Ventas, Inc. (VTR) Presents at Bank of America Global Real Estate Conference (Transcript)

Q – Josh Dennerlein

Yes, maybe you could actually start question, [indiscernible], kind of, for those who got yesterday the — or what is a little bit of a deep dive there to benefit under everyone a great kind on that platform initiative?

Bob Probst

Sure. So [indiscernible], it really — let me start with my background, just in case you don’t know. I am self-described as a operator to redevelopment. In my 28 years of career, I’ve had 18 years in operations and I’ve had 10 in the REIT sector. Within the operations experience, I’ve had nine years, I’ve been either Chief Operating Officer or Chief Executive Officer of very large national senior housing companies for the US and in the UK. So that’s been my background.

The — taking that and some team members that we’ve added and bring that to data science and operating [indiscernible] financial analytical capabilities to produce really a few things. One is information that is operationally driven insights, so we can help operators to focus where they’re going to have the best opportunity to create value in specific markets, specific communities through specific actions.

The other is on the real estate side, we have the opportunity to make big decisions that are data-driven, so that might be a decision to transition a community or triple that to shop transition to a new operator, sell something, buy something, invest CapEx or redev. We’re starting with the deep analytics. We’re driving the process, and then we’re bringing them to the manager and insights into it at the end of the process to decide off, where to create value.

And then another area is just, areas of kind of specialization and one recently was digital marketing, where leads are overwhelmingly derived digitally now. We did an analytical review and technical review of our websites. So, starting with the tech clips review, then we did a UX audit, which was the user experience involving websites. And then we analyze hyper local SEO, which is really the ability to source leads from the right neighborhoods, in terms of where your website is facing.

But what was interesting about that for instance is, we ranked 25 senior housing companies, some of which we own, some we don’t. We included hotels, apartments, included place for on.com, carry.com and one operator, actually, we were very pleased with this, it came out on top, it was actually Atria, they’re better than everybody.

But even Atria, through our interactions to provide a lot of value creation opportunity to a hyper local SEO approach. And so, we’ve got a lot of follow-up in the refining, they — the way the website is targeted other operators had four upside. But everyone benefited and what’s interesting too is that, we have the in-house expertise, both operators, they either have in-house expertise in this regard through digital marketing and they’re using a third-party firm. None of these people are used to be unmeasured.

And so, we brought accountability to an area where there — usually, they’re the experts in the room and so now we bring accountability and focus to it and they intend is to continue to measure this on a monthly basis.

So, moving ahead, I’d say someone asked earlier, where have you made impact with this, and I’d say number1 area is absolutely pricing. And we started on this last year in-house increases. You can see there’s a page in our deck where just across the board, whether it’s level of care increases, rent increases, re-leasing spreads. We’re demonstrating pricing power, and there’s got a compounding impact with this approach.

And what I mean by that is we’re now in the season, again, we’re planning the upcoming rent increases. Last year, we had a lot of push, and we were really pushing our analytics and our — and the high standards. This year, we’re pushing on an open door, because the operators have been through this with us. They’re trying to get ahead of us, and we’re looking to have even better results next year in terms of pricing. And if better margin [indiscernible].

Josh Dennerlein

Maybe how long — can you walk us through how long is thinking or take us to see that impact?

Bob Probst

Well, the big — the first big impact was pricing. In terms of — and that’s already played out. In terms of margin expansion, there’s a page in the deck that we pointed to. It’s really more of an illustration of operating leverage. It’s on Page 26. And what this points to is, it separates assisted living and independent living, and we’re always talking about how much we love the operating leverage in the business and how that plays to your favor as you increase occupancy. This is organized by occupancy been.

You can see that there’s an 89% group that has a 20% margin in assisted living. This illustrative portfolio is huge. It’s hundreds of communities in each of these. So, it’s a really good sample size. And you can see that as your occupancy goes up from 90 to 100, you’re getting 900 basis points of margin expansion. And then same with independent living and the — as you point out, the absolute margins too, it’s 29% in AL, 43% in the independent living.

So, your question is like how are we going to know if it’s working? Is it getting faster? It’s a little bit of a gray area in terms of — it’s not as clear as of wins and losses per se. Maybe all else equal, we’ll be able to like for the same level of occupancy, I think we’ll get to achieve higher margins as a result.

Deb Cafaro

It’s intended to drive performance. And so yes, we do. The quantification of it is a little bit more of an art but.

Josh Dennerlein

Then, I’ve follow-up on that.

Bob Probst

Yes.

