Ventas Inc (VTR) — Q1 2021 Earnings Call Transcript

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 at ir.ventasreit.com. As a reminder, remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental posted on the Investor Relations section of our website. I will now turn the call over to Debra A. Cafaro, Chairman and CEO.

Thank you, Sarah. And good morning to all of our shareholders and other participants, and welcome to the Ventas first quarter 2021 earnings call. Let me start by saying that we believe the macro environment and the Ventas outlook have turned an 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 in taking steps to win the recovery for our stