Ventas Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2023

There are 19 speakers on the call.

Operator

Thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas 4th Quarter 2022 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Star and the number one on your telephone keypad. I would now like to turn the conference over to BJ Grant, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Regina. Good morning, everyone, and welcome to the Ventas 4th Quarter Financial Results Conference Call. Yesterday, we issued our 4th quarter earnings release, supplemental investor package and presentation materials, which are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks today may include forward looking statements and other matters. Forward looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated in such statements.

Speaker 1

For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non GAAP financial measures will also be discussed on this call. And for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental posted on the Investor Relations website. And with that, I'll turn the call over to Deborah A. Cafaro, Chairman and CEO.

Speaker 2

Thanks, BJ, and good morning to all of our shareholders and other participants. Welcome to the Ventas' 4th quarter year end 2022 earnings call. We are pleased to deliver a strong 4th quarter, which reflects the attractive operating and financial results of our diverse portfolio and the benefits of our key strategic initiatives. 4th quarter normalized FFO was $0.73 per share fueled by accelerating shop growth at 19%, record medical office building performance and Profitability from our 3rd party Institutional Capital Management Business, VIM. The demand fundamentals that support our business are strong and Getting Stronger across all Ventas asset classes, which are unified in serving the nation's large and growing aging population.

Speaker 2

After significant capital recycling and asset management actions, our diverse portfolio of high quality senior living communities, Medical office buildings, R and I labs and other healthcare assets is well positioned to capitalize on these demand trends. In 2022, Ventas began what we believe will be a multi year growth and recovery cycle, led by SHOP and supported by favorable supply demand fundamentals, actions we've taken in the portfolio and our post pandemic rebound. In senior housing, there are compelling supply demand tailwinds. The over 80 population will grow at record levels in 2023, Yes, we continue to see construction as a percentage of inventory at its lowest level in 5 years and substantially better inventas markets. Over the last few years, we have taken decisive actions to position our SHOP portfolio to capitalize on this exciting demographically led demand.

Speaker 2

We strengthened our team, enhanced our powerful analytic capabilities, rolled out the Ventas OI platform, sold, transitioned and acquired properties and Invested Capital in Communities with Strong Market Fundamentals, all to win the recovery. Benefiting from these trends and actions, we are well underway to recapturing the post pandemic SHOP NOI opportunity. Our portfolio has already enjoyed significant occupancy and NOI growth from the COVID trough, and we see even more recapture potential ahead of us in the coming years as we first seek to reach 2019 performance levels and then hopefully exceed them. Bob also took significant steps to maintain our financial strength and flexibility and improve our balance sheet and liquidity. These actions garnered 3 positive credit rating moves in 2022 and reduce our 2023 maturities to a very manageable level.

Speaker 2

In 2022, we also continued our long Tree of Value Creation with $1,200,000,000 of new investments, often with key partners. These include the $425,000,000 Atrium Health, Wake Forest University School of Medicine Development in Charlotte, North Carolina $200,000,000 in senior housing investments, including the acquisition of Mangrove Bay and a new development with Le Groupe Maurice, both in very attractive markets and $300,000,000 in MOB Investments, highlighted by the acquisition of an 18 property MOB portfolio leased to Arden. Finally, we remain committed to our values, including our ESG leadership. We accelerated our progress in 2022 as we further diversified and elevated our Board and made a bold commitment to achieve net 0 operational carbon emissions by 2,040. These efforts will be advanced under the leadership of our General Counsel, Carrie Roberts, who has the passion and experience to move us forward.

Speaker 2

Now we enter 2023 with strong momentum. Today, we are pleased to introduce full year normalized FFO guidance, representing 5% growth at the midpoint. We are projecting unprecedented organic growth in our portfolio, once again driven by SHOP and complemented by the positive compounding contributions of our office business led by Pete. We also will continue to build out our Vim business, which already has over $5,000,000,000 in assets under management and mine our non property investments for value as evidenced by both the pending Ardent Equity stake sale and our recently completed Atria Glynis software deal. While we also seek to optimize the outcome in our Centier loan.

Speaker 2

Finally, we will continue to invest capital wherever we find compelling opportunities to sustain and reinforce our new cycle of success. The macroeconomic assumptions underlying our forecast include some slowing of the economy, moderating inflation, softening labor conditions and continued albeit less aggressive Fed tightening. Segment. Against that backdrop and in many other likely scenarios, we believe our business is relatively advantaged because demographic demand for our assets is large, growing and resilient. We have demonstrated strong pricing power in shop and softening economic conditions should benefit our operations in multiple ways.

Speaker 2

One final note. In January, Justin assumed the additional role of Chief Investment Officer at Ventas. I know you want to join me in congratulating Justin, and I want to thank him for his continued leadership, which has been instrumental in our success and positive outlook. Working with our strong teams, Justin will use his experience and insights to create value by making good investments across our asset classes, enhancing section between our investment activity and business operations and deploying the powerful Ventas OI platform across our organization. And now, I'm happy to turn the call over to the man himself.

Speaker 2

Justin?

