Q1 2022 Ventas Inc Earnings Call
Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the Ventas first quarter 2022 earnings conference call.
Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one once again.
Thank you and at this time I would like to turn the conference over to Sarah Whitford Miss Woodford you May begin your conference.
Thank you Abby good morning, and welcome to the Ventas first quarter financial results Conference call yesterday, we issued our first quarter earnings release supplemental and Investor presentation. These materials are available on the Ventas website at IR job Fantast REIT dotcom.
As a reminder remarks made today may include forward looking statements, including certain expectations related to COVID-19, and all 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 Jesse SEC filings all of which are available on the Ventas website.
Certain non-GAAP financial measures will also be discussed on this call for a reconciliation of these measures to the most closely comparable GAAP measures. Please refer to our supplemental posted on the Investor Relations section of our website.
With that I'll turn the call over to Debra Cafaro, Chairman and CEO . Thank.
Thank you Sarah good morning to all of our shareholders and other participants I want to welcome you to the Ventas first quarter earnings call I'm delighted to be joined by my Ventas colleagues, who have worked so hard for shareholders. Each other our partners and our other stakeholders over the past two plus years.
We are off to a strong start in 2022.
We are delighted to deliver on our commitment to grow normalized <unk> and same store shop NOI year over year for the first time since the pandemic began.
It is certainly worth pausing to appreciate a corridor that recurring first to Greg and underscores our positive momentum and the senior housing recovery that is underway.
In the quarter, we continued to benefit from stability and growth in our office and health care Triple net lease businesses.
And in sharp, we saw outstanding year over year, NOI revenue and occupancy growth that overcame meaningful impact of COVID-19, and inflationary pressures during the quarter.
Looking forward the power of our well positioned communities strong demand evidenced by leads that consistently exceed pre pandemic levels into April pricing power in advantaged markets should translate into sustained NOI growth through the balance of the year.
This trend should be further enhanced by favorable supply demand fundamentals supporting net absorption in our market specific.
Specifically Q1 2022 starts are down two thirds from the peak just as he over 80 population is set to grow over 20% during the next several years.
But we are not just relying on demographics to win the recovery Jack.
Justin and his senior housing team continue to take decisive actions following the right asset right market right operator approach to best position, our senior housing portfolio to capture the upside ahead.
We've already started to see the benefit of these actions with the strong first quarter.
And our shop portfolio has outperformed industry benchmarks for Comparables senior housing communities over the last year.
Today, we've announced another important step in this progress we have revised our agreement with sunrise to align our interests toward profitable growth and value creation.
We've been working together with Sunrise since 2007 and are delighted to reset the relationship with the current management team at this point in the cycle.
In addition to organic growth. We also benefited from the investments we've made under our consistent long term capital allocation philosophy and priority.
On the investment front, we've posted about $4 billion of investment activities since the beginning of 2021 with our first quarter 2022 capital allocation priorities continuing to be the acquisition and development of senior housing life Science and select medical office building.
I want to highlight two of our first quarter investments and show how they demonstrate our investment approach.
Two investments have reliable going in cash yield limited downside and room for growth.
And both came from trusted relationships built over long periods of time through repeated and mutual success.
Mangrove Bay is an irreplaceable senior housing community located on the waterfront and the high wealth Submarket of Jupiter, Florida.
Wired for $107 million NAND growth has large units high revpar and a strong consistent operating history.
Since the acquisition performance has been strong and our investment yield has grown to 6%.
Our recent value add investment in the youth city Philadelphia's Submarket represents an opportunity to add another component to our incredibly well performing research and innovation portfolio located between pen and Drexel.
We intend to convert a portion of the building to high demand lab space and achieved a 7% stabilized yield on our aggregate investment cod.
The Penn Drexel market has been very successful for us with our two ongoing developments now, 90% leased or committed and rents up 40% since we've put a shovel in the ground.
I'd like to touch on three more points before closing our continued focus on driving total shareholder return E.
ESG leadership and the macro environment.
First as a continuation of our commitment to driving GSR performance I welcome Vijay grid to the V T. Our team he.
He is a highly regarded longtime REIT investor who has a distinct appreciation for health care and senior housing real estate.
