Q1 2021 Ventas Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Ventas first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this time, we will need to press Star then one on your telephone.
If you require any further assistance. Please press star zero and an operator will come back on to assist you.
I would now like to hand, the conference over to your first speaker today, sorry, Whitford director of Investor Relations. Please go ahead.
Good morning, and welcome to the Ventas first quarter financial results Conference call earlier. This morning, we issued our first quarter earnings release supplemental and Investor presentation. These materials are available on the Ventas website, and I got Fanhouse REIT dotcom.
As a reminder remarks made today may include forward looking statements, including certain expectations related to COVID-19, and other matters and 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 that site.
Certain non-GAAP financial measures will also be discussed in this call for a reconciliation of these measures to the most closely comparable GAAP measures. Please refer to our supplemental posted on the Investor Relations section of our website I will now turn the call over to Debra Cafaro, Chairman and CEO. Thanks.
Thank you Sarah and good morning to all of our shareholders and other participants and welcome to day Ventas first quarter 2021 earnings call.
And we start by saying that we believe the macro environment and the Ventas outlook have turned and important corner and that the worst of the pandemic is behind US you have no idea how good it feels to say those words, even though we recognize that significant uncertainty remains.
The whole Ventas team is actively engaged and taking steps to win the recovery for our stakeholders.
These steps include making smart portfolio and capital allocation decisions and capturing the embedded upside and our high quality senior housing portfolio.
Focusing on operational excellence and initial cash and.
That's good and value, creating development and acquisition opportunities across our demographically driven asset classes and.
Tracking diverse attractive capital.
And maintaining financial strength and flexibility.
I also think it's important to reiterate our gratitude and optimism.
The widespread administration and efficacy of COVID-19 vaccines have dramatically benefited the health and wellbeing of our senior residents and their caregivers and also laid the foundation for sustained economic recovery.
Let me first address senior housing trends and results.
With respect to health and safety and thrilled to report that our confirmed new resident cases and shop have fallen to literally a single person per day out of a resident population of 40000.
And all of our communities are now open to new move ins and most have reintroduced expanded visitation and communal activities.
As a result, and natural resilience and demographically based demand for senior living has revised and we reached a cyclical pandemic occupancy button and our shop portfolio and mid March.
Since then.
And by our U S shop communities, which posted 280 basis points of growth. We grew shop spot occupancy of 190 basis points through April 30th two nearly 78%.
Our Canadian shop portfolio, which has maintained occupancy of over 91% tempered the full shop occupancy growth because Canadian clinical condition and regulatory measures are currently lagging there and the U S.
We do expect there to catch up over time.
Notably for the whole portfolio March and April were the first two consecutive months when sharp move in and exceeded both the pre pandemic live and levels and move outs since the start of the pandemic.
In fact move ins during April and 1800, and Eddie totaled more move ins and a single months than we've experienced at any time since June 2019.
While many of these positive trends began and the first quarter and therefore did not fully benefit first quarter results. We are also pleased with those results our first quarter normalized and peso per share and shop performance came in ahead of our expectations.
And our shop occupancy gains were at or above those reported by other market participants to date.
The resilient and robust demand we are seeing for senior housing once again validates the need based nature of our community and the crucial role and care providers play and facilitating longer healthier lives for this portion of the nation's population, which is set to grow by over 2 million.
And she was over just the next few years.
Supply trends and senior housing are also highly favorable.
This combination of growing demographic demand and constrained supply creates a favorable backdrop for senior housing recovery, which represents an incredibly significant value creation opportunity for our shareholders.
The high quality of our senior housing portfolio and Justin will describe makes us well positioned to recapture NOI and realize this upside.
Turning to our capital allocation approach, we are confident of our ability to recycle about $1 billion through property dispositions and the second half of this year and those are expected to enhance our enterprise.
I mean, that's been side are attractive life Science research and innovation and business continues to provide us with value creating opportunities to invest capital.
And then past portfolio, which now exceeds 9 million square feet is located and three of the top five cluster markets and its affiliated with over 15 of the nation's top research universities.
We are also investing and are active and chest delivered ground up developments and life Science research and innovation, which totaled nearly $1 billion and project costs.
And I'm pleased to report that we also have another $1 billion and potential projects and affiliated with major universities right behind the four developments currently underway.
We look forward to sharing more information on our exciting development pipeline with you later this year.
We recently expanded our life sciences business through our investment and a class a portfolio of life science assets anchored by Johns Hopkins Medical which we purchased at an attractive valuation of $600 per square foot.
Located in the fourth largest life science cluster and the U S. Hopkins is a global leader and research and medicine and the number one recipient of government research funding.
This acquisition Leverages, our unique expertise at the intersection of universities life Sciences and academic medicine.
In addition, we continue to invest capital and senior housing with our partner live Groupe Maurice and Quebec.
L T and maintains a first class brand product and financial model for success are.
Kim most recently completed high and community with L. G M opened and the fourth quarter and have already achieved 87% occupancy.
We have three additional developments underway with LG, and representing nearly $300 million and aggregate project costs.
Looking at the broader investment market fuel volume is again trending toward normalized levels.
And a typical year, our gill team refused over $30 billion and investment opportunities are.
Our pipeline of potential investments across our asset classes and active and growing and we are on our front foot from an external growth standpoint.
We have access to significant liquidity and a wide array of capital sources to fund deals.
Our investment philosophy continues to be focused on growing reliable cash flow and favorable risk adjusted return taking into account factors such as market position and trajectory of the asset and business cost per square foot or unit downside protection and ultimate potential for cash flow.
Growth and asset appreciation.
In closing, we believe we've turned and important corner and key metrics and our business are showing meaningful improvement.