Speaker 3

Thank you, Debbie. I'll start by noting how excited I am about the execution in our SHOP portfolio. Over the past few years, we have taken many actions to put ourselves in a position to achieve positive performance as we aim to recapture NOI in this multi year growth and recovery cycle. We have been successful executing portfolio actions, which include over 50 triple net communities converted to SHOP and over 130 transitions to new operators. We've acquired over 100 new communities and executed 30 dispositions and 8 new developments.

Speaker 3

Finally, we have over 100 communities that are in the process of getting refreshed and are expected to complete during the key selling season. I am really proud of our tremendous team that supports our senior housing business that has executed Ventas OI. Our approach to collaborative oversight where we leverage our operating expertise and best in class data analytics to the benefit of our operating partners to drive positive results, which has gained tremendous momentum. Our programmatic approach addresses 2 priorities in parallel. 1st, timely market, financial and operating insights to influence near term performance and revenue enhancing capital expenditures.

Speaker 3

2nd, tackling key strategic challenges that will deepen our competitive advantage and maximize the long term value of our portfolio. Now I'll cover the Q4 SHOP results in our year over year same store pool of 478 communities. Our SHOP portfolio continues to perform really well. The Q4 was ahead of our expectations while delivering excellent year over year growth due to pricing power, occupancy growth and moderating expenses. NOI in our Q4 year over year pool grew 19.1%, which is above the midpoint of our SHOP guidance range and includes 22.2% growth in the U.

Speaker 3

S. Led by Sunrise and Atria, while Canada demonstrated positive growth again with 11.7% led by L'Groupe Maurice. I would like to thank all of our operating partners for their significant achievements delivering excellent services and care and financial results. We continue to benefit from operating leverage even at this relatively low occupancy resulting in margin improvement from a 23% in Q3 to 23.6% in Q4. Same store average occupancy grew year over year by 140 basis points to 82.5%.

Speaker 3

Revenue in the quarter grew ahead of expectations, increasing 8.3% year over year due to continued acceleration of RevPAR growth and positive trends in occupancy. Pricing power continues to impress. At 6.5% year over year growth RevPAR is the strongest we've seen in the last 10 years, primarily driven by in house rent and care increases and improving re leasing spreads. As expected, expenses were $4,700,000 per day. As a reminder, our year over year expense growth peaked in Q2 2022 at 11%.

Speaker 3

It reduced to 8% in Q3 and was lower again in Q4 at 6%. Leading indicators in the U. S. Remained strong as we experienced Leads as a percentage of 2019 at 120%, move ins at 101% and outs at 101%. Canada continues to deliver growth and high occupancy at 95%.

Speaker 3

Demand accelerated in January with move ins at 104 2019 in the U. S. And 111% in Canada. Now I will cover 2023 SHOP guidance and our expanded same store year over year pool, which includes 508 communities representative of 92% of our portfolio. There are 3 primary drivers of our positive outlook: occupancy growth, rate growth and moderating expenses.

Speaker 3

SHOP same store cash NOI is expected to accelerate from 13.4% growth in 2022 to growth in the range of 15% to 21% year over year in 2023. The low and high end of the guidance range is driven by occupancy and expense performance. We expect margin expansion of 200 basis points at our midpoint. We anticipate year over year revenue growth of approximately 8% at the midpoint of the same store cash NOI guidance range, Driven by continued strong rate growth and occupancy growth of 130 to 170 basis points. With the deployment of our Ventas OI platform and excellent execution by our operators, we are able to achieve substantial rent increases this season of approximately 10%.

Speaker 3

This in combination with improved care pricing, rising street rates and typical resident attrition results in about 6% expected RevPAR growth in 2023. It is important to note that 80% of our revenue growth in 2023 will be driven by the RevPAR growth, Much of which has already been realized as over half of our resident population have already received the rent increases. In regards to occupancy growth, we project that more residents will move into our communities in 2023 compared to prior year. We also project our net move ins to be higher. However, we expect to return to more normal seasonal occupancy patterns, which include typical clinical conditions and slightly elevated financial move outs in the Q1.

Speaker 3

We expect a significant occupancy ramp throughout the year supported by an accelerating aging demographic and new to new supply translating to about 150 basis points of year over year average occupancy improvements in 2023. We also expect moderating inflationary expense impacts and lower contract labor year over year with overall expense growth expected to be around 5%. Through the execution of initiatives to improve employee recruitment and retention, we have had 5 consecutive quarters of net hiring, which are providing the tailwinds needed to stabilize the workforce and support the moderation of expenses. Moving on to investments. I'm really excited to work with our deeply experienced investments team in my newly expanded responsibilities.

Speaker 3

I am very pleased to step into a situation where I can work to continue our strong track record and expert capital allocation. We have a wealth of existing relationships across our targeted asset classes of senior housing, life science and R and I and medical office. I look forward to contributing to the ongoing success of our investment platform by combining the advantages embedded in the enterprise with my extensive network and investment experience to drive external growth. I look forward to expanding Ventas SOI across the enterprise to drive portfolio optimization, external growth and refresh re dev capital across our senior housing and office portfolios. We will continue to pick our spots and investments and work with our best in class partners on attractive opportunities.

Speaker 3

Moving forward, I am confident in the demand drivers of the business and believe we are well positioned to continue this positive trajectory. Team. Bob? Thanks, Justin.

