Welcome to the 3:00 P.M. Tuesday session at Citi's 2023 Global Property CEO Conference. I'm Michael Griffin, here with Nick Joseph from Citi Research, and we're pleased to have with us Ventas and CEO Debi 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 on the webcast, you can sign on to liveqa.com and enter code GPC23 to submit any questions if you do not want to raise your hand. Debbie, we'll turn it over to you to introduce Ventas and any members of management here with you today, provide any opening remarks, and then we'll get into Q&A.
Hello. Thanks for having us here. I'm Debra Cafaro, longtime Chairman and CEO of Ventas, and it's our pleasure to be here. I'm joined by our CFO, Bob Probst, and our Head of Senior Housing and Chief Investment Officer, Justin Hutchens, as well as BJ Grant and Emmett from IR.
Very nice. Thanks.
So most of you are highly familiar with the Ventas story. We're a $30+ billion enterprise healthcare REIT. We operate at the intersection of healthcare and real estate to 20% parts of GDP. And all of our asset classes are unified by playing to and serving a large and aging demographic. Most of our properties are in the U.S., but some are in Canada and the U.K. And what I'm really excited about at Ventas is really reigniting Ventas's cycle of success. We've been at this for over two decades. We've delivered over 18% compound annual returns during that time period. And we look forward to the coming years where we have a relatively advantaged outlook. And that's again because our assets have demographic demand. When you look across real estate, I think we'll all be dealing with the impact of higher interest rates.
But yet at our company and in our businesses, we will enjoy large and growing demand for all of our verticals. And that's really we have great businesses in each of those verticals, whether it's university-based life science or certainly our senior housing business, which is at least half of the Ventas enterprise. And we're really excited. We're at the precipice of unprecedented organic growth, the likes of which I have not seen during my tenure. And it's really driven by very favorable supply-demand fundamentals, the ability to recapture the NOI that we lost during COVID. And then because of the supply-demand fundamentals, we have strong conviction that the company can exceed those and go on to even greater heights in the senior housing business. We have a great experienced team. I'm proud to work with them.
We have the size and scale and resources to really be a winner in the coming years. With that, we'll open to your questions.
Great. Thank you very much. You touched on maybe a few of these, but we are starting every session off with the same question. What are the three main reasons an investor should buy your stock today?
We're relatively advantaged in a host of economic environments that you can imagine in the forward environment because we have this demographic demand for our assets, and that is precious, and it's growing. That demand is growing. This unprecedented organic growth opportunity, we've never seen anything like it before. Our forward expectations for senior housing operating portfolio growth on a same-store basis are 15%-21%, and I think we have the best team.
Great. Thanks for that, Debi. Maybe just starting on the seniors' housing side of the business. I mean, as you mentioned, fundamentals in this remain strong. You've talked about a multi-year cycle of growth opportunity we're at the precipice of. How confident are you, both in terms of rental rate increase and occupancy coverage, that the senior housing industry and Ventas's portfolio in particular has poised to capitalize on this over the coming years?
Yeah, we have a very strong conviction in the senior housing fundamentals and the opportunity, this multi-year opportunity of organic growth. It's really in two parts. The first is recovering the NOI we lost in the pandemic. And just to put some numbers on that, the low point for us on our NOI in the pandemic was $545 million of NOI. We've recovered $72 million of that to date. So that's about 20% of what we lost, leaving $285 million of opportunity at $0.70 a share just to recover that which we lost. And in our guidance this year is for us to recover $100 million of that, obviously showing the multi-year opportunity. And that's to get back to the 88% occupancy, which we had pre-pandemic. The truth is the fundamentals of supply and demand have never been better. And therefore, we think we should well exceed that 88%.
Going back in time, 92% was a high watermark post the financial crisis. Supply was low at that point, as it is today. Demand was okay then, but demand now is multiples of what it was at that point and only scheduled to accelerate. So the opportunity to go into the '90s is clearly in front of us. So this is a multi-year, both recovery and growth story that drives that organic growth. And we have strong conviction therein.
Maybe we could just touch on labor availability and demand. Both labor availability and wage pressure seem to be trending in the right direction, particularly on the contract labor side, but there's still work to be done. You've done a good job highlighting the growth opportunity within the Ventas OI initiative. How confident are you that you can apply these practices across your portfolio in order to maximize operator performance?
