Okay, welcome. This is the 1:45 presentation with Ventas. I'm Mike Carroll of RBC Capital Markets, and I cover the company. To my right, I have Debbie Cafaro, who is the CEO. Then I have Bob Probst, the CFO, and then Justin Hutchens, who is the EVP of Seniors Housing and CIO. To start this off, I'll flip it over to Debbie, and she can provide some opening remarks. Debbie?
Good afternoon, everyone. Great to be here with you. Mike, thanks so much for hosting. Ventas is an S&P 500 company focused on the longevity economy, which is basically serving a large and growing aging population with powerful secular demand trends. I'm pleased to report we recently improved our outlook for the company, both on an FFO per share basis at expected 7% at the midpoint for 2025, and we increased our Same-Store senior housing operating portfolio, our SHOP, expected growth rate to 12%-16%. Our entire strategy currently is a 1-2-3 strategy that's focused on senior housing, or SHOP, and really it's to drive this multi-year NOI growth opportunity that we have that's been really powered by secular demand, incredibly limited supply, and really the alpha is our platform on top.
As we look at this, we're in about the fourth year of adding about $100 million a year of NOI from our portfolio in organic growth, and that favorable supply-demand trend should continue for an extended period. There's virtually no supply, and the senior population is burgeoning and is looking to have a step increase in growth as we look to 2027 and beyond. As Justin likes to say, the best is yet to come. We also have about 86% occupancy, as you look at our total SHOP portfolio, Same-Store, non-Same-Store, U.S. and Canada, and that gives us a base on which to drive occupancy and rate going forward, which is the way we would expect to participate in this compelling and really unprecedented multi-year NOI growth opportunity in SHOP.
We're adding to that by the second part of our strategy, which is to allocate capital to invest in senior housing, and we have about a $1.5 billion expectation for external growth focused on SHOP this year. The purpose of that is to expand our footprint, elevate our enterprise growth rate, and deliver from the way that we're funding the investment activity. Together, the organic growth and the external growth should make SHOP over 50% of our NOI by year-end 2025. At the same time, we're improving our balance sheet and overall, with the goal being driving enterprise growth, driving multiple, driving TSR. We're excited about where we are. We have a great story to tell across the REIT space, and we're looking forward to our conversation today and to continuing to deliver for investors. Thank you.
Great. Thank you very much. I have a list of questions that we're going to go through, and obviously, if anybody in the audience has questions, you can come up and we can answer those. First off, I know that Ventas has provided a business update specifically on its seniors housing operating portfolio post-earnings. Maybe you can run through that of how that portfolio has really trended post-earnings.
Yep, will do. Thank you, Mike. As Debbie mentioned, we did raise our guidance not only on FFO, but also on SHOP. Our new SHOP range, Same-Store, Cash NOI is to grow between 12% and 16%. That, as Debbie said, means we are entering our fourth year of double-digit growth, which is fantastic. Unpacking the confidence to raise our guidance in SHOP was really the year-to-date performance. Stepping back, year-to-date, we have seen very favorable pricing, RevPAR in SHOP, and we have seen very favorable labor costs. The combination of those two things has really driven the guidance raise. Of note, of course, very important is always occupancy growth. We had a very strong first quarter on occupancy. We were up 290 basis points year- over- year, which was great. We did have a higher level of mortality in our portfolio late in the quarter.
That lowers the start point coming into the second quarter. We did update the market on how we're performing since the quarter end. The good news is we've seen strong demand all year, and that strong demand has continued through May. We're about 28, now 31 days into the key selling season starting in May. We're seeing sequential occupancy gains of 30-50 basis points from March through May. That really showing the proof points of the key selling season really starting to lift off. We saw 15% growth on our NOI in the month of April, which is really good, again, led by the occupancy pricing and labor. We also appear to be normalizing on the deaths in May as well. All in all, that gives us the confidence in the outlook, and we're really excited about the key selling season.