Speaker 4

I'm going to share some highlights on our Q4 performance, touch on our balance sheet and close with our 2023 outlook. To start, we are proud of the 4th quarter results. Throughout 2022, we were accurate in our forecasts and followed our mantra to do what we say. In the Q4, normalized FFO was $0.73 at the higher end of our guidance range. 4th quarter property growth was particularly strong with total company and shop same store cash NOI growth of 8.5% and 19.1 percent respectively.

Speaker 4

I'd like to give a shout out to Pete Bulgarelli and our office team. Office had a great year growing same store cash NOI by 3.8% in fiscal year 2022. And that office result was led by our MOB business, which posted some outstanding metrics including strong leasing performance with same store year end occupancy of 92%, highest level since 2017. Tenant satisfaction measures exceeded 93% of all MOBs. Same store operating expenses increased just 2.6% year on year, well below inflation.

Speaker 4

And as a result, full year 2022 MOB same store cash NOI grew 3.4%, the highest on record for the company. R and I also posted attractive organic performance, growing same store cash NOI by 5.1% in the full year 2022, led by leasing at higher rates and solid expense management. I'd highlight 2 other items in the 4th quarter. We earned our 1st promote approximating $0.02 per share as general partner of the Ventas Fund, which was a penny better than our guidance. We're also eligible to earn further promotes in 2023.

Speaker 4

2nd, we recognized a $20,000,000 non cash CECL allowance on our $486,000,000 mezzanine loan investment to Santerra Health Investors. Interest coverage on the loan has declined through year end, But the loan remained fully current through January 2023 and full interest is expected in February. Next a few comments on our balance sheet. Over the last 2 years, we enhanced our portfolio and strengthened our balance sheet through $1,300,000,000 in asset dispositions and loan repayments, with proceeds used to reduce near term debt. We also issued $2,700,000,000 of new debt in that period, extending duration at attractive pricing before the run up in interest rates.

Speaker 4

As a result, we have just 4% of our consolidated debt or under $500,000,000 coming due in 2023. And we've made good progress towards this refinancing, having locked in all in cash rates of 4.2% on nearly 2 thirds of this requirement. Consistent with our long held risk management approach to maintain 10% to 20% of floating rate debt, 12% of our consolidated debt was floating in the 4th quarter. We have plans to issue $500,000,000 in new secured fixed rate debt with proceeds designated to pay down floating rate debt in 2023, which would bring our floating rate debt to the lower end of our targeted range. We have significant liquidity of $2,400,000,000 at year end 2022.

Speaker 4

And finally, our net debt to adjusted pro form a EBITDA improved by 30 basis points to 6.9 times in the 4th quarter, with SHOP NOI growth steadily moving that ratio back toward our pre pandemic target range. Last but not least, I'm extremely pleased to reintroduce full year 2023 guidance. This is tangible evidence that we are in a post pandemic world and our guidance demonstrates the exciting post pandemic organic property growth opportunity for Ventas. The key components for our 2023 guidance are as follows. Net income attributable to common stockholders is estimated to range between $0.20 $0.34 per fully diluted share.

Speaker 4

Normalized FFO is forecast to range from $2.90 to $3.04 per share. We expect our portfolio same store cash NOI to grow 7.5% at the midpoint, led by SHOP same store cash NOI growth of 18% at the midpoint. Our 2023 FFO guidance at the midpoint of $2.97 represents growth year over year of 5% or $0.13 per share against the rebased 2022. The FFO bridge describing the $0.13 is straightforward with 2 main drivers. First, we expect $0.29 from outstanding year over year organic Property Growth in SHOP.

Speaker 4

And second and partially offsetting is a $0.16 reduction principally from the impact of higher interest rates. A stronger U. S. Dollar against the Canadian dollar and the pound is also a contributor. Other guidance items include receipt of over $300,000,000 in capital recycling proceeds, no additional promote revenue, G and A approximating $151,000,000 at the midpoint and $404,000,000 weighted average fully diluted shares.

Speaker 4

The low and high end of our FFO guidance range are largely described by changes in the macro environment, including potential changes in inflation expectations and interest rates. A few thoughts on phasing of our normalized FFO through the year. We expect FFO in the Q1 of 2023 to be roughly flat to the Q4 of 'twenty two of $0.71 when adjusted for the $0.02 promote received in the 4th quarter. The Q1 of 2023 is the seasonal low point for SHOP. As the key selling season in SHOP kicks in and interest rates plateau, FFO growth is expected to pick up in the balance of 2023.

Speaker 4

A more fulsome discussion of our 2023 guidance can be found in the earnings and public presentation posted to our website. To close, we enter 2023 with momentum. The entire Ventas team is fully engaged and excited to deliver on our 2023 plans and to reignite a new cycle of success for the company and our shareholders. And that concludes our prepared remarks. For Q and A, we ask each caller to stick to one question to be respectful to everyone on the line.

Speaker 4

With that, I'll turn the call back to the operator.

Operator

Our first question will come from the line of Joshua Dennerlein with Bank of America. Please go ahead.

Speaker 5

Yes. Hey, guys. Thanks for the time. I just want to ask about that Entera Health Investors loan. Just provide more background why the allowance?

