Ventas Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2022

There are 18 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ventus 2022 Second Quarter Earnings 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. As a reminder, today's call is being recorded. I will now hand today's call over to BJ Grant, SVP of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Tamika. Good morning, and welcome to the Ventas Second Quarter Financial Results Conference. And other matters. Forward looking statements are subject to risks and uncertainties, and a variety of factors may cause 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 CC filings, all of which are available on the Ventas website.

Speaker 1

Certain non GAAP financial measures will be also discussed on this call. For a reconciliation of these measures 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 Deborah A. Cafaro, Chairman and CEO.

Speaker 2

Thanks, BJ, and good morning to all of our shareholders and other There's another participant. I want to welcome you to the Ventas Second Quarter Earnings Call. I'm delighted to be joined by my colleagues, Today, I'll recap our strong second quarter results, highlight the momentum in our Life Science, Research and Innovation business and address the macro trends in the economy and labor markets. We believe that Ventas is in an advantage position To deliver value in this dynamic business environment because of our high quality diversified portfolio and our team's industry insights and deep experience. Let's start with results.

Speaker 2

Ventas delivered a very positive second quarter With $0.72 of normalized FFO at the higher end of our guidance range. Property performance was at or above our expectations, led by 9% year over year shop same store net operating income growth. I'm excited to showcase our differentiated life science Research and Innovation business, which now spans 11,000,000 square feet and accounts for 10% of our property portfolio. This portfolio has significant momentum in deliveries, leasing and investment activity. With our strategic partner Wexford, Ventas enjoys the nation's leading track record and reputation at the large and growing intersection of research, medicine and universities.

Speaker 2

Importantly, 77% of our rent It's from high credit tenancy with 50% from universities with a weighted average credit rating of AA and the balance from investment grade for $1,000,000,000 market cap companies. I'm really proud of what we've accomplished since 2016 when we began to invest in this business and how we've grown it since then. Here are some examples of our strong R and I momentum. Starting with deliveries, we recently delivered the 100% leased Drexel University Health Science Building on budget and ahead of schedule. This $280 plus 1,000,000 project located in the thriving U City Innovation District in Philadelphia was developed by our strategic R and I partner Wexford.

Speaker 2

Drexel's Health Science building is ready to welcome Drexel's School of Nursing And Health Professions, its School of Medicine and its graduate programs for biomedicine when school opens this fall. The project is expected to provide a 7% cash and 10% GAAP yield. We also intend to deliver 1 U City Square by year end. This 400,000 square foot multi tenant lab and research building Continues to expand our presence in the U City Innovation District in Philadelphia, adjacent to University of Pennsylvania, and it is already 80% leased. We expect the building to exceed 90% leasing with highly regarded life science and institutional research tenants in early 2023.

Speaker 2

The lease up pace and rental rates Are both substantially ahead of our pro form a and the project is now expected to deliver over a 7% Stabilized cash yield on costs of nearly $300,000,000 We also see terrific leasing momentum Across other portions of our life science R and I portfolio. Our portfolio caters to the top 5% of research universities in the nation and these institutions are aggressively expanding their research functions, creating incremental demand for lab space. We are currently in discussions with a handful of universities about taking significant amounts of additional lab space. In addition, we are leasing space quickly and demand is high from commercial tenants who are attracted 2 University Innovation Centers. For example, at Pitt Phase 2, scheduled to open shortly, We recently signed a lease for 66% of the building with a premier global technology company.

Speaker 2

In Miami, we've already leased or committed 80,000 square feet that expired mid-twenty 22 to new tenants at higher rates. Finally, we have momentum in R and I investment opportunities that will create value and deliver future growth. Today, we announced 2 exciting new developments that are great examples. With these two projects, We currently have $1,600,000,000 of total R and I development in progress. All leverage our significant competitive advantage With Wexford at the intersection of research, medicine and universities.

Speaker 2

The first new project is the Pearl, Located in fast growing Charlotte, North Carolina. Sponsored by Atrium Health, a top 10 health system, the Pearl Project will house research, Lab, medical and academic uses, including the Wake Forest University School of Medicine. Atrium Health, which is rated AA3, is leasing 70% of the project and will be our 37% partner. The Pearl will also serve as the exclusive North American headquarters for ERCAD, the French Training Institute Advanced surgical techniques and robotics for world class surgeons. We expect delivery of the Pearl in 2025.

Speaker 2

On the West Coast, Wexford and Ventas have been selected by the University of Washington to develop a 300,000 plus Square Foot Project, anchored by the university for its research programming in clean energy, medicine and life science. UW, rated AAA by Moody's, is a world class research university that receives more federal research funding than any other U. S. Public university. Seattle is the number 6 life science market in the U.