Positive investment thesis for all of our demographically driven asset classes and for Ventas is pointing firmly positive.
As a team at Fantast, we're really happy about the strength and stability, we've shown and the recent upswing and economic clinical and operating environment.
We have and abiding commitment to win the recovery for all our stakeholders and we are confident we're taking the right steps to do so.
You know suggested.
Thank you Debbie.
I am very excited the senior housing recovery is underway as we've mentioned before the lifestyle offering and our communities will be a leading indicator of performance.
And now that vaccines have been executed activities are picking up again communal dining is coming back and all of our communities are open to visitation from relatives and the underlying demand for our services should continue to strengthen.
As we have visited communities recently, the enthusiasm expressed by residents and their relatives and employees is compelling as communities are literally coming back to life again.
As Debbie noted we are pleased with the improvement and leading indicators and occupancy as our move in and move out performance in March and April resulted in 266, and 363 net move ins respectively.
We expect occupancy improvements benefiting from a return to 20 and 19 move and levels.
At the same time move outs should be lower than 2019 levels due to lower current occupancy levels.
If we use the move out rate as a percentage of the resident population from 'twenty and 19 and apply that percentage to the current lower resident occupancy the.
And the outcome is lower move outs than pre pandemic levels.
That in combination with a 2019 move and run rate results and projected net positive occupancy gains.
And I refer to this as the turn the lights on scenario.
And where we simply get the structural benefit from this netting effect.
Having said that.
March and April both performed well above this baseline as we started to see a resurgence of high converting leads sources, which include <unk>.
And personal and referrals as.
As these lead sources and professional referrals continue to recover.
We could see them move in rates growth.
Moving on to macro drivers.
We remain optimistic on our long term supply and demand outlook construction starts continue to decelerate in the first quarter to the lowest level since the first quarter of 2011.
And we're down 77% from the peak and the fourth quarter of 2017.
Fewer starts should translate into materially lower deliveries in 2020, two and 2023.
In addition.
We expect strong demographic tailwind to provide support for occupancy growth.
The 80, plus population is expected to grow 17% over the next five years more than double the rate witnessed during the five year recovery following the financial crisis.
I'll comment on our shop portfolio.
When I joined Benthos, just over a year ago. One of my first priorities was to assess the overall quality of our portfolio.
And now that we are traveling again and visiting communities and I'm pleased to verify we benefit from a well invested Hollywood and diversified portfolio of market, leading senior housing communities with.
With service offerings that range from active adult independent living.
Social assisted living and assisted living and memory care.
We are well located and high barrier markets that have substantial income and wealth demographics to support our offering.
Our three primary operators Le Groupe Maurice Sunrise, and atria are each uniquely positioned to be competitive within their respective markets.
Collectively they account for 90% of our shop NOI on a stabilized basis.
With these attributes of our high quality portfolio and mind moving forward.
We are actively reviewing opportunities to optimize our portfolio through pruning.
Strategic Capex investment tranche.
Transition and communities, new developments and pursuing new acquisitions and to maintain our strong market position and senior housing.
Moving on to Triple net senior housing.
Given the proactive measures taken last year, where we address a substantial portion of our portfolio.
And additionally, paired with government subsidies and other tenant resources, our tenants continue to pay as expected and the first quarter and through April <unk> received all of its expected Triple net senior housing cash rent.
Our trailing 12 cash flow coverage for senior housing.
Which is reported one quarter in arrears is 1.3 times and stable versus the prior quarter.
I'll summarize by expressing our enthusiasm around our strong leading indicators.
High quality portfolio of communities and operators and I have a high confidence and our ability to compete and what should be a very exciting period of recovery for the senior housing sector.
With that I'll hand, the call to Pete.
Thanks, Justin I'll cover the office and health care Triple net segments.
Together these segments represent over 50% of Ventas as NOI.
They continue to produce solid and reliable results.
First I'll cover office the core.
Core office portfolio ex parking performed well and core office grew one 7% year on year and one 1% sequentially.
Those results were tempered by lower parking activity, which I'm pleased to say is materially increasing all in the office portfolio delivered $123 million of same store cash NOI in the first quarter.
This represents an 80 basis point reported sequential growth in terms of rent collections are strong record continued during the quarter and into April.
And this outstanding record is enabled by the mission critical nature of our portfolio.
And our high quality credit worthy tendency.
And our medical office portfolio, 88% of our NOI comes from investment grade rated tenants and HCA and.
And our life Sciences portfolio, 76% of our revenues come directly from investment grade rated organizations and publicly traded companies.
All of our M O b properties are and elective surgery restrictions for relocations and clinical activity and building utilization is rebounding.
Clinical rebound provides confidence to health care executives and making business decisions and we're certainly seeing that on the real estate side. As an example, we are finishing negotiations and a 10 year 160000 square foot renewal with a 16000 square foot expansion with a leading health system in the southeast.
And another example, we relocated and extended several hospital offices and the Midwestern campus to accommodate the addition of a 50000 square foot health care focused technical college, the leases will commence in July a win for the health system The college.
And Ventas.
Medical office had record level of retention of 91% for the first quarter and 86% for the trailing 12 months.
Driven by this retention total office leasing was nearly a million square feet for the quarter.
This includes a 160000 square feet of new leasing.
The result is that M O be occupancy stayed essentially flat down only 10 basis points for the quarter, both sequentially and year on year.
Previous actions to bolster leasing are clearly showing results and 2019, we hired a head of leasing.
And 2020, we hired a digital marketing lead in 2020, we redeployed, 30% of our third party brokers and in 2020, we increase the number of third party brokers by 70 per cent to impact the local coverage.
Our digital marketing program focused on local market awareness and virtual touring a vacant suites is fully in place and making a difference.