P. J is going to work with the Ventas team and externally with the investment community to reinforce the ventas value proposition.
Second I'd like to highlight our sustainability leadership, which continues with our announced commitment to achieve net zero carbon emissions over the next two decades and our recent recognition as the number one medical office building owner operator for energy Star certification.
Finally, let's discuss the all important macro economy, particularly current inflationary pressures and the tightest labor market, we've seen in 50 years.
It is encouraging that today's jobs report evidenced some emerging indications of stability.
Emanating from a confluence of factors annual inflation is expected to continue to run high perhaps exceeding 8% through the second quarter.
And then moderate by a couple of percentage points in the back half of the year and moderate again by another couple of percentage points by mid 2023.
While significant uncertainty remains this improvement in expectations as a result of various policy actions, including fed tightening tempering demand greater balance and workforce supply and demand from expansion of the labor force participation rate and a slower pace of job creation.
And some supply chain normalization.
Whether these forces, resulting in a soft landing or trigger a recession, then ties is relatively well positioned.
Demand is robust it is need based and it is growing.
Pricing power is strong and has the potential to strengthen further as occupancies continue to recover.
Softening the rate of growth in labor and other expenses should improve our margin, particularly as revenue and occupancy increase.
But regardless of the macro environment and uncertainty at Ventas, we will remain agile execution focus and performance driven.
With an attractive valuation and high quality portfolio growth potential are well covered advantage dividend, 90% fixed rate debt and the opportunity to drive external growth, we are very well positioned.
In closing I want you to know that all of us at Fantast are committed to using every tool at our disposal to XL and create sustained value for our shareholders and other stakeholders. Thank you Jessica thank.
Thank you Debbie.
I'll start by noting that we are very pleased with the NOI growth in the quarter and the start of what should be sustained improvement in our shop portfolio throughout the year.
The revenue performance is very strong driven by volume and pricing in spite of the COVID-19 activity in the first quarter, leading to our best year over year and sequential revenue performance, we have ever seen in our portfolio now.
Now I will speak to the first quarter shop performance, excluding HHS grants second quarter guidance.
Comments and update on our key initiatives.
In the first quarter same store revenue increased by nearly 10% versus the prior year due to the positive trends in occupancy and rates.
Same store average occupancy grew year over year by 420 basis points to 83%, which was ahead of the guidance midpoint of 410 basis points, although the first quarter was slowed by impacts of Covid.
Demand remained resilient.
Year to date through April .
Lead and move in activity continues to outperform pre pandemic levels led principally by our U S business.
Revpar increased by four 2% versus the prior year benefiting from strong in place resident rate increase is approximating 8%.
An improving re leasing spreads not only did we execute very strong in house rent increases during the quarter. We have also witnessed strong sequential growth in street rates over the past several months as move in rates have improved 5% sequentially.
The result of these favorable pricing trends has helped to translate into narrowing releasing spreads which is now a low single digit reduction in more favorable than pre pandemic levels.
<unk> demonstrated pricing power is occurring at 83% occupancy. Therefore, we believe we have significant occupancy rate and ultimately revenue growth potential in front of us.
Turning to expenses same store operating expenses grew 8% year over year, excluding HHS drew.
Driven by higher occupancy and macro inflationary impacts throughout the quarter on labor utilities and other operating expenses labor.
Labor expenses remain elevated as we navigate the macro it staff shortages with enhanced hiring practices and target wage increases.
Net hiring has improved seven months in a row and although we are pleased to see the progress on hiring.
You have to see it impact the P&L.
Although inflation has elevated and labor expenses remain high the incremental margin growth is strong.
The best aspects of the senior housing operating business at this point in the cycle is the high operating leverage we are starting to benefit from this operating leverage as the incremental margin was 56%, which helped the overall margin improved to 24%.
It is important to note that even though we were pleased with the quarter's performance the impacts from Covid drove uneven geographic results with the U S significantly outperforming Canada on the bottom line NOI.
NOI in the U S grew 26% year over year versus Canada, which was down 2%.
We expect conditions to improve over the balance of the year as Canada is moving restrictions were the primary driver of its performance compared to the U S.