Speaker 2

S. And this project will expand our R and I footprint to 6 of the top 7 life science markets. We look forward to sharing more details with you as this exciting project progresses. Behind these new projects, our R and I development pipeline contains an additional $1,000,000,000 of potential development opportunities. I hope that gives you a picture of the momentum we see In our attractive life science R and I business.

Speaker 2

It is a great example of our ability to enter a new space thoughtfully, expand and grow it successfully through different market conditions and align with excellent partners. Regarding our capital allocation approach and activities, we've shown $1,300,000,000 of investment activity year to date consistent with our stated priorities and balanced approach. We've also announced additional investments in the senior housing space at an attractive yield with future growth potential and a fully leased medical office building, utilizing capital from our fund to acquire this stable MOB. As we look forward in the Q3 of 2022, we are again projecting that our earnings will benefit from outstanding Year over year growth in our shop segment, which is expected to increase NOI 12% at the midpoint, Higher than 2nd quarter's 9% year over year SHOP NOI growth rate. We do expect expenses and wages in Q3 to remain elevated, reinforced by today's jobs report.

Speaker 2

We will also recognize the benefit of $20,000,000 of HHS grants in the 3rd quarter, which we received to reimburse us for a portion of the expenses we incurred to keep residents and workers safe during the pandemic. Although that benefit will be muted by a $0.02 impact we expect from higher interest rates as a consequence of the Fed's tightening. The demographic backdrop is supportive of our business and we believe we are well positioned to succeed. First, supply and demand conditions are favorable with acceleration in the growth of the 80 plus population. Our senior housing product is highly affordable and need based and the senior market we serve has significant resources.

Speaker 2

With senior housing starts and inventory under construction well below cyclical highs, particularly in independent living, Our senior housing business is set up for continued net absorption and pricing power. With this favorable supply demand backdrop in senior housing, we will use the power of our high quality diversified portfolio and our team's commitment, experience and insights to continue to create value for stakeholders. Thanks for your time, and I'll turn it over to Justin.

Speaker 3

Thank you, Debbie. I'll start by highlighting how well positioned our senior housing portfolio is within this sector, which is benefiting from very strong demand drivers. We are the 2nd largest owner of senior housing in the world with communities located in 47 states, 7 Canadian provinces in the U. K. Managed by 37 distinct market leading operators.

Speaker 3

As Debbie mentioned, The supply demand fundamentals in senior housing are compelling. We have experienced an acceleration in the 80 plus population growth over the past 2 years And 2023 will represent the highest increase in 80 plus population on record. We also have outsized affordability in our respective markets For our target customer network is 4 times the average cost of a stay in our setting. The senior population has significant savings And home equity that are utilized to pay for our services if the need arises. On the supply side, according to the National Investment Center For Senior Housing, Units under construction as a percentage of inventory of 4.8 percent has not been this low since the Q1 of 2015 And deliveries of 4,600 units is down 49% from the Q2 of 2017 peak.

Speaker 3

And aside from the Q2 of 2020 has not been this low since 2016. 99% Aventas senior housing markets are not exposed to new starts as we face an aging demographic, which is the strongest we have seen. These facts point to considerable upside in our well positioned senior housing portfolio. We are seeing early evidence of the benefits of our strong For instance, year to date through July, net move in activity continues to grow and we have had positive net move ins for 16 of the past 17 months and NOI has been solid as our year over year same store shop portfolio grew 14.2% In the Q1 and 8.7% in the second. Turning to the 2nd quarter SHOP results and our year over year same store pool.

Speaker 3

We are pleased to report another quarter that was consistent with our expectations, while delivering solid year over year and sequential NOI growth. Pricing power has been impressive. At 5% year over year growth, Rev 4 is the strongest we've seen in the last 10 years, primarily driven by in house rent increases, which are running approximately 8% in the U. S. And 4% in Canada, carry rate increases at 10% And re leasing spreads that have improved from negative 14.7% since the low point in the Q1 of 2021 to nearly flat in June.

Speaker 3

Same store average occupancy grew year over year by 390 basis points to 83.7%, which was in line with our guidance. Leads, move ins continued to perform above pre pandemic levels. The key selling season of May to September is off to a strong start. We have netted 470 move ins through July, which is 307 higher than the same period in 2019. July average occupancy grew 30 basis points over June.

Speaker 3

These positive results in occupancy and rate drove same store revenue To increase by over 10% versus the prior year. Turning to expenses. As we anticipated, Expenses were $3,800,000 per day. Same store operating expenses grew 6.1% See and continued macro inflationary impacts on labor and other operating expenses. Labor expenses remained elevated as expected As we navigated the inflationary wage pressure and macro staff shortages.