Average length of term for new leases was 7.3 years five months higher than the 2019 average renewal term length also exceeded 2019 averages average escalators for new leasing was two 7% higher than our average in place escalator of two 4%.
All of this represents growing health care community confidence and the recovery.
I'd also like to highlight our pre leasing construction initiative. This is where we take a vacant suite, where it is difficult to visualize its future potential and either demolish the in place improvements to core and shell or complete a hospital standard physician suite in advance of leasing.
We've invested over $2 million and a pilot across 20 suites. The results have been fantastic. These projects have driven 20 basis points of occupancy and created a nearly 20% return on investment because of these results. We intend to expand this program later this year.
We remain enthusiastic about the office business, and particularly investment opportunities and the RNA space we.
We continue to make progress and our recently announced $2 billion pipeline of development opportunities with Wexford.
We've publicly announced four projects and their pipeline, Arizona State University, and Phoenix, which opened in the fourth quarter and is soon to be over 70% leased.
Drexel University College of nursing and Philadelphia is 100% leased.
Our project and partnership with the University of Pittsburgh for immuno immuno therapy is 70% pre leased and our new development and the thriving use city submarket of Philadelphia between pen and Drexel is showing strong pre leasing activity.
Since the acquisition of our South San Francisco Life Science Trophy asset, we have renewed several tenants and no driven occupancy to 100% and so.
Some cases, the mark to market has exceeded 30%.
And our newest life Sciences acquisition and the Johns Hopkins campus in Baltimore, we are and lease negotiations to take the buildings from 96% to a 100% occupancy demand far exceeds our current capacity.
Now, let's turn to health care are triple net.
During the first quarter.
Health care Triple net assets show continued strength and reliability with 100% rent collections in April and May Trail.
Trailing 12 month, EBITDA and cash flow coverage through 12, 31 improved sequentially for all the very health care Triple net asset classes.
Acute care hospitals trailing 12 month coverage was a strong three five times and the fourth quarter, a 20 basis point sequential improvement.
And has performed extremely well and this dynamic market.
Earth and LTE coverage improved 10 basis points to one seven times and the first quarter.
Buoyed by strong business results and government funding.
Census levels were high at yearend and continued into the first quarter.
During this period kindred has been able to demonstrate their expertise and treating complex respiratory disorders. So their health system partners.
Regarding our loan portfolio it is fully current.
And finally.
A word of thanks to and frontline workers, who have kept our facilities open and safe. During this last year. They are our heroes. We are relieved that now protected by the vaccine. They can do their jobs with peace of mind, and and safety with that I'll turn the call over to Bob.
Thanks, Pete and my remarks today I'll cover our first quarter results our expectations for the second quarter of 2021, and our recent liquidity balance sheet and capital activities.
Let's start with our results and the first quarter Ventas reported first quarter net income of minus <unk> 15 per share driven by non cash charges in the quarter as we transferred assets to held for sale.
Normalized funds from operations and the first quarter was 72 cents per share a penny beat versus the high end of our prior guidance range of 66 cents from 71 cents.
As previously communicated and included in our Q1 guidance range.
We received four cents and HHS grants and shop and Q1.
Adjusted for these grants Q1 <unk> per share was <unk> 68 cents.
And as expected office and Triple net contributed stable sequential NOI performance in the first quarter.
Q1, outperformance was driven by better occupancy and lower than expected operating expenses and shop.
As a result same store shop, NOI declined sequentially by 8% and the second quarter versus the first.
Turning to our Q2 guidance.
Second quarter net income is estimated to range from flat to seven cents per fully diluted share.
Our guidance range for normalized <unk> for Q2 is 67 to 71 per share.
The Q2 <unk> mid point of 69.
Is one penny higher sequentially than the first quarter results.
Due to an improving shop trajectory.
After adjusting for HHS grants in both periods.
Key second quarter assumptions underlying our guidance are as follows starting with shop.
Q2 spot occupancy from March 31 to June 30th is forecast to increase between 150 to 250 basis points.
With the midpoint, assuming the occupancy improvement and March and April continues through May and June.
Sequential shop revenue is expected to grow modestly as a result of occupancy gains.
While operating expenses, excluding HHS grants.
Our forecast to be flat.
And with lower COVID-19 costs, offsetting higher costs due to increased occupancy higher community activity levels.
And an additional day in the second quarter.
Finally, we've not included the receipt from HHS grants and shop, and our Q2 guidance.
And our office and Triple net segments, we expect stable NOI in Q2 relative to Q1.
And finally, we continue to assume 1 billion and proceeds from property dispositions and the back half of 2021.
I'd like to underscore that we're still and a highly uncertain environment.
No trends and shop are positive.
And that mix impacts on our business remain very difficult to predict.
I'll close our prepared remarks, with our liquidity balance sheet and capital activity.
We continue to enjoy robust liquidity with $2 7 billion as of May 5th.
Notably in the first quarter, we renewed our revolver at better pricing.
And improved our near term maturity profile by fully repaying $400 million of senior notes due 2023.
In terms of capital structure, we maintained and total debt to gross asset value of 37% and the first quarter.
Q1, net debt to EBITDA was seven one times.
As EBITDA continued to feel the impacts of COVID-19 and the quarter.
We expect net debt to EBITDA will reach its peak and the first half of 'twenty one.
And then begin to improved and the second half as senior housing rebounds, and we reduced debt with asset sales.
On behalf of all my colleagues at Ventas is committed to continuing to take the actions to win the post pandemic recovery, which finally is appearing in our sites.
That concludes our prepared remarks before we start with Q&A, we are limiting each caller to two questions to be respectful to everyone on the line.
