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Top-Rated AMD nears major breakout level
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AI powerhouse NVIDIA will hit $1000 soon
Roku stock and the mother of all entry opportunities
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Nvidia, Royal Caribbean rise; Rivian, Etsy fall, Thursday, 2/22/2024
Rivian shares gets discounted; shares can move lower 
The perfect AI stock under $10 (Ad)
The Trade Desk: 3 reasons to buy before a new all-time high
Wall Street sees a solid year ahead for homebuilders, though mortgage rates remain a wildcard
S&P 500   5,087.03
DOW   39,069.11
QQQ   438.07
Top-Rated AMD nears major breakout level
Clear Buy, Sell, or Hold Recommendation on any Stock, FREE (Ad)
AI powerhouse NVIDIA will hit $1000 soon
Roku stock and the mother of all entry opportunities
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Rivian shares gets discounted; shares can move lower 
The perfect AI stock under $10 (Ad)
The Trade Desk: 3 reasons to buy before a new all-time high
Wall Street sees a solid year ahead for homebuilders, though mortgage rates remain a wildcard
S&P 500   5,087.03
DOW   39,069.11
QQQ   438.07
Top-Rated AMD nears major breakout level
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AI powerhouse NVIDIA will hit $1000 soon
Roku stock and the mother of all entry opportunities
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Nvidia, Royal Caribbean rise; Rivian, Etsy fall, Thursday, 2/22/2024
Rivian shares gets discounted; shares can move lower 
The perfect AI stock under $10 (Ad)
The Trade Desk: 3 reasons to buy before a new all-time high
Wall Street sees a solid year ahead for homebuilders, though mortgage rates remain a wildcard

Ventas Q3 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • BJ Grant
    SVP of Investor Relations
  • Debra A. Cafaro
    Chairman and Chief Executive Officer
  • J. Justin Hutchens
    Executive Vice President Senior Housing
  • Robert F. Probst
    Executive Vice President and Chief Financial Officer
  • Peter J. Bulgarelli
    Executive Vice President, Office; President and CEO, Lillibridge Healthcare Services

Presentation

Operator

Good morning. My name is Audra [Phonetic] and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas 2022 Third Quarter Results conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]

At this time, I would like to turn the conference over to BJ Grant, SVP of Investor Relations. Please go ahead.

BJ Grant
SVP of Investor Relations at Ventas

Thanks, Audra. Good, morning, everyone, and welcome to the Ventas Third Quarter Financial Results Conference Call. Yesterday we issued our third-quarter earnings release, supplemental investor package and presentation materials, which are available on the Ventas website at ir.ventas.com.

As a reminder, remarks made today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated 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 and for a reconciliation of these measures to the most closely comparable GAAP measures please refer to our supplemental posted on the Investor Relations website.

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

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thanks, BJ, and good morning to all of our shareholders and other participants. Welcome to the Ventas Third Quarter 2022 earnings call. We're very pleased with our enterprise and property results this quarter, led by our SHOP growth. Let's begin with some highlights. Normalized FFO per share was $0.76, right in line with our forecast with 13% SHOP growth, led by an outstanding 9% increase in year-over-year revenue, and nearly 5% total company year-over-year same-store cash NOI growth. Our $0.71 normalized FFO ex-HHS grants grew 3% from last year's comparable period.

We are very pleased that we have delivered on our guidance once again and, more importantly, that we continue to realize sustained growth in our senior housing business that is accelerating. With year-over-year SHOP growth of 9% in the second quarter, 13% this quarter, and 15% to 21% projected in the fourth quarter, this is what we have been waiting for. Our strong numbers validate our long-standing commentary that we are at the start of a multi-year recovery and growth period in senior housing, driven by positive and improving supply-demand fundamentals. And propelled by the actions and decisions we've taken, Justin and the team's experience, accuracy insights, and credibility, and of course, our operators' efforts. I'd like to take this opportunity to thank them.

Looking ahead to the fourth quarter. In addition to SHOP growth, our normalized FFO guidance of $0.71 at the midpoint represents 4.5% growth versus Q4 2021 excluding material unusual items, overcoming the macro, interest rate, and FX headwinds that we and virtually all other real estate companies are experiencing.

Turning to capital allocation, we continue to focus on our priorities of life science, research and innovation, and select senior housing, and working with longtime partners. We are driving and expanding our differentiated life science, research and innovation investment business. We have $2.3 billion in R&I projects recently delivered and in progress. Recently, we delivered core and shell of our new state-of-the art 400,000 square-foot lab building in Philadelphia's premier life science ecosystem at One uCity Square. It is on time and on budget and currently over 90% leased or committed to leading gene and cell therapy company and a premier research university.

We are very proud of what we and our partner Wexford have created in service of the major universities, research companies, and innovators in this growing life science market. We own significant additional land in One uCity available to meet robust demand. Recently, we also began a new 255,000-square-foot lab building to be anchored by the University of Maryland, Baltimore. UMB part of the University of Maryland system is rated AA+ and they rank in the top 15 of US universities for R&D spend. The project enhances our existing position in a market with the nation's most favorable ratio of current life science tenant demand to under-construction lab space. The project is projected to produce a stabilized cash yield of 7.5% and open in 2024.