Our independent living business was also impacted by Covid in the quarter, but I am encouraged to see reacceleration of move ins in that portfolio in both March and April .
We continue to believe in the independent living thesis over time, we should benefit from our independent living through that overall higher stability with higher margin.
Lower labor higher occupancy and a longer length of stay.
Our independent living communities in the U S and Canada are located in markets that support strong net absorption over time.
Moving onto significant updates in our senior housing portfolio.
Our transition 90 portfolio of mid market assisted living communities.
Located in markets with favorable demand characteristics, which was fully transitioned as of January one of this year to new regional operators is showing early signs of improvement as occupancy and NOI are both starting to improve.
Our leading senior living portfolio services over 75000 residents across 46 U S States seven Canadian provinces, and the UK and is comprised of 38 operators.
We remain fully engaged in developing deeper and mutually beneficial relationships, especially with our shop operating partners through Ventas Oi Oi.
Our goal with this platform is to use our operating experience and deep analytical capabilities to improve all aspects of operations from digital marketing strategy to capex optimization to recruitment and retention we have developed a differentiated support structure to help our operators succeeds.
We continue to identify opportunities to improve our portfolio through selective pruning as we are targeting roughly $200 million of senior housing dispositions this year.
We are also pleased as announced today that we refreshed our relationship with Sunrise Senior living who operates 92 of our high end assisted living communities. This relationship has been reframed with better alignment, which adds flexibility and rewards NOI performance, which now contributes to the management fee and incentive.
Based on outsized NOI growth.
The emphasis on NOI at this point in the cycle. We think this alignment is perfectly timed.
I'll close by reiterating our expectation for sustained improved shop performance throughout the year driven by revenue through occupancy growth and improved pricing.
I would also like to acknowledge our operating partners, who have been successfully navigating an evolving macro environment and ultimately, creating a valuable living experience for our residents and value creation for our shareholders now ill hand, the call to Bob.
Thanks, Justin.
Going to share a few thoughts on our first quarter office and enterprise results and finish up with our second quarter outlook before turning the call to Q&A.
Our office segment, which includes our medical office and research and innovation businesses performed well in Q1, delivering four 6% year on year same store growth.
Medical office year on year quarterly same store growth was three 5%.
Led by strong retention contractual escalators and parking recovery.
<unk> increased seven 9%, which also benefited from escalators in leasing.
As well as from <unk> million dollars in holdover rent from an exiting tenant.
Adjusting for this holdover rent R&R growth was four 6% in the quarter and office same store NOI growth was three 8%.
In terms of overall enterprise performance, we were very pleased to have posted growth in the first quarter for the first time since the onset of the pandemic we.
We delivered <unk> 79 per share and organic shop revenue and NOI same store growth of 10% and 14% respectively.
Meanwhile, total property same store NOI increased five 8% excluding HHS grants.
And this growth was achieved while omicron reach for the majority of the quarter. These results speak to the quality of the ventas portfolio and the commitment and skill of the ventas operators and team.
Leverage improved sequentially by 30 basis points to six nine times in Q1 as a result of senior housing NOI growth and HHS proceeds partially offset by acquisitions closed in the first quarter that had been pre funded in 2021.
And this rising interest rate environment, 90% of our debt is fixed rate with a duration exceeding six years and an average cost of debt of three 4%.
We are pleased that we extended debt maturities in 2021, having paid down over $1 billion of near term debt, while raising over $1 billion of new debt with a weighted coupon of 265%.
And our liquidity remains robust with $2 2 billion available at the close of the first quarter.
In terms of Q2 guidance, we expect net income to range from minus three to plus one.
Peripherally diluted share.
Q2 normalized <unk> is expected to range from 69 to 73 per share.
When excluding HHS grants, our Q2 guidance midpoint of 71 <unk>.
Compares to Q1 <unk> of 71.
We expect shop to grow approximately <unk> sequentially.
This was largely offset by two items previously communicated.
A one penny sequential reduction from the mood out move out of two life science tenants, which will enable redevelopment into high demand lab space and.