With that I'll turn the call back to the operator.
Ladies and gentlemen at this time, if you would like to ask a question. Please go ahead and press star and the number one on your telephone keypad.
Again, Thats star one to ask a question.
So our first question today comes from the line of Amanda Sweitzer with Baird. Please proceed with your question.
Thanks, Good morning.
You highlighted the opportunity for further improvement and move and as higher conversion lead horses and respite stays Richard can you quantify that opportunity at all where could it take your conversion radar index move ins.
Amanda This is Debbie good morning, I just wanted to welcome you I think this is your first time participating and our calls and we went and welcome you, but I will turn the hard work over to Justin to answer your question.
I'm going to ask you to turn to page 10 of our business update if you have it handy.
And we articulate our lead.
And move in and move.
Volume.
And the prepared remarks.
And what I'd like to highlight is that you know.
The typical <unk>.
Primary driver of lead conversion comes from professional and personal referrals and that's historically been a very strong driver throughout the pandemic.
The business has been resilient, it's benefited from Leeds driven through company Internet to spin.
Benefited from lease driven through referral agencies, those referral sources should persist.
But what we're looking to see come back and what has started to come back are those other referral sources and his personal and professional referrals, which convert at 20% to 25% each versus you know the overall, 10% conversion rate their experience plus respite.
And to put all this together rasp bids have during the pandemic ran at about a 25% of pre pandemic level run rate they are back to 50% now.
Personal and referrals ran at 50% to 60% they're back to 94% now.
Those will grow because that's simply residents and relative referring their friends, which is phenomenal and that will grow as our occupancy growth and then professional referrals. If you want a leading indicator for that category. It look toward health care activity.
And as health care and skilled nursing picks up that's a driver of professional referrals and those are still running at only 50%.
So given that and given where our performance is and the strong net activity. We have we do feel comfortable that there's opportunity for more move on move ins over time, and that's why we've highlighted that.
You know we could see.
You know a pickup and.
10, and 20% of our moving volume.
Over time as those leads come back.
And we started to see it come back you'll notice and the and the on the slide that we highlight in Q1, and we know that in March and April that theirs.
Particularly respite from the personal referrals are playing a bigger role and leads and therefore driving more move ins.
Thanks for that detail. That's helpful. And then following up can you talk more about trends, you're seeing with and U S shop, specifically across different acuity levels, either in terms of occupancy improvement and our movements relative to 2019 have you seen a return of a more lifestyle driven customer and the U S.
Yes, I can tell you that independent living performed well throughout the pandemic and continues to perform well.
We have a strong.
The concentration of independent living and social assisted living which is otherwise known as al light. They have played a big role in the recovery of that Debbie mentioned in her prepared remarks.
There's also a little bit of a geographic list lift from the southern part of the United States, where they had 340 basis points growth relative to the 280 that Debbie reported over that time period from the low part of March to the end of April so.
But I think the bigger point is that across the U S. It's really every asset class.
And geography is contributing to the recovery thus far.
Thanks Amanda.
Thank you I appreciate the time.
Your next question comes from the line of Rich Anderson with S. M. D. C. Please proceed with your question. Thanks Good morning.
Rich this is not your first rodeo and no fantastic so well for them too.
Yeah.
Actually this is my hundreds earning season and few.
A few of us on the core congratulation.
Yeah, so on the disposition side and maybe a more broad com.
Discussion is on your view of senior housing, obviously, you're getting more excited about it but there was a period of time, where you were making it clear that you know your area of growth for the company was much more aligned with our life science and medical office with what Youre seeing now in terms of the recover has that mindset and sort of.
Meaningfully changed and when you look at dispositions, where where will that come out of them. You know in terms of how the pie chart might look down the road.
Uh-huh, great well in the disposition. We've commented that we expect it to be a combination of office and senior housing and again you know just inherited to exercise his professional judgment in terms of how we can make dispositions enhance our portfolio.
And so.
And a year later he is finally getting to that but just and I don't know what you've been doing and between now and then but he's finally, you know so that that's how we're looking at the disposition side and then on the investment side I would say clearly you know our priorities have been the link group Murray.
Ground up developments, which is a great business model and has been consistently really well and.
It's been obviously the life science with the South San Francisco and Hopkins investments as well as the ground up developments at.
Our opening kind of theory, Adam here with the pipeline behind that.
And of course, we continue to look and other health care asset classes and senior housing.
So.
So I think we really are and our French split across our asset classes Rich I guess the question is senior housing a bigger piece of the puzzle.
Two three years out now that you're seeing what you're saying that's the crux of the question.
And I believe first of all the most important embedded upside that we have and the company is recapturing and exceeding prior levels of NOI and as I mentioned, we have every opportunity to do so and then of course on the investment side.
And you could see external growth coming from that as well, okay and just a quick one on the triple net and a number down 13%. You. You you you kind of listed a few good things and the on the Earth and a L tax side and this hospital side.
What was it what's what's the what's the noise and that number that created that that 13% downward number on a same store basis year over year.
You're just collecting rent and I'll.
I'll take that one rich at the Brookdale restructure we did as you know and the second half of last year, So you've seen that lap right.
Yeah. If you recall, we essentially collected two and a half years sports and full ran upfront. It gets it gets run through the financial statements are GAAP.
And then just a gratuitous comment we're very pleased to see how you know brookdale reported numbers today and glad we have the warrants and yeah. I guess I was asking again. My question is like what would that 13, b b, if you'd normalize those types of things out and that's it that's what I'm asking.
Well normalized for the big rocks that we addressed last year, you'll see escalator type growth Richard and the nature of it okay. Thanks.
Thanks very much.
Thank you.
Yeah.