Josh Dennerlein

So, I was wondering first of all, did you identify if you are kind of that led you to a focus on pricing as they invest the metric? And then other than this, it suggests that really the number is occupancy. I’m just wondering like how those two…

Bob Probst

Right. Yes, that’s great. So, the analytics we started with last year was fast growth by market and what price it needed to be to offset that. It was a necessity. And so, where operators — typically — I think everyone knows there’s no price transparency in senior housing. So you don’t know what your competitors are charging.

And there’s been a bit of a routine process of putting around a 5% rent increase in place, which is actually, considering where CPI has been, not bad. And the operator’s point of view as well — we have a lot of recovery to go after from an NOI standpoint. Maybe I’ll do 6%. We said that’s not going to be enough. Look, we’re — like what’s happening with the agency, look what — read into what’s being projected in terms of inflation.

Deb Cafaro

Right.

Unidentified Company Representative

We need a lot more. So, it has actually started the expenses by market, and that really made the case for the revenue.

Deb Cafaro

And I think this is where, again, we’re — this environment that we’re in is extremely dynamic. And one of the best indicators that we have right now of optimism in the space is what Justin just touched on, which is, we’re driving these — and this is what the operators were hesitant to do. They said, we’ve never been able to increase rate 8% when we have 80% occupancy. And we were able to demonstrate logically with information about why those rates were appropriate. And even though there was 80% occupancy, and why they would be accepted by the customer? And we were right, we actually affected the whole market, because we were the first people kind of to come out with that publicly.

Bob Probst

And the second part of it was, the reason why we were so comfortable was the demand is so strong and growing. So combining the necessity of what demand in it, it was the right call. And that continues to be.

Josh Dennerlein

The views in those price increases?

Bob Probst

Right.

Deb Cafaro

The occupancy growth, as I mentioned, yes, has been very strong and continues to — net movements continue to be outpacing 2019 levels. And the in-place increases when you — are also rising, and that’s given the operators confidence to push there as well.

Bob Probst

So there’s always, like, as part of the regular — a way now. So there’s price elasticity. So we’ll look at markets now and say, okay, is there — there are certain markets where we should put pricing as much, because there’s a volume trade on. There’s others that volume and price is just rolling. So we want to keep pushing on those. And that’s all part of this analysis and ultimately the anticipation [indiscernible].

Josh Dennerlein

Can you elaborate on the digital move-ins? I was surprised to hear that.

Deb Cafaro

Good.

Bob Probst

Yes, sure. Let me just quote, there a date in here. So, it’s our first big one.

Josh Dennerlein

18?

Deb Cafaro

18.

Bob Probst

Yes. It’s May 18. Okay. So, here’s the — and a lot of this — like a lot of sectors, the pandemic really pushed technology a lot faster. 90% of the total lead volume now is derived digitally in the sector, and that’s up 800 basis points from where it was pre-pandemic. So there’s been a shift to the digital leads.

So the importance of this is that, we couldn’t find a bigger priority than your lead source. So, therefore, what can we do to be sure, we’ll be most competitive from a digital lead standpoint? And it all starts with couple of things. One is, one source of digital leads is placement monitoring and carreer.com.

That’s the referral agencies, they charge per placement. They have a pretty good market share, then there’s your website. And we’ve been investing into the websites. We then measured it. And the first thing you do when you do a technical website audit, you’re checking to see — you want to be as appealing to Google search as you possibly can.

So when you audit it, you’ll find discrepancies. Where am I showing duplicates? Is there duplicates? Is there confusion in terms of what page you go to? And we’ll identify the errors and will show it to the operators and the third-party managers and manage with digital marketing, they’ll clean it up.

I was scanning for website to be as appealing to Google as possible, will be as competitive as possible. And there’s like 140 issues that you see pop up when you do these audits.

The second part was, how — what’s the experience of actually using this? If I’m a consumer, and I want to pursue a placement, is it easy? Does it have the right information? Is pricing disclosed, which we’re pushing and because we watch transparency in the space. And so — and we know consumers want it. I can’t remember ever buying something on Amazon that didn’t disclose the price.

So we need to move the sector into what the consumer wants, which is transparency around pricing and then all the other aspects of using in the website how did that stack up to other senior housing operators, but also how does this stack up against Marriott and Private Companies, et cetera?

And then the Hyperlocal SEO analysis is probably the one that was most powerful because, you could have all of this in place and still have a shotgun approach. And what you really want is like I’m sitting here and I’m Googling — Google searching for a hotel near me.

Conrad should show up number one and probably always will. But who’s going to show up second, third and fourth? And if I’m two blocks away, am I still in the top three or did I fall back down to the top 10?

So you want to make sure that your community within that local market is storing high from every part of the market where you think you have potential customers. And that’s a — it’s an art and a science.

