financing markets.
Right. That sounds about right.
Good.
Maybe back to fundamentals. Can you remind us what the normal seasonal trend is from 4Q- 1Q and how much you've outperformed relative to that? I would think that, you know, given this demographic shift, you know, and how much occupancy was lost during COVID, it's fair to assume you would have outperformed those historical trends.
What was the last part of what you said?
Just, you know, I think that it was probably an expectation that, given the demographics combined with the occupancy loss during COVID, that you would see outperformance on the occupancy recovery side kind of relative to where seasonality was.
So normally, in the fourth quarter and the first quarter, actually we see typically a decline in occupancy due to illness primarily. So that's usually move-out driven. There's also less move-ins during that period. There's holidays during the period. Generally, economic activity in our sector picks up during the summer, and so we see, you know, more move-ins and less move-outs because you have a healthier population.
The weather's better.
During the key selling season, the weather's better, et cetera. We outperformed what we expected, and we haven't disclosed the details, but what we have disclosed is that we've started out strong relative to our full-year expectations.
Can you maybe give an update on the recently transitioned Holiday assets and how those have been performing?
Sure. So in the fourth quarter, the Holiday portfolio that grew 100 basis points occupancy, and those are doing great. We had some of that transition. Those grew as well. They grew about 40 basis points occupancy. And one thing that you should know about the SHOP portfolio that we have is we have a big same-store pool, includes 80% of our communities, 90% of our NOI, so well-represented same-store pool. The non-same-store pool is a little over 100 communities, but it's also not contributing a lot of NOI.
And so it has lower occupancy. It's getting the OI playbook, the refreshes, the new managers. It's going to be part of what positions us for the fourth quarter to have the jumping-off point and out in 2025. The reason I mention that in this context is those communities that we transitioned away from Holiday last year are in that pool, and they are off to a good start. We anticipate them particularly being a big contributor as part of that non-same-store group next year.
We had another question come in here from live QA. How do the rates in your portfolio compare with competing products nearby? And as inflation comes down, how does that impact rent?
So, the answer is it varies. We have price points everywhere from kind of a mid-price point independent living product all the way to a high-price point, high-acuity AL product. So we tend to be on one end, we tend to be market leaders either in the, you know, the first or second spot in terms of price, and that's driven by our Sunrise communities.
And then in the middle part of the portfolio, we tend to have you know, we're just kind of in the middle. And so that's been a real unique opportunity for us because there's an opportunity there to drive more demand and price to that product. A good example I'll share was the formerly known as T90 portfolio, where we really applied the entire playbook to this. We disaggregated the portfolio to seven operators.
We sold 13 communities that were in markets that didn't have upside. We refreshed every asset and put new managers in place that are off to a really good start and the OI platform to drive pricing volume, agency reduction, digital marketing, et cetera. That portfolio has grown in the Q3 of 2023 over the prior year by over 700 basis points of occupancy. RevPOR has been over 8%. NOI is obviously through the roof as a result. So we really like how we're positioned. And what we particularly like is that the assets are appropriately positioned within the markets where they reside and affordability strong. Our pricing strategy is to stay within our relative market position as we increase pricing so that we optimize price and volume.
I just to put an exclamation point on what Justin said, we have strong pricing even at the U.S. 80% occupancy level because of the value proposition we're giving to seniors and their families. So we would expect, as occupancies increase and capacity is taken out of the market, that that would continue to be the case and possibly even strengthen.
Maybe a couple broader macro questions that we got in here. Given that a lot of people have to sell their homes to go into a senior living facility, is there any issue with the fact that mortgage rates are as high as they are, and that's resulted in existing lower turnover for homes?
Well, first of all, senior housing is highly affordable, and that's one of the key metrics that we look at as we're making investments and in our portfolio. So seniors have a variety of net worth. You know, the average over-75 household has $1 million of net worth. When you look at the length of stay, which is two years in Assisted Living and three years in Independent Living and the price points that we're offering, most of our seniors can afford that many, many times over. And that's true. They're savers.
They have. This is one area where increased interest rates really actually help our customer because they're getting savings for the first time on their liquid assets. Many of them have pensions. Most of them don't have mortgages on their homes. So Justin's made a really good point that, you know, seniors can mostly sell their homes even now, and they're not, you know, getting a new mortgage. And so, you know, it really has not been a factor in move-ins. And, you know, more seniors now are living in senior housing than ever before, and we're seeing the move-in rates at the, you know, significantly higher levels than pre-pandemic.
Yeah. So, you know, I'm sure you know that, you know, home pricing remains very strong. Home sale inventory remains relatively low. And our customer, when selling their home, is getting a good price, and it is moving relatively quickly in the market. So home liquidity is most important in regards to using that asset to fund our services, and we're experiencing that.
Maybe shifting gears to the triple-net segment now, wondering if there is any update you could provide on negotiations around the Kindred or Brookdale leases. Obviously, you want an outcome that's beneficial to all parties and shareholders, but what can we expect in terms of whether or not these leases will be renegotiated? And if so, at what rent?
So we have two triple-net leases that have lease renewal dates into 2025, and we'll talk about both of them. So one is Brookdale. It's about 8% of Ventas NOI. The trends in the portfolio are very good and improving. And the tenant has an all-or-nothing renewal that has to be exercised, if at all, by December 1 of 2024. And so because the trends are so positive in the assets and we expect EBITDARM to continue to grow, there are lots of ways that there can be really good outcomes for Ventas. There could be a renewal, in which case rent would be escalated in year one of the renewal at a collared level of 3%-10% growth and then escalate thereafter. And one might be that.