Speaker 5

And then Debbie, I think you mentioned you're looking to optimize the outcome. So kind of just help us think through like the outcomes that you're expecting.

Speaker 2

Sure. Good morning. The loan is part of our normal business. Over the last 5 years, I think we've collected about $1,700,000,000 in loans that we've made on health Care Properties or to Health Care Operators. This particular loan took a $20,000,000 allowance in the quarter.

Speaker 2

And we continue to be current in terms of interest receipt of interest payments. And it's under some compression of coverage because some of the assets haven't recovered from COVID while interest rates have been increasing. And so it's really a timing issue if you want to think about it that way. And so we would expect to work through that, and we have a lot of experience and tools and rights at our disposal to do that.

Operator

Our next question will come from the line of Vikram Malhotra with Mizuho. Please go ahead.

Speaker 6

Thanks for taking the question. So I just wanted to understand in your deck, you outlined potential CapEx investments, I guess, in SHOP and maybe triple net to position the portfolio. I'm wondering CapEx was a little elevated in the Q4. So I'm wondering if you can give us a sense of just like the magnitude of these investments over the next, call it, 2 or 3 years to achieve what you want with the portfolio and perhaps tie those CapEx to the bridge you've outlined in terms of the SHOP NOI growth.

Speaker 3

Hi, it's Justin. I'll start and I'll probably want to jump First of all, it is a large initiative. We have 100 communities that they're In the process of being refreshed, we do believe that it will be impactful. It's about $1,000,000 a pop. It should Health Improve Performance.

Speaker 3

Certainly, we've considered that when we gave our guidance for 2023. And there's More to do, but at this stage, we picked our highest priorities and we've been executing aggressively. Release. So we look forward to these projects coming online during the key selling season.

Speaker 4

I'd add the $1,000,000 a pop, we've mentioned 100 properties that's obviously $100,000,000 The timing of that clearly isn't all in 1 quarter. It will be spread over the course of time. But these are NOI generating opportunities, ROI generating opportunities and are indeed embedded in the forecast we've given you in terms of the NOI growth. And I believe top use of our cash, best use of our cash is to reinvest in these assets given the backdrop of SHOP and Senior Housing.

Speaker 6

And sorry, could you just clarify this $100,000,000 is that this year or is it spread out? I'm just trying to tie

Speaker 3

it back

Speaker 6

to Ultimately the fad growth coming through because if these are multiple years of $100,000,000 then maybe the fad growth gets press.

Speaker 4

Well, first of all, we started these last year. So you mentioned the Q4 seeing some acceleration that clearly is part of it. 2nd point to make is just in terms of a classification of the CapEx spend. This is ROI generating a re dev. So you'll see that acceleration in re debt.

Speaker 4

At the same time, FAD CapEx will increase. Again, the top priority is investing behind our SHOP assets. So you'll see that increase at the same time, but it's a multiyear program.

Speaker 2

And it's a multiyear NOI impact as well. We believe going forward really investing into this multiyear recovery in senior housing and advisory and fundamentals in our market.

Speaker 6

Got it. Thank you.

Speaker 2

Thank

Operator

you. Your next question will come from the line of Ronald Kamden with Morgan Stanley. Please go ahead.

Speaker 7

Great. Just a quick two parter. Thanks for the presentation. It was super helpful. Two things caught our eyes.

Speaker 7

The first was just the leading indicators and the lead generators seem pretty strong both in 4Q and January. Maybe just

Speaker 5

a little bit more color

Speaker 7

on what that's capturing conversion rates, just thought that was really interesting. And then the second piece is, I think on the end of the presentation, talked about sort of a $900,000,000 shop NOI opportunity with all things said and done. If you take a step back, just curious how you guys are thinking about sort of the margin profile at that point versus pre COVID. Thanks.

Speaker 2

Well, Ronald, we're glad you liked the deck. We obviously We pride ourselves on our analytics, but your old colleague BJ Grant helping us put it in the best format for our external constituencies. So we're glad that you like it. And I'll turn it over to Justin to start to answer your question.

Speaker 3

Sure. So in regards to leading indicators, you've noted they're looking really good. We've had, We think the highest 4th quarter lead volumes on record in terms of leads. Move ins were solid. You noted the conversion rate.

Speaker 3

We had an operator that put in place and website upgrade into a month in December slowed down leads a bit, slowed down move ins. Those move ins have since recovered in January already, so no worries there. We expect to follow normal seasonal trends and so you'll see move outs be a little bit higher. We've had It's normal to have additional clinical move outs. It's normal to have additional financial move outs.

Speaker 3

And then so far in January, We're off to a strong start with move ins at 104% of 2019 in the U. S, 111% in Canada. So all looking pretty good from a leading indicator standpoint. In regards to the margin question, There's one thing that we're all excited about. Obviously, Debbie noted it, I noted it, and that's the pricing power.

Speaker 3

That's really helped to accelerate our margin expansion. Occupancy growth does as well. So we do anticipate margins to continue to expand and also to Debbie's point, we're participating and hoping to get back to that 2019 level again and margins will should settle out, but also should continue to grow because Of the strong demand for the senior housing sector.

Speaker 8

Thanks so much. You're welcome.