Speaker 3

I am encouraged that our managers have successfully implemented A number of labor initiatives that we identified last fall. These initiatives include centralized line staff recruiting, applicant tracking technology enhancements and application process improvements. The result is an advancement in net hiring And the stabilization of our workforce. We have had 11 months in a row of positive net hiring and we experienced a double digit reduction and contract labor costs in the Q2. Net hiring is critical to our ability to stabilize the workforce and reduce reliance on more costly and less reliable contract labor.

Speaker 3

NOI grew 8.7% year over year Near the high end of our shop guidance range led by the U. S. At 14%, while Canada demonstrated positive growth again with 1%. The incremental margin from Q1 to Q2 was 80%, while overall margin Expanded 60 basis points from 23.8 to 24.4. NOI grew 6.1% in the sequential same store Cool.

Speaker 3

Bob will cover our Q3 SHOP guidance shortly. COVID conditions have remained relatively consistent The last few months, we still have new cases occurring for staff and residents causing marginal impacts on move ins and staffing, most notably in Canada, Where the regulatory environment is more stringent. Before I wrap up, I'll give a quick update on Ventas OI. We continue to utilize Ventas operational insights to engage with our operating partners more closely using our operational and analytical expertise. This quarter, we addressed digital marketing capabilities in 3 modules: Technical website audits, UX audits, which are user experience evaluations and hyper local SEO.

Speaker 3

This initiative is meant to optimize our digital lead bank, which is the fastest growing of all our lead sources and now represents over 3 quarters of all lead volume. I am pleased with how well received Ventas OI has been among our operating partners since we introduced it at the beginning of this year and we continue to develop it to be a model for mutually beneficial capital partner And operator relationships. I'll summarize by saying that we have made significant progress toward our post COVID NOI recovery opportunity with a lot of upside remaining. The occupancy low point was 78% in March of 2021. We've already grown significantly since then to 84% and given our strong market position and supportive macro backdrop, We are excited about the continued organic growth opportunity in our senior housing portfolio.

Speaker 3

Bob? Thanks, Justin. I'll start with an overview of our Q2 office and enterprise results before closing with our outlook for the Q3.

Speaker 4

Our office segment, which includes our medical office and research and innovation businesses performed well in Q2, delivering 3.2% year on year same store growth. Medical office year on year quarterly same store growth was 2.8%, led by contractual escalators, strong retention, New leasing and favorable expense controls. MOB occupancy rose 50 basis points from prior year and 10 basis points sequentially. R and I increased quarterly same store 4.6 percent, also benefiting from escalators, leasing and higher parking. Same store occupancy and R and I is a strong 93.2%.

Speaker 4

We were very pleased with our overall enterprise performance In the Q2, with results top to bottom at the higher end or better of our guidance range. Notably, we delivered FFO of $0.72 per share, which is at the higher end of our guidance range of $0.69 to 0 point 73 9% year over year as Justin described with occupancy revenue and NOI where we called it a quarter ago Despite a challenging backdrop. When combined with strong performance in office and triple net, total property same store NOI increased 3.5% year over year, Above the high end of our guidance range. Our performance trajectory and proactive steps to deliver results are being recognized. For example, all 3 rating agencies have made positive ratings moves in the last month, it's BBB plus stable.

Speaker 4

And 20 of our lending relationships provided a $500,000,000 5 year term loan refinancing and upsizing the prior term loan At better pricing. We're very pleased that we took smart steps to enhance our portfolio quality and to reduce near term debt, Extend maturities prior to the run up in rates and now have 89% fixed rate debt. Debt duration exceeds 6 years. Our average cost of debt is 3.5%. We have limited near term maturities and robust liquidity of 2,500,000,000 In terms of Q3 guidance, we expect net income to range from $0.04 to $0.09 per fully diluted share.

Speaker 4

Q3 normalized FFO is expected to range from $0.73 to $0.78 per share. The bridge from Q2 FFO per share of $0.72 to $0.76 at our Q3 midpoint Is as follows. A net increase of $0.03 from $0.05 of HHS grants received in July, Less $0.02 from higher interest rates on our floating rate debt and a stronger U. S. Dollar, plus a penny of property growth Led by the opening of the Drexel R and I development Debbie described earlier.

Speaker 4

A note, to enhance comparability, We now present SHOP same store and cash NOI results excluding the benefit of HHS grants received in all periods. Let's drill into the SHOP assumptions for Q3. We expect SHOP cash NOI to grow in the range of 9% to 15% year over year or 12% at the midpoint, which represents an acceleration from the 9% year over year NOI growth posted in the 2nd quarter. Revenue is forecast to grow 8% at the midpoint, led by occupancy increasing 250 to 300 basis points, as well as through improving rates. Despite continuing broad inflationary expense pressure, our NOI guidance growth of 12% at the midpoint implies margin Expansion.