Our next question comes from the line of Jordan Saddler with Keybanc capital markets. Please.
Please proceed with your question.
Thank you and good morning.
<unk>.
My.
And it really comes back to the to the move ins and just and I wanted to come back to your comment about the <unk>.
Turning to like John scenario.
So if you look across the portfolio.
That's in there and you and you overlay sort of what happened in 2019 rates at the 2019 move ins and the 2019 move outs as a percent of in place occupancy what does that suggest net absorption could look like.
In 2021.
Yes, just basically turning the lights on and as I describe it and show up the word and based on that structural advantage 30, 40 basis points a month.
Obviously, we are performing well above that for the other reasons I described earlier.
Okay. That's helpful and then.
And maybe as a follow up non sequitur.
On the sort of investment opportunity that you guys are seeing.
Where are we where would you say, it's more heavily weighted right now and I know you guys. Since you flagged some of the RNA opportunity, but there is there more development to come there or is it more a day.
And acquisition story.
It's both.
Thank you and it'll be it'll be.
And next year of the ground up developments.
And senior housing as we talked about as well as life Science and research and innovation and you know we've always been.
Net and effective you know consolidator as we've grown and we're starting to see that deal volume as we talked about and so I would expect there to be acquisition says Wow Jordan.
Thank you for the time.
Thank you.
Your next question comes from the line of Nick Joseph with Citi.
And with your question.
Thanks.
Maybe following up on the expected dispositions where are those assets right now in terms of marketing and just being identified.
Uh-huh Theyre and Theyre in the pipeline at differing stages summer already kind of out there other store.
Almost out there and others are kind of on the way so it's.
Going through the system.
Worth reiterating Nick that we expect to close to get the proceeds and the back half of the year. So.
It gives you a sense of that you know they're willing they're way in many cases.
Thanks, and then maybe just on senior housing.
You've obviously talked a lot about before demand drivers and the demographics.
From an industry perspective, do you know what would you expect starts to start to accelerate obviously, there they're well down from their previous peak, but just given kind of go forward runway.
That you and the industry is looking at when would you expect that to attract additional development starts mhm. Yeah. I mean, we are evaluating that closely and I would say that yeah. It is and matter of of judgment and experience to make such a prediction I'm curious what's interesting again starts are dramatically.
And the sense that as Justin said.
The first quarter was down.
Gigantic Lee from the peak and then the lowest level since 2011. So that's really really good we know that really when you look forward and the near term.
The most important thing is even NASA over the next couple of years things start to you know get.
Get on the drawing board Youre going to have this window of opportunity, where you're going to have 3% to 4% CAGR on over 80 population, which ultimately spikes and 26 27 over 6% as you know.
And youre going to have this window of time, where the cash.
And that and communities are going to have some really great supply and demand tailwind and this sort of intermediate term so hard to say when they would pick up again, we know their increased construction costs and we know there are supply chain issues and.
Well, probably delay some of the things that that would start and we also know that you know rents right now and may not be supportive of those higher construction costs. So when you put all those things together, we like the forward runway as we come out of you know we really emerge.
Merge and post pandemic into the recovery.
Thank you.
Thank you.
Yeah.
Your next question comes from the line of Daniel Bernstein with capital. One. Please proceed with your question.
Hi, good morning, I'm going to stick with seniors housing here.
So I was listening to Brookdale call. This morning, they indicated that they were looking at maybe more flat margins and <unk> and then a ramp up and the second half and year or so I was trying to I guess pick your brains and how youre thinking about the margin ramp and seniors housing and might look like.
And given trends and occupancy.
Yeah. So hi, it's Justin you would you would definitely expect to see.
The NOI growth really lagged the occupancy.
Revenue comes first and then there's.
There's a dynamic occurring now where you have COVID-19 expenses should come down and then some of the operating expenses will come back up obviously, the second quarter has an extra day and it so there's some little extra expense coming from that but as you run forward.
And you would you would you would see margin.
And that's kind of a lagging the last lagging performance metrics.
Okay.
And then maybe a related question is how are you thinking about pricing power and the industry.
Historically, we've had to be and 85 upper and operating use of occupancy to see pricing matching inflation.
And you'll have some dynamics changed at all in terms of the industry's focus on acuity that might allow pricing power earlier.
And then in previous cycles.
Well I will say that.
No.
And we get the advantage of the highly leveraged business on the way up so it's really a volume game right now and operators are using discounting and price incentives to try to encourage volume.
And we would definitely expect that to continue for a period of time and one thing that just two months into this recovery, though that we're starting to hear is is more selectivity around discounting and focusing in on.
Certain markets and.
But.
Will we start to see consistent recovery and occupancy a little higher I would expect.
Nice to be a tool operators, who used to go for volume and as you know you know once we build the volume.
And we get the benefit of the in place increases when you turn the page into 2022, and we have really been able to see pretty strong pricing power in that environment even.
And this January one and so that's really where you start to accrete in terms of the benefit of the volume that Justin is talking about.
And that's a really good point.
Appreciate the time.
Thank you.
Thanks.
Okay.
Your next question comes from the line of.
Juan Sanabria with BMO capital.
Proceed with your question.
Hi, good morning.
Hi, Juan.
A question for Justin.
And he has been and his team about a year now curious.
And if you've changed the approach here with management from an asset management perspective of the seniors housing business, whether it's by.
Geography or partner or things you've stamped on.
The enterprise and then kind of secondly R. R.
Added to that.
Notice you didn't necessarily call out eclipse and wonder if your.
Top operators that constitute 90% of the shop business. We previously talked about joint venture and Matt is that something that's still on the table or are you thinking about that relationship.
Hi, Juan I'll start with the first the first question.
And 2020 of the pandemic really drove the priorities.