And one penny from lease resolutions with a handful of smaller operators in the senior housing Triple net business with future upside participation in the cash flows at the assets.
Further impacting the shop Q2 year over year same store guidance.
We expect revenue to grow approximately 10% at the midpoint led.
Led by occupancy increasing by 400 basis points as well as improved rates.
We expect to grow shop, NOI in the range of 2% to 10%.
At the guidance midpoint, <unk> expects operating expenses per day in Q2 to remain consistent with Q1 <unk>.
Flat operating expenses per day sequentially in Q2 is higher than normal seasonal trends as a result of incorporated continued inflationary pressures.
Notably on labor utilities and resident services.
Looking sequentially overall shop segment NOI is expected to grow approximately 4% from Q1 to Q2.
Looking beyond Q2 for shop.
Just on the favorable supply demand backdrop, the strength of the revenue engine and the expectation of some moderation in inflationary pressure in the back half.
We continue to expect sustained improvement in shop same store cash NOI through 2022.
Final Q2 guidance assumptions include no new unannounced material acquisitions or capital markets activities.
And 403 million fully diluted shares.
For more information on our guidance assumptions I would direct you to the business update deck posted to our website.
I would also point you to pages 29, and 31 of our supplemental.
Which provide insights and disclosure including segment NOI guidance.
And an NOI to <unk> trending schedule to allow for easier insight into unique items in our results.
Yes. It goes Ww's comments I'm excited to have Vijay Grand joint vent us as our leader of IR.
P J as an accomplished REIT investor has deep knowledge of healthcare and Ventas and will be a great fit with our team.
To close we believe the senior housing recovery that is now underway. The actions we have taken and our continued focus on execution position us for sustained value creation.
That concludes our prepared remarks before we start with Q&A.
We ask each caller to stay to one question to be respectful to everyone on the line.
With that I will turn the call back to the operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Steve <unk> with Evercore ISI. Your line is open.
Thanks, Bob I, just wanted to maybe drill in a little bit on what you were talking about on expenses and just make sure I understand contract labor I know it was kind of a big headwind in the first quarter I am just trying to understand what are your expectations for that in Q2, and just maybe labor overall in Q2 versus.
This is kind of labor in Q1.
Sure, Thanks, Steve and Theres, a really helpful page and the business update on page 12, which speaks to expenses and just to frame. This I know you are asking about labor, but again.
I want to put labor in the context of the overall expense base, because we are seeing inflationary pressure not only in labor, but in other areas, such as food and utilities and so on and that's embedded in the forecast but specific to labor.
Contract labor within that which is which is <unk>.
Call it 5% of labor with 95% being in house labor.
We did see some some modest improvement in contract labor it towards the end of the first and we expect that to continue modestly improving into the second.
As we continue to get some success in hiring is just an articulated.
Importantly, the overall labor we are assuming continued inflationary impacts in targeted ways in order to enable that recruiting if.
If you step back from it all we are holding our cost per day flat.
Sequentially Q2 to Q1.
Quarter was seasonally lower typically to reflect that inflation.
This hopefully that that helps frame the answer.
And we will take our next question from Nick Joseph with Citi. Your line is open.
Hey, you've got Michael Griffin here on for Nick just curious on on future Senior housing investments is there more of a preference for the U S or Canada.
Okay.
I'll take that and then turn it over to Jeff.
Justin but we've been very successful in both markets.
Over time, Canada has really outperformed during the pandemic occupancies remain very high and the market has been favorable over long periods of time.
And of course, the U S is the engine of growth in this quarter with 26% year over year. So we like the growth potential there as well Justin I would just say that.
Underwriting deals we.
Drilling into the local market and we're following the philosophy of right asset right market right operator.
Certainly the broader Canadian market tends to have a better supply demand dynamic over time, they've been 90% occupied for the last 10 years. So that's it's been supportive of very stable and growing investment in Canada, and then the U S. Looking ahead.
With supply being so low and.
And starts being so low over the next few years.
We like our opportunity to grow organically, but also to make investments in the U S as well.
And we will take our next question from Vikram Malhotra with Mizuho. Your line is open.
So much for taking the question, maybe just a bigger broader one Debbie and Justin.