Universities which represent half of our consolidated R&I portfolio tenancy continue to demonstrate significant demand for lab space and our portfolio is well-located and positioned to capture. Before I wrap up, I'd also like to highlight two strategic investments we've made that demonstrate value creation in unique ways connected to our core real estate investments as we've built valuable businesses and aligned with quality partners. Notably, we've seen the success of our Ventas Investment Management or VIM platform which is Ventas' third-party institutional capital management business with over $5.5 billion of AUM. VIM has proven to be an effective strategy to continue to grow in attractive asset classes and build a valuable business and create a recurring revenue stream.

We expect to earn the first promote revenue from VIM approximating $0.01 per share in the fourth quarter of this year. We intend to continue growing our VIM business, which provides strategic benefits to our public shareholders and leverages our platform and industry expertise. Second, our $1.4 billion strategic investment in Ardent, a high-quality health system has been very successful. In addition to our well-performing Ardent real estate, we have a $50 million investment and a 10% equity stake in the Ardent OpCo alongside stem cells EGI. Recently, EGI entered into an agreement to sell a minority equity investment in Ardent to new investors, at evaluation representing over a four-time equity return. As a 10% owner, we expect to sell a 2.5% stake. Because the transaction remains subject to regulatory review, we have not included any potential gains in our guidance. Ardent demonstrates the importance of creating valuable partnerships and carefully choosing successful operating partners.

Finally, we believe we are in an advantaged position to succeed. Demographic demand fueled all our asset types and senior housing supply-demand fundamentals are highly favorable and improving. While we like most companies across the real estate space our affected by higher interest rates, we are happy to be in a business that has pricing power, upside from occupancy and margin expansion, and has been historically resilient in a variety of economic environments.

Thank you. And I'll now turn the call over to Justin.

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Thank you, Debbie. I'll start by covering the third-quarter SHOP results and our year-over-year same-store pool. We are pleased to report another quarter that was consistent with our expectations while delivering strong year-over-year growth. NOI grew 13% year-over-year, which is above the midpoint of our SHOP guidance range led by the US at 17.4%, while Canada demonstrated positive growth again with 5.9%.

Same-store average occupancy grew year-over-year by 260 basis points to 84.7%. Same-store SHOP revenue in the third quarter grew ahead of expectations, increasing nearly 9% year-over-year due to continued acceleration in RevPOR growth and positive trends in occupancy. Pricing power has been impressive. At 5.4% year-over-year growth, RevPOR is the strongest we've seen in the last 10 years, primarily driven by in-house rent and care increases and re-leasing spreads that have improved to positive 1.4% in Q3 from negative double-digits during the low-point in the first-quarter of 2021. Underpinning the re-leasing spreads are improvements in street rates, which increased 11% year-over-year in the third quarter. This pricing power is being driven in a US portfolio that is only around 80% occupied, which is a real testament to the underlying demand for senior housing and bodes well for future pricing.

As expected, expenses were $3.8 million per day. Operating expenses remained elevated as contemplated in the Company's guidance for the third quarter, year-over-year same-store operating expenses grew 7.6%, driven primarily by occupancy growth and continued macro inflationary impacts throughout the quarter on labor, utilities, repair and maintenance, and food costs. Leading indicators in the US remained very strong as we experience leads as a percent of 2019 at 109%, move-ins at 107%, and outs at 98%.

Canada continues to deliver growth and high occupancy at 94%. We are benefiting from positive operating leverage. SHOP NOI margin expanded 90 basis points in the third quarter due to stronger-than-expected revenue growth that outpaced continued elevated expenses. I have to say a big thank you to our operating partners including Atria, Le Groupe Maurice, Sunrise, and our regional operators who are delivering great results.

Now, I will cover Q4 SHOP guidance and our expanded same-store year-over-year pool, which includes 478 communities. We are pleased that our strong year-over-year growth expectations are reflected in this much larger pool which represents 87% of our SHOP portfolio. This larger pool includes assets that have transitioned from triple-net, transitioned from other operators, and acquisitions made in the prior year.

Both the legacy same-store communities and the new entrants to that pool are expected to contribute attractive growth, with the pre-existing pool showing the strongest performance. SHOP same-store cash NOI is expected to accelerate from 13% growth in the third quarter to grow in the range of 15% to 21% year-over-year in the fourth quarter. We anticipate year-over-year revenue growth of approximately 8% at the midpoint of the same-store cash NOI guidance range, driven by continued strong rate growth and occupancy growth of 100 basis points and 250 basis points.

Year-over-year revenue growth is expected to be partially mitigated by continued broad inflationary expenses. At the guidance midpoint, operating expenses are expected to be consistent on a per-day basis with a third guard [Phonetic] quarter in 2022. The bottom and top ends of the NOI range are principally driven by variability in operating expenses. Our guidance assumes attractive margin expansion.

Moving on to asset management. Ventas OI which is our approach to a collaborative oversight where we leverage our operating expertise and best-in-class data analytics to the benefit of our operating partners continues to differentiate our platform and is creating tangible value in our senior housing business. I'm pleased to report that we had a very productive third quarter, engaging with our operators on the underlying fundamentals and two important deep-dive topics: rate increases and recruiting.

Rate increases this coming year will be our highest on record. We started our process early and collaborated with our operators to develop recommendations down to the unit and resident level. These customized rate -- recommendations are grounded in data, should limit controllable move-outs, and will be a huge contributor to revenue growth. It's really important to note that pricing power is greatly enhanced when we are delivering care and services resulting in highly satisfied residents and families.