I'm going to add a few comments onto what Bob and Debbie covered. First of all, as it pertains to the elevated mortality and the low jumping-off point in occupancy, responding to a comment I heard earlier in a meeting, HVS senior living has absolutely nothing to do with either one of those data points. I just want to clear that up. Also, I wanted to get into SHOP portfolio composition strategy, which really is a double-click on the positioning we've put in place to make sure that we're going to take advantage of this tremendous opportunity in senior housing. First of all, we always start by focusing on making sure that we're in the right markets and the right assets and the right operators.
We have a data analytics platform that we use to determine the favorability in markets as it pertains to the aging population, the wealth of the aging population, the affordability of the product that we're going to invest in or retain in that market. The asset within that market needs to be competitive. If we need to invest in the asset to improve the competitive position of the community, we'll do so. We also have a great opportunity where we're transitioning communities that we already own that are a triple-net structure over to the SHOP structure. I'll come back to that. We look at who's the operator. We have grown our operator pool to 33, 32 in the U.S. and Canada, one in the U.K. in our SHOP portfolio. That's up from 10 a handful of years ago.
That has really given us great coverage to cover different markets, also a wide variety of price points and asset classes within senior housing. We have become really skilled at transitioning to new operators. We had over 150 transitions that we have managed over the years. The goal of those transitions is always to improve operating performance. We have a great track record doing that. We would anticipate that at any given time, we might have anywhere from 5%-10% of our portfolio that specific communities are eligible for transition to new management. Even with our very best operators, it could always be one or two or three that we could move on to new management. It has been a successful program for us.
The other part that's been successful, and this is probably the most important point, and Debbie made the point around the 86% occupancy that we have in our total SHOP portfolio. Underneath that is a U.S. portfolio that excludes these conversions from triple-net to SHOP that's 84%. The group that we've been converting from the triple-net structure to the SHOP structure is only 79% occupied. That includes 130 conversions we've already done. It includes another 45 that are coming later this year as part of the deal that we worked out with Brookdale. When you look at that, you combine it with a very strong, stable Canada that's 95% occupancy.
The acquisition approach is to acquire high-performing communities with upside that are around 90% occupied, but in strong markets with strong affordability, price opportunity, and a much longer runway for more occupancy growth as well. We have a really good combination of enduring growth through this lower-occupied community and this lower-occupied portfolio of 86%, which will benefit from the multi-year demand cycle that we are facing, but also the new acquisitions, which is improving on the quality and giving us outsized returns given the risk-adjusted return profile of those communities. All together, we are really well-positioned within our portfolio of senior housing.
Okay, great. That is a good backdrop.
I guess, Justin, can you talk a little bit about the pricing power that you have right now within the seniors housing operating portfolio?
Maybe kind of differentiate that between the communities that are in the mid-80s versus the mid-90s. I guess, how much more pricing power do you have as occupancy builds within this portfolio?
Sure. The first thing I'll just reinforce is a comment that Bob made, and that is that we're outperforming on RevPAR. We're having good experience in terms of pricing this year. That's really taking place in both the U.S. and in Canada. In the U.S., what we're seeing is good in-house rent increases. It's consistent with last year, around 7%. We're also seeing a trend where our street rates are increasing as well. In this industry, there's always been a bit of a gap between in-house and street rates. We're starting to see that catch up. That is supporting strong RevPAR growth. We would anticipate that opportunity will continue as occupancy goes higher. Where we see the proof point is in our portfolio, we have 90% plus occupied communities. Those communities are generating outsized RevPAR growth.
It's 2x what the rest of the portfolio does. As we face our markets, where we project 1,000 basis points of net absorption and 1,500 basis points of net demand, because there will be supply shortages in the future, the price opportunity should only get better because we're really just at the beginning of the scarcity value of the asset. We have increasing demand, and we know that we're delivering a very valuable and important service to seniors. That certainly the demand will continue moving forward.
Great. Maybe can you provide an update on the incremental margins that a resident has coming into the community, how that changes from 80% to 90%, even if it's fully occupied? How different is that flow-through margin?