Sure, so Ventas OI, for everyone's benefit, is our operational insights approach, which combines our best-in-class operating experience with our best-in-class data analytics to help in a number of areas with the ultimate goal to drive performance in our portfolio. We focus on right markets, right assets within those markets. If that doesn't line up, then probably moving the asset out of the portfolio. We've done a lot of that over time, and then the right operators, and we've definitely put a lot of time and energy over the last couple of years to make sure we have the right operators in place that are running assets that line up well with their geographic experience and their professional experience, then the next step is to take these analytics and to give insights to our operators in ways that they can't do.
We have resources within Ventas that are not accessible to our operators. We marry that with their day-to-day operating experience and have managed to bring strategic insights and focus and execution in a way that we think will be a competitive advantage over time.
Oh, Debi, you were going to say something?
Justin, you're right. The expense pie within the senior housing operating business has been improving. We're projecting a continued improvement in that in 2023 as part of our forecast.
Justin, just on that contract labor portion, I mean, it continues to decrease quarter-over-quarter on a sequential basis. But I think it was at 3%, now maybe closer to 2.5%. I think the longer-term run rate has thoroughly been in that 1%-1.5% range. But is that the expectation for kind of where it should trend maybe for 2023 and then into out years beyond?
So we've had, when you look at our fourth quarter run rate, we had a 70% reduction in contract labor, which is really a proxy for the stability of the workforce. So we've had five quarters in a row of positive net hiring. We assumed in our 2023 outlook that that fourth quarter run rate would remain constant. And if we do a little better than that, if net hiring continues and we're able to continue to reduce costs and labor, maybe that plays towards the upside of the range we gave in terms of NOI guidance. And we left room at the lower end as well.
Maybe just expanding on some of those data analytics initiatives that you highlighted earlier, is that micro-marketing, customer outreach, potential lead conversion? We look at all those leading indicators you give. Conversely, on the expense side, is it personnel management? Is improving quality of employee experience there with the operators? But anything else you could highlight there would be helpful.
Yeah, sure. So the way it works is we focus on a number of areas. First and foremost, this is a push of our analytics. And so rather than us calling the operator and asking them to explain why they've missed on NOI or why they're not creating more value in certain locations, we're doing the analysis and going to them and saying, "Here's why you're missing an NOI." We bring the analytics and we help to narrow the focus down to encourage a very focused action plan. We also focus on deep dive topics. And I'll give you a couple of my favorites. One is around pricing, where we literally went to our operators and gave pricing guidance on a per-unit basis per community.
Every unit priced differently based on a number of factors that we fit into the algorithm that included internal dynamics with the residents and external market dynamics that we considered as well, with a really wide range of potential increases, and together, that helped us to get over 10% in-house rent increases. Another example is digital marketing, where digital has become 90% of our lead bank. We decided we needed to be an expert in this area, and we are now, so we're able to analyze our operator's organic website presence, the competitiveness of the website, we compare and contrast to other senior housing operators, apartments, hotels, and agencies such as Caring.com and A Place for Mom.
And we can give a technical roadmap to improve the website, as well as a user experience roadmap to help improve from the user's standpoint to improve the quantity of leads that we're generating and the conversion of those leads over time. And that's been an area of focus. And one final point I'll make on this is a question we had a year ago when we rolled out Ventas OI in this very structured and aggressive manner was, would it be adopted by the operators? Would it be pushed back? And the reality is that there's absolutely not. Quite frankly, it's the exact opposite. We have very experienced managers that are very good at managing the day-to-day business. And they are finding a lot of value add by interacting with our OI platform.
We have a question from the audience.
Yeah, just to follow up on the data analytics. How do you guys begin to frame the opportunity in terms of revenues, cost, operating margin for the data analytics? Or at least how do you begin to think about that?
Yeah, so we're looking for trends in the business. For instance, it became apparent that labor pressures were starting to become an issue in the middle part of 2021. So we actually started. The easiest thing to do to start battling labor pressure is wage increases. The harder part is to actually improve your operating protocols. So we help the operators to do a few things. One is to centralize line staff recruiting, professionalize the recruitment of line staff. Another is to use applicant tracking technology to manage their talent pool through the application process. We actually mystery shopped our operators to rank, order how easy it is to apply for a job within them. And is it three clicks or 10 clicks? Is it five minutes or 30 minutes to apply for a job and help everyone to become more efficient in that regard?
And ultimately, we're improving our hiring practices. So that was an early detection. Digital marketing is another one where we saw those trends emerge. And we decided to be ahead of it and be an expert in the space. And so we're detecting it in the trending, in the performance trending. And then we're prioritizing what we think would be the biggest value creators in the business.
So I need to ask that question because you answered the question I asked, but not the one I wanted you to answer. So I apologize. How do you begin to quantify the potential opportunity? I mean, frame the sort of where the opportunities are and how much opportunity there is within that. That's what I'm trying to get at.