You've created now at between four and call. It seven turns multiple spread to your largest peer.
I'm just wondering like.
I know youre going to be executing over the next few quarters, but are there other changes or strategies.
Are there things you can do that you think.
Investors will allow that gap to close.
Okay.
Yes.
Well. Thank you for the question as I mentioned, we are and have been taking a lot of decisive action on the portfolio with the team.
And then just in general to execute to make sure people understand the Ventas story and the opportunities.
And really we have a consistent strategy that over time has delivered superior performance.
And we look forward to the opportunities ahead and.
Again look forward to driving GSR as I mentioned.
And we will take our next question from Austin <unk> with Keybanc capital markets. Your line is open.
Great. Thank you.
So I was curious based on the positive trends Youre seeing in street rate growth for.
For senior housing.
The improvement in re leasing spreads to the low single digit decreases.
Do you expect re leasing spreads to turn positive into the stronger leasing season, and what that could imply for future pricing.
Hi, it's Justin yes.
So we are very encouraged by the trends and we certainly have demonstrated pricing power as we mentioned and to do so Ed at 83% occupancy is just a real good indicator of the demand for senior housing which has been strong.
Strong and growing.
Performing above pre pandemic levels. So we would expect pricing power to persist we demonstrated first with running in house rent increases at around 8%, which was solid.
The next lever, we can pull as street rates and narrowing the releasing spread which is happening already.
We would expect it to continue theres aspects, there's parts of our portfolio that are already positive in terms of re leasing spreads. So we certainly think that can be achieved in and should be.
And I would just say that we're encouraged by the trends and expect.
The environment to support more improvement in that area.
We will take our next question from Juan Sanabria with BMO capital markets. Your line is open.
Hi, good morning.
Good morning, two part.
Morning.
A two parter I guess, one would be any April occupancy update you can provide in part two would be a follow up to Austin's question typically we see revpar year over year growth peak in the first quarter, and then kind of moderate as we see some churn in the portfolio.
Wondering if you can give any commentary on expectation beyond the second quarter in the context of your comment.
Investors are these quarterly deck about the percentage of the portfolio of having the one year anniversary between the second and the fourth quarter as well as during the leasing spreads on how we should think about year over year revpar growth for the balance of the year.
I'll take I'll take the second one first and let just to talk about April one. So you are right revpar traditionally at least over the last five years or so.
If you look sequentially at the growth rate year over year, we tend to drift down over the quarters with the first quarter being supported.
Supported by the in house rate to increase and then the re leasing spread dragging that down over the balance of the year the dynamic and that was in the supply backdrop really that was typically the case whats really encouraging here is the firming street rates for new resident pricing.
I would suggest that that drift should improve.
Ultimately a positive re leasing spread overtime as discussed.
So we should have a better profile over time, notwithstanding the fact that the re leasing spread is still lower.
But over as a trend I would expect that would be better than the supply area era, particularly given the backdrop of the fundamentals you want to talk to you.
One page page 11 of course has April leads and move ins, which are as Justin mentioned.
Ahead of pre pandemic levels leads leads were very strong and do you want to talk about sort of entering and we're entering the key selling season, obviously, yes, one thing about the key selling season, which is really may through September .
We would expect that literally 99% of our net move ins occurred during this period. So this is the red Hot.
Part of the selling season for this sector.
We're around 83, 3% occupied in April .
After a good start in the quarter as Debbie mentioned that the underlying demand has been just been a really solid.
We will take our next question from Rich Anderson with <unk>. Your line is open.
Thanks, Good morning.
Drafting off that occupancy monthly occupancy number you mentioned in your in your deck 500 basis points to return to pre pandemic occupancy I think the market is probably.
It has an appetite for what.
Sequential.
Occupancy numbers look like in your guidance for the second quarter.
So maybe you could give some cadence to the April may June expectation and also what the timeline is in your mind too.
To capture that 500 basis points and get us back to square one pre pandemic occupancy. Thanks.
Hey, rich.
So sequentially, we would expect 80 basis points of sequential average occupancy growth.
The start to the quarter in April is 20 basis points.