Historically, we have seen around 5% in-house rent increases in the US. We saw 8% in 2022, and we expect over 10% in 2023. Certain operators, notably Sunrise, have already implemented early in-place rent increases and the results are positive and a good preview of what should be a successful execution in the first quarter and beyond.

We continue to address labor challenges in innovative ways. Our recent focus has been on community-level staff recruiting to help our operators compete for talent more effectively. In doing so, we see [Indecipherable] over 50 job titles across 15 different operators to evaluate reputation, career websites, the application process, and application follow-up. While I was pleased to see that our operator scored well relative to industry benchmarks, we came away with several actionable recommendations to attract fresh talent to our communities.

Ventas OI also continues to be a powerful tool in the capital allocation process. Our asset management teams are leveraging access to extensive industry and market-specific data to help drive decision-making around revenue-generating capex projects. Portfolios are evaluated on an asset-by-asset basis with communities prioritized based on near-term occupancy and rate upside as well as long-term supply-and-demand outlook. A significant investment of time and capital into this process has resulted in over 100 individual renovation projects currently underway within our SHOP portfolio, with a material number of those completing in the next several months.

I'll conclude by highlighting my continued confidence in the growth opportunity in our senior housing business. There are very encouraging facts that continue to support this view. The supply-demand outlook remains very strong, the growth rate of the 80-plus population will be the highest on record as we've noted before, and 99% of Ventas' senior housing markets are free from competitive new starts, we have had positive net move-ins for 18 months of the past 19 months, and pricing power is consistently demonstrated through in-house rents and street rate increases, all working together to drive NOI growth.

Now, I hand the call over to Bob.

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

Thank you, Justin. I'll start with, an overview of our third-quarter office and enterprise results before closing with our outlook for the fourth quarter. Starting with office, same-store cash NOI grew 3% year-over-year, which represents a beat to our third quarter guidance. MOB has led the way with growth of 3.4% driven by 90 basis points of occupancy gain.

Quarterly retention was strong at 93% in the quarter, supplemented by new leasing exceeding 200,000 square feet. Medical office same-store occupancy is now at 91.8% and has increased year-on-year for five straight quarters. MOB same-store quarterly performance has now exceeded 3% for four of the last five quarters. For R&I, year-to-date same-store cash NOI performance is a strong 4.8%, while we posted same-store growth of 1.5% for the third quarter. As we told you earlier in the year, we're in the process of converting space into labs where we have seen opportunities from tenant departures as a result of COVID. At the enterprise level, despite the market volatility, we're very pleased that we once again delivered results that were in line or better than our original guidance ranges.

Our total property same-store cash NOI increased 4.8% year-over-year at the high end of our guidance range. And that result was led by SHOP where same-store cash NOI grew 13% year-over-year as Justin just described, with the SHOP P&L top-to-bottom where we called it a quarter ago. Q3 normalized FFO of $0.76 per share is right in line with our guidance. And as a reminder, we received $0.05 of HHS grants in the quarter which were included in our initial guidance.

From a balance sheet perspective, we saw our leverage improved to 6.9 times in the quarter. As we look ahead, we're benefiting from the proactive steps we took prior to the run up in interest rates to reduce near-term debt and extend duration. Some Ventas stats to call out include $2.5 billion of available liquidity, 2023 consolidated debt maturities and amortization is just $500 million or less than 2% of enterprise value. And 11% of our consolidated debt is at floating rates.

Let's talk Q4 guidance. We expect net income to range from $0.06 to $0.12 per fully diluted share. Q4 '22 normalized FFO is expected to range from $0.68 to $0.74 per share, which represents nearly 4.5% growth at the midpoint when compared to the fourth quarter of 2021, adjusted for unusual items in the prior year. SHOP is contributing $0.06 of growth year-over-year, while interest rates and FX are a $0.04 headwind. Total company same-store NOI growth year-over-year of 6% to 9% is expected, with accelerating SHOP same-store NOI midpoint growth of 18% leading the way.

Bridging FFO from Q3 to the Q4 guidance midpoint is as follows. Starting with Q3 at $0.71, adjusted for the $0.05 of HHS in Q3. In the fourth quarter, we expect $0.02 of sequential growth from SHOP, materially outperforming normal seasonal trends. We also expect to earn our first promote of approximately $0.01 from our third-party capital business. The $0.03 of sequential good guy is explained by SHOP in the promote are offset principally by a $0.02 reduction in FFO due to higher interest rates on our floating rate debt.

Other notable assumptions in our fourth-quarter guidance include no new or unannounced material acquisitions or capital markets activities, 404 million fully diluted shares, and finally, we do not expect to receive any HHS grants in the fourth quarter. For more information on our guidance assumptions, I would direct you to the business update deck and the supplemental posted to our website.

To close, we believe we are in an advantaged position in a dynamic macroeconomic backdrop, with a portfolio and the team to deliver sustained value creation. That concludes our prepared remarks.

For Q&A, we ask each caller to state one question to be respectful to everyone on the line. With that, I will turn the call back to the operator.


Questions and Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Juan Sanabria at BMO.