And so we’ve assessed that. And we’ve got the feedback back. And then we can measure it every month, see where we stand. Well, the net result is, more leads and most importantly, though, higher quality leads, that’s the intent and stay competitive and try to get ahead of this.

Josh Dennerlein

Thanks. And does this program help with making capital in decisions at all or?

Bob Probst

Yeah, it definitely does. And so if you think about the evolution of real estate management, from the standpoint of senior housing, the old way in Triple-Net is that really the operators are responsible for deploying capital to the asset.

Now it’s our asset. It’s our P&L. It’s our licensed operation. We invest the real estate. And we want the operators’ feedback, but we want to make sure, we’re making good capital allocation decisions.

And so we have a just picture of funnel, all these different screening criteria to say, where can we put capital in to have the best impact. We saw West 86 yesterday, great example. You have a good asset, really strong historical performer basis new supply, higher price supply which actually raised the ceiling in the market.

We invested into the units and the common area of corridors and the units they’re getting 20% more, and it’s a two-year payback on the capital set. And we’re taking the same approach and same decision across our Holiday portfolio of other Atrias, Transition ADA [ph]. And around the country where can we put capital and make the most impact to Ventas.

And then we bring the operator and we said, tell us, give us advice and how to design it. Give us advice on what improvement is going to be most competitive. And so they certainly play a role, but we’re driving it first through the analytics of the process and avoiding the kind of the subjective decisions.

Josh Dennerlein

Bob my last question. And second, do you have your team in place? Are you still — is this platform still think go down?

Bob Probst

It is in place. We have a fabulous team. There are some investors that came through. We had a meeting in Chicago and got a flavor, I think some were actually in the room today, but we had — we were able to showcase our team.

Our data scientists and our Head of the senior housing analytics and then a couple of other resources and their role is, really impressed. And so the goal is to try to get a little bit more exposure so that you can see the depth of the talent, and then we’ll talk more about this moving forward because it’s a big part of what we focused on.

Josh Dennerlein

Were you focused on – we try to sort of put that in perspective. Does this shift to digital leads, change the competitive landscape for you guys that may be big operators to small operators, shares maybe customer acquisition possibly?

Bob Probst

Almost like self-storage. Yes. There is the — so that — and that’s come up a lot. I mean, ideally, you want to actually — you want to take market share from the – from the agencies. And there’s — but the reality is there’s still need them. And so what we recommend is just cast the lighter get more from your website and continue to get from that.

You can ever truly take their market share, then it’s going to reduce your costs for acquiring a customer, but that’s really not the goal. The goal here is to drive volume and then — and also make sure that their paying market rate when they move in, that’s the pricing side. We’re pretty excited about Ardent OpCo transaction kind of provides essentially Ardent OpCo – the cash out — we’re investing or [indiscernible] later is something else?

Deb Cafaro

Okay. So happy to do that because it’s been a really good story on both real estate and on the OpCo side. The short answer is we do have a monetization. We have an opportunity to kind of mark the investment to over four times what we invested in, but we also have a monetization opportunity for portion of the stake.

And if it goes forward, realize a gain that we structured the deal in a way where we would have the option to participate in any kind of monetization opportunity on a pro rata basis. And so that’s a good structure for us and one where we can achieve some liquidity, some gain and basically retain a 7.5% interest in a multibillion dollar valued organization. So very good. And then as I mentioned, the real estate, which is where the lion’s share of our capital was invested, is continuing to perform very well in the triple net basis and Ardent just generally done well.

Josh Dennerlein

And so [indiscernible] continue to grow? And I guess it’s the hospital sector that are…

Deb Cafaro

Well, we definitely have thought that a good hospital that has market share and pricing power with commercial payers is kind of at the top of the food chain in healthcare. And they’re not plentiful, frankly. And so we seized the opportunity with Ardent and are really happy with it. And we certainly would add to it, if we found something of the similar risk-reward profile because you kind of have to get it right. And so in this case, I’m glad to say that so far, we have and would certainly invest additional capital if we had the opportunity to do so either with Ardent, as they grow or with others have a similar quality and risk return profile.

Josh Dennerlein

[indiscernible] Ardent. Can you just talk about broadly I guess to actually transaction points [ph] changes you see across the different…

Deb Cafaro

Yes. Yes. Well, we’re in a dynamic market across the board. And obviously, capital costs for public and private real estate companies are changing by the minute, as we saw this morning. And meanwhile, as we know from long decades of experience, cap rates take longer to adjust, right? And so we are – our focus is really on picking our spots, where we – this Life Science University business, where we have a huge competitive advantage. We can buy cluster market life science, with our fund that has kind of a lower cost of capital. We’re really – that’s been a big success story as well.