Suggesting it to go if you like in the 50 on average per month for the balance of the quarter remember back to the key selling season that begins to accelerate here in the coming.
Months, if you looked at last year, how we trended that looks like a reasonable forecast.
And the leads as you look this year versus last year are also favorable so that would suggest a good setup for the guidance number.
And we will take our next question from Michael Carroll with RBC capital markets. Your line is open.
Yes, I just wanted to stick on the seniors housing demand trends, obviously, the leads and move ins are strong and had been strong, but how could a potential economic slowdown or even a downdraft in the housing market.
Impacts those trends and obviously the leaves as a percent of 2019 kind of started to dip.
In the first quarter into April I mean, I'm not sure if there's anything to read into that or is that just something unique with the 2019 versus the 2022 trends.
Hi, This is Justin.
The first part of your question really refers to the macro backdrop and we've obviously been through.
The other cycles, including one that that had a housing.
Demand and price decline.
There is there can be dramatic like it was during the great recession, there can be an initial shock.
Shock to the system, but what we saw.
During the post kind of the initial period of the great recession is that senior housing performed really well.
<unk> well.
Had a backdrop for a few years of limited new competition.
More so than what we're seeing now and we have a we have a real opportunity with with the starts being so low and the deliveries being so low relative to that period. So the other thing too is that house wealth and.
Income demographics in our markets are very supportive of the affordability for our product is very very strong so we.
We think we're well positioned right.
I would say even potentially within real estate.
Relatively advantaged because that would result in some more slack in the labor market as well so it would change the the expense equation here, while the demand and supply are favorable.
So that's I think an important an important point to understand and then in terms of April I think where.
We're actually doing well compared to prior April yes. We're way ahead of April of last year in terms of absolute leads and we're still well ahead of 2019. So so we're not.
Encourage than anything.
Those quarters embed this key selling season of May and June the prayer present.
The prior period presentation.
And we will take our next question from Joshua <unk> with Bank of America. Your line is open.
Yes, good morning, everyone.
Just.
Just curious what.
Third.
Initial conversation with Sunrise on switching the management contract over to more NOI base kind of how did that come about and then is there any ability to do this with other other operators.
Well this was all part of Justin's mandate that we keep talking about these decisive actions operationally focused positioning the portfolio to capture the upside and obviously when he first came in March of 2020, there was a lot of focus on sort of the COVID-19.
Covid reaction and stabilization and so now we're we've been taking these steps in the Sunrise is another. Good example of what we're trying to do to position the portfolio. Justin you can comment in particular about how.
Sure I mean, one thing I'll just mention is that Jack callison and the team at Sunrise have just been.
Performing really well and we just couldn't be happier about having a partnership with them.
And what we like about this new arrangement as it's pretty simple.
If they deliver higher NOI to US then they will get a higher management fee. If it's lower slower. So we love the alignment they are fired up about creating value over time and we'll both benefit from this.
And we definitely anticipate more of our portfolio to have this type of contract we have.
Several already but it will continue to put this type of arrangement in place.
And we will take our next question from Steven Valiquette with Barclays. Your line is open.
Great. Thanks, good morning.
Good morning.
Hey, Good morning, you guys touched on the obviously the pricing Revpar environment.
There is a bit of a growing vibe among some investors and conjecture from a few other senior housing companies about the potential for a multi year cycle of annual resident rate increase is trending well above historical averages and the current inflationary environment. So I know, it's hard to predict any sort of multiyear trend, but I'm wondering yes at least for 2023 do you have any preliminary view on.
Whether you are.
<unk> growth in 'twenty three can may make your 8% average trend in 'twenty, two or is there already a bias that maybe 'twenty two is a unique year and 'twenty three increases go back to historical averages.
Yes.
We've taken a view generally that.
Correct.
There is this is really sustainable demand and again.
<unk> backdrop in our markets is favorable.
Because of that.
Sure.
Incredible drop in starts to supply is low and stay low we have this window of opportunity where.
The senior population is starting to grow and then we have an attractive kind of compelling.
Portfolio and so that is a backdrop Justin always says at the table is such that certainly is a good backdrop for a window of opportunity.