Juan Sanabria
Analyst at BMO Capital Markets

Hi. Good morning. Just hoping we could talk a little bit about rate in RevPOR, specifically, you mentioned, Justin, that Sunrise has moved up seemingly some of their rate increases. So, could you give us a little window into how seasonality is or the new seasonality now as some of the rate timing has shifted away from the traditional first quarter and maybe bucket ties where the rate increases are expected to happen, I think, going forward?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Sure. In fact, Juan, there's a page in the deck we put out. That is page 12 that describes this a little bit. And on the bottom right, we actually SMA the percentage of units that are eligible for increases and we mentioned that 7% were actually pulled forward, so they would have normally been a first-quarter increase, they've been pulled forward to before that, that includes Sunrise which is mostly a fourth-quarter increase. Sunrise targeted around 9%. They were really responding to the need to create value. And one thing we're very pleased with is that our revenue growth is outpacing expense growth. And Sunrise took an action to ensure that that continues to happen. They'd made a decision to pull early. We also have other operators, obviously, that are targeting increases that are over 10% as we are stating on this page and those start in the first quarter, and then there's a big group about 42% that get them in the first quarter and then throughout the rest of the year we'll see a 39% that are eligible for anniversary rent increases. And then, the remaining just moved in late in '22, so they don't get a 2023 increase.

So obviously, we're very focused on this and we'll continue to be, and the pricing power has just been superb.

Juan Sanabria
Analyst at BMO Capital Markets

Thank you.

Operator

We'll move next to Joshua Dennerlein at Bank of America.

Joshua Dennerlein
Analyst at Bank of America

Yeah, good morning, everyone. I wanted to explore the dynamic with -- looks like we said fall-in but move-ins had risen during the quarter as a percentage of 2019 [Phonetic], could you kind of explain what's going on there?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Hi. Sure. This is Justin. So, I think what you're referring to is just the percentages that we're reporting as a percentage of 2019, which has been really good because we've been outperforming the pre-pandemic levels, and it's a good metric because, obviously, we're in a recovery mode post pandemic and it's been interesting to see how we perform relative to 2019.

But trending is really on an absolute basis. And I think a stat that might help you is, from Q2 to Q3, our leads were down 1%. Our move-ins on an absolute basis were up 4%. So, I would basically say not much to report there.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Josh, this is Debbie. And obviously, the leads are well over 100% of '19 levels and move-ins are at 109% I believe of 2019 levels which is very, very strong.

Joshua Dennerlein
Analyst at Bank of America

Yeah, I wasn't sure if you guys were getting better conversions.

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Yeah, so we've had -- our conversion rates have been relatively -- they move around a little bit but relatively consistent around 9%. And moving activity, as I mentioned, actually was higher in the third quarter than it was in the second quarter on an absolute basis. So, we're very pleased with how we're positioned from a leading indicators and the national move-ins standpoint, and occupancy and ultimately, our pricing power as well.

Joshua Dennerlein
Analyst at Bank of America

Great. Cheers guys.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thank you.

Operator

We'll take our next question from Michael Carroll of, RBC Capital Markets.

Michael Carroll
Analyst at RBC Markets

Yes, thanks. A 10% annual rate increase is pretty encouraging. I mean has there been any pushback from residents? I know last year when you did the 8%, there wasn't much pushback, so I'm just wondering if this year is any different related to that?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Hi. It's Justin. So, the process I described in the prepared remarks was really designed to first of all make sure that we're getting us right and then we're down to the community level and looking at units and residents, a number of factors to consider what is the right increase. That was most important. Secondly, it's, how is this being communicated and the process that our operators are using to make sure that there is a feedback loop that's really strong, well-executed.

We have a early look obviously with Sunrise pulling forward, we have rate letters going out as well for some of our operators that are giving increases in January. And so far so good. It's been relatively quiet and which is really encouraging.

Operator

We'll move next to Steve Sakwa at Evercore ISI.

Steve Sakwa
Analyst at Evercore ISI

Thanks. Good morning. Justin, I guess maybe just sticking on that kind of move-in and move-out. I noticed that the move-outs are at 98% which is the highest it's been in some time and I guess. I would expect that number to continue to trend up as you get more people in the facilities where it's going to be just more move-outs, but are you surprised that it's almost back at 100% when you're maybe not back at a 100% of 2019 occupancy?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Yeah that's a great question because it does stick out a little bit. You'll notice if you look on the trending that we've been -- I'm going all the back to the first quarter '21, 94%, 91%, 91%, 96%, 97%, 92%, and now 98. And I absolutely would agree that as our absolute number of residents go up through occupancy growth that we'll see higher move-outs again. There is -- I don't think this is necessarily the start of a trend. I think it was just an outcome within a quarter. And over time, though, eventually, they'll go back to 100%, but that would mean that our occupancy is back to where it was on a pre-pandemic basis.

Operator

We'll move next to Michael Mueller at JP Morgan.

Michael Mueller
Analyst at JP Morgan Cazenove

Yeah, hi. I was just wondering, can you -- excuse me, talk about what you're seeing or thinking about in terms of private market pricing changes for life science and MOBs?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Hi Mike. This is Debbie and I think that we still are in a period of volatility as far as capital costs. And as you well know and historically when we see this type of volatility, there is a period of price discovery which we are still in. I would tell you that the life science market in particular continues to have very tight cap rates expectations, and that's because there's really good demand continuing for, certainly, our types of lab buildings. And so, that's showing through and it's holding up frankly very well in the context of the volatility we've seen on capital costs.

And MOBs, I think we're still seeing in low-to-mid 5. But I will close and say there is very limited data yet, and we still are in the price discovery period and so more to follow once we get to a point where people are transacting more frequently. We'll have more data to report on.

