Ventas Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Sarah Whitford, Investor Relations Officer
• Debra A. Cafaro, Chairman and Chief Executive Officer
• J. Justin Hutchens, Executive Vice President of Senior Housing
• Robert F. Probst, Executive Vice President and Chief Financial Officer
• Peter J. Bulgarelli, Executive Vice President of Office

Analysts

• Stephen Thomas Sakwa, Evercore ISI Institutional Equities
• Michael Anderson Griffin, Smith Barney Citigroup
• Vikram L. Malhotra, Mizuho Securities USA
• Austin Todd Wurschmidt, KeyBanc Capital Markets
• Juan Carlos Sanabria, BMO Capital Markets
• Richard Charles Anderson, SMBC Nikko Securities America
• Michael Albert Carroll, RBC Capital Markets
• Joshua Dennerlein, BofA Securities
• Steven James Valiquette, Barclays Bank
• Richard Hill, Morgan Stanley
• Omotayo Tejamude Okusanya, Credit Suisse Group AG
• John Joseph Pawlowski, Green Street Advisors
• Michael William Mueller, JPMorgan Chase & Co.
• Nicholas Philip Yulico, Scotiabank Global Banking and Markets

Presentation

[Operator]

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas First Quarter 2022 Earnings Conference Call. [Operator Instructions]

And at this time, I would like to turn the conference over to Sarah Whitford, Ms. Whitford, you may begin your conference.

[Sarah Whitford, Investor Relations Officer at Ventas]

Thank you, Abby. Good morning, and welcome to the Ventas first quarter financial results conference call. Yesterday, we issued our first quarter earnings release, supplemental and investor presentation. These materials are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks made today may include forward-looking statements, including certain expectations related to COVID-19 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 by such statements.

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. For a reconciliation of these measures to the most closely comparable GAAP measures. Please refer to our supplemental posted on the Investor Relations section of our website.

And with that, I'll turn the call over to Debra A. Cafaro, Chairman and CEO.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Thank you, Sarah. Good morning to all of our shareholders and other participants. I want to welcome you to the Ventas first quarter earnings call. I'm delighted to be joined by my Ventas colleagues, who have worked so hard for shareholders, each other, our partners and our other stakeholders over the past two-plus years. We are off to a strong start in 2022. We are delighted to deliver on our commitment to grow normalized FFO and same-store SHOP NOI year-over-year for the first time since the pandemic began. It is certainly worth pausing to appreciate a quarter that returns us to growth and underscores our positive momentum and the senior housing recovery that is underway.

In the quarter, we continued to benefit from stability and growth in our office and health care triple-net lease businesses. And in SHOP, we saw outstanding year-over-year NOI revenue and occupancy growth that overcame meaningful impacts of COVID-19 and inflationary pressures during the quarter. Looking forward, the power of our well-positioned communities, strong demand evidenced by leads that consistently exceed pre-pandemic levels into April, pricing power and advantaged markets should translate into sustained NOI growth through the balance of the year. These trends should be further enhanced by favorable supply-demand fundamentals, supporting net absorption in our markets. Specifically, Q1 2022 starts are down 2/3 from the peak just as the over-80 population is set to grow over 20% during the next several years.

But we are not just relying on demographics to win the recovery. Justin and his senior housing team continue to take decisive actions following the right asset, right market, right operator approach to best position our senior housing portfolio to capture the upside ahead. We've already started to see the benefit of these actions with a strong first quarter, and our SHOP portfolio has outperformed industry benchmarks for comparable senior housing communities over the last year. Today, we've announced another important step in this progress. We have revised our agreement with Sunrise to align our interest toward profitable growth and value creation.

We've been working together with Sunrise since 2007 and are delighted to reset the relationship with the current management team at this point in the cycle. In addition to organic growth, we also benefited from the investments we've made under our consistent long-term capital allocation philosophy and priorities. On the investment front, we posted about $4 billion of investment activity since the beginning of 2021, with our first quarter 2022 capital allocation priorities continuing to be the acquisition and development of senior housing, life science and select medical office buildings. I want to highlight two of our first quarter investments and show how they demonstrate our investment approach.

The two investments have reliable going in cash yields, limited downside and room for growth. And both came from trusted relationships built over long periods of time through repeated and mutual success. Mangrove Bay is an irreplaceable senior housing community located on the waterfront in the high wealth submarket of Jupiter, Florida. Acquired for $107 million, Mangrove has large units, high REVPOR and a strong, consistent operating history. Since the acquisition, performance has been strong and our investment yield has grown to 6%.