Speaker 4

Our SHOP Q3 revenue is expected to grow sequentially led by average occupancy, which is forecast to increase 100 basis points versus the Q2 average and incorporates a continuation of positive occupancy growth trends observed in July. This revenue growth is effectively offset by sequential operating expense increases in Q3, notably including broad inflationary pressure and an extra day in the quarter. Therefore, shop cash NOI, So ahead of seasonal patterns is effectively flat. Final Q3 guidance assumptions include no new unannounced material acquisitions or Capital Markets activities and 404,000,000 fully diluted shares. For more information on our guidance Assumptions, I would direct you to the business update deck posted to our website.

Speaker 4

To echo Debbie's comments, I'm excited to have BJ Grant on the Ventas team. BJ has hit the ground running and the approved and streamlined supplemental package posted as part of Q2 earnings Is the latest evidence of the IR enhancements that are underway at Ventas. To close, we believe we are in an advantage position In the dynamic macroeconomic backdrop with the portfolio and the team to deliver sustained value creation. That concludes our prepared remarks. Before we start with Q and A, we ask each caller to state to one question to be respectful to everyone on the line.

Speaker 4

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

Operator

Thank you. Your first question comes from the line of Steve Sakwa from Evercore ISI.

Speaker 5

Thanks. I guess maybe for Justin, You laid out a lot of positives, whether it's the re leasing trends getting better, the care pricing, The move ins, the in place rate increases, everything seems great. And I guess I'm just wondering why Your occupancy gain is less in Q3 than it was in Q2. What's sort of holding that back? Is that conservatism?

Speaker 5

Is there something that you sort of see about the occupancy gain?

Speaker 3

Sure. So I'll just reinforce a few of those positives first. So the one thing that I mentioned is that 16 of the last 17 months, we've had Positive net move ins, our year over year comparison has been really strong. In fact, in the U. S.

Speaker 3

In the 2nd quarter, it was 4 70 basis points year over year. We're expecting that to be 3 20 year over year in Q3. Canada, by the way, was 250 year over year in 2nd. We're expecting that to be 200 year over year in the 3rd. One thing I'll mention is that the sequential growth is expected to be 100 basis points.

Speaker 3

We were 70 basis points in the last quarter, so we do have It's some sequential occupancy growth as well, but everything has been pointing up, and we're certainly benefiting from that and We have a lot of upside ahead of us over time.

Operator

Your next question is from the line of Joshua Dennerlein with Bank of America.

Speaker 6

Yes. Hey, everyone. A Question on Canada, I guess it lagged in 2Q. What's the underlying assumptions for 3Q and maybe just

Speaker 7

a little bit more color on

Speaker 3

Hi, it's Justin. So, yes, Canada, first of all, it's 94% occupied. It's a very stable, strong, consistent performer for us. It did have growth in the 2nd quarter. Just to break down the guidance that Bob gave, Canada in the 3rd quarter is Expected to have cash NOI growth of between 2% 5%, and that includes revenue year over year of 6% And I mentioned already 200 basis points of occupancy on a year over year basis.

Speaker 3

And so we're anticipating growth in Canada. They've had We've had not a lot of activity that was COVID related in the Q2, but where we did have it, some restrictions on move ins, it was disproportionately affecting Canada. And then meanwhile, the U. S. Is really the growth engine, where our cash NOI is expected To grow between 13% 21% in the 3rd quarter, revenue 9% year over year and 3 20 basis points of occupancy.

Speaker 3

So Really strong stable performer in Canada, growth engine in the U. S.

Operator

Your next question is from the line of Mike Griffin from Citigroup.

Speaker 8

Hey, thanks for taking the question. Just Wanted to go on to the disposition guidance. I noticed that it declined $100,000,000 quarter over quarter. Just curious if you can expand on that a bit, maybe assets you're targeting for sale and then what you might be seeing in the transaction market more broadly?

Speaker 4

Yes, I'll hit on the guidance. I can Pass it to John on the second question. But we went from $200,000,000 to $100,000,000 in the back half. It's really a timing question as much as anything frankly in terms of expectations of when asset sales will close with various portfolios on the market. But the theme I'm looking for opportunities to upgrade the portfolio using those disposition proceeds to reinvest.

Speaker 4

We'll continue in the back half and into next year. You want to touch on transactions?

Speaker 1

Sure. I mean,

Speaker 9

I think we had a good start in 2022. We've done roughly about $1,300,000,000 of new investments. I think we're seeing a fair amount of deal volume still out there. I think we're being Careful in what we choose, but we're just we are seeing still seeing a fair amount of volume of transactions that we do like.

Operator

Your next question is from the line of Michael Carroll with RBC Markets.