Michael Mueller
Analyst at JP Morgan Cazenove

Okay. Thanks.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Yes.

Operator

We'll take our next question from Vikram Malhotra at Mizuho.

Vikram Malhotra
Analyst at Mizuho

Thanks for taking the question. I just wanted to clarify the sort of move-out levels and maybe think about the trends into '23. Is the length of stay changing in any way versus pre-COVID? You have a lot of like maybe older residents coming in that do not have maybe a two-year to three-year length of stay, is that sort of impacting the volume of move-ins? And if this trend continues, let's say it's not a one-quarter aberration, if this trend continues, does that impact the occupancy ramp into '23?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Hi. It's Justin. So, first of all actually -- our length of stay has been very stable. There has been -- I remember that we had questions last year, is it shortening, is there some kind of higher acuity person coming in, that never happened. And so, I'd -- it's pretty consistent with where it was even before the pandemic and it's been consistent. So, not much to really report on from a length of stay standpoint.

One thing I'll also mention which is indicative of the man at the doorstep and the pricing power is that our re-leasing spreads have been so good, so as residents have been moving again, they've been paying more than the last resident that occupied that unit and as I mentioned in my prepared remarks, that actually went positive in this past quarter.

So, pricing power has been great internally through in-house increases but it's also been really strong from a street rate standpoint as well.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

And that's the lemonade of the move-outs, really.

Vikram Malhotra
Analyst at Mizuho

The pricing power basic -- the pricing power driving some of that, is that what you're saying?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Now, it's just that the -- when you have someone move out and you have a new person paying more for that unit when they move in, that's a healthy dynamic. [Phonetic]

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

And if people moved in during a period of the pandemic at lower rates, obviously, that's where you start to get this positive momentum on re-leasing.

Vikram Malhotra
Analyst at Mizuho

And then can I just follow up just to clarify the trajectory? I know you said Sunrise has -- or one of the operators already has a 10% bump in place, are expected to be 10%. If you see the similar level of pricing power into next year, just given where the -- and expenses, let's say, remained flat, meaning your reliance on temp labor is where it is today and you see modest growth just given inflation-wise, should the gap between revenue and expense growth see an elevation? [Phonetic] The margin see material expansion next year?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Yeah, so that -- absolutely. There -- right now, we're pricing off of the current inflationary environment, so if that changes, and certainly that could be additive to NOI growth. But we've been -- this sector historically has had a pretty healthy spread in terms of increases over CPI. And CPI, obviously, is much higher these days and we've continued to build that spread in. Pricing power has really always been a strength and it's magnified now because of the emphasis on the expense growth, obviously, revenue has been outpacing expenses significantly. So, we're in good shape.

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

And we're seeing really nice margin expansion, 90 basis points in the third quarter. The implied guidance again, obviously, with operating leverage, we're going to see more margin expansion. So despite the labor discussion and everything else, we're pricing that plus. And we know this is a high operating leverage business so that's a good formula.

Vikram Malhotra
Analyst at Mizuho

Thank you.

Operator

We'll move next to Michael Griffin at Citi.

Michael Griffin
Analyst at Smith Barney Citigroup

Great. Thanks. Justin, in your conversations with operators, have you noticed that there has been any improvement in the turnover of the workforce?

And then I just wanted to clarify something on the contract labor side, I noticed that moved up to about 3% of the expense stack versus 2.5% last quarter. Should we read into that that there is more contract labor utilization or is that just a rounding issue?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Well, let me start with the first part. The one thing I mentioned in my prepared remarks that we had 12 quarters now of positive net hiring. Excuse me, 12 months, four quarters of positive net hiring. And so, that's obviously a really good indicator given the backdrop.

One thing I'll mention is that contract as a percentage of total labor has actually been coming down. You'll see that on that same page you mentioned, it's page 13 of the deck. We were as high as 8.7% in the first quarter of '22, it's down to 5.9% in the third quarter. There is -- so, that's good to see that there is some relief in terms of agency.

Overall labor expense, you can see off to the right, it's indicated on these bar charts, has been relatively stable -- after an initial period of being elevated. And we are seeing agency reduce in certain key markets that we've highlighted before that are big users of agency and we're starting to see that come down. North Carolina is one that jumps out. I know we've mentioned before Philadelphia as well, they both had double-digit reductions in agency. The LA MSA, it also had a double-digit reduction in agency. And so, where we've had heavy users, we're starting to see some softening and improvement. And it's been a relatively slow process though, but it but it's a process that's yield improved results.

Michael Griffin
Analyst at Smith Barney Citigroup

Great, thanks.

Operator

Next, we'll go to Steven Valiquette at Barclays.

Steven Valiquette
Analyst at Barclays

Hi. Thanks. That senior guide [Phonetic] shown on page nine in the slide deck that the same-store SHOP pool will change dramatically from 3Q to 4Q with the increase in the properties. So I guess that the same-store cash NOI accelerating from that 13% to 15% to 21%. I'm guessing that probably even the 3Q same-store pool will probably see acceleration just with the price increases you're talking about. I just want to reconcile kind of what the trend would be without the S&R and transition assets there as far as an acceleration -- how much does that impact acceleration? [Speech Overlap]

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Yeah, thank you for asking that because Justin addressed it and we want to be crystal clear on it. We are seeing that or projecting that accelerated SHOP year-over-year growth in the fourth quarter and what we're really happy about is this is representing now the lion's share of our senior housing business. And that's really good for investors, it creates a lot of transparency, and gives a really good insight into how the business is performing. And Justin can answer the -- your specific question on what's carrying the day here.