Right. One of the most powerful parts of the senior housing business model is that as occupancy gets higher, your costs become more fixed. Labor is 60% of the cost, and there are variable costs as well. When you are on that journey from 80-90% occupancy and you are at 90%, you look backwards at your performance, we would expect to see around a 50% incremental margin. The same can be said for that journey from 90-100% occupancy. You would look back and you would expect even better incremental margin of around 70% because your costs have become even more fixed. The incremental revenue that you are adding drops more to the bottom line. There is this margin expansion opportunity that occurs at the higher-occupied communities.
Okay. And then just kind of looking at the current uncertainty that we have in this market related to the tariffs, I mean, how does that flow through to seniors housing? I mean, with some of the tariffs or the macro uncertainty, does that cause any delays in move-ins or anything like that? Or is there any type of weakness that you'd expect to see?
One of the things we really like about our business and like about our company, frankly, is that our strategy and our company are very well-positioned to outperform in the current environment. We're mostly domestic. We have limited exposure to tariffs. We have pricing power so that if there is inflation, we're able to pass that through as long as we're providing the right value proposition to seniors and their families. We feel really good about our installed base because we think replacement cost is going to continue to increase as we look at new construction. We have incredibly favorable supply-demand fundamentals right now with virtually no new supply. We think that the tariff situation with raw materials in particular, and also with labor, which isn't strictly a tariff issue, but a public policy issue, should enhance our position as we look forward.
It is part of the reason that we continue to try to take advantage of what is a pretty compelling external growth opportunity as well to buy more assets that serve this population at below replacement cost.
If you think about, I know this is a need-based business, so a lot of seniors, when they need to move in, how long could they delay a decision? If there are concerns that we would have in the marketplace, like the inability to sell one home, does that cause seniors to delay? Does that have any type of potential impact on demand that you could foresee? Or is just the demographic tail ends just too strong?
I mean, the sheer numbers are really overwhelming. When you look at the over 80 population, it was growing $100,000 or so a year a couple of years ago. Now it's in the $500,000 a year. And it's likely to step function up to $800,000-$900,000 a year, whereas the start in the first quarter in senior housing were in literally the 1,000-type units. So we feel really good about the demand. I'll defer to Justin in terms of the time to move in and the elasticity of this secular demand. And it may differ by product type as well.
I just want to make sure I understand the question in terms of the time to move in. What was that part of the question?
Just like if there is any economic weakness on the macro side, like maybe a weaker housing market, I mean, do seniors delay decisions? I mean, I'm assuming they're going to have to move in no matter what, but how long are they able to delay a decision if something like that happens?
I mean, if you just look back at history, there's been two times where really demand has been impacted in the sector. One was the Great Financial Crisis, which was a very, very deep housing crisis. That was pretty extreme. Even through that, senior housing ended up being one of the most resilient asset classes in real estate. That was an example of occupancy being impacted. The other one was the health crisis. That was a direct hit in terms of the pandemic. Even during that period, we were really pleasantly surprised by the amount of demand we had at the doorstep. It was really more around restrictions and regulatory requirements and operators taking on certain policy around potential move-ins that caused a lower occupancy. When you consider that, those two extremes, this is a very resilient asset class.
We do not usually see little shocks. I would expect that little shocks along the way would not interrupt us much. That has been the experience that we have had in the sector. To Debbie's point, the demand is only increasing significantly.
Yeah. One just proof point of that in the deck is that in April, with all of the controversy and disruption in the macro environment, our move-ins were 102% of prior year, which was a very strong year. Again, I think it's the secular demand overwhelming kind of these intervening type of circumstances.
Maybe we should stick on a little bit on the update you provided in the opening remarks regarding what happened in March and through the key selling season. I mean, maybe can you spend a little bit of time on what happened to the occupancy trend in March? Maybe how big were the increased move-outs? As we're entering the key selling season, are you seeing those move-ins kind of ramp up as you would expect just given the better part of the year?