Well, I'll put it this way. So these communities now cover the lease on an EBITDARM and EBITDAR basis, and they grew 35% last year. NOI did. And of all the fundamentals that I mentioned to support tailwinds, for instance, in the markets where our Brookdale triple-net communities reside, we expect 1,000 basis points of net absorption in their markets over the next three years. So tailwinds are excellent. So we'll see. I mean, you know, right now, Brookdale has the option, and they'll let us know which direction they like to go. And then otherwise, we're happy to have it in our SHOP portfolio moving forward.
From those conversations, if they're already being covered and everyone sees the next few years there, what gives you an indication that they wouldn't want to renew it, kind of per the context?
It's early. It's early.
Okay.
I mean, we're more than a year and a half away from the end date. And so.
So it's December 2025, not 2024?
That's when, right? But the notice date is.
2024.
By December 1 of this year. So it's very early, but we, again, feel really good about the trends. And you have to think about what will NOI be kind of at the end of 2025 going into 2026. And as Justin said, we feel optimistic about that. That leaves a lot of room for a variety of positive outcomes. On the Kindred side, happy to be talking about this 25 years after I started when Kindred was 100%. Now happy to say that the lease is a 5% of our NOI. Again, similarly, Kindred has an all-or-nothing renewal that would have to be exercised, if at all, by May 1, 2024. And the lease renewal date would be effective in May 1, 2025. In the case of Brookdale, you know, the timing's great for us. In the case of Kindred, it hasn't been as optimal.
The assets in the pool made almost double the EBITDARM that is currently reported during COVID. What's really important, again, is thinking forward about what the EBITDARM earning capacity of those assets is. We believe that it's significantly higher and has been higher than where it is right now. It's about 30% of Kindred's business, which is an important point. We have all the kind of tools and experience to maximize the outcome for Ventas, which is what we intend to do. It's too early to say what an outcome might be, but we've been working on this for three to six months to get ready to start to address this.
Maybe touching on external growth opportunities next. You've communicated that you're looking opportunistically to acquire seniors' housing this year. Just given where your cost of capital is and the funding needs, would you really have to see leverage pretty materially decline in order to kind of turn the acquisitions engine back on full steam?
Well, thank you so much for asking that because that is a really important part of our one, two, three strategy. What we anticipated and what is happening is that the investments would be focused on U.S. SHOP. The expected going-in yields would be 7% or higher, and the expected unlevered IRRs would be in the low to mid-teens. And Justin is doing a lot of work using his data and analytics to identify markets where we want to be.
So we think that, given our platform and position, we want to find a way to invest in this multiyear growth opportunity, expand our U.S. SHOP footprint in a way that benefits Ventas shareholders. And we have multiple ways to do that. We've projected $350 million of near-term acquisition opportunities. As the pipeline builds, Bob and the team will continue to find ways to fund those that make sense for shareholders.
Would it make sense to recycle capital out of your other business lines? I think about outpatient medical or life science, if this investment opportunity, both from a yield and an unlevered IRR perspective, is so enticing for seniors' housing?
Yeah. Short answer is absolutely yes. You know, we have our scanners out for low cap rate, low growth assets that we could recycle into fast-growing U.S. senior housing. And obviously, we've got 1,400 properties. We can look across that and see where there might be opportunities. Outpatient medical might be an area. Research might be an area. But that would clearly be a way to enhance growth and do so in a way that would be attractive financially. So that's clearly on the list.
Justin, maybe you can comment on what types of opportunities you're seeing and that you're most interested in.
Sure. So senior housing, primarily need-driven, assisted living and memory care combo communities or independent living, assisted living and memory care combination communities. Bottom line is they're need-driven. They have a unique profile from an investment standpoint where you have a strong going-in yield that's either neutral or accretive and growth. Haven't usually seen those combinations in the past. And so, you know, operators, you know, good markets.
They have strong net absorption. Newer communities, generally, or adequately positioned communities within their market. Operators, the operator selection, generally, if it's doing well, we'll prefer keeping the existing operator in place, even if that means it's a new operator to us. Or, of course, we have, you know, a national coverage of good operators with track records that are excellent.
So we're happy to make a change as well. The pipeline's obviously much bigger than $350 million. That was put in place. The guidance was given to indicate to the market that we're serious about growth. We have an actionable pipeline. We're going to show proof points to the market in hopes that that generates support for us to go do more and hopefully we're doing more at a lower cost of equity.
Well, if there are no other investor questions, we can end the session with our three rapid fires. What is the best real estate decision today: buy, sell, develop, redevelop, or pause?
It's definitely to invest in U.S. senior housing opportunities, as just outlined.
What is your expectation for same-store growth for SHOP in 2025?
I love that you guys keep asking this, and I usually decline. But this year, I'm just going to say we are convinced of this multiyear NOI growth opportunity that we have in the portfolio that's adding, you know, $100 million last year, $100+ million of NOI this year. And we mentioned that the setup for 2025 should be excellent with the NOI fourth quarter in 2024. So we feel good about that.
All right. But no number.
Pardon me?
I said, but no number.
And lastly.
That's more than I've ever said before.
That's true. That's true.
And lastly, will there be more, fewer, or the same number of publicly traded healthcare REITs one year from now?
I think there will be more because, you know, what could be better than healthcare real estate with a demographic demand? And I would just tell you that, you know, we hear.
New session ended. The session will begin in five minutes.
We at Ventas think we have a really unique combination of value and growth right now. So hopefully.