Speaker 1

Yes, thanks. I'm going

Speaker 10

to touch on the RevPAR growth expectations within your SHOP portfolio. I think we all understand the real estate part. But on the care part, with pricing up 10% in the second quarter, is that fully keeping up with inflation? And how often Or can your operators pass those increases to residents given how quickly the inflation expectations are changing?

Speaker 3

So as it pertains to care, we are seeing the actual Care rate that's charged has been raised 10%. And that is A huge step in the direction of keeping up with inflation. The other thing that occurs, as I'm sure, is that As residents are in place and their needs grow, we'll have care charges increase in conjunction with Resident needs, which helps to pay for the labor required to take care of residents. And so this is the it's really the highest we've seen in terms of care charge increases. They can happen more than one time a year.

Speaker 3

They tend to only happen one time a year, but there's It was encouraging to see the execution on care prices on top of the strong in house rent increases, plus the street rates Are growing as well.

Operator

Your next question is from the line of Rich Anderson with SMBC.

Speaker 10

Hey, thanks. Good morning. So I want to talk about the sequential again and Specifically looking at same store versus total. So you did 70 basis points on the same store pool. I think I had that right.

Speaker 10

And but when you look at the total portfolio, which is Substantially more assets. The increase was I'm looking at the sequential rate, excuse me. The increase was somewhat less. So what is the maybe Justin, can you bucket The 546 assets that are total versus the 3 21 that are same store and whether or not The difference is an incremental upside to Ventas beyond the same store picture Or is there something about New Senior and some of the new acquisitions and transitions that are going to take more time for You to see the occupancy build that we're all anticipating.

Speaker 3

Yes, that's a good observation, Rich. There's Couple of 100 communities that are in that kind of non same store category, they have some unique characteristics. One is that they're lower Right. So they run below the rest of the pool, like kind of mid-seventy ish. They have more upside, therefore.

Speaker 3

They also have been growing faster. They had double digit sequential growth from Q1 to Q2. So the Performance is good and we do expect that pool to grow and be a big contributor to that U. S. Growth engine that I mentioned.

Operator

Your next question is from the line of Juan Sanabria with BMO Capital.

Speaker 11

Hi, good morning. I just wanted to change tact a little bit, notwithstanding the Credit affirmations by the rating agencies. I just wanted to get a sense of the plan for the balance sheet with the leverage kind of taking up at 7.3 times. What the plan is and when do you expect to be kind of back to within your target range, which is Definitely lower than that. Just curious on visibility there and timing.

Speaker 4

Yes, I'll take that one, Juan. First off, we were really pleased to see all three agencies take that positive rating action to BBB plus And really the predicate of that across the board was the trends we're seeing in senior housing. And you'll know the fact that we've been above the range Due to COVID, is the impact on SHOP NOI and the recovery, therefore, of the NOI has been continues to be the key To get back in the range. In the meantime, we've been doing smart things along the way. I mentioned asset dispositions to upgrade the portfolio, reducing near term That as an example, we'll continue to do those types of things depending on market conditions, but fundamentally the predicate of getting back into that range It's SHOP NOI growth.

Speaker 4

Right.

Speaker 2

The net debt to EBITDA, the EBITDA growth

Operator

Your next question is from the line of Vikram Malhotra from Mizuho.

Speaker 12

Good morning. Thanks so much for taking the question. So, I guess I just want to step back and think about maybe a little bigger picture Trend that you can maybe help us walk through or tell me where I'm wrong. You just laid out, ONI really strong. You're Producing 4 plus percent NOI growth, MOB is steady.

Speaker 12

You just and Justin, you laid out why the senior housing portfolio is very well set up Into 23. So given all of this, if I want to boil it down to underlying earnings growth or FAD growth Over a multiyear period, and we're not I'm not asking for 23 numbers. What I'm trying to understand is, where would I be wrong if I take all of that And say over a 3 year period, you can average 5% plus FAD growth, because ultimately the underlying Question is, does all of this translate into cash earnings?

Speaker 4

Well, the short answer is yes. We do feel across the portfolio with different drivers, non correlated drivers of demand and growth We will see portfolio cash flow growth and NOI growth, FFO and FAD to your point, not giving you a forecast of course on timing and Slow, but absolutely that is the portfolio view. The organic growth opportunity is Better than I've seen in my years at Ventas and I think sometime before that. And so growing reliable cash flows certainly is the projection.

Operator

Your next question is from the line of Steve Valiquette with Barclays.

Speaker 13

Hi, thanks. Good morning. Just on Slide 6 in the presentation where you show the 3,800,000 Per day of shop operating expenses in 2Q, that should be the same number in 3Q. I guess I just wanted to unpack that a little bit further And when there could be more favorable operating leverage if that does come down. And I guess at the end of the day, the question is, on an absolute basis, will that $3,800,000 number actually Come down or does it just stay flat to up or hopefully just grow at a slower pace maybe as you exit 2022 and move into 2023?