So there's a. I'm going to answer it two ways, okay? So the first way I'm going to answer it is in terms of the first approach I described, where we're pushing the analytics out to the operators. And what we do there is we use a contribution margin analysis. And we can look backwards. And we can see how the execution has been relative to what the market would have provided over time. And then also, we know by price and looking forward several years, we know what the potential net absorption is and therefore the pricing power is within markets. So we can go to an operator. And we can tell them, "Here's exactly where the opportunity is and where you should focus." And operators are managing a lot of priorities on a day-to-day basis.
We want them to focus on the priorities at the local level that drive the most value. So we're quantifying that from a margin expansion standpoint with revenue expense being the drivers. And then on the big initiatives, 90% of leads. I mean, if we can make a dent on leads, that's an obvious one. Labor is 40% of our cost. So if we can help reduce labor costs and improve hiring, that's an obvious one. We're taking shots at what will move the business the fastest and have the most impact.
Okay.
Thanks. So talking on data analytics, best practices for operators. We've seen at least some movement within the sector more and more towards operating directly, right? Maybe lower acuity, maybe through private letter rulings. What are your thoughts on kind of operating senior housing a bit more from Ventas versus through RIDEA or net lease structures?
I'll start and turn it over. We have a very strong operating platform internally, as you know, in the MOB business. We have vertically integrated property management leasing, and we're having great success with that. What I can tell you about Ventas is we've been a thought leader for over 20 years in sort of changing the way investors think about healthcare real estate, changing the tax rules, getting RIDEA passed, all along those lines, and we have thoroughly vetted the idea of having an in-house operating platform in senior housing, and frankly, if anyone should do it, it should be Justin because he's actually done it globally multiple times, and so we have an in-house resource to do it. That having been said, we engaged in kind of an upside-downside analysis, and what we are doing is working.
We are driving performance through our relationships with the managers, the operational insights platform, the data analytics. It's working. We're producing really robust year-over-year growth. And so our conclusion is that the risk-reward is not there at this time.
Yeah. I mean, that was summarized. I think ideally, there's another couple of comments. One is there's the risk-reward of erecting a national platform. If we were to do it, it needs to be big, to be a needle mover. And if you're going to take on the risk of erecting a national operating platform, you better believe it's going to drive NOI better than your current approach. And we are absolutely a believer in our OI approach and the day-to-day management of our experienced managers. It's working. And so we're going to continue to build on the platform that's working.
Thank you.
Great. Maybe switching to Same-Store expectations for this year. It seems like the SHOP portfolio, given the integration with the assets from the S&R acquisition, represents about 90% of the overall asset base. Seems like a good number to go off of. In terms of performance, are you seeing more of a contribution from the legacy assets in your portfolio or those that came over as a result of the S&R acquisition?
Yeah. The good news is, Michael, that all of the different portfolios are contributing to that 18% at the midpoint growth, whether that be when you slice it by operator or by IL/AL or by geography, U.S./Canada, all are contributing attractive growth. This is broad-based. I mentioned the supply-demand fundamentals being so strong. It's benefiting all of those portfolios. So all of them are helping that growth.
Debi, were you going to say something?
We're just excited now that almost all of our SHOP business is in the same-store portfolio. We're really giving a really good reflection of how the whole business is doing. I'm happy that we've gotten to that point.
Makes the modeling for BJ and Em that much easier.
It's all about that for us.
And then, just on the preference of makeup for AL versus IL facilities in your portfolio, Bob, you talked about the contribution kind of across portfolio. But are there any that maybe stick out that you might have a preference for or any additional commentary around that would be helpful?
I'll jump in there. We like senior housing in general due to the supply-demand backdrop that both Debi and Bob described. 60% of our portfolio is independent living, and we've leaned that direction because it does tend to run at a higher absolute occupancy, has a higher margin, less reliance on labor. It's not regulated. It has a nice growth profile. We do like assisted living as well. That's positive as well. It's more need-driven and certainly has a really strong growth profile at this stage. So I'd say that within senior housing, we like the U.S. opportunity the most. There's not as much opportunity to grow in Canada, although it's a very, very strong performer for us.
And then across all asset classes, senior housing is the one we would lean into from an external growth standpoint as well because it offers the best growth profile for our other asset classes, which are very strong and stable and great performers in medical office and life science. What we're seeing in the market, we're not really connecting yet between the public market and the private market price expectations. And we'll start to see that play out over the next few months or so. But really, we're really bullish on senior housing.