Our recent value-add investment in the uCity Philadelphia submarket represents an opportunity to add another component to our incredibly well-performing research and innovation portfolio located between Penn and Drexel. We intend to convert a portion of the building to high-demand lab space and achieve a 7% stabilized yield on our aggregate investment costs. The Penn-Drexel market has been very successful for us, with our two ongoing developments now 90% leased or committed, and rents up 40% since we put a shovel in the ground. I'd like to touch on three more points before closing. Our continued focus on driving total shareholder return, ESG leadership and the macro environment.

First, as a continuation of our commitment to driving TSR performance, I welcome BJ Grant to the VTR team. He is a highly regarded long-time REIT investor, who has a distinct appreciation for health care and senior housing real estate. BJ is going to work with the Ventas team and externally with the investment community to reinforce the Ventas value proposition. Second, I'd like to highlight our sustainability leadership, which continues with our announced commitment to achieve net zero carbon emissions over the next two decades and our recent recognition as the number one medical office building owner operator for ENERGY STAR certifications.

Finally, let's discuss the all-important macro economy, particularly current inflationary pressures and the tightest labor market we've seen in 50 years. It is encouraging that today's Jobs Report evidenced some emerging indications of stability. Emanating from a confluence of factors, annual inflation is expected to continue to run high, perhaps exceeding 8% through the second quarter and then moderate by a couple of percentage points in the back half of the year and moderate again by another couple of percentage points by mid-2023.

While significant uncertainty remains, this improvement in expectations is the result of various policy actions, including Fed tightening tempering demand, greater balance in workforce supply and demand from expansion of the labor force participation rate and a slower pace of job creation and some supply chain normalization. Whether these forces result in a soft landing or trigger a recession, Ventas is relatively well positioned. Our demand is robust, it is need based and it is growing. Pricing power is strong and has the potential to strengthen further as occupancies continue to recover. Softening the rate of growth in labor and other expenses should improve our margin particularly as revenue and occupancy increase.

But regardless of the macro environment and uncertainty, at Ventas, we will remain agile, execution-focused and performance-driven. With an attractive valuation and high-quality portfolio, growth potential, a well-covered advantaged dividend, 90% fixed rate debt and the opportunity to drive external growth, we are very well positioned. In closing, I want you to know that all of us at Ventas are committed to using every tool at our disposal to excel and create sustained value for our shareholders and other stakeholders.

Thank you. Justin?

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Thank you, Debbie. I'll start by noting that we are very pleased with the NOI growth in the quarter and the start of what should be sustained improvement in our SHOP portfolio throughout the year. The revenue performance is very strong, driven by volume and pricing in spite of the COVID activity in the first quarter, leading to our best year-over-year and sequential revenue performance we have ever seen in our portfolio. Now I will speak to the first quarter SHOP performance, excluding HHS grants, second quarter guidance, comments and update on our key initiatives. In the first quarter, same-store revenue increased by nearly 10% versus the prior year due to the positive trends in occupancy and rates.

Same-store average occupancy grew year-over-year by 420 basis points to 83%, which was ahead of the guidance midpoint of 410 basis points. Although the first quarter was slowed by impacts of COVID, demand remained resilient. Year-to-date through April, lead and move-in activity continues to outperform pre-pandemic levels, led principally by our U.S. AL business. REVPOR increased by 4.2% versus the prior year, benefiting from strong in-place resident rate increases approximating 8% and improving re-leasing spreads. Not only did we execute very strong in-house rent increases during the quarter, we have also witnessed strong sequential growth in street rates over the past several months as move-in rates have improved 5% sequentially.

The result of these favorable pricing trends has helped to translate into narrowing re-leasing spreads, which is now a low single-digit reduction and more favorable than pre-pandemic levels. This demonstrated pricing power is occurring at 83% occupancy. Therefore, we believe we have significant occupancy rate and, ultimately, revenue growth potential in front of us. Turning to expenses. Same-store operating expenses grew 8% year-over-year, excluding HHS, driven by higher occupancy and macro inflationary impacts throughout the quarter on labor, utilities and other operating expenses. Labor expenses remain elevated as we navigate the macro staff shortages with enhanced hiring practices and target wage increases.