Over time, and our view is and I think Jeff mentioned it too is if you can drive rate.
In place right in the U S went up 8% in January at this low occupancy level in the low eighties as Zaki Pnc's increase and these demographics supply demand fundamentals improve that should further support.
Does that kind of pricing power. So a lot has to go right. There is a lot of uncertainty it may not be a straight line I need to caution all of those things, but certainly there is a case to be made.
And we will take our next question from Rich Hill with Morgan Stanley . Your line is open.
Guys. Thanks for taking the question.
I want to come back to maybe some comments in the prepared remarks.
I think specifically you said.
First quarter 2002 capital allocation priorities continue to be.
Acquisition of the acquisition and development of senior housing life Sciences, and select medical office buildings.
And at the risk of reading into it too much clothing and in the select does that mean, you're maybe de prioritizing margin a little bit more in favor of senior housing and life sciences or have I read into that too much.
Uh-huh well when we look at 2021 $3 7 billion that we had it was really I think 70% senior housing, 20% life science and 10% of Adobe's I mean, we have.
Been fortunate to have had an early thesis our NIM obese and grown that business and Keith has done a great job Britney niche and we've done these bolt on type of acquisitions like the one we did this quarter with our hospital partner, Oregon, which without a relationship driven opportunity.
So.
That's what I would say about our capital allocation priorities and we've been very consistent in that regard.
Okay, and we will take our next question from Tayo Okusanya with credit Suisse. Your line is open.
Hi, Yes, good morning, everyone Debbie congrats on the on the order of Merit.
In the Illinois, and also B J I'll welcome aboard.
<unk> is on senior housing.
And the Triple net portfolio in particular.
Again, realizing you guys have made a bunch of adjustments already to some of the struggling tenants.
Well I used to have kind of rent coverage that still probably somewhat weak relative to historical levels.
About 10% of your NOI is still tied to triple net senior housing tenants, where rent coverage is below one.
How comfortable do you kind of feel that you've made all the adjustments slash restructurings you need to do.
For those tenants or is that kind of risk that you may have to expand that scope going forward.
I think at this point because of the pandemic, we have probably touched on the vast majority of these triple net tenants in.
Thats a lot of what we were doing dairy during the pandemic and working with them and as Bob said, what we've tried to do is really.
Get to a sustainable rent level, and then participate in the upside as the industry recovers.
And that's what we've said generally so Justin do you want to yes, I would just say that.
There has been a lot of action taken in.
We certainly believe that.
The vast majority of that is way behind us so.
We'll look to see the operations improve as the rest of the sector recovers.
And we will take our next question from John Pawlowski with Green Street. Your line is open.
Yes.
Thanks, Justin could you spend a minute just talking about specifically in Canada, what's really holding back that market much lift from the shop fundamental perspective occupancy remains high.
Cash NOI down 2% year over year.
Mike.
Canada has been lagging for a while so just a bit more specifics of what's happening on the ground there.
Yes sure so.
The main thing that really happened was was the omicron variance.
And in Canada, our communities had restrictions.
They've always been much quicker to kind of shut down win when there is a little bit of an outbreak or a threat of an outbreak and so that slowed the move ins down.
Canada is 93% occupied it's going to have kind of structurally higher move outs because it doesn't have the benefit of this.
U S portfolio that dropped so much because it's just been such a strong stable performer. So January and February had.
Soft move in March and April after a good start.
We do think there is potential to recover and we're looking forward to Canada getting back on track but.
Just really point to Covid related yeah, so driving some of those restrictions really are continuing.
Have been.
From a health care standpoint, and much more.
Rigorous kind of government controls on activities and so.
Takes a little while for this to kind of run off but it is a great portfolio and a really high performer and we're very confident in the future performance.
And we will take our next question from Mike Mueller with Jpmorgan. Your line is open.
Yeah, Hi, just curious what are your in place escalators today for the MLP and life science portfolio and as Youre looking at signing new leases today are the new escalators something considerably higher.
Yes.
Yes. Thanks. Thanks, Mike This is Pete Thanks for the question Yeah. Our escalators are about two 5% right now in place escalators for MRV.
