We're good. Okay. Thank you for coming to this presentation. My name is John Kim with BMO Capital Markets, also known as Bank of Montreal. I'm very pleased to introduce the senior management team of the biggest landlord, healthcare landlord in Montreal. I'm not sure, but one of the biggest in North America. Debra Cafaro, Chairman and CEO of the company, Robert Probst, CFO. I think I'm going to hand it off to Debbie for opening remarks, and then we'll go into Q&A. I'm sorry, Juan Sanabria as well, Investor Relations.
Exactly. Exactly. Good morning. It's wonderful to be here with everyone. It's nice to see you, and we have lots of great to talk about today. First, I think I'll give you a brief overview of Ventas and our competitive advantages, and then we can open to questions. As you know, Ventas is a very successful S&P 500 company with a high-quality, diverse portfolio of senior living, healthcare, and research and innovation properties in North America and the U.K. We've always prided ourselves on reliable, growing cash flow from that diverse portfolio, and we are very lucky to be in several verticals that have incredible demographic demand. Over the past 20 years, we've delivered 23% compound annual return to shareholders, and we have a management team that has always had a strong commitment to delivering total return and a strong commitment to our shareholders.
Three of the things that I really love about Ventas and that were really proven in our recent transaction, which I'll touch on, is that we have an incredibly skilled, tenured, interdisciplinary team, and they have delivered this incredible track record. The team is very collaborative, and we know how to accomplish even difficult things in short periods of time, and I'll talk about that. Another thing we pride ourselves on is our deep relationships with best-in-class operators and developers, and we have a history of partnering very successfully with them. Then, third, we've talked about this pivot to growth, and Bob will get into it in greater detail.
But basically, after a long period of growth, we've had, over the last couple of years, some portfolio repositioning and elevation that was accompanied by at least $8 billion in asset dispositions, and we are coming to the end of that. And we see a pivot to growth for Ventas based on really four underpinnings. One is reigniting our external growth machine, which we have started to do, continuing to see core utility-like growth in our base portfolio, the powerful upside that we see in senior housing, and the delivery of our research and innovation pipeline. So those are the four underpinnings of the Ventas pivot to growth. And so we're very excited about where we are. We just announced yesterday a $2 billion investment in a very high-quality Québec-based senior living business. It is apartment-like, a new product with a really well-regarded brand and management team in Québec.
The market is very favorable, and as I said, it really shows off the three things I just talked about, so one is it was a very opportunistic situation. We were presented with an off-market opportunity for great assets with a good growth profile. Our experienced team, interdisciplinary, was able to swarm the transaction and complete it in a short time frame because the transaction was on a very specified time frame, and we were also able to underwrite the operator, the assets, and they were able to underwrite the quality of the partnership that they would have with Ventas based upon some of the other relationships that we do have, and that really segues to the second item I talked about, which is our relationship with best-in-class operators and developers. The Le Groupe Maurice transaction really highlights that. Le Groupe Maurice has been around for over 20 years.
They've had a very consistent, very successful track record of delivering a great product to seniors, very apartment-like with à la carte services, and have consistently started two to three new projects every year, which lease up in a very short period of time. And so partnering with Le Groupe Maurice, we think, will give us consistent growing cash flow coupled with a new platform for growth in the Québec market. And then fourth, the pivot to growth. Obviously, we've announced that the transaction is financially attractive. We're buying below replacement cost. And in addition, the portfolio through lease-up, in-progress development, and our exclusive rights to the development pipeline will provide additional growth over time, and the transaction is accretive in 2020.
What I would say is great team, best-in-class partners, developers, operators, and a pivot to growth that we hope to talk about in more detail at our Investor Day coming up in June, which I hope you'll attend. With that, I would turn the floor over to John for questions.
Sure. Thank you. This transaction was very interesting, eye-opening. We've got a lot of, I think, eyes on the transaction. And a couple of things that struck out was the low cap rate of the transaction and the high penetration rate. Can you just talk about that dynamic? What makes this a little bit different than maybe senior housing in your U.S. portfolio?