Net hiring has improved seven months in a row. And although we are pleased to see the progress on hiring, we have yet to see it impact the P&L. Although inflation is elevated and labor expenses remain high, the incremental margin growth is strong. One of the best aspects of the senior housing operating business at this point in the cycle is the high operating leverage. We are starting to benefit from this operating leverage, as the incremental margin was 56%, which helped the overall margin improve to 24%. It is important to note that even though we were pleased with the quarter's performance, the impacts from COVID drove uneven geographic results, with the U.S. significantly outperforming Canada on the bottom line.

NOI in the U.S. grew 26% year-over-year versus Canada, which was down 2%. We expect conditions to improve over the balance of the year as Canada's move-in restrictions were the primary driver of its performance compared to the U.S. Our independent living business was also impacted by COVID in the quarter, but I am encouraged to see reacceleration of move-ins in that portfolio in both March and April. We continue to believe in the independent living thesis. Over time, we should benefit from our independent living through the overall higher stability with higher margin, lower labor, higher occupancy and a longer length of stay. Our independent living communities in the U.S. and Canada are located in markets that support strong net absorption over time.

Moving on to significant updates in the senior housing portfolio. Our transition [Technical Issues] 90 portfolio of mid-market assisted living communities located in markets with favorable demand characteristics, which was fully transitioned as of January one of this year to new regional operators, is showing early signs of improvement, as occupancy and NOI are both starting to improve. Our leading senior living portfolio services over 75,000 residents across 46 U.S. states, seven Canadian provinces and the U.K., and it's comprised of 38 operators. We remain fully engaged in developing deeper and mutually beneficial relationships, especially with our SHOP operating partners through Ventas OI.

Our goal with this platform is to use our operating experience and deep analytical capabilities to improve all aspects of operations, from digital marketing strategy to capex optimization to recruitment and retention. We have developed a differentiated support structure to help our operators succeed. We continue to identify opportunities to improve our portfolio through selective pruning, as we are targeting roughly $200 million of senior housing dispositions this year. We are also pleased, as announced today, that we refreshed our relationship with Sunrise Senior Living, who operates 92 of our high-end assisted living communities.

This relationship has been reframed with better alignment, which adds flexibility and rewards NOI performance, which now contributes to the management fee and incentives based on outsized NOI growth. Given the emphasis on NOI at this point in the cycle, we think this alignment is perfectly timed. I'll close by reiterating our expectation for sustained improved SHOP performance throughout the year driven by revenue through occupancy growth and improved pricing. I would also like to acknowledge our operating partners, who have been successfully navigating an evolving macro environment and ultimately, creating a valuable living experience for our residents and value creation for our shareholders.

Now I'll hand the call to Bob.

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

Thanks, Justin. I'm going to share a few thoughts on our first quarter office and enterprise results and finish up with our second quarter outlook before turning the call to Q&A. Our Office segment, which includes our medical office and research and innovation businesses, performed well in Q1, delivering 4.6% year-on-year same-store growth. Medical office year-on-year quarterly same-store growth was 3.5%, led by strong retention, contractual escalators and parking recovery. R&I increased 7.9%, which also benefited from escalators and leasing, as well as from $1 million in holdover rent from an exiting tenant.

Adjusting for this holdover rent, R&I growth was 4.6% in the quarter and Office same-store NOI growth was 3.8%. In terms of overall enterprise performance, we were very pleased to have posted growth in the first quarter for the first time since the onset of the pandemic. We delivered FFO of $0.79 per share and organic SHOP revenue and NOI same-store growth of 10% and 14%, respectively. Meanwhile, total property same-store NOI increased 5.8%, excluding HHS grants. And this growth was achieved while Omicron raged for the majority of the quarter. These results speak to the quality of the Ventas portfolio and the commitment and skill of the Ventas operators and team.

Leverage improved sequentially by 30 basis points to 6.9 times in Q1 as a result of senior housing NOI growth and HHS proceeds, partially offset by acquisitions closed in the first quarter that have been prefunded in 2021. In this rising interest rate environment, 90% of our debt is fixed rate with the duration exceeding six years and an average cost of debt of 3.4%. We are pleased that we extended debt maturities in 2021, having paid down over $1 billion of near-term debt while raising over $1 billion of new debt with a weighted coupon of 2.65%. And our liquidity remains robust, with $2.2 billion available at the close of the first quarter.