And they are about the same for Rmi.
We are certainly pushing limits on that we're starting.
<unk> to 3% and in some cases higher.
And another related comment would be we are trying to push more CPI related escalators as we deal with this inflationary environment and we're in some places we're finding success in others. We're just.
We're settling for higher escalators in the three and three plus percent ranges.
And we will take our next question from Nick <unk> with Scotiabank. Your line is open.
Thanks, Good morning, everyone. So I know you haven't given third quarter guidance, but just trying to put together various numbers here I'm just trying to think about third quarter sequential occupancy growth could look like for the shop portfolio I mean last year third quarter grew sequentially 230.
Basis points I think you said Bob on the guidance for the second quarter that May and June were assuming about 50 a month so.
Should we use that.
<unk> 50, a month kind of assume that pace could continue in the third quarter. So you get to around 150 basis points for the quarter or are you closer to 200. If you look at the numbers from last year I'm, just trying to kind of frame out a possible occupancy growth scenario for the third quarter. Thanks, great try.
Great.
<unk> focus on we're very focused on executing and delivering in the second and.
Youre right about the expectations for the second and.
We have said, we expect sustained NOI improvement through the year I would just add sequentially, which to your 0.3 versus two does this key selling season and occupancy Matt.
<unk> manifest itself and will be crucial to determining the answer to your to a fundamental but seasonal patterns would suggest Q3 <unk> sequentially favorable.
And we will take our next question from Vikram Malhotra with Mizuho. Your line is open.
Thanks, so much for taking the follow up just sort of in this market.
With all the volatility I'm just wondering your views on two things one just using the fund more activity that you've created.
And do maybe given the medical office environment.
Using that as a source of capital for other growth just all tying that all into the balance sheet and where you see leverage.
Or how you see leverage trending over the next 12 months.
Well, thanks, yes defined as a great competitive advantage that we have we started it in March of 2020, and our overall third party investment management business is up to about $5 billion of assets under management.
Generally is focused on kind of lower cap rate core type assets and so to.
To the extent there was an opportunity there that made sense that is an attractive.
Asset that we have Bob do you want to talk about the balance sheet sure in terms of leverage is a little bit of a broken record, but the recovery of the $300 million of NOI. We lost in shop in the pandemic is really the key to unlock the leverage ratio back into the 5% to six times, we're trending that direction, which is encouraging in the meantime.
Been doing other things such as <unk>.
And the portfolio through asset sales for example, last year, reducing near term debt extending duration things like that.
To make sure that we're in a good spot, which we are.
And we will take our next question from Joshua <unk> with Bank of America. Your line is open.
Hey, guys.
I wanted to ask about the <unk> <unk> drag from the life science redevelopment it seems like two tenants.
Moved out.
<unk>.
Did you disclose who those tenants were.
No, but we disclosed the locations.
Maybe you can give a little color.
Sure Yeah. This.
This is Pete so yes.
It was just as a reminder, you know life Sciences is one of our high capital priorities over the last couple of years. The research innovation portfolios performed very well and we found consistently is when we have ready lab space that the space leases up very quickly and very good.
Rates its unique space in the marketplace and there is a shortage of the Ross across the country. So.
One of our vacant upcoming vacancies is in Raleigh, very near research Triangle Park.
And.
As a straight office tenants that is departing and it's this building is within.
Associated with Wake Forest University has seen the innovation center is adjacent to the medical school that they have and so we think that there's a good probability that we would redevelop that space into lab space and be very successful in re leasing it.
The other is in.
Is associated with our Keystone properties.
And.
Alright.
Yes.
Bob I'm sorry.
Raleigh, Theres two ones in RTP and one's in the wake innovation Center and they both.
Could be very in demand for kind of lab space. So that's that's what we're undertaking.
There are no further questions at this time I will now turn the call back to Ms. Deborah Cafaro for closing remarks.
Okay, well, thank you Abbie and thank you to everyone who joined US today, we really appreciate your support and participation.
And are excited about the quarter excited about senior housing recovery that is underway and look forward to seeing you soon.
And this concludes today's conference call. We thank you for your participation you may now disconnect.
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