I mean, I think it's a market cap rate. We've done a lot of work on valuations in the U.S. and in Québec and Canada generally. Apartment cap rates in Québec have touched the 4% number. We've seen senior housing transactions this year with institutional capital in the low fives. We are buying below replacement cost. And 5.5% is, I think, a good cap rate in the per-unit valuation, I think, is very good for the quality of product. So that's right down the middle.
If I could touch on the penetration rate, which you mentioned.
Yeah, please do.
John, because I think it's a really unique market, Québec that is, in first of all, having a high propensity to rent, whether it be apartments or senior housing, the senior housing industry, 93%+ occupied, highly occupied, very strong demand, so recent openings, the last 10 openings coming from Le Groupe Maurice have leased up within a year, and a really interesting business model, very apartment-like with services and amenities, very active-type senior, so that together with the aging population, which in Québec as well as in the U.S. is accelerating, really gives us great confidence in the growth opportunity.
Is this product similar to age-restricted multifamily, or is it more of like independent living or somewhere in between? How would you compare that to a U.S. product?
Yeah, I mean, it's an in-betweener. There are services being provided for daily living, but very, very light touch. It is much more about an active lifestyle. You'll see a pool and a bowling alley and a spa within the community. They're very large, by the way, 300-type unit communities and very active. So it's a little bit between.
How important was it to have Maurice as the partner? Because it comes with a very good reputation. Who are some of the competitors? Did you talk to other potential companies like this in Québec or maybe in Canada with similar product?
Right. Le Groupe Maurice is the fourth-largest senior living operator in all of Canada. They obviously focus in the Québec market. They have almost 10% market share there and a really good brand. And many people, even outside the province, know the brand. We have been looking at the market to invest and have talked to various groups. There are a couple of quality operators. But for us, again, in healthcare and senior living real estate, so much of the success is based upon who the operator is. And so wanting to have a partnership with someone who has a proven track record of both operating the assets well for the benefit of seniors and profitably, and then also driving consistent growth, that was really what we were looking for. And so the identity of the partner was extremely important to us. And we to them.
They were very interested in a long-term partner who has expertise in and commitment to senior living and can put capital behind that growth. So.
To clarify, this is a RIDEA structure?
It's a management contract, and we will have an 85/15 partnership with Le Groupe Maurice.
Are there any aspirations with Le Groupe Maurice to expand outside of Québec, or is it specifically Québec-focused?
I'm glad you're going there because we have lots of options. I think the immediate opportunities are in Québec with the four in-progress developments and others behind that. But certainly, we've had a lot of success in Ontario and BC, and potentially there could be opportunities for that type of product there. But we're just happy with what's right in front of us, and that would be icing on the cake, to be honest, because what we're acquiring is very, very strong.
That's great. Any questions before we move on to the here we go.
Just a question just in terms of pricing. Obviously, the demographics of the business are a little bit gray over the mid and long term, but in terms of the pricing, where people are going to get the income to pay for the underlying services, the housing you have, obviously, like you said, baby boomers haven't saved enough for retirement. You have Medicare that is maybe financially stressed at some point in the future. Do you have any concern that where the income comes from to pay for?
Are you talking in the U.S. or with the investment?
I'm talking actually both because it brought to mind in general where people are going to have the income to pay for the senior housing.
Okay. Good question, important question. I'll touch on the investment and then turn it to Bob for the broader U.S. picture. In terms of the investment, this product is a premium product. It's about CAD 2,600 a month for rent, and then services are added. The average household income in Québec is about CAD 85,000, so more than enough. And seniors there get a stipend every month, more like a social security. That's maybe CAD 1,600 a month. And then in Québec proper under some circumstances, you can also get an additional CAD 1,500 a month stipend. So the product is what I really like about it is it's extremely high quality, but it is also affordable to a mass market there given the household income levels and social programs that are available to everyone there, just like social security is available to senior individuals in the U.S.