Operator

Your next question will come from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Speaker 9

Yes, thanks. Just regarding to your SHOP same store growth forecasts, is there a meaningful difference between the legacy same store assets versus the new properties coming in, in terms of growth. I mean,

Speaker 4

I think that a lot

Speaker 9

of the new stuff being added From New Senior. So is the growth profile of the New Senior assets different than the legacy same store portfolio?

Speaker 2

Hi, Mike. I'm glad you asked that and I'm going Bob to answer. Yes. Mike, I'd say

Speaker 4

first off, all of the pools, all of the operators are contributing really attractive growth across the board literally as you look at it. This is broad based growth and recovery and improvement across the portfolio. And you mentioned New Senior. New Senior is importantly part of that contribution. And when you look at the Q4 of 2022, you'll see almost the same asset pool, and that growth in the 4th quarter reflects that broad based strength.

Speaker 2

So, Yes. What I mean, what I think you should like about it is we've now have the vast majority of our shop business in the same store pool. So

Operator

segment. Our next question will come from the line of Steve Sakwa with Evercore ISI. Please go ahead.

Speaker 10

Thanks. Good morning. Justin, I guess I was just hoping you could speak a little bit about the occupancy growth. You picked up, I think, 300 basis points in 2022. Your forecast is for $150,000,000 at the midpoint this year.

Speaker 10

So I'm trying to figure out was the $300,000,000 maybe Picking up low hanging fruit in the early parts of the recovery and the 150 is a more normalized pace or do you think the 1 50 is a bit of a slowdown as you have maybe got a bit of a cautious view towards the economy. I'm just Trying to reconcile that with the leads and the move ins that you sort of talked about.

Speaker 3

Yes, that's a great question. Let me start with describing the 300 basis points and I want to relate it to seasonality. When we grew 300 basis points in 2022, we had 2 things helping growth metric. One was that Q1 of 2022 performed better than typical seasonality. So very strong start in In 'twenty two, there really wasn't much clinical activity at all.

Speaker 3

And so that was helping us. It was also comparing to a prior year Q1 of 2021 that was pandemic impacted. So you have a stronger start in 2022 and you have a favorable comparison. Moving ahead into 2023, I mentioned in the prepared remarks that we're experiencing normal seasonality. So we have a lower starting point in Q1.

Speaker 3

So effectively Q1 has lower occupancy than Q4. It's in line with normal seasonality. Typically, you see about 100 basis points change downward from Q4 to Q1. And then what we'll see this year is an acceleration in growth. And as I said, we're expecting more move ins, we're expecting more net move ins.

Speaker 3

So in fact, the growth rate In 2023, it will be stronger. The effective growth rate is stronger, but the average overall is at the midpoint of 150 basis points of growth.

Speaker 2

Because of timing. And phasing.

Speaker 5

Exactly.

Speaker 2

Thanks, Steve.

Operator

Your next question will come from the line of Jonathan Hughes with Raymond James. Please go ahead.

Speaker 11

Hi, good

Speaker 12

morning. I appreciate the full year guidance and the confidence in the seniors housing recovery that providing that outlook conveys. But I was hoping You could give us the SHOP NOI growth guidance breakdown between the U. S. And Canada.

Speaker 12

Canada seems to have been where some of the upside versus guidance came in the Q4, but I know there are some price restrictions in some provinces north of the border. I just would find that that breakdown between the U. S. And Canada for this year would be helpful. Thanks.

Speaker 3

Hi, it's Justin. Well, everything is included in the full year guidance in 2023. And as Bob said, Everyone is contributing. Canada has set a higher occupancy. It does tend to generate less growth overall, but it is contributing growth and we'd expect the U.

Speaker 3

S. Be on the higher end of the average of the guidance range, Canada a little bit on the lower side, but with everyone contributing to the growth.

Speaker 4

I would just I'd emphasize 95% occupancy in Canada and we delivered 12% growth in the 4th quarter. That business is Performing well. But obviously the U. S. Is the engine driving the overall midpoint.

Speaker 8

Thank you.

Operator

Your next question will come from the line of Michael Griffin with Citi. Please go ahead.

Speaker 13

Great. Thanks. Justin, in your conversations with your operating partners,

Operator

can you give us a

Speaker 13

sense what the better performing partners are doing right on the labor side of the equation. And then conversely for those that might be underperforming,

Speaker 11

what the

Speaker 13

plan is to bring them sort of up to snuff? And ultimately, if they're not performing, Could you look to transition maybe to some of your better partners, but any expansion there would be great?

Speaker 3

Sure. Well, first of all, Really similar to how everyone's contributing to the NOI growth in 2023, all of our operating partners are contributing to the improvement in managing the labor costs and it's done a few ways. One was to professionalize the recruitment of line staff where that had been a local priority, it's become a central priority for operators, that's done through automation. It's also done by gearing your recruitment professionals towards that person. There's been more emphasis on retention as well.

Speaker 3

There was wage increases that were competitive that were put in place all the way back starting in 'twenty one and throughout 'twenty two that helped to be more competitive. And then just extra emphasis where you have the Leading indicator is always agency, which you probably noted in our numbers that's been coming down. But if the community entering agency or our markets entering agency that's an indicator to make put additional focus on that localities. So really good execution, and there has been, I think, changes that have been made That will be lasting in terms of just process improvement.