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Yeah, so the third quarter pool, so what we kind of referred to as the existing pool, that was the year-over-year pool in the third quarter, continues to be in the fourth quarter, which has now expanded, that pool is the strongest performer in this fourth quarter projection. So, there -- everyone is contributing in a very positive way. You mentioned the senior -- we have a number of transition communities and some acquisitions that are in there as well. They're all contributing in the greater pools financial growth, but particularly the third quarter pool that was existing is driving the most of the growth.

Steven Valiquette
Analyst at Barclays

Okay. That's helpful. Thanks.

Operator

We'll move next to Rich Anderson at SMBC.

Rich Anderson
Analyst at SMBC

Thanks. Good morning. Can you hear me okay?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Yes, Rich.

Rich Anderson
Analyst at SMBC

Okay, great. Thanks. So, I guess I wanted to ask about the asset class that hasn't been mentioned much in this call which is medical office. Your priorities are senior housing and life science. You've even mentioned senior care as a possible area to look at but not medical office so much. And I'm curious you mentioned your price discovery commentary. Could we see some change there of substance for Ventas maybe MOB conversions to life science, maybe MOB to the VIM fund, maybe MOB sales?

I'm certain you have an audience for that portfolio that's 20% of your business. Can you comment at all on where things might go with MOBs for Ventas in the next year or two or three? Thanks.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Well, my colleague, Peter is here and he's done a great job on running that business. And it's producing good results, and we've always liked the business but we really like the portfolio that we have. It's really high quality. Mostly on the campuses of successful hospital systems, large creditworthy systems, that are in a position to grow. and that's the main criterion for a successful medical office building. So, we really like the business. It has good metrics. It's performing well and if -- we're happy with the business that we have, and for the current time intend to keep it and grow it -- as Pete's been bringing home over 3% growth here on same-store.

Rich Anderson
Analyst at SMBC

Okay, sounds good to me.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thank you.

Operator

We'll move next to Jonathan Hughes at Raymond James.

Jonathan Hughes
Analyst at Raymond James

Hey. Good morning. Justin, I was hoping you could talk about the SHOP occupancy guidance, is there any impact in there for a potential increase in COVID, and/or flu cases weighing on occupancy, meaning that without that potential for a spike in case counts like we've seen in the past two winters and the spike we're currently seeing in Europe that guidance might have been higher? Or is there a little impact in that guidance since residents today are mostly vaccinated, pandemic is more endemic, and move-in restrictions seem unlikely?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Sure. So, the fourth quarter expectation, it has around -- we mentioned the year-over-year growth range of 100 basis points, 150 basis points. The sequential growth around 30 basis points. That's sort of consistent with what we would have seen pre-pandemic, it's a little higher, it's a little bit more growth. And -- but it's relatively flat. So, if you look at history, you mentioned flu and impacts such as that, normally that's more of a first-quarter event if it does in fact have an impact. So, I think the fourth quarter kind of expectation took into account. I think what we know on the ground today and a little bit just what we've seen historically from a seasonal sale point. [Phonetic]

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Yeah, I mean, basically the portfolio isn't showing signs of clinical conditions. And we've assumed that that status quo continues in the fourth quarter.

Jonathan Hughes
Analyst at Raymond James

Okay. And forgive me but I'm going to try to sneak in one more here related to Steve's question on move-outs. If the volume of move-outs today is the same as 2019 but occupancy is lower, doesn't that mean we're seeing more move-outs on an occupancy-adjusted basis that's preventing a faster rebound? Is there some kind of change in resident behavior here that is ongoing? Just trying to understand better those comments you made earlier. Thanks.

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

Yeah, sure. So first of all, it's not there yet. It's 98%, so I would say that I wouldn't -- I'm not reacting to one-quarter of results, and to be indicative of a trend there or something that we should consider to be forward-looking. It's -- move-outs, they've never really -- ins or outs, they have never really moved on a perfect straight trend, so it's little bit elevated in the third quarter. And eventually, as occupancy gets higher we'll see move-outs go up as well as we said. One thing I want to clear up too because I made a -- I mentioned a number earlier, I talked about conversion rates, and on the slide, on page 10, bottom-left to see conversion rates. These conversion rates refer to the US. I mentioned a different number, this number is 8% in the third quarter. Obviously, that was higher than where it was in the second quarter. So, that kind of brings home the whole point of we had a little slightly less leads but higher move-ins now due to the conversion rates. I just wanted to clear that up.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

And the move-out resident behavior is stable and consistent with historical patterns.

Jonathan Hughes
Analyst at Raymond James

Okay. Thank you.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thank you.

Operator

We'll take our next question from Ronald Kamdem at Morgan Stanley.

Ronald Kamdem
Analyst at Morgan Stanley

Hey. Just going back to the same-store NOI guide for SHOP, and I appreciate that the pool change a little bit slightly. But yeah, I guess the first question is just when I think about the acceleration from 3Q to 4Q, how do we break that out between sort of the occupancy versus the pricing? What's driving those?

So that, and then, as we look into '23, not really asking for guidance there, but how do we think about the comp for this year and potentially into next year? thanks.