In terms of Q2 guidance, we expect net income to range from minus $0.03 to plus $0.01 per fully diluted share. Q2 normalized FFO is expected to range from $0.69 to $0.73 per share. When excluding HHS grants, our Q2 guidance midpoint of $0.71 compares to Q1 FFO of $0.71. We expect SHOP to grow approximately $0.02 sequentially. This is largely offset by two items previously communicated: a $0.01 sequential reduction from the move out of two life science tenants, which will enable redevelopment into high-demand lab space; and $0.01 from lease resolutions with a handful of smaller operators in the senior housing triple-net business, with future upside participation in the cash flows at the assets.

Further impacting the SHOP Q2 year-over-year same-store guidance, we expect revenue to grow approximately 10% at the midpoint, led by occupancy increasing by 400 basis points, as well as improved rates. We expect to grow shop NOI in the range of 2% to 10%. At the guidance midpoint, Ventas expects operating expenses per day in Q2 to remain consistent with Q1. Flat operating expenses per day sequentially in Q2 is higher than normal seasonal trends as a result of incorporated continued inflationary pressures, notably on labor, utilities and resident services. Looking sequentially, overall SHOP segment NOI is expected to grow approximately 4% from Q1 to Q2.

Looking beyond Q2 for SHOP, based on the favorable supply/demand backdrop, the strength of the revenue engine and the expectation of some moderation in inflationary pressure in the back half, we continue to expect sustained improvement in SHOP same-store cash NOI through 2022. Final Q2 guidance assumptions include no new unannounced material acquisitions or capital markets activities and 403 million fully diluted shares. For more information on our guidance assumptions, I would direct you to the business update deck posted to our website. I would also point you to pages 29 and 31 of our supplemental, which provide insights and disclosure including segment NOI guidance and an NOI to FFO trending schedule to allow for easier insight into unique items in our results.

To echo Debbie's comments, I'm excited to have BJ Grant join Ventas as our leader of IR. BJ is an accomplished REIT investor, has deep knowledge of health care and Ventas and will be a great fit with our team. To close, we believe the senior housing recovery that is now underway. The actions we have taken and our continued focus on execution position us for sustained value creation. That concludes our prepared remarks. [Operator Instructions]

With that, I will turn the call back to the operator.

Questions and Answers

[Operator]

[Operator Instructions] And we will take our first question from Steve Sakwa with Evercore ISI.

[Stephen Thomas Sakwa, Analyst at Evercore ISI Institutional Equities]

Thanks. Bob, I just wanted to maybe drill in a little bit on what you were talking about on expenses and just to make sure I understand -- contract labor I know was kind of a big headwind in the first quarter. I'm just trying to understand what are your expectations for that in Q2? And just maybe labor overall in Q2 versus kind of labor in Q1?

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

Sure. Thanks, Steve. And there's a really helpful page in the business update on page 12, which speaks to expenses. And just to frame this, I know you're asking about labor, but again, I want to put labor in the context of the overall expense base, because we are seeing inflationary pressure not only in labor but in other areas such as food and utilities and so on, and that's embedded in the forecast. But specific to labor, contract labor within that, which is, call it, 5% of labor with 95% being in-house labor.

We did see some modest improvement in contract labor towards the end of the first, and we expect that to continue modestly improving into the second, as we continue to get some success in hiring, as Justin articulated. Importantly though, overall labor, we are assuming continued inflationary impacts in targeted ways, in order to enable that recruiting. If you step back from it all, we are holding our cost per day flat sequentially Q2 to Q1 in a quarter which is seasonally lower, typically, to reflect that inflation. And hopefully, that helps frame the answer.

[Operator]

And we will take our next question from Nick Joseph with Citi.

[Michael Anderson Griffin, Analyst at Smith Barney Citigroup]

Hi. You've got Michael Griffin here on for Nick. Just curious, on future senior housing investments, is there more of a preference for the U.S. or Canada?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

I'll take that and then turn it over to Justin, but we've been very successful in both markets over time. Canada has really outperformed during the pandemic. Occupancies remain very high and the market has been favorable over long periods of time. And of course, the U.S. is the engine of growth in this quarter with 26% year-over-year. So we like the growth potential there as well. Justin, do you want to...

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Yes. And I'd just say that as we're underwriting deals, we always drill home to the local market, and we're following the philosophy of right asset, right market, right operator. Certainly, the broader Canadian market tends to have a better supply/demand dynamic over time. They've been 90% occupied for the last 10 years. So it's been supportive of a very stable and growing investment in Canada. And then the U.S., looking ahead, with supply being so low and starts being so low over the next few years, we like our opportunity to grow organically, but also to make investments in the U.S. as well.