So that's, I think, a selling point of the product that we are acquiring. And then I'll turn it to Bob about the U.S. market.
Sure, and the economic value proposition in the U.S. for senior housing is fantastic because the opportunity cost, the alternative is to stay home and receive the services you get in a senior housing community: activities of daily living, food, if you have to pay property taxes, and so on and so forth, so to be in a community, and we've looked across the country at multiple markets, it's half the cost versus staying at home to be in a senior housing community, so there's a big economic benefit. Secondly, a big social benefit, of course, as being part of a community, and as you look at the average length of stay and the average wealth of the U.S. senior population, it's very affordable, so on all those dimensions, we don't see affordability as a gating item.
Yeah. I mean, and just to put a number to that, the average household wealth in the U.S. for the over 75 is, it's like almost $1 million. And if you think about average length of stay in the U.S. being, say, two to three years, let's call it $6,000 a month, it is eminently affordable for a large, large cohort of the population. Thank you. John?
Any other questions? Okay. So if we could move a little bit towards research and innovation because that was the focus of a lot of your investments until the one that was announced yesterday.
It will continue to be.
Okay.
Yes.
What else are you going to do this year? You did a recent acquisition in Cambridge, which was maybe a little bit outside of the university-based life sciences. Can you discuss what the strategy is?
Sure. Well, let's start with the core research and innovation business, which is the university-based business. And for the group, that is a business model where we are partnering with the university. It is the anchor tenant in that building. It's typically on or adjacent to the campus of that university. And they, as the anchor tenant, are conducting life science research in that building. And that is our core tenant. And they have a great credit profile. It's a very long-term relationship. And that by itself is a fantastic business. But what that university does is attracts private capital. They want to be in the same building to commercialize the research that's going on. New businesses are spawned. That creates employment. That brings in more economic activity for the university and for the local government.
It creates what we call a Knowledge Community, which is beneficial to all the stakeholders. That's a really fabulous business model. We have a fabulous portfolio of Knowledge Communities at Yale, at Penn, at WashU, Wake, and to name a few. We are doubling down in that market. We have a great competitive position together with our partner, Wexford, who is really a preeminent developer in the space, and see wonderful opportunity. On the back of that, announced a $1.5 billion pipeline of development to commence within 15 months. We're well underway in that opportunity. The broader life science real estate market, we think, is about $140 billion, very, very large. We dipped our toe in the water in a more traditional-type cluster market in life science through an acquisition in Cambridge, Massachusetts, 1030 Massachusetts Avenue. That is a great investment on its own.
It's a rapidly growing market in terms of pricing, 100% occupied building, but also gives us a glimpse into the cluster market, and we think we've earned the right to have a look, and the investment stands on its own, so it's a really exciting space. We think we have an advantaged position, and it's the number one capital priority right now.
I mean, should we expect San Francisco, South San Francisco, or San Diego, some of these other major biotech markets? Are they on your radar screen now, or is Cambridge unique because of its proximity to universities?
I think they're all on the board, for sure. And as we look at, for example, a Penn in Philly, it is rapidly becoming a cluster market unto itself. But certainly, the more traditional Boston, San Fran, etc., could be possibilities.
Given Wexford's success and your investment in this, I think it's raised the profile for this kind of asset class. What's the competition like? Are there other Wexfords out there? Are there other REITs looking to do what you're doing?
Well, we're used to competing and winning. We do like it when we have replicated, and we've done this in a replicable way over time where we've developed a thesis on an asset class. We've made a beachhead investment. We've partnered with a great operator developer, and we've talked about the merits of the strategy. And then that was true with Lillibridge. It was true with Wexford, true with Atria, and really put our capital behind the growth strategy. And in each case, have very successfully grown a core portfolio of assets into a much larger business line. And we have found in some cases that others follow. First, we like to create the value, obviously, just like investors do when they establish an investment before they tell everyone about it. And we do find that some competitors do follow.