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

Sure. Let me breakdown the price to volume question. I think, inherent in the fourth quarter guidance, we've got occupancy growing 100 to 150. [Phonetic] Revenue growing 8. [Phonetic] Implied in that is something like 6 [Phonetic] revenue i.e. RevPOR growth. So rate growth is really a strong contributor to the revenue growth. That's flowing through not only offsetting inflationary pressure but driving margin expansion. And that's pretty much the playbook for the fourth quarter led by the legacy pool as Justin was describing. But the new entrants contributing as well, so that's the way it plays out.

Clearly, what we've seen this year from a baseline if you're thinking about year-over-year is significant HHS grants. I'd start there. We got $54 million of HHS in the current year, notably in the first quarter and third quarter, nothing in the fourth quarter, no expectation of any more HHS. But more importantly, we've seen this nice trend of occupancy, very nice pricing power, and this expense dynamic that is a macro dynamic. And that's been what we've seen really for the last few quarters.

Ronald Kamdem
Analyst at Morgan Stanley

Great, thanks.

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

You bet.

Operator

Next, we'll take Nick Yulico at Scotiabank.

Nicholas Yulico
Analyst at Scotiabank

Hi. Good morning, everyone. So I just wanted to go back to the pricing in senior housing. I appreciate all the detail on page 12 there, it's helpful. I guess if we put together all these numbers, it suggests I think that RevPOR growth should be stronger next year. But oftentimes, it's a little bit confusing to build up how RevPOR growth works in senior housing, and I'm not sure if you're -- at some point do you face difficult comps next year, do you also -- is it harder to put a 10% rent increase out to residents if labor inflation comes down, right? Because I think that was a lot of justification for very-high renewal rates was that labor costs were going up. So, just trying to understand, putting all this together, how we should think about potential RevPOR growth next year?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Nick, this is Debbie. We tried to put the funnel in there for you that Justin described on pricing and how it affects the installed base. Obviously, street rates and care also affect kind of your RevPOR. Those are the components of it. And in terms of, really, I want to turn it over to Bob because pricing is his favorite, his absolute most favorite topic. I would just point out that seniors are seeing Social Security and Cola increases that were nearly 9% this year. And that's really supportive of the continued pricing, and most importantly, you would expect, regardless of conditions, as we take capacity out of the system, as supply is low, demand is high, we increase from the 80 percentage occupancy level where we are today, that pricing should get stronger, even -- irrespective almost of economic conditions.

And so that is where you really could see some additionally positive momentum if you're able to price higher but there is a softening of operating expenses and labor. That is the -- that would be a very favorable backdrop. Bob, do you want talk about pricing?

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

I would just add that the move-in versus move-out rate is fundamental. And you mentioned this earlier, but as we are increasing in-place rates at 10%-plus, all else equal, the street rate needs to rise consistent with that to keep you neutral on the re-leasing spread on RevPOR, right? And so the encouraging support to that is, as Debbie describes occupancy going up means scarcity of rooms that gives you pricing power, but that's the dynamic that needs to hold true.

You then get into subtleties in RevPOR, things like change in acuity, for example. The in-place increase does not equate to RevPOR growth. There is both the street rate versus move-out rate, there is the acuity mix, there is geographic mix. Those tend to tick down the headline RevPOR number. But we have not seen RevPOR growth like this in a decade, so we are in somewhat uncharted territory. But those are all considerations to take into account.

Operator

We'll go next to Tayo Okusanya at Credit Suisse.

Tayo Okusanya
Analyst at Credit Suisse Group

Yes, good morning, everyone. My question is kind of along the line of Nick's question and it's just about operational insights in particular. So, Justin, again, curious a little bit what you're seeing with all the data you guys are analyzing about trends? And specifically, I'm curious about -- you had kind of discussed dynamic pricing at one point and maybe that could be another driver for increased pricing on the SHOP side. And also kind of what you're seeing just around home price appreciation as that's decelerating, whether that's having any real impact on demand in any of your markets?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Hi. Yeah, good questions. We are piloting dynamic pricing in several communities and so far so good. It's a predictive model in its early stages, so it needs to evolve over time before it has a really big impact. But we're using a number of sources to evaluate pricing power, where to set street rates, where to set in-house rate increases. We have a really close partnership with our operators as they're ultimately making these determinations.

You asked about -- what was the second question?

Tayo Okusanya
Analyst at Credit Suisse Group

Home price appreciation, where it's really flowing [Phonetic] --

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

Right.

Tayo Okusanya
Analyst at Credit Suisse Group

Is that changing demand at all?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

So, we've been tracking the housing market and one thing that I think is a really good indicator of where the market stands is days on market. Obviously, I think most people know that during the summer months that -- houses were not sitting, they were moving really quickly than normal days on-market back in like pre-pandemic areas, it was like 60 days. We were seeing low-double-digit days on market for houses and within our markets, now that's closer to around 30 days or so. I think it's just above 30 days, it's been going up. And obviously, you would expect that it would.

But I think what's important is that there is an enormous home equity, there's also other sources of income that our seniors are pulling from the affordability in our markets, it's like four times over our average length of stay, so we feel really comfortable that our residents have the ability to pay for our services and our care. And the indication on the ground is that that's continuing. And one of the good indicators is really the lead number which is running way ahead of pre-pandemic levels. And in the third quarter, we have it on here, it was 109%.

Tayo Okusanya
Analyst at Credit Suisse Group

Great. That's helpful. Also, a shoutout to Pete on the MOB results.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

He's smiling, Tayo.