[Operator]

We will take our next question from Vikram Malhotra with Mizuho.

[Vikram L. Malhotra, Analyst at Mizuho Securities USA]

Thanks so much for taking my question. Maybe just a bigger broader one, Debbie and Justin. You've traded now at between four and call it, seven turns multiple spread to your largest peer. I'm just wondering like, I know you're going to be executing over the next few quarters, but are there other changes or strategies -- are there other things you can do that you think will -- investors will allow that gap to close?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Well, thank you for the question. As I mentioned, we are and have been taking a lot of decisive action on the portfolio with the team and just in general, to execute, to make sure people understand the Ventas story and the opportunities. And really, we have a consistent strategy that over time has delivered superior performance, and we look forward to the opportunities ahead. And again, look forward to driving TSR, as I mentioned.

[Operator]

We will take our next question from Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Todd Wurschmidt, Analyst at KeyBanc Capital Markets]

Great. Thank you. So I was curious, based on the positive trends you're seeing in street rate growth for senior housing and the improvement in re-leasing spreads to the low single-digit decreases, do you expect re-leasing spreads to turn positive into the stronger leasing season? And what that could imply for future pricing? Thanks.

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

It's Justin. Yes. So we are very encouraged by the trends, and we certainly have demonstrated pricing power, as we mentioned, and to do so at 83% occupancy is just a real good indicator of the demand for senior housing, which has been strong and growing and performing above pre-pandemic levels. So we would expect pricing power to persist. We demonstrated first with rent -- in-house rent increases that around 8%, which was solid. The next lever we can pull is street rates and narrowing the re-leasing spread, which is happening already.

We would expect that to continue. There's aspects -- there's parts of our portfolio that are already positive in terms of re-leasing spreads. So we certainly think that can be achieved and should be. And I'd just say that we're encouraged by the trends and expect the environment to support more improvement in that area.

[Operator]

We will take our next question from Juan Sanabria with BMO Capital Markets.

[Juan Carlos Sanabria, Analyst at BMO Capital Markets]

Good morning. Just the two parts -- just a two-parter. I guess, one would be any April occupancy update you can provide? And part two would be a follow-up to Austin's question. Typically, we see REVPOR year-over-year growth peak in the first quarter and then kind of moderate, as you see some churn in the portfolio. But wondering if you can give any commentary on expectations beyond the second quarter, in the context of your comment in the investor -- or the quarterly deck about the percentage of the portfolio having the 1-year anniversary between the second and the fourth quarter as well as the re-leasing spreads and how we should think about year-over-year REVPOR growth for the balance of the year?

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

I'll take the second one first and let Justin talk about April 1. So you're right, REVPOR traditionally, at least over the last five years or so, if you look sequentially at the growth rate year-over-year, we tend to drift down over the quarters, with the first quarter being supported by the in-house rate increase and then the re-leasing spread dragging that down over the balance of the year. The dynamic -- and that was in the supply backdrop really. That was typically the case.

What's really encouraging here is the firming street rate or new resident pricing would suggest that, that drift should improve, i.e., ultimately, a positive re-leasing spread over time as discussed. So we should have a better profile over time, notwithstanding the fact that the re-leasing spread is still lower. But over -- as a trend, I would expect that would be better than the supply area, particularly given the backdrop of the fundamentals. You want to talk about...

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Juan, page 11, of course, has April leads and move-ins which are, as Justin mentioned, ahead of pre-pandemic levels, leads were very strong. And do you want to talk about sort of entering -- and we're entering the key selling season, obviously.

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Yes. One thing about the key selling season, which is really May through September, we would expect that literally 99% of our net move-ins occur during this period. So this is the red hot part of the selling season for this sector. We're around 83.3% occupied in April, off to a good start in the quarter. And as Debbie mentioned, the underlying demand has just been really solid.

[Operator]

We will take our next question from Rich Anderson with SMBC.

[Richard Charles Anderson, Analyst at SMBC Nikko Securities America]

Thanks, good morning. And drafting off that occupancy, monthly occupancy number, you mentioned in your deck, 500 basis points to return you to pre-pandemic occupancy. I think the market is probably -- it has an appetite for what the sequential occupancy numbers look like in your guidance for the second quarter. So maybe you could give some cadence to the April, May, June expectation? And also what the timeline is in your mind to capture that 500 basis points and get us back to square one pre-pandemic occupancy?