Sure. Move-ins through the year, April through May, have been strong. We just quoted 102% in April, but demand has been strong through the year. The dynamic we saw was not one of move-ins, but move-outs. Notably elevated deaths in our portfolio late in the quarter. Just putting some numbers on this, year- over- year, in the first quarter, our occupancy was 290 basis points higher than the prior year. In our release through May, we have updated that our average through May in the second quarter is 230 basis points higher year- over- year. A 60 basis point impact. Putting some numbers around that, we have about 52,000 occupied units in our portfolio. That 60 basis points equates to about 300 elevated deaths. That is just a sad fact of the business. It does bounce around. That was a very unusual number for us.
The result of it is a lower start point in terms of occupancy. That being said, the demand led by the move-ins and starting in May in the key selling season are strong. May through September is the key period in senior housing. We have had a very good start, so.
Bob, the spot occupancy projection from the end of March to?
Is 30-50 basis points is the range that we've given, yeah. Sequentially from end of March to end of May.
Okay, great. Just sticking on the March move-outs, and then we'll move on from that. I know you said it wasn't Atria. Was there any specific operator or geographic concentration? Or was it just kind of broad-based, one of those anomalies that occurred within the portfolio?
Yeah, it was uncorrelated to anything. There was a handful of operators. There was no correlation to any kind of flu season, no correlation to particular asset class or geography. They just happened and had absolutely nothing to do with Atria Senior Living at all. One thing that I'll also say, though, as we've moved into the key selling season, is that the growth we're anticipating is more broad-based, though. Broad-based growth across asset classes, across geographies, and encouraged to be on the better side of things again.
Great. Let's move to investment activity because obviously you're seeing a pretty big uptick in investment activity over the past few years. I mean, can you kind of qualify what are you seeing in your pipeline right now and how quickly is that opportunity set continues to expand from what you guys are looking at?
Yeah, sure. I'll talk about it. We've been, basically from a standing start, at the beginning of last year, we have close to $2.8 billion of senior housing investments. That's been targeted towards communities that we call high-performing with upside, around 90% occupancy. They've established market leadership. They're high quality. They're in markets that have strong net absorption and strong affordability. We're buying below replacement costs. We're targeting 7%-8% year one yields, low to mid-teen unlevered IRRs. The risk-adjusted return profile is very attractive. You're getting good yield. You're getting growth and high quality, all in one package. That's been a good opportunity. We've continued that. This year, we've increased our line of sight to $1.5 billion. When we give a line of sight, that's where we're certain we're going to close on a certain amount.
It's not putting a ceiling on the pipeline opportunity. It's actually putting a floor on it. The opportunity set we're seeing is multiple billions. The opportunity set in our pipeline has been growing. We anticipate continuing to execute on the investment strategy and continue to expand our footprint in senior housing.
How are you typically sourcing these transactions? What does the competitive landscape look like as you're pursuing these deals?
The sources are, I mean, 70% of them or so have been relationship-oriented. We have a strong relationship with operators. Where you have operators that are performing well, they certainly have big influence over the process, whether they are in the ownership or in the structure with the seller in another capacity. That has really served us well. We have had off-market opportunities where operators are really choosing to work with Ventas. We also have the classic broker transactions as well. The competition is going to increase because just listen to the fundamentals that we are speaking to and the demand profile, which is extraordinary. I mean, this is a red-hot asset class. There will be more competition coming in. We have seen that in the deal flow as well. It is a good opportunity to remind everybody why Ventas is so well-positioned to compete in this asset class.
First of all, we have 33 operators, and that will probably grow. The reason that's important is because this is a fragmented sector. Half the industry's operators have 10 or fewer assets. 80% have less than 100. These aren't big institutional players you're working with. It's a high-touch business. We're highly engaged in asset management through our Ventas OI platform. We're highly engaged in the improvement of the assets through our CapEx refresh program. If you're going to own this at scale, you really need to have a platform that can back it up. That gives us a wide variety of different investment options that new entrants, it will take years for them to get to that place.
With the OI platform that you were talking about, I mean, do you have operators that choose to do deals with you or expand with you specifically because you help them operate their business or help guide them on what to look for? Is that kind of a competitive advantage to kind of lock up some of those relationships?