One thing that we did want to make sure though is that we had adequate resources and attention on the triple net priorities and we addressed a lot in 2020 now we're moving to recovery. So we certainly have resources focused on supporting our operators through the recovery and.
Taking some of the portfolio actions that I described and my my.
And my remarks and rigor.
Hard to eclipse and there's really the three operators have highlighted were sunrise atria and Le Groupe Maurice together on a stabilized basis, that's 90% of our business eclipses and the 10% along with a handful of others.
Okay.
And you just curious on the moving data what is the data analytics, telling you about the acuity level of the people coming in.
Are you seeing.
Pent up demand, presumably some level, given you're 100 and over 100% of what you saw 19 and and what does the data history suggest in terms of what that May do to the length of stay if in fact, you're seeing higher acuity coming in.
Yeah, that's a great question.
No.
Throughout the past 12 months, we've actually seen and length of stay go up.
And part of the driver of that was that reduced rest of the business that I described earlier. So so length of stay has gone up a little bit it'll come down a little bit as we bring more short term stays back into the pipeline and.
And regards to pent up demand there and if you look at the leads us to page nine and the business update you'll notice that leads there at about 104%. When we think about pent up demand I think of 120 130, some big number that's lined up and we really just look at it as demand.
And demand thats, not even fully supported by a traditional lead sources. So.
Not so much a P.
Pent up.
But certainly we're pleased with the recovery, thus far and one other thing I'd mentioned is that as we've spoken with operators there.
And theyre not having leads come to the doorstep and and say I've been waiting for the vaccine and I've been waiting.
To make this decision.
We actually had quite a bit of activity throughout the pandemic and.
If you normalize it for the communities that were close it was pretty consistent.
<unk>.
And we're just in the communities open again, and and some lead sources come back and and providing demand for our service.
Thanks, John I appreciate the time.
Thank you.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Good morning, Thanks for taking the question.
And thanks for all the data on the on site and at Slide eight nine and then a lot of useful information.
Maybe just first one on the just going back to the margin and the expense side, maybe just and if you can walk us through how operators are prepping for this potential and greens over to Q and potentially treat you from my neighbor perspective and and.
And you know all the other sort of bigger line items in terms of.
Food and and maybe even PPE decide how and how would you have the operated all these stuffed up do we do we anticipate margins inflicting and near term at least and then if I could.
Just extend that to talk about labor.
Sure, yes, so that in the near term.
Margins.
We expect to be relatively flat.
Because in total expenses, yes, COVID-19 coming down and other operating expenses coming up and if we look ahead at our quarter, we're projecting around $7 5 million of expense growth half of that is just an extra day and the quarter. The rest is a mix of just labor costs and other expenses. So it's not really a big mover in the near term.
And then after you know as we get into more occupancy recovery of course, we would expect.
Expenses to lift a bit.
We would expect a very high margin on that that incremental revenue.
And then.
Maybe just Debbie bigger picture given this this recovery and the potential now you're citing over a multiyear period.
Maybe give us some color on.
Whether you're maybe rethinking the acquisition focus in terms of buckets is there an opportunity for ventas to get more aggressive on and senior housing and certain areas or are you sticking to sort of a more balanced approach.
Again, we do highly subscribe to the benefits of diversification from it has served us incredibly well over the years and particularly over the last year.
We have always been big believers and the senior living business were excited that we have this recovery upside opportunity embedded in our portfolio now and.
And we intend to capture that and also we we totally do intend to invest and acquire senior housing.
And assuming we find assets of our quality and in markets, where we think it's really going and provide good risk adjusted return, but yes, we would certainly expect to have that and our acquisition bucket.
Thank you.
Thank you.
Your next question comes from the line of Lukas Heartland with Green Street.
Please proceed with your question.
Thanks.
And when it comes to capital allocation can you just provide an update on the house view on senior housing development and the U S. I'm just curious what the opportunity set looks like in terms of size and maybe returns.
Mhm.
Well, we talked about it a little day and good morning, and welcome to you also we talked about it a little bit you know construction costs are relatively high and we do know we have the growth in.
The 80, plus population which is.
Really fueling.
Demographic demand that we have.
And right now I think really with the existing and.
Investment basis that we haven't senior housing again, the big opportunity is to recover that there is an opportunity to invest and this great business model and that we have and Canada with LG and <unk>.
We certainly would look at senior housing and ground up development and the U S and because we do think there's because of the demand but from a cost standpoint, I think we you know as we discussed I think you'd have to be cautious to make sure that the returns penciled out commensurate with the risk.
That's helpful and then on the disposition guidance when it comes to shop and I'm, just curious how you're thinking about selling now versus waiting to let the story and on fundamentals improve.
Yes.
Yeah, very important question chest and why didn't you interest that share. So one of the big priorities is to make sure that we're well positioned for the recovery.
And I mentioned some of the operators there is theres certainly communities that that have probably less potential to contribute to the recovery or maybe it may not be alarmed from fit for us or maybe a better fit and the hands of a different operator and so there's there's a lot of review under.
And and actions that we're considering that that should net really positive in terms of the overall quality and growth of our portfolio.
Very helpful. Thank you.
Thank you.
Your next question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.
Thanks, Good morning, everybody.
Good morning, good morning, So just using a round.
Round numbers here and well first my question also relates to the operating leverage within the shop portfolio that was touched on earlier and just using round numbers you lost about 1000 bps of occupancy close to 1000 and bps and the NOI margin when we take stimulus out of the equation and it's pretty much in line with the industry averages.
You did talk about the lag and the NOI margin recovery versus occupancy recovery this year and 'twenty one but over the next few years should we assume that the shop NOI margins ultimately get back to that 29% to 30% range that we saw in 2019 pre pandemic I just want to confirm the longer term view around that dynamic. Thanks.