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

Rich, so sequentially, we would expect 80 basis points of sequential average occupancy growth. The start to the quarter in April is 20 basis points, suggesting it to go, if you like, in the 50 on average per month for the balance of the quarter. Remember, back to the key selling season, that begins to accelerate here in the coming months. If you looked at last year, how we trended, that looks like a reasonable forecast. And the leads, as you look at this year versus last year, are also favorable. So that would suggest a good setup for the guidance number.

[Operator]

And we will take our next question from Michael Carroll with RBC Capital Markets.

[Michael Albert Carroll, Analyst at RBC Capital Markets]

Yes. I just wanted to stick on the seniors housing demand trends. Obviously, the leads and move-ins are strong and have been strong. But how could a potential economic slowdown or even a downdraft in the housing market impact those trends? And obviously, the leads as a percent of 2019, kind of started to dip in the first quarter into April. I mean I'm not sure if there's anything to read into that? Or is that just something unique with the 2019 versus the 2022 trends?

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

It's Justin. So the first part of your question really refers to the macro backdrop, and we've obviously been through other cycles, including one that had a housing demand and price decline. There's -- there can be -- if it's dramatic like it was during the Great Recession, there can be an initial shock to the system. But what we saw during -- post kind of the initial period of the Great Recession is that senior housing performed really well. It performed well and had a backdrop for a few years of limited new competition, more so than what we're seeing now.

We have a real opportunity with the starts being so low and the deliveries being so low relative to that period. So the other thing, too, is that house wealth and income demographics in our markets are very supportive. The affordability for our product is very, very strong. So we think we're well positioned in that regard.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Right. And I would say, even potentially within real estate, relatively advantaged because that would result in some more slack in the labor market as well. So it would change the expense equation here, while the demand and supply are favorable. So that's, I think, an important point to understand. And then in terms of April, I think we're actually doing well compared to prior Aprils.

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Yes. We're way ahead of April of last year in terms of absolute leads, and we're still well ahead of 2019. So we're not -- we're more encouraged than anything.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Because those quarters embed this key selling season of May and June, the prior period presentation.

[Operator]

We will take our next question from Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, Analyst at BofA Securities]

Yes. Good morning, everyone. Just curious what spurred the initial conversation with Sunrise on switching the management contract over to more NOI based? Kind of how did that come about? And then is there any ability to do this with other operators?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Well, this was all part of Justin's mandate, as these -- we keep talking about these decisive actions, operationally focused, positioning the portfolio to capture the upside. And obviously, when he first came in March of 2020, there was a lot of focus on sort of the COVID reaction and stabilization. And so now where we've been taking these steps and the Sunrise is another good example of what we're trying to do to position the portfolio, Justin, you can comment, in particular, about how you've done this.

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Sure. I mean one thing I'll just mention is that Jack Callison and the team at Sunrise have just been performing really well, and we're just -- couldn't be happier about having a partnership with them. And what we like about this new arrangement is it's pretty simple. If they deliver higher NOI to us, then they'll get a higher management fee. If it's lower, it's lower. So we love the alignment. They're fired up about creating value over time, and we'll both benefit from this. And we definitely anticipate more of our portfolio to have this type of contract. We have several already, but we'll continue to put this type of arrangement in place.

[Operator]

And we will take our next question from Steven Valiquette with Barclays.

[Steven James Valiquette, Analyst at Barclays Bank]

Great. Thanks. Good morning. So you guys touched on the -- obviously, the pricing REVPOR environment. There is a bit of a growing vibe among some investors and conjecture from a few other senior housing companies about the potential for a multiyear cycle of annual resident rate increases trending well above historical averages in the current inflationary environment. I know it's hard to predict any sort of multiyear trend. But I'm wondering, at least for 2023, do you have any preliminary view on whether your rate growth in 2023 can mimic your 8% average trend in 2022? Or is there already a bias that maybe 2022 is a unique year and 2023 increases go back to historical averages?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

We've taken a view generally that there is -- this is really sustainable demand. And again, the fundamental backdrop in our markets is favorable because of the incredible drop in starts, so supply is low and it's going to stay low. We have this window of opportunity where the senior population is starting to grow. And then we have an attractive kind of compelling portfolio. And so that is a backdrop -- Justin always says that the table is set. That certainly is a good backdrop for a window of opportunity over time.

And our view is, and I think Justin mentioned it, too, is if you can drive rate -- in-place rate in the U.S. went up 8% in January at this low occupancy level in the low 80s, as those occupancies increase and these demographic supply-demand fundamentals improve, that should further support those -- that kind of pricing power. So a lot has to go right. There's a lot of uncertainty. It may not be a straight line. I need to caution all those things, but certainly, there is a case to be made.