Speaker 14

Great. Thanks.

Operator

Your next question will come from the line of Juan Sanabrio with BMO. Please go ahead.

Speaker 8

Hi, good morning. Just a question on THAAD CapEx. Good morning. Just a question on THAAD CapEx, maybe to piggyback off of Vikram's question. Just curious, I guess, what the guidance is for what we should be thinking about is in the 2023 guide.

Speaker 8

And then as well as maybe a little bit of color on what gets included in the ICE versus normal fab CapEx. If I kind of add the 2 together And compare that to the average units for 2022, it implies about $23,200 per unit per year, which It seems a little low given the inflation. So just curious on that breakout and what we should be expecting for the year? Thanks.

Speaker 2

Well, I mean start out with the principle that bad CapEx is really routine recurring non income producing kind of steady state activity. And then Bob will go for it.

Speaker 7

The second

Speaker 4

premise is ICE It's really a function of either transitioned or acquired assets bringing up to market standard. And part of what you'll see in 2023 versus 2022 is a reduction, significant reduction in ICE because simply because we haven't had that activity in the last call it year or So that flushes out of the system, bringing you back to core CapEx and FAD, which I would expect to see some acceleration in. I mentioned that earlier. Again, our best use of cash to invest behind the properties, both front of house and back of house. So you will see an increase in that.

Speaker 4

And more meaningfully, The increase in re dev, which is really these front of house refresh ROI projects, which we mentioned the $100,000,000 number as a placeholder. So both will be going up. I think net net net, I would think about it in terms of the bottom line FAD contribution in 2023 also growing driven by the cash flows of the properties.

Speaker 8

Any dollar guidance for Total CapEx spend

Speaker 4

then? No, simply the change. I'll give you a re dev up by $100,000,000 as a year on year as a number.

Speaker 8

Thanks.

Speaker 2

You've got some out of them, Juan.

Operator

Your next question will come from the line of Tayo Okusanya with Credit Suisse. Please go ahead.

Speaker 11

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 11

Quick question on the guidance side. Again, very strong underlying fundamentals Built in 'twenty three. I'm trying to understand a little bit more about some of the kind of the drags on the numbers, if I may Let me use that word that results in the guidance. And specifically on the interest and FX side, Trying to understand the FX assumptions being made and quantitatively how much of a drag that is on earnings this year in case FX becomes better than expected. I'm also trying to understand the assumptions around the $500,000,000 of refinancing that's baked into the numbers exactly what kind of rates are you expecting to refinance that at?

Speaker 4

Great. I'll take that. So Page 14 of the deck we posted yesterday is helpful here because it really focuses on the impact of rising interest rates. Of the $0.16 I noted in the bridge, the vast majority is interest rates. And the vast majority of that is really the curve on floating rate that we show in the deck.

Speaker 4

FX is a contributor, but a small contributor. And in large part because we have in Canada, Canadian Debt. And that's a natural hedge to what is a stronger U. S. Dollar, which is having translation impact on NOI.

Speaker 4

So that's the primary driver. In terms of the $500,000,000 this year of refinancing, again, that's in Canada, Principally, we've been able to secure some attractive pricing on mortgages in Canada. That's going to be a key source of funds as well as some agency debt here in the U. S, which we're planning to issue, which we'll use to pay down floating rate debt. And Those are really the 2 key drivers of the guidance in terms of refinancing.

Speaker 11

And specifically for the $500,000,000 could you give us a sense of what the new rate Going to be versus the old rate?

Speaker 2

Well, I mean it depends on the 10 year. Yes, it

Speaker 4

depends on tenure. In the 5s would be a reasonable expectation depending on where the tenure is.

Speaker 11

Okay, great. Pete, you're giving me 2% to 3% MOB next year. It's going down, but I still like it.

Speaker 4

We're feeling good.

Operator

Our next question will come from the line of Nick Yulico with Scotiabank. Please go ahead.

Speaker 15

Thanks. Good morning. I just also in terms of the guidance, It's a question on the $300,000,000 of capital recycling proceeds that you're getting. If you

Speaker 13

could just give the breakdown

Speaker 15

on the loan repayments versus property dispositions in that number. And then a second part on that would just be how we should think about your using those proceeds and maybe earmarking for debt pay down, acquisitions or development, any color there would be helpful. Thanks.

Speaker 2

Hi, Nick. It's Debbie. On the $300,000,000 a couple $100,000,000 as we show in the deck is based on office dispose, some of which are purchase option driven. There's a we got full repayment on a Freddie Mac loan in January that was $43,000,000 I think at a double digit interest rate. We got paid in full on that.

Speaker 2

And then the balance is other small items.

Operator

Our next question will come from the line of Rich Anderson with SMBC. Please go ahead.

Speaker 16

Thanks. Good morning, everybody. So I want to talk about the supply side of the house. As Some people may not remember the senior housing business was not in a great spot prior to the pandemic, because of oversupply. And I know that you trended down, it's trending down substantially as shown in Page 11 of your deck.