Debi, maybe just on that regulatory front, obviously, seniors relative to some other healthcare asset classes might not be as regulated or have as many government initiatives in there. I know you've worked well in the past with public stakeholders. So just any insight on conversations you're having with those parties just around the industry and kind of thought about that going forward?
The biggest discussions right now on the regulatory side are less Ventas involved because they are most around the skilled nursing business, which we substantially exited some years ago. There are a lot of regulatory actions around the skilled nursing business, whether it's the REIT-related ownership and private equity ownership requirements or some of the operational ones in terms of staffing or length of stay requirements. So we're less involved in that. We're happy to be back out of the policy arena and into the money-making arena.
Great. Maybe we'll turn to external growth opportunities right now. It seems like the transaction market is expected to be muted, at least here for the near term. But if you are seeing any opportunities out there, be it buyer pools, pricing, cap rate expectations, any color on that would be helpful.
Yeah. I'm happy to jump in. And just more on senior housing. I mean, Ventas should be the best owner of senior housing in the world, period. And that's through the approaches we've described. And the growth profile we're seeing is very exciting. And we're also very encouraged about the macro backdrop. So as I mentioned, moving in that direction more externally makes a lot of sense for us. As you look at the pipeline, senior housing is going to deliver the best unlevered returns at 10+. You're going to see something more around eight, probably, in medical office and life science. And if life science can also trade at very, very low cap rates as well, we have other funding sources that we can consider to use for that purpose.
We're going to stay committed to the diversified approach from a capital allocation standpoint with a lean towards senior housing in the near term, and I would expect us to continue the long tradition of Ventas investing in reliable and growing cash flow streams.
We had an interesting question come in here to LiveQA. So thank you for whoever submitted it, making our jobs easier. If you were able to go back to the beginning or before the pandemic, what would you do differently to better position the company now?
Well, I think what I like about what we did, I'll start there, is that we've been very focused on having this diversified portfolio that can really carry us through the pandemic because, of course, half of our business was senior housing. The other half was healthcare, medical office, and life science. And what I've learned over 24 years at Ventas and longer in my career is that you don't know what's ahead of you. And so you have to be humble about your ability to be entirely predictive. And the diversified portfolio has enabled us to play offense and defense in very many cycles along the way. And so what I like about what we did is the diversified model.
I would say if we were to do anything different, maybe it would have been to have the kind of balance sheet we had when we went into the financial crisis going into.
Great. Maybe just one more on external growth opportunities, specifically on development and redevelopment initiatives. Do development opportunities, if any, make sense right now? And on the other side, are the yields you're seeing of potential redevelopment opportunities looking as more attractive way to drive growth?
One of the ways we've really elevated our business over the last five or so years is really to have this university-based life science business, which has been a ground-up development business. It's been really successful, added a ton of value. And where our sweet spot is, is really this triangle of medical, universities, and labs. And that has been just a great business. We want to really use that advantage position that we have in the marketplace to continue that. I would suggest, though, that because of the debt capital markets, that the yields will have to rise. And some of those we've always had a lot of pre-leasing in our buildings. All the buildings have been very successful. But some of those requirements may have to tighten a little bit as we look forward.
We just announced an amazing project that is in the middle of that triangle with Atrium Health, a top 10 not-for-profit hospital system in North Carolina, and the Wake Forest University School of Medicine in Charlotte that is going to really be just a marquee project that is pre-leased and AA credit. So we're excited about that. So if we can find more of those, we'll find a way to get them done.
If I could jump in on redevelopment as well, because we are really excited about the RIDEA opportunity in senior housing, specifically because you think about the demand growth we have in front of us, limited supply. We've identified the markets and the operators that we think are going to be winners. Now the job is to invest behind those through refreshes to make sure they're positioned to take advantage of this growth ahead of us. That is a very high return use of cash and a very low risk use of cash. We're accelerating that investment, again, informed by OI.
How do those conversations come about? Are you identifying the markets? Is the operator coming to you? Can you walk us through how those redevelopment opportunities present themselves?
I can do that. So the approach is we select all the markets that we're going to invest in through using our data analytics as a backdrop for the market selection. We identify the communities that we think are going to deliver the most value creation over time. And we'll have already made the right match of right operator and right market. So that's one. That's the selection. And then the second part is the project management's also managed by Ventas through a third party. That's how we've been able to move this much volume, 100 projects simultaneously, literally. And that's by internalizing the project management. So it's very much Ventas-led. The managers do give input to us in terms of how they think they could position themselves to be competitive in the relative local market. But it's a Ventas-driven initiative.