But we have such a unique competitive advantage in this university-based space right now. The universities all talk to each other. We are the only people who have the kind of track record and projects that universities can go and see and touch and feel and know that we can deliver the project. So it is really we understand how they think. So we have a great competitive advantage. We want to use the momentum we have. That's why we have the pipeline that Bob talked about. And inevitably, others will follow. But hopefully, by then, we will have established a great portfolio, delivered a huge amount of value creation, and still have the premier reputation in the market so we can continue the growth.
Sticking to your office segment, can we get an update on your views of off-campus versus on?
Yes.
Because it seems like it's very fluid, and when I look at your numbers, your occupancy and margins are higher in off-campus than it is on. What's your thoughts on that?
John is talking about medical office. And the on-campus, off-campus debate, people would always say, do you like on or off? What's the cap rate difference? Both can be good. Both can be bad. So we like both and have both in our portfolio. When you're on campus, you have a real advantage if you have effectively underwritten the hospital and the credit and understand the hospital strategy and understand that it is a growing hospital because the MOB basically drafts off of the hospital's success and vice versa. So in those buildings tend to be multi-tenant buildings that are on campus, and that has certain operating characteristics and financial characteristics. But on campus is a winner if it's on the campus of a successful, growing hospital.
We also like off-campus where it is branded or affiliated with a leading hospital who's trying to deliver care more in, say, affluent communities that are in the path of growth, and we have several of those. Those can be, often are, not always, single-tenant, triple-net buildings, and so would tend to have higher average occupancy because you don't have frictional vacancy and so on that you would typically have in multi-tenant. So both serve a good purpose in the delivery of care, and both can be good. If you have just a straight off-campus multi-tenant building somewhere that isn't branded, that is something we're less interested in general, so hopefully, that puts it in context for you.
What do you think is the current spread between on-campus versus off versus unaffiliated, and where should it be?
It can be opposite. It could be inverted. So if we had a single-tenant building in a really high-wealth demographic that Northwestern had a 25-year lease on, I mean, that's going to be a four to five cap rate. That's going to be a five probably because and we've seen university-type buildings like that that are all Duke or something go for a sub-five cap rate. So that's one example. So it really all depends on the credit profile, the neighborhood, the age, the length of the lease, whether it's multi or not, and then what the hospital growth profile is if it's an on-campus asset. So there isn't a simple answer on or off 50 basis points one way or the other. Do you want to?
Good answer.
Okay.
It'll make it easier for us if there was an answer.
I know. I want to make it easy for you, but.
I was going to move on to senior housing, but I wanted to open the floor to questions. Anything on office, life science, MOBs?
Come to the Investor Day. You will see a very, very evolved, interesting campus Knowledge Community that we have at Penn that's a combination of medicine, research, life science, innovation. I mean, it's really awesome.
On the senior housing front, anything you could share as far as how the second quarter is progressing quarter to date?
Just reaffirming guidance, no change. This is the, as you know, this is the key time. This is the key selling season. We're right in the middle of it, and so obviously keeping a close eye on it. The flu, which we had talked a little bit about earlier in the quarter, really hasn't panned out to be anything in the second quarter, I'd say that. If you look at it, it's tailed off as an impact. But we're right in the middle of it now, so more to come in the Q2 earnings in a month or so, but nothing new to report.
I think, Bob, on the call, you mentioned the second half of the year you'll benefit from reduced discounting. Is that still the case?
Yeah, so last year, we saw, this was industry-wide in our portfolio, more aggressive price discounting in the second half of last year. This is really on the back of the new deliveries, new supply coming online, and so as we think about year-on-year performance, as we look at our second half from a rate perspective, revenue, year- over- year, we expect to have an easier comp in the back half.
Any trends on construction? It looks like it was dipping for a while, and then the first quarter went up again. I don't know what you're seeing in your markets, but if you could discuss.