[Operator]

And we will take our next question from Rich Hill with Morgan Stanley.

[Richard Hill, Analyst at Morgan Stanley]

Hi, thanks for taking my questions. I want to come back to maybe some comments in the prepared remarks. And I think specifically, you said, first quarter 2022 capital allocation priorities continue to be acquisition and development of senior housing, life sciences and select medical office buildings. And at the risk of reading into it too much, including in on the select, does that mean you're maybe deprioritizing MOBs a little bit more in favor of senior housing and life sciences? Or have I read into that too much?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Well, when we look at 2021, the $3.7 billion that we had, it was really I think 70% senior housing, 20% life science and 10% MOBs. I mean we've been fortunate to have had an early thesis on MOBs and grown that business, and Pete's done a great job running it. And we've done these bolt-on type of acquisitions, like the one we did this quarter with our hospital partner Ardent, which was a relationship-driven opportunity. So that's what I would say about our capital allocation priorities, and we've been very consistent in that regard.

[Operator]

And we will take our next question from Omotayo Okusanya with Credit Suisse.

[Omotayo Tejamude Okusanya, Analyst at Credit Suisse Group]

Yes, good morning everyone. Debbie, congrats on the order of merit in Illinois. And also, BJ, welcome aboard. Question is on senior housing. On the triple-net portfolio, in particular, again, realizing you guys had made a bunch of adjustments already to some of the struggling tenants. But you still have kind of a rent coverage that's still probably somewhat weak relative to historical levels. About 10% of your NOI is still tied to triple-net senior housing tenants, where rent coverage is below one.

How comfortable do you kind of feel like you've made all the adjustments/restructurings you need to do for those tenants? Or is there kind of a risk that you may have to expand that scope going forward?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

I think at this point, Tayo, because of the pandemic, we have probably touched on the vast majority of these triple-net tenants. And that's a lot of what we were doing during the pandemic and working with them. And as Bob said, what we've tried to do is really get to a sustainable rent level and then participate in the upside as the industry recovers. And that's what we've done generally. So Justin, do you want to...

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Yes. I would just say that there has been a lot of action taken. And we certainly believe that the vast majority of that's way behind us. So we'll look to see the operations improve as the rest of the sector recovers.

[Operator]

And we will take our next question from John Pawlowski with Green Street.

[John Joseph Pawlowski, Analyst at Green Street Advisors]

Thanks. Justin, could you spend a minute just talking about specifically in Canada, what's really holding back that market from a SHOP fundamental perspective? Occupancy remains high, but NOI, cash NOI down 2% year-over-year. Feels like Canada has been lagging for a while. So just a bit more specifics of what's happening on the ground there?

[J. Justin Hutchens, Executive Vice President of Senior Housing at Ventas]

Yes, sure. So the main thing that really happened was the Omicron variant. And in Canada, our communities had restrictions. They've always been much quicker to kind of shut down when there's a little bit of an outbreak or a threat of an outbreak. And so that slowed the move-ins down. Canada is 93% occupied, it's going to have kind of structurally higher move-outs because it doesn't have the benefit of this U.S. portfolio that drops so much, because it's just been such a strong stable performer. So January and February had soft move-ins; March and April, off to a good start. So we do think there's potential to recover. We're looking forward to Canada getting back on track. But I would just really point to COVID, really to -- as the driving force.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Yes. And some of those restrictions really are continuing. They have been, from a health care standpoint, a much more rigorous kind of government controls on activities. And so it will take a little while for this to kind of run off, but it is a great portfolio and a really high performer, and we're very confident in the future performance.

[Operator]

And we will take our next question from Mike Mueller with JPMorgan.

[Michael William Mueller, Analyst at JPMorgan Chase & Co.]

Yes, hi. Curious, what are your in-place escalators today for the MOB and life science portfolio? And as you're looking at signing new leases today, are the new escalators something considerably higher?

[Peter J. Bulgarelli, Executive Vice President of Office at Ventas]

Yes. Thanks, Mike. This is Pete. Thanks for the question. Yes, our escalators are about 2.5% right now, in-place escalators for MOB, and they're about the same for R&I. And we are certainly pushing limits on that. We're starting pushing to 3% and in some cases, higher. And another related comment would be we are trying to push more CPI-related escalators as we deal with this inflationary environment, and we're -- in some places, we're finding success and others, we're just -- we're settling for higher escalators in the three- and three-plus percent ranges.