Speaker 16

But the rule of thumb for supply is, in my mind, is if you're anywhere over 2% of existing stock, it's On the table as a possible problem. So tell me why even though it's down substantially over the past 5 years, comp year of 5 years ago was not a great fundamental period for the business. So tell me why this Is a good thing beyond just the optics of it being down. And also, what you think the window is for you to sort of see this ramp in demand that we're all seeing and expecting and when you think supply starts to sort of muddle in the story again because it certainly will, particularly with development costs coming down now. So if you could comment more Color on that, that would be great.

Speaker 16

Thanks.

Speaker 2

Good. I mean, it all starts with the demand side, as you know, with the record 80 plus population growth in 2023. In terms of supply, I would analogize where we are to a little bit after the financial crisis because during those years, Construction and Development and Start. Obviously, we're paused for a period of time Because of the Great Financial Crisis. And this is similar really to what we're seeing from kind of the pre COVID period that you referenced, but then also kind of during COVID and then continuing now Extremely expensive now.

Speaker 2

And so the costs remain for the time being very high. And There would tend to be because starts are really low in our markets. Justin can give you the specifics. But We believe we have a good multiyear window here where we know kind of the demand profile And can capture that, while at the same time, deliveries should remain muted, very muted, because they'll be seeing the effects again much like we did after the financial crisis where deliveries were low. And I think at that Point.

Speaker 2

Occupancy has got up in and around the 92% level and that's really where we want to be able to see if we can get back to that kind of 92% level in this nice window that we have, and kind of that's the game plan.

Speaker 3

Yes. I mean, I think you summed it up perfectly. I would just point out again that the 80 plus population, what's different from that period is growing at record levels and will continue to for the next several years. So that's obviously very supportive on the demand side. Supply.

Speaker 3

You'll notice our supplemental, we have starts in our top markets. It's like it's in the basis points. It's like 10 basis points. It's exceptionally low. And that supports the window that Debbie is describing over the next few years.

Speaker 3

And this is sector that has tremendous demand fundamentals. So the capital will see through those and will bring supply eventually, but We do have a window that's formed that's really exciting and supportive of the recovery that we've been talking about.

Operator

Your next question will come from the line of Mike Mueller with JPMorgan. Please go ahead.

Speaker 4

Yes. Hi. I'm curious for SHOP, should the RevPAR growth moderate a lot in 2024 and 2025, Just given the pace of how your expense growth has been moderating.

Speaker 3

Hi, it's Justin. So I'm going to go back to what I was just talking about, which is demand. So another part of this is just affordability in our markets, which is Very high, and there's demand for the services. So you have the combination of people needing the service and people having the ability to pay. And with numbers that we've never seen before in terms of demand at the doorstep.

Speaker 3

So that should be supportive of pricing power moving forward. There's always some sensitivity relative to inflation and CPI, but what you're really working to do to generate earnings growth is to create a spread, and we've been effective in doing that in this cycle.

Speaker 2

And you would think as you take capacity out of the market through higher occupancies that you may maintain some all or more of this pricing power.

Speaker 4

Got it. Okay. Thank you.

Operator

Your next question will come from the line of Derek Johnston with Deutsche Bank. Please go ahead.

Speaker 14

Everybody, good morning. On SHOP OpEx release and specific to labor costs and agency. Pre pandemic, I don't recall agency labor Being material at all or even utilized outside of very special situations. So there's been improvement, no doubt. How do you plan to get agency labor out of your centers?

Speaker 14

And can you achieve pre pandemic levels Agency Labor by year end 2023.

Speaker 3

Hi, Justin. You're absolutely right. Agency was close to 0 pre pandemic. Obviously, there's been big shifts in the labor market since then. And We've had it enter our sector as others.

Speaker 3

We've managed to bring it down, which you've noted. In our 2023 guidance, we assume lower agency than we did in 2022 year over year. And so that's supportive of our moderating expenses. But we are in fact carrying that Q4 run rate, Like 2% of revenue forward throughout the year. There is, I mentioned In my prepared remarks, the guidance range, it assumes lower expenses and more occupancy at the top end, which is the other way at the bottom.

Speaker 3

So we've incorporated that into our thinking. But we're anticipating that agency remains relatively stable.

Speaker 2

And this is true across healthcare writ large and is principally a function of the labor force participation rate, and other kind of macro factors. And the key is really to take the actions at the hiring level that Justin mentioned about positive net hiring where you're at least getting your fair share of that workforce.

Speaker 14

Got it. Thanks, Debbie, and congrats, Justin. Thanks.

Operator

Your next question comes from the line of Steven Valiquette with Barclays. Please go ahead.

Speaker 17

Great. Thanks. Good morning, everybody. Good morning. So just on the shop, you talked about the seasonality earlier.

Speaker 17

But on Slide 18, the presentation, you talk about expecting normal historical seasonality in 1Q 'twenty three versus 4Q 'twenty two.

Speaker 6

Yes, it's a little bit of a sense of the subject,

Speaker 17

but I guess to the extent that high flu prevalence historically leads to, let's call it, elevated levels of resident expiration.