Speaker 13

Thanks.

Speaker 4

Yes.

Speaker 2

I mean, that's really a macro question. And obviously, we're in a very Dynamic macro environment changing by the minute as we saw with today's jobs print. I think looking into the third, We do continue to see those inflationary pressures. I think we need to incorporate in policymakers' minds A longer term view now with the new news today of where we expect to see CPI and wage Expectations over the next year, but that is the 3.8 is really a function Of the macro, we are doing everything we can. Our operators are doing everything they can to manage that Growth, including the net hiring that Justin talked about, which is pretty fundamental.

Operator

Your next question comes from the line of Adam Kramer with Morgan Stanley.

Speaker 7

Hey guys, thanks for taking the question. Good morning. Just wanted to maybe kind of drill in on Slide 9 and appreciate kind of the disclosure there around pricing RevPOR, looking at kind of the releasing spread trends, really kind of positive trends here in the last year plus. I guess kind of the question is, where can we go from here? And again, not asking you to kind of drill down on the specific timing for when this may turn positive, but How much can you kind of push releasing spreads?

Speaker 7

And where can we kind of take that from here? And then on the care side, 10% is a really strong number. How high can you kind of push that number as well?

Speaker 3

Hi. So this is Justin. So first of all, yes, the trend has been great, particularly the releasing spread trend. You might remember that even before the pandemic, that was typically a negative number, around kind of Mid single digit negative. We're doing much better than that now.

Speaker 3

That really helps demonstrate the demand at The doorstep and the pricing power and to see that number actually, we're showing the Q2 on the slide you mentioned, but It was almost flat in June. That's really encouraging. We do have groups of communities that are positive already from a releasing Spread standpoint, and that's certainly possible, but there's always going to be a consideration around price and volume That will come over time. So this doesn't necessarily it's not necessarily going to look like walking up a set of stairs. There could be some Movement in the trend.

Speaker 3

And then on Care, that's really It's just another form of pricing. The in house rent increases really gave confidence around the pricing power. The re leasing spread helped Well, and care is an important component in the assisted living business. So that's an area that gets focused as well in terms of pricing. And with the really The goal and opportunity is really just to keep a differential eventually between that revenue increase and the expense increase And drive the NOI growth and doing that in a way that's taking the best possible care of people.

Operator

Your next question is from the line of Nick Yulicki with Scotiabank.

Speaker 14

Thanks. Good morning, everyone. So I want to turn to the development program. I know you New start with La Group Maurice, you also have a new R and I development. Can you just remind us from a size standpoint,

Speaker 6

How we

Speaker 14

should think about incremental starts going forward? I think when you did with the group Maurice originally, you talked about 2 to 3 development starts per year. And then R and I, I know, is sort of a lumpier. You got a big one this quarter. And then I guess just reminding us as well, just from a funding standpoint how we should think about this?

Speaker 14

Is this all are there already construction loans set up within the joint ventures to fund Most of this. Thanks.

Speaker 2

Well, thanks. Good to talk to you. I would say, yes, You're correct about the group, Maurice. This has been a great investment for us both in terms of the existing operating That's what we acquired and then the development pipeline. And you're right, we have grown that at about 2 to 3 a year And did announce a new deal.

Speaker 2

These are really outstanding assets. And one thing we really like about the developments there Is that when they open, they're already significantly pre leased and that's a unique model that's been really effective. In terms of the R and I business, these two new projects are super exciting. We'll continue to fund those optimally. I would say in general, we do get construction financing for 50% to 50% to 2 thirds of the building and some of them we do on balance sheet and some of them we do under our Ventas Investment Management platform.

Speaker 2

And with these new developments, we would expect To optimize that capital structure for the best way we can for Ventas.

Operator

Your next question is from the line of Mike Mueller with JPMorgan.

Speaker 15

Yes. I'm curious for the 2 new development announcements, how long ago did you start discussions for those? And did your expected returns I guess your return expectations evolve over the past few months?

Speaker 2

These discussions with these major research universities are long processes. The good news is, again, this demand from universities for state of the art lab space is just voracious And we're able to continue with Wexford to target really this top 5% of research universities. The yields continue to be, I think very attractive on a risk adjusted return basis. And, we've been successful in delivering projects On time, on budget, and so we have a very good track record there and an ability to Modify yield based upon ultimate costs working with those universities. So it's a very good model with significant pre leasing And the risk reward is quite good, which is why we keep doing it.

Speaker 2

We're lucky that we have this competitive advantage in this business.

Operator

Your next question is from the line of Daniel Bernstein with Capital 1.

Speaker 2

Okay, operator. Let's we'll let Dan come back on, but let's go to the next caller.

Operator

The next caller will come from John Pawlowski with Green Street.