Hi, it's Jonathan I'll just mention that.
The answer is yes.
Yes, there is.
There was a question earlier on the call I talked about pricing power and pricing is going to be volume first.
And then as pricing returns and that's going to help margin get all the way back to pre pandemic levels.
Together with the underlying fundamentals that we need to keep pointing to you know.
Supply demand equation, and again as occupancy and begins to rehydrate the in place increases more pricing power.
And I don't think there's any reason to believe anything other than we'll get back to normal over time.
Okay. That's helpful just to reinforce that.
Thank you.
Okay.
Your next question comes from the line of Nicky Nikko with Scotiabank. Please proceed with your question Thanks and good.
Morning, everyone. So just going back to the you know the move and data and you know the topic of pent up demand.
I think you said it earlier and the call that.
April was the most moving you've had and the single month since June of 2019, and then we're.
And we're also saying that you didn't think that there was that much pent up demand and I'm just trying to square those two comments to go and because it seems like it can move into that high there. There is some level of pent up demand that's benefiting moving right now.
Yeah, that's really not what we're hearing and.
And it.
It very well could be just organic.
Demand.
And so.
And there are no.
And they'll have Justin but I was just going to say there's one other.
Point that I didn't mention earlier and that's really the I mentioned in the prepared remarks, the move outs being lower as well. So there's a certain amount of just kind of structural nothing that's going to occur and then you have.
The resurgence of the higher converting leads they're not all the way back yet that's why.
That combined with the feedback from the operators in terms of what they're seeing that their door just south.
And I thought that I would necessarily characterize as pent up.
And just.
And the probably one of the biggest indicators of that I think I mentioned earlier is the personal and referrals.
These are relatives and resident referring their friends again as they did.
The overall demand fundamentals are recovering not necessarily pent up demand.
Okay.
And I guess I guess as we think about the.
The guidance from the second quarter, 150 to 250 basis points and spot occupancy benefit.
How should we think about that you know as a sequential benefit and <unk>.
Future quarters, meaning is this is this an unusually large benefit that you're expecting and the second quarter, because yeah and you move outs are low and eventually move outs will pick up.
You have sort of this high level of moving activity right now, which is a high conversion rate but.
Yeah, we'll see how that moves going forward just trying to think about you know as we're thinking about the the sequential occupancy bills going forward here as a second quarter number a reasonable number to think that carries through the future or are there some unusual benefits and the second quarter.
But I would highlight what the adjusted described as the turn on the lights scenario, which is the lower occupancy and means lower move outs at the same rate of move out that over time goes away, obviously as occupancy goes up.
And so and that's in that regard that's temporal.
The the move ins and sort of hundreds of under 10% before some of these incremental referrals would suggest.
And there should be continued moving opportunity overtime. That's his decision stands out.
And so much as just real demand.
And so put those together and.
And not only benefits the second quarter, but should benefit from the future.
Okay. Its helpful. Thanks, everyone.
Thank you.
Your next question comes from the line of Michael Carroll with RBC capital markets. Please.
Please proceed with your question.
Yeah, Thanks, and just off of I guess next question on pent up demand and I'm, sorry, I think my son breakout. So you might have answered this already if I missed it.
And I know you Havent liked the term of pent up demand and I've been hearing a few times on this call I mean do you expect that we'll see some level of pent up demand that could drive leads and move ins higher from today's level over the next few months or how should we think about that.
And.
I mean, our bias really Mike is that this is the organic demand that is based upon the need based nature of the community and.
And the availability.
And the communities and it is and has strong resilient and organic demand and that's really good.
And.
Whether it's pan out or not.
And we aren't hearing.
From good sources that its if anything other than move in and that would have moved in and now anyway.
Well I don't know if that makes it more clear but go ahead sir.
Yeah, one other point.
And page nine.
If you ignore the first two months April may and the beginning of the pandemic and you just draw a straight line across the averages.
Even during the pandemic, we were running 80% leads move ins Ryan levels.
And we had 20% of our communities close at any given time and so.
So people continue to move in as they have the knee yes.
And looking at that on that on page nine of the deck and and you can see that there is and that's why I think we keep using this word resilient, which I know.
Use that frequently but it really is you know sustained need based demand from a growing demographic and that is very positive cash.
Okay, and just trying to get to that it's like do we expect pent up demand could enter the market as these other referral sources come on and we could see.
Some of those leads and moving even move higher from this point.
Well they could because when you think about it if you maybe whatever you want to call it and say, okay with that.
And when you think about and for example, when United Healthcare reported and they said really that senior level medical procedures and surgeries and things really hadn't bounced fully back okay, and you connect that with what Justin said earlier that.
And really a leading indicator of those kind of professional referrals would be you know really health care procedures.
And those senior start to have those procedures. If you look at that and then you see those professional referrals come back you could characterize that if you want as pent up demand as they had delayed.
And as those.
Surgeries and so on and so you could I don't want to quibble over words I think what's good is there's really good demand and we're seeing it come through and it's been two consecutive months and we hoped and are projecting for the second quarter that it will continue.
Okay, and then just one more real quick.
The lead data that you have and the presentation and I guess, what's the breakout of that between U S and Canada, Obviously, Canada has been a little bit weaker due to the COVID-19 outbreak. So.
And so there's leads and the U S higher than Canada.
Yeah. So the.
The way I'd characterize Canada, maybe it's not around leads it's more around just they're moving activity.
And our Canada and.
And what you might look at page seven.
We're at the top there's a purple number four and that really just marks when Canada.