What sort of return hurdles do you need before starting a RIDEA?
8%-12%. Some now will be way past that. But overall, we're targeting 10%. And we also like to remind people it's not like it's a one and done either. Our intention is if we're going to own senior housing, we want to perform at market or better in every market. And we want to take actions to make sure that we're positioned to do that. And that happens over time. So you might initially get a 10% return, but then as you move in, it compounds over time. Exactly. And importantly, these are not disruptive to the operations of the community. And so, in fact, they accelerate move-ins. We see the RIDEA plans, and they're excited to move in potentially a bit ahead of the price increases. And so it's a very quick return.
Then maybe just expanding again on the R&I platform. You obviously view this university partnership model favorably. How should we think about that maybe relative to how investors might be used to in life science in terms of the traditional biotech tenants? I think y'all might have some of those in the VIM business. Specifically on university partnerships, why does that make sense?
I think I mentioned the triangle, which is where our business is most concentrated. What we love about the business is it's 75% credit tenants, often AA-rated tenants. The universities are the engines of the R&D in these markets. They are voracious users of space. They have a lot of capital. They are magnets for other types of enterprise. The two blocks we own between Penn and Drexel in Philadelphia are prime examples of that, but there are plenty of others. That is more along the lines of credit tenancy, long-term leases, compounding, reliable returns. A lot of the other types of life science that we own, which is multi-tenant, is really in our fund business, as you mentioned. Those are great projects as well. They have more mark-to-market on the upside, but they're more in the normal kind of life science occupants.
I would tell you that in our unlevered balance sheet, we have nearly 90% of our business that's either significant credit and/or commercialized businesses where they have a product, they're selling it, they have revenue, and so that's a very different profile and one that works for us and I think is really advantaged in the environment where we are right now.
And then maybe just switching over to medical office for a bit. I think it seems that the expectations are for a return to a more steady-state growth rate, call it that historical 2%-3% rate. Is there any chance that we could see growth potentially surprise to the upside?
Pete Bulgarelli, who runs our office business, has done a remarkable job. The MOB business I would highlight has just been posting a number of record results. 3.4% same-store growth last year being one, 92% occupancy being another. It's really been just through, I'll call it operational excellence, blocking and tackling on leasing, on costs, tenant satisfaction. We expect that to continue. The beauty of that business is it's reliable, growing cash flows led by Pete. More of that.
Yep. And it's also highly demographically driven. So thank you.
And then just touching on the mezz loan business, particularly with the loan to Santerre Health Investors. Any expectations around what the ultimate outcome of this might be? I think you talked on the call about the yield being north of 10% at this juncture and that it's current through January. And I believe some of these loans in the loan books are to both operators and properties themselves. And if that's the case, do you know the split between operator loans and property loans?
Yeah. I mean, we've had a successful small portion of the business over time. It's typically been below 5% of our business of extending capital, typically during capital-constrained time periods to mostly property-based. Virtually all of our lending has been property-based and secured, and we've gotten probably $1.7 billion back from that loan book over the past five years at par. So we've done a good job at it. We currently have a loan book that's composed almost entirely of a property-secured loan that's about $480 million. And just like a lot of what we've talked about in healthcare, the assets under the collateral for the loan, the NOIs have a lot of room to recover post-COVID, but they haven't gotten there yet. So there is this expansion opportunity. At the same time, though, interest rates have risen considerably, and that's putting stress on the loan.
So we always enter these with the ability, the knowledge that this could be a loan-to-own situation. We're fully capable of doing that and being a great owner of those assets and, frankly, probably managing them better. And there's a whole variety of other structured kind of resolutions that could happen. We forecast in our guidance the same amount of NOI or FFO, frankly, that we've received in 2022, in 2023, with brackets around it for upside, downside. And we have all the tools and experience that we need to have a solution this year.
I have my rapid fire to end the session. I know we're coming up on time here, so first question, best real estate decision today: buy, sell, develop, redevelop, or pause?
As I usually say, some of all of the above. But we did talk about investing in our assets in senior housing, which we really think is going to continue to drive this multi-year growth opportunity in our senior housing portfolio. And we do think there will be external growth opportunities as well.
Same-Store growth expectations for 2024 for SHOP, R&I, and medical office?
I think I haven't answered that for 24 years straight.
All righty. There we go. More, fewer, or the same publicly traded healthcare REITs a year from now?
Fewer.
Lastly, Debi, over or under nine wins for the Steelers next season?
Tom hasn't had a losing record during his tenure, so we're going to go with not a losing record.
Great. Thanks so much.
All right.