[Operator]

And we will take our next question from Nick Yulico with Scotiabank.

[Nicholas Philip Yulico, Analyst at Scotiabank Global Banking and Markets]

Thanks. Good morning everyone. So I know you haven't given third quarter guidance, but just trying to put together various numbers here to try and think about what the third quarter sequential occupancy growth could look like for the SHOP portfolio. I mean, last year, third quarter grew sequentially 230 basis points. I think you said, Bob, in the guidance for the second quarter that May and June, you're assuming about 50 a month.

So should we use that 50 a month -- kind of assume that pace could continue in the third quarter, so you get to around 150 basis points for the quarter? Or you're closer to 200 if you look at the numbers from last year? Just trying to kind of frame out a possible occupancy growth scenario for the third quarter.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Great try. Let's focus on -- we're very focused on executing and delivering in the second. And you're right about the expectations for the second. And we have said we expect sustained NOI improvement through the year.

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

I would just add, sequentially, which, to your point, three versus two, this key selling season in occupancy manifests itself...

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

And will be crucial to determining the answer to your question.

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

So fundamental, but seasonal patterns would suggest Q3 occ is sequentially favorable.

[Operator]

And we will take our next question from Vikram Malhotra with Mizuho.

[Vikram L. Malhotra, Analyst at Mizuho Securities USA]

Thanks so much for taking the follow-up. Just sort of in this market, with all the volatility, I'm just wondering your views on two things. One, just using the fund more actively that you've created? And two, maybe given the medical office environment, using that as a source of capital for other growth, just all -- tying that all into the balance sheet? And where you see leverage or how you see leverage trending over the next 12 months?

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Well, thanks. Yes, the fund is a great competitive advantage that we have. We started in March of 2020, and our overall third-party investment management business is up to about $5 billion of assets under management. It generally is focused on kind of lower cap rate core type assets. And so to the extent there was an opportunity there that made sense, that is an attractive asset that we have. Bob, do you want to talk about the balance sheet?

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

Sure. In terms of leverage, it's a little bit of a broken record, but the recovery of the $300 million of NOI we lost in SHOP in the pandemic is really the key to unlock the leverage ratio back into five to six times. We're trending in that direction, which is encouraging. In the meantime, we've been doing other things such as upgrading the portfolio through asset sales, for example, last year, reducing near-term debt, extending duration, things like that, to make sure that we're in a good spot, which we are.

[Operator]

And we will take our next question from Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, Analyst at BofA Securities]

I wanted to ask about the $0.01 drag from the life science redevelopment. It seems like two tenants moved out. Did you disclose who those tenants were?

[Robert F. Probst, Executive Vice President and Chief Financial Officer at Ventas]

No, but we disclosed the locations, which maybe, Pete, you can give a little color.

[Peter J. Bulgarelli, Executive Vice President of Office at Ventas]

Sure. Yes. This is Pete. So yes, we -- with -- just as a reminder, life sciences is one of our high capital priorities. Over the last couple of years, the research and innovation portfolio has performed very well. And what we found consistently is when we have ready lab space, the space leases up very quickly and at very good rates. It's a unique space in the marketplace. And there's a shortage of it across the country. So one of our vacant -- upcoming vacancies is in Raleigh, very near Research Triangle Park, and it's a straight office tenant that is departing.

And it's -- this building is within -- is associated with Wake Forest University, it's in the innovation center, is adjacent to the medical school that they have. And so we think that there's a good probability that we would redevelop that space into lab space and be very successful in re-leasing it. The other is in -- is associated with our Keystone properties and -- sorry, I mixed two of them up, I'm sorry. There's one in Raleigh...

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

There's two -- one is in RTP and one is in the Wake Innovation Center, and they both could be very in demand for kind of lab space. So that's what we're undertaking.

[Peter J. Bulgarelli, Executive Vice President of Office at Ventas]

That's right.

[Operator]

There are no further questions at this time. I will now turn the call back to Ms. Debra Cafaro for closing remarks.

[Debra A. Cafaro, Chairman and Chief Executive Officer at Ventas]

Yes. Okay. Well, thank you, Abby, and thank you to everyone who joined us today. We really appreciate your support and participation and are excited about the quarter, excited about the senior housing recovery that's underway and look forward to seeing you soon.

[Operator]

[Operator Closing Remarks]