For our portfolio, the trend has been really, really positive on new starts. Indeed, as we will show at the Investor Day, even looking at pre-starts, things like permitting, we've also seen a favorable trend there. For the industry, 50% or more down in terms of new starts relative to the peaks of 2015 and at a level not seen since 2012. The industry trends are very favorable in that regard. That gives us good visibility now into the next several years of deliveries and the dynamic of supply and demand. That trend is really positive as we look forward.
Earlier, we talked about the high penetration rates in Montreal, and although I think it's been coming up a little bit in the U.S., but this may be sort of a question with a long answer, but what gets the penetration rates higher in the U.S.? You have the volume coming through, but what about the percentage?
That would be so awesome because one point is very powerful.
It is. The trend on penetration has also been good. It's steadily growing, albeit basis points on such a huge population. To me, the number one thing we have to do as an industry is market the value proposition. We talked about that earlier, the economic and social benefits of senior housing. There's just a lack of awareness of what senior housing is among the consumer population, that being the senior and their children. So we need to do a better job of marketing that value proposition. And in so doing, I think we'll see accelerated penetration. And there are studies that many have published that say when new construction comes online, when it opens, more seniors go into senior housing because they see it. They're driving past it. You can't miss it.
So you go in for a tour and you realize what it is, which is a fantastic opportunity for a senior. So that tells me there's a marketing opportunity that we as an industry need to go after.
Just to summarize the three key points, supply, which is a leading indicator, starts. It's improving incredibly, down 50% from the peak. Demand is obviously going up. 2018 was the absolute nadir of the Depression babies. Now we start to see 3% and 4% compound annual growth in seniors coming in the intermediate term. Then finally, this so-called penetration rate, which is the number of seniors who use our product. That's been hovering around the 10%, 11% over the years. We are seeing some increase in that. What's really powerful about that number is if there were a 1% increase in the penetration rate, it would fill every vacant senior housing unit in the United States. That number is very meaningful. We noted in Canada the penetration in Québec. It's 18%, 19%.
So it can happen, and it's happening slowly here in the U.S. But that's a game changer if that can really move meaningfully.
Any other questions? We have about a minute left. Here we go.
Yes. I want to ask you a little bit about the deal that was just announced in your cost of capital. I'm not second-guessing the decision, but you've been trying to reduce exposure to senior housing. Now, your senior housing deal teed up. So how do you think about that in terms of your cost of capital? The most improved year to date. But how do you think about your cost of capital where you could invest in MOBs at, say, 5.5% roughly cap rates today, more durable defensive asset class? As you've said, you're doubling down on life science, which your closest peer yields 7% development yields on life science projects. So how do you think about that deal compared with those other opportunities that you could deploy capital?
Good. Yes. That's a great question because capital allocation is something that we've used to create value over the years, and it has to be a core competency, and when we talk about investing and pivoting to growth, what we're talking about is really some really high-quality, relatively low-cap rate assets like the 1030 Massachusetts Avenue. We talk about the middle, which is really MOBs and senior housing that maybe are going to grow at predictable levels, and then we have a silo or a sleeve for some higher-yielding assets, and together, that should drive reliable growing cash flows and dividend growth. That has been the pattern of Ventas for 20 years. I think that pattern will continue. In terms of the Québec acquisition, the entire market dynamics are completely different in different markets.
So, I don't really even put it in the senior housing bucket because, as we talked about, the penetration rate being extremely high, the consistency of performance, the new platform for growth. I mean, it's a very different situation than, say, U.S. senior housing. And so, I view it as a diversifying capital allocation decision and one that should provide 4% compound annual growth in NOI over the next four years. So, important question. I would put them in entirely different investment categories, to be honest. Okay? Good?
I think that's it. Do you want to make one last pitch?
One last remark is the following. Whatever you think about macroeconomics and the Fed and so on and so forth, I would challenge you to find any S&P 500 company with a BBB+ balance sheet, a demand-driven business, a 5% dividend yield, and a growing business and an okay management team. And I hope you'll think about that when you make your next investment. So thank you for being here.
Thank you. Thank you, Debbie.