And then really on senior housing, selective investments, we just acquired something at a six cap cash going in, with growth potential that still works. And then, of course, we’re finding ways to fund things through dispositions, through lower pockets of – lower cost pockets of capital that make these transactions work.

Josh Dennerlein

Or do you think you see the most cap rate moving so far?

Deb Cafaro

There hasn’t been a lot of transaction data points. And that typically kind of will take a while, to really get enough data to say, this is really where – where it’s moved.

Josh Dennerlein

[indiscernible]?

Deb Cafaro

Yes, Bob loves that page.

Josh Dennerlein

On page 7?

Deb Cafaro

Question for Bob. Go ahead.

Bob Probst

Is there a question in this one to mine.

Josh Dennerlein

That’s great.

Bob Probst

Yeah. There’s a green bar on the releasing spread.

Josh Dennerlein

Releasing spread is – Bob, even though it is one that were they to be positive – and where do you kind of expect them to go and overall breakout?

Bob Probst

There hasn’t been a positive re-leasing spread in at least a decade. Justin, will tell you from a history lesson over two times in his career in the last 20-odd years that we saw that. One was just coming out of the financial crisis and one was earlier in 2000, where you had this really positive supply-demand dynamic, a positive backdrop. Relative to that, we are light years better in terms of the fundamentals. So we would, therefore, expect that there is more opportunity here. And – some examples of that clearly are the in-place increases. We mentioned we took 8% in the US last year.

Our move-outs financial move-outs with 8% were de minimis. So clearly, back to price discovery, there’s an opportunity there as we think about the coming in-place increases. Care is the second area, not only in terms of the amount of the increase, which we’re seeing 10%, but also the frequency of that increase. And then, of course, street rates, all of those are working together in driving the RevPOR to over 5%, the highest we’ve seen again in years. And all of this, of course, necessary in light of the operating expense pressure we’re seeing from an inflation perspective. But we have the pricing power. There’s no question.

Josh Dennerlein

And then adjusted rent expenses, how should we be thinking about that going forward and find us where you are on the agency team – I’m going to throw that Bob as well?

Bob Probst

Yeah. Okay. Expenses, which is page 12. Look, we’re seeing inflation, no surprise there across the operating expense base. Let’s just start with labor, and there’s a lot of discussion around labor. In our guidance, our expectations was continued inflationary pressure in labor. We are seeing that as we look at our performance thus far in the quarter.

The mix within the labor bucket, which we look at overall, is changing a little bit. We had expected continued improvement in contract labor, lower. That was the trend we were seeing. That seems to have flattened out, i.e. these expenses have stayed higher. But meanwhile, the in-house labor has been slightly favorable.

The net of those things effectively is putting us back in the same place versus our expectation, which, again, was to be higher due to inflation. But where we are seeing things that are above expectation are things like repairs and maintenance, food, utilities. There is pressure really across all those buckets.

So, again, back to both the macro picture as we think about labor, where is the market going in terms of the labor market, that will strongly influence the labor component and the inflation generally for the rest of the cost base.

Josh Dennerlein

And you’ve got down arrow, if there is again [indiscernible].

Bob Probst

You should. Yes, there was a down arrow. If you looked at the last one. So, yes.

Deb Cafaro

Yes, but the main takeaway, as Bob said, is that labor in total and the vast majority of the labor expense is outside of that line. It’s in the installed base. That labor in total is consistent with our expectations, which was growing, because we know we have wage inflation in the United States.

Bob Probst

Right.

Deb Cafaro

So the mix is a little bit different, between that installed base and the contract side.

Josh Dennerlein

With that, we’re actually right out of time.

Deb Cafaro

Oh, my goodness. We’re just getting started.

Bob Probst

Well, that was fast. Thanks.

Josh Dennerlein

But we do have few rapid fire questions, so we’ve been asked you all the management teams to get a response. So the first one is, which of the following greatest effort challenge facing the US public brands today? A, risk of higher rates? B, risk of recession or C, private equity and non-traded higher REITs?

Deb Cafaro

Higher rates.

Josh Dennerlein

Second question is, which of the following is the great sectors’ specific grid? One, labor institute; two, supply; or three, capital markets?

Deb Cafaro

I mean capital markets for us and our customer base is an opportunity. And otherwise, I would say, within senior housing and health care providers, I would say, it’s labor.

Josh Dennerlein

The final thought is, are you seeing any signs of weakening demand, yes or no?

Deb Cafaro

Our demand is above pre-pandemic levels may have continued.

Josh Dennerlein

Awesome.

Deb Cafaro

Thank you.

Bob Probst

Thanks.

End of Q&A

Deb Cafaro

Thank you very much, Josh and Jeff.