Speaker 14

I thought that would have

Speaker 17

been a trend that maybe would have hurt occupancy a little bit in the Q4 just given the normal spike in flu happened so much earlier this season In the Q4 instead of 1Q and then inversely, with flu really kind of falling off dramatically here in 1Q 2023, I would have thought the historical downtick Maybe would not really happen this year in 1Q. So hopefully all that kind of makes sense. I just wanted to get your thoughts on this early flu potentially altering some of the normal seasonal trend. Thanks.

Speaker 3

Yes. So the great points or observations, I'll start with the clinical side. The clinical side, I would just described as kind of normal. It certainly wasn't representative of the headlines that there were around flu. It's very normal, kind of typical seasonality in both December and so far in January.

Speaker 3

We have had financial move outs, which is also typical around this time because I mentioned that over half of our residents have received their in house rent increases. We've also mentioned the relatively high this year as well. So that's contributing to the move out trend and which is normal. That's kind of the point I was trying to make and in that regard, we're kind of back to normal trends. And then From a move in expectation standpoint and that move in expectation standpoint, we expect those to continue to improve due to the demand at the doorstep.

Speaker 14

Got it. Okay. Thanks.

Operator

Your next question will come from the line of Tayo Keay with Stifel. Please go ahead.

Speaker 5

Hey, good morning. Thank you for taking my question. So Justin, the shelf guidance assume a 6 percent RevPOR growth, which is kind of slowly slightly lower than the higher single digit and even 10% in place rate increase Some senior housing operator has been talking about. So could you comment on the expectation on the moving rates and the current promotional activities? Are you still expecting deposit releasing spreads for 2023.

Speaker 5

And as a quick follow-up on the Colony loan, how much of the $50,000,000 annualized interest income, did you take off the guidance?

Speaker 3

How about I start with the pricing question. There's a page and then the deck for those that have it, Page 20 that addresses this. First, the contributors to Rev 4, strong in house rent increases running around 10%, Care pricing 11% and then street rates have increased as well. So really everything is going up in that regards. One thing about care, it's adjustable throughout the year, represents about 15% of our Rev 4.

Speaker 3

And then there's just normal attrition, typical attrition. And so in other words, not every resident is receiving the full benefit of these increases throughout the whole year. So that's why You're seeing a 6% Rev 4 rather than around 10% which the numbers above might indicate.

Speaker 2

And then on Colony, I would say there's a range of outcomes basically bracketing the FFO contribution in 2022.

Speaker 5

Got it. Thank you.

Speaker 2

Thank you.

Operator

Segment. Your next question will come from the line of John Pawlowski with Green Street. Please go ahead.

Speaker 18

Thanks for the time. I just had a follow-up question on the mezzanine loan. Can you remind me what loan to value range your mezz tranche sat at in the capital stack when you originated the loan? And then can you give us a sense for what magnitude of NOI increases are needed at these properties to fully service the debt? Because I believe the interest rates LIBOR plus 6.40 bps and that's really, really painful for cash flows.

Speaker 18

And so just any thoughts on how you got Comfortable about not taking a larger impairment would be helpful.

Speaker 2

Sure. I mean, I think, again, as we said, there There is a post COVID impact on some of the assets and rates have increased. The full loan stack is really closer to L plus 330 ish, if you will, in the senior and the junior. And so The original underwriting was very conventional kind of 75%, 80% LTV. And so it's this timing mismatch, if you will.

Speaker 2

And the borrower, we believe is taking actions on the portfolio side and the rates are the rates. And so we value the collateral and taking making our decision at the twelvethirty one balance sheet and made reasonable consistent assumptions about valuation.

Speaker 18

On the timing mismatch, if rates stay where they are, when will NOI operating income start To fully cover the loans.

Speaker 2

Well, it's being paid now. So it's covering the loan. So interest is being paid.

Speaker 18

I'll jump back in. Thanks.

Speaker 2

Great. Thank you.

Operator

Our final question will come from the line of Dave Rodgers with Baird. Please go ahead.

Speaker 16

Yes, good morning. Probably for you Justin. In terms of capital deployment this year, you guys put out I think $1,200,000,000 last year. Where are you seeing kind of the best opportunities today outside of the redevelopment, which you've mentioned earlier in the call? But are you seeing more opportunities commercially to put more money to work In life science or MOB or do you think it will continue to be in shop by bringing new portfolios on?

Speaker 16

I guess, what are the biggest dislocations today in your mind and how much Are you interested in taking advantage of those?

Speaker 3

Yes. So first of all, we're fortunate to have a wide variety of capital sources to Fundor acquisitions. We'll prioritize our key asset classes. Senior housing obviously is one of those life science medical office as well. The market itself is not normal.

Speaker 3

There's exceptions to this, but there tend to be fewer market participants right now. The deals that we're seeing are getting repriced. Again, there's exceptions to that. Pricing can be unclear on the stabilized assets, But we remain very interested in expanding the portfolio and growing in our preferred asset class.

Speaker 8

Conference call.

Operator

At this time, I'll turn the conference back over to management for any concluding remarks.

Speaker 2

Thank you so much. I want to sincerely thank everyone for joining us on the call today. We really appreciate your interest in the company. We look forward to seeing you. We're all very optimistic and aligned around our 2023 momentum and opportunities and ready to get after it.

Speaker 2

Thank you very much.

Operator

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Ventas Q4 2022
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