Speaker 14

Good morning. Thanks for

Speaker 6

the time. I want to go back to Steve and Rich's question about the trajectory of shop occupancy. So 100 bps sequential improvements, very good in a normal year, but we're still coming out of the basement. So I guess we're all wondering what's holding back specifically in the U. S, the trajectory of occupancy, Given we should have a lot of pent up demand and why aren't we seeing 150 bps, 200 bps, 250 bps type of trajectory And see given the jump off point we're coming from.

Speaker 3

Well, I guess the way I would frame it is, it's a function of Supply and demand, we've had it's not just kind of a recent phenomenon that we've been experiencing with net movements. It's been happening for 16 outlast17 months. If there was some pent up demand, I think I would point The early part of 'twenty one where we had a pop when vaccines were executed and April stands out, for instance. But I think what we're seeing overall is just really strong demand fundamentals. And like I mentioned, it's growing and we have even More growth ahead of us in next year and beyond.

Speaker 3

So, we're well positioned. Playing into it. Our portfolio has been significantly outperforming the overall NIC data, the sector data that the NIC industry puts out. We're entering and we're growing at a pace we haven't seen before.

Speaker 2

And the sequential occupancy Projected growth is higher than the 2nd quarter sequential occupancy growth. So we're pleased by that and Good year over year growth projected in the 3rd.

Operator

Your next question is from the line of Dave Rodgers with Baird.

Speaker 4

Yes, good morning. Wanted to drill down

Speaker 6

a little bit on commercial and leasing spreads a little bit for R and I And medical office, can you kind of give us a sense for where those leasing spreads are coming in today? And I guess for MOB in particular, would be interested if you're seeing an increased level of Spreads and those conversations and being able to push through additional escalators and leases. So any additional color there would be helpful.

Speaker 2

Pete's very happy for the question. Yes, you got the question. Yes, exactly.

Speaker 16

Yes, terrific. Well, we've been having a high degree of success in MOBs in particular, And really all across office in growing occupancy. For MOBs, we were one of the few that had occupancy growth last year, Also in the Q1 and then again in the Q2. So we're very pleased with our leasing success. We have much less space to lease just based on the lease expirations in this quarter, but we're leasing quite a bit more space than we did last year at this time.

Speaker 16

So it's a great dynamic. Leasing spreads and escalators are both increasing significantly. For the entire portfolio, the leasing lease escalator has gone up by 10 basis points just in this quarter. And we don't disclose the releasing spreads because I still haven't been able to make heads and tails of how it really works with some of our competitors, But it's positive.

Operator

Thank you.

Speaker 1

Thanks.

Operator

Your next question is from the line of Tayo Okusayo with Credit Suisse.

Speaker 17

Yes. Good morning, everyone. So a quick question about the triple net portfolio. And I guess, again, the occupancy on the Senior housing side, it's so well below your occupancy side. So kind of curious why That continues to lag as much as it does.

Speaker 17

And if there's kind of any additional risk of having to address Rents with some other tenants that still have kind of need the weak rent coverage?

Speaker 2

Justin is going to take that Tayo.

Speaker 3

Yes. So the occupancy is really just a function of the going in occupancy. So when I say that, I mean, like leading Heading into the pandemic period, it was running lower already. We have higher absolute occupancy in our SHOP portfolio. The triple net portfolio is obviously a little lower occupied.

Speaker 3

It's carried a little bit more expense as well. But the kind of the credit situation and the stability of the cash flows have improved dramatically. We've put a lot of effort in over the last year They have to improve our position with those leases. And we mentioned last quarter some COVID cleanup, that's occurred now. So if the Trajectory of the sector continues in a positive way.

Speaker 3

We expect the triple net portfolio to continue to improve and perform well.

Operator

Your next question is from the line of Daniel Bernstein with Capital One.

Speaker 15

Can you hear me now?

Speaker 2

We can.

Speaker 15

I got some new Bluetooth headphones that are giving me problems. So So I actually wanted to go back to seniors housing and the projections for 3Q. When you look at the percentage of move ins versus 2019 have kind of been coming down over the last few quarters. Have you seen any historically, we've seen some impacts from when our move ins right when Stock market goes down when home sales velocity kind of slows. Have you seen any evidence of that kind of deer in headlight effects In the last quarter or 2 and into 3Q, and does that play into your projections for 3Q?

Speaker 3

Yes. So I mean one thing we do watch is consumer sentiment. It's something we keep an eye on because it although it's not usually strongly correlated Senior housing because senior housing is more needs driven. It's something that maybe could have impact on the fringes. The growth we've experienced has been pretty consistent.

Speaker 3

We've had very consistent Lead and move in activity, move outs have been relatively low, which is obviously helpful and supportive of net move ins. Right now, I mean, we just gave guidance on the Q3, we're expecting growth and there's good support for that. And we're always watching all the macro market kind of key indicators. Debbie mentioned a lot of them and there's others as well. So We'll be mindful of the macro environment.