I'm really proud to say and humbly say that it's become clear that a competitive advantage for Ventas is the relationships that we formed with our operators and potential operators. It has definitely played a role in our ability to grow. The way we engage with operators through our Ventas OI platform has been highly collaborative. It's high touch. My team's made over 400 site visits this year. We're not sitting behind a desk somewhere directing traffic. We're in the field, interacting, finding opportunities to improve and also ways we can support the operators to be successful. I would say that is a big advantage for us. I would expect for that to continue as we move ahead.
As you kind of utilize your OI platform to kind of talk to these operators, how receptive are they for advice that you may give them on how to drive better results?
As you might imagine, there's always skepticism that we faced when we started introducing this concept because most high-quality operators feel as though they have a good handle on running their business. They're not looking for advice. What we've had to do is focus on areas where it's truly value-add. There are three core areas we focus on. One is benchmarking. We benchmark operating metrics across the board on an anonymized basis. We're able to compare revenue and expense-related metrics. That gives operators just a good check in terms of where they can improve, where they're performing well, where they can improve across the board. We also focus, and that's like the benchmarking approach. We also have a heavy emphasis on digital marketing where 70% of the move-ins are derived.
We have technical analysis and also sales support and oversight that is very significant, significantly focused in that area. It is an area that all U.S. operators can easily agree on is important and needs extra support and focus all the time to maintain your competitive edge. The other one is price volume optimization. There is no price transparency in this space. To the extent that we're able to use our analytics platform to bring to operators some guidelines in terms of where to set pricing from a per unit and a per community and per market basis. We do not set the pricing, but we give guidance based on our analytics platform that has proven to be very valuable and helpful to the success of the business.
Okay. I want to see if there's—we have a few minutes left. I have a handful of questions. If anybody in the audience wants to ask a question, I just want to offer that opportunity.
Thank you. I would love to hear your perspective on how you marry the growth expectations in your acquisitions and for Ventas versus the capacity for seniors' incomes to keep up with the rate growth.
The question is how to think about senior housing and OI growth with the capacity to pay. That is a really, really important question. I'm glad you raised it because we haven't expounded on it. It is one of our key investment criteria. I'll just start by saying that anyone who's had a loved one who's used senior housing understands and appreciates the value it provides to the senior and their family, not only for care, but also for socialization. It really is designed to help people live longer, healthier, happier lives. That is really a starting point. Secondly, all the data show that if you're a single individual living in your home, it's about the same cost to live in senior housing because when you move into senior housing, you don't have upkeep, you don't have taxes, you don't have insurance.
All of the things that you pay for, you're no longer paying for. You're really just paying to reside in the community. That is a second important point. The third point is that, and this is a quantitative one, we're very careful when we invest about affordability. In our markets, a senior can afford to live through both income and assets in our setting seven times what it actually costs for them to live there. If a length of stay is two years, that would imply that a senior could live there for 14 years. That is an important metric that we look at very closely when we acquire things because it is important for continued pricing power and the ability of seniors and their families to be able to take advantage of our settings.
All right. I guess we have one more question just in case we have 50 seconds left. I mean, Bob, maybe can you talk about how you plan on funding these investments? What's the primary source of funding on the acquisition activity that you guys are pursuing?
Yeah. The strategy of, first of all, growing organically with senior housing, and then secondly, investing in senior housing to grow our participation in that asset class. Equity-funded has been the playbook over the last year and a half and a very successful one because we're seeing not only growth in our earnings, but also improved leverage, most recently at 5.7 times, which is a full turn of leverage improvement in the last year. Even all equity-funded, the returns, as Justin was describing, are very attractive. The strategy is working together with the funding to really drive TSR, a stronger portfolio, stronger growth, and better leverage.
Just as soon as you finished that question, the light started blinking red. So we'll end.
That was the right answer.
Yeah. We'll end the session there. Thank you, everybody, for joining us. Thank you guys for showing.