Had 75% of the communities vaccinated you can see that it's much later than the U S and the good news is we know once we got there and the U S that there's that the trends have been phenomenally strong we would expect the same thing and Canada. So there was a little bit of underperformance.
And you can see that on and.
The next page, where Canada and March was negative 20 basis points. Obviously the U S was was up 80 basis points during that time. So there is just lagging a little bit you know the vaccines came later.
And a good performer for US we would expect them to come back as the vaccines are fully executed.
Yes.
Okay, great. Thanks.
My Thanks, and and again compliments on your life Science report.
I appreciate it.
Take care. Thank you.
Your next question comes from the line of Joshua <unk> with Bank of America. Please proceed with your question.
Yeah, good morning, everyone.
And on margins, just kind of thinking about the shop margins kind of going forward is there anything structural that you're seeing that would prevent the shop margin from hitting their pre pandemic levels kind of once we return to pre pandemic occupancy levels.
Yeah.
Okay.
Sure.
Josh I think fundamentally structurally as we look at it there isn't anything structurally that would suggest that the margin structure is changing fundamentally.
<unk> of that.
To be determined obviously.
But again the.
The value proposition and senior housing the demand that we've seen through the pandemic and that we're seeing especially now and the second quarter.
And pricing power, which will return over time, we believe will give some confidence from that.
Okay. So it does sound like once we get to like a pre pandemic level, we should we should see the margins kind of at roughly the same theres that day.
What I'm asking is like is there are you going to do anything differently on the operator front as far as like cleaning protocols that might be higher expenses going forward or anything like that.
Yes, I'd say on the margin and there might be some of that.
But it's going to be relatively limited.
Moving forward once we get out and get the pandemic. It's further behind us. So we are definitely comfortable that margins come back.
Okay, and then thinking and another question. It was kind of briefly touched on but just pointed to and that's kind of a little bit differently on a new rate for move ins.
What's like the current level of discounting going on.
And because it's one month free or any kind of games and there would be helpful.
There is basically you name it.
Yes.
There's a freebie and given there's wave and the community fees, there's just kind of structurally lower rent being offered.
Typically care charges are never discounted.
But rent and community fees are fair game, and it and operators tend to give them upfront. So we can get the impact of the discount is behind us.
But there's a wide variety of discounting right now and the market.
Okay is that accelerated over the past months or is it kind of holding steady at this point.
It's been relatively steady yeah. It's.
It found its way from the system last fall and its been relatively steady.
And like I said earlier operators are starting to get very focused on local markets and pulling back on the discounting where they're already seeing recovery.
And once that I'll mention that kind of support that is at 16% of our communities at the end of April are back to pre pandemic Occupancies. So you would imagine that they have pricing power and now moving forward again, and so operators are identifying those communities are starting to tighten a little bit on the discounting and.
Obviously that'll be supportive of NOI growth.
Great. Thank you.
Thanks.
Your next question comes from the line of Sarah Kim with J P. Morgan. Please proceed with your question.
Hi, good morning.
Moving on for Mike Mueller and.
Just wanted to adjust and regarding the senior housing operating portfolio and specifically.
Kim from demand differences between the southern and northern geography, but what are you seeing in terms of similarities and differences between more of an asset and the London and thought about it.
Yeah.
Yes, sure there has been.
A.
A wide.
Let's say the recovery has been experienced and every geography.
And there has been a little bit of difference and the only real and meaningful difference that we can point to as really the south and the south east.
If you dig down into local markets and New York is one that comes to mind that we visited recently and obviously they had a very bad early experience with the pandemic.
Several of those communities are very very high leads and move ins and so youre seeing some recovery happened.
And the northeast, it's going to vary by asset type and price point and Theres a lot of shaking out to do I think before we really start calling markets or particular asset classes, it's still really early but but the widespread recovery is very encouraging.
Okay. Thank you so much that's all from me thanks.
Thanks, Sarah Okay.
Let's bring it home.
Your last question for today comes from the line of Oh My tail, Okay, Shannon with Mizuho. Please proceed with your question.
Tayo.
You may be on mute.
Hello can you hear me.
We can now.
So loans I'm betting law that's great.
And then come back with a great quarter.
Thank you.
Justin This is Juan specifically see you again, the occupancy gain since you will lose.
And in the past, let's call. It 60 day, so I'd be really really strong your <unk> guidance.
Your assumptions also really really strong and then you have a peer out there who is also seeing similar trends, but doesn't seem quite as long as the numbers you're seeing on the numbers, you're kind of forecasting and just talk a little bit about what why is that and maybe why this kind of this kind of meaningful difference between the two.
Let's call it and near term outlook.
And I really can't comment on what the peers are saying, but it just within our own markets and what we're seeing in terms of performance and.
Leads and et cetera, there continues to be strong support for move ins and then as I mentioned earlier with move outs and structurally lower restaurant support frenetic.
So.
<unk>.
That's what we're seeing right and then and also we had we also had strong outperformance and the first quarter and that's obviously helping that momentum.
Right and then and then from a recovery perspective John.
And then kind of thing.
And magically is at the high end of the market that's recovering faster than the lower price point is it is at the core is it C that kind of got hit with COVID-19 first that I've kind of recovered faster this year.
Lewis to be kind of share any kind of when you look at the data things you're picking up.
That's a great question and I can tell you that we're looking for those correlations and we're not seeing them yet, but what we know is that and the U S has been widespread recovery, we know that Canada is lagging, but traditionally very strong performer.
And then we will study it closely as the trends materialize.
Alright, so more to come okay.
Well, thanks, Barb for ramping to call up and about I want to thank everyone, who joined US. This morning, we sincerely appreciate your participation and your interest and fantastic and we look forward to speaking with you again soon thank you.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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