Speaker 12

Okay. Thank you.

Operator

Your next question is from the line of Mike Griffin with Citigroup.

Speaker 8

Thanks for taking the follow-up. Just a quick question on spot occupancy growth. I noticed the occupancy build is kind of late in the Q2 and maybe that explains the higher average In the Q3, but kind of curious about your thoughts there and maybe any expectations around that?

Speaker 4

Yes, Michael. I'd say the spot in the average are pretty close to each other. So yes, we had a nice end of the second, but hope for the same in the third. So average is a good proxy.

Operator

Our final question will come from the line of Juan Sanabrio with BMO Capital.

Speaker 11

Hi. Just a question maybe for Justin.

Operator

If I

Speaker 11

look at Page 17 of the Investor Day focusing on affordability. It looks like you have significant headroom to potentially push pricing. Is that Something that the operators are receptive to or just curious if that is a push for the OI Platform and an opportunity in your mind.

Speaker 3

Those are so much my favorite topics, I would say the first is I know you did. I don't even think we have time to go through it all. I would say the first one the first part on affordability, and I know you know this, but The big opportunity in the sector is price transparency, which we really don't have today. So you'll hear language like price discovery where we're pushing Pricing and markets and just testing for resistance. And obviously, this year, there hasn't been much because we're pushing on all fronts.

Speaker 3

And the affordability really points to that as well. And our operating partners have been Just magnificent, I think, in playing into that opportunity and having the confidence to push. And it's an area that we're definitely improving in. And then from an OI standpoint, we definitely do focus on pricing. It's a huge part of the focus even before we called it OI.

Speaker 3

Officially, last fall, we were highly engaged with our operators to plan For the pricing execution that we've seen this year. So it's always a hot topic and it's a Big opportunity for the sector over time as well because it we deliver a tremendous service to our residents. It's comprehensive And it's very valuable and

Speaker 2

And they can afford it.

Speaker 3

And they can afford it, bottom line. Yes, exactly.

Operator

So that's

Speaker 2

The definition of a good situation. All right. Thanks, Justin. I think we do have a couple more follow ons and we can take those before we close.

Operator

Okay. Your next question is from the line of Tayo Okusayo with Credit Suisse.

Speaker 2

Hello? Hello?

Speaker 17

Can you hear me?

Speaker 2

Yes. We can now Tayo.

Speaker 17

Okay. Great. So thanks for taking the follow on. No one ever really seems to ask about post acute, but just kind of curious what's happening over there, slight decline in coverage For you guys, a lot of kind of news in general on the hospital side and the kind of first half Of 2022 industry wise. So just curious, again, it's a small part of your portfolio, but curious what you're seeing on that side?

Speaker 2

Well, you've seen from the public hospital operators, all the providers are In a transition period now, I think they are coming out of kind of a COVID period and going into a more normal Kind of census and census environment and acuity environment. So As wage pressures abate, I think you'll see improvement there and volumes continue to increase. Certainly higher employment there is beneficial to the acute care business. So that's positive. They just got a rate increase obviously That will take effect October 1.

Speaker 2

And then in post acute, I think you're also sort of starting to see some Normalization in both the volumes and the beginning of some normalization in wages, But a long way to go there, and that's going to take more time, I would say, than in The hospital business, which is always at the top of the food chain.

Speaker 17

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our final question comes from the line of John Pawlowski from Green Street.

Speaker 6

Thanks for keeping the call going. Pete, I'm hoping you can expand on the line in the press release talking about Frictional vacancy coming into life science, could you help quantify that and what caused the move out?

Speaker 16

Yes. Thanks for the question, John. So we have really good occupancy 93% You know, in our same store pool for R and I. But, you know, COVID, we also have some we have some tenants that Our pure office tenants in innovation space, and we disclosed this last quarter that we had a couple of move outs in that area where people have just reconsidered Space they need and the type of space they need. It's actually caused, created an opportunity for us to, convert some of that space Into the high demand lab space.

Speaker 16

And so we have over the next Quarter or 2, some transitions, we'll be converting to lab space and repopulating some of those tenants, tenant vacancies. But, we are Bullish about the full year or bullish about 'twenty three and beyond?

Speaker 2

And as I mentioned, for example, in Miami, We've already backfilled 8,000 feet immediately at higher rates. So Pete's done a great job on that. We're all here and ready and committed to continue delivering value. We know it's a dynamic environment, but we're excited about the future. So thank you very much.

Operator

Thank you. This concludes today's call. Thank you for joining. You may now

Powered by Quartr
Earnings Conference Call
Ventas Q2 2022
00:00 / 00:00