Peter J. Bulgarelli
Executive Vice President, Office; President and CEO, Lillibridge Healthcare Services at Ventas

Thanks, Tayo.

Operator

We'll go next to Austin Wurschmidt at KeyBanc Capital Markets.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

Great. Thanks, everybody. Wanted to hit on how the 10% in-place rent increase breaks out between the US and Canada. I'm just curious within that breakdown you provided in the business update, how does the 50% or so of early in-place increases in the 1Q increases break-out between those two regions?

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

Sure. So, that -- Canada, I don't think made the deck, but I'm happy to share with you that last year we were 8% in the US, we were 4% in Canada, and those are both relatively high increases, some of the highest that we've put forward. This year in Canada, we're expecting around 7%. So, pretty big increase and it varies by region because there are certain limitations that we have to consider. But it'll have healthy growth as well.

Important to note that the US is the 10%, right. In Canada it's described as 7%.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

And what is [Speech Overlap] of the increases? And what is the timing of the increases in Canada throughout the year versus the US?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Yes, a lot of Canada's anniversary.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

Got it. That's helpful. Thank you.

Operator

Next, we'll move to John Pawlowski at Green Street.

John Pawlowski
Analyst at Green Street

Good morning. Justin, curious for your views whether labor, broader labor availability in the senior housing industry has improved enough where you can get back to pre-COVID occupancy without needing to incur another big step-change in labor costs from here?

J. Justin Hutchens
Executive Vice President Senior Housing at Ventas

That's a great question. And it's something that we've been very interested in because, obviously, you're in a situation where we're growing occupancy, and on a year-over-year basis -- on the full year-over-year basis, I want to say we've added -- another way to put it is, since -- we're like halfway back to our pre-pandemic levels, so we've added like 400 basis points, 500 basis points of occupancy, and we continue to have the ability to care for people safely.

One thing that definitely works in our favor is that operating leverage that we mentioned earlier, Bob highlighted it I think nicely in the Q&A. And that is important because most of our operating expenses now are built in. You're getting an over 80% occupied labor, all the other expenses tend to start growing at a much slower rate and you have more flow-through. That's the operating leverage working for you. So, as we move into this next phase of growing from 80% occupancy up to 90%, or wherever we land, you'll see it -- less expenses needed to support those new residents. And that's one of the big benefits of this operating model is the operating leverage.

John Pawlowski
Analyst at Green Street

Okay. But as of now are you seeing any kind of issues that could prevent that 88% to 99% to 90% occupancy, or would that type of occupancy change need to coincide with reliance on agency labor or just increased staffing needs?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

I mean it will depend on market conditions at that time. And what the labor participation rate is, and overall unemployment trends. And so that's a key factor. And what we're doing and what Justin's working with the operators on, as he described, is making sure that our operators get at least, if not more than their fair share, of the available labor pool to put our communities in the best possible position to win.

John Pawlowski
Analyst at Green Street

Okay, thank you for your time.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thank you.

Operator

We'll take a follow-up question from Juan Sanabria at BMO.

Juan Sanabria
Analyst at BMO Capital Markets

Hi. Thanks -- thank you. Just two quick follow-ons, given -- follow-ups given we're at the end of the call. First, could you comment on any expectations for Colony I believe that loan could be paid next year, and so just thinking about the modeling and the implications of that?

And then secondly, maybe more broadly, any thoughts on Brookdale, obviously a large triple-net tenant, reports on the press and your appetite to have greater exposure there or not? So, just any thoughts around Brookdale would be appreciated.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Thanks, Juan. In terms of the Colony loan, it's performing. It matures in '23. It has -- the borrower has a one-year extension subject to certain conditions and it's freely pre-payable and well-structured in terms of the way it could be prepaid. And so, that's the update on Colony.

And Brookdale, I think you know, I'd refer any questions on that to Brookdale.

Juan Sanabria
Analyst at BMO Capital Markets

That's right. Thank you.

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

You're welcome.

Operator

And we'll take our final question from Vikram Malhotra at Mizuho.

Vikram Malhotra
Analyst at Mizuho

Thanks for taking the follow-up. I know where it's -- from you giving sort of first-quarter guidance, but I'm wondering few things, one, would you consider now giving full-year guidance? And number two, just for the first quarter, can you just maybe highlight any bigger picture ins and outs that sort of maybe are more obvious that this -- whether it's rates or what you may be taking or thinking about FX? Just so that as we think about the trajectory which historically numbers have been pressured versus 4Q, is there any big blocks we can think about?

Debra A. Cafaro
Chairman and Chief Executive Officer at Ventas

Well, thank you for the question, Vikram. We are very focused on delivering a strong end to the year of 2022 in line with our FFO growth and our SHOP growth projections. We're very excited about that and very focused on once again delivering those results in accordance with our projections.

I would say that we embrace the opportunity to give full-year guidance as and when it's appropriate for 2023. And as we sit here today, that's our expectation. The reason we embrace that opportunity, it will mean that we really are back to a normalized environment and there's nobody around who welcomes that as much as we do. So, thank you for the question.

And with that, I'd like to really end and close the call and thank everyone very sincerely, both my colleagues as well as our participants here. We've been waiting a long time, as I said, to e looking at such good results, good projections. I'm very proud of the team and we very much appreciate our relationship and dialog with you. Look forward to seeing you soon. Thank you.

Operator

[Operator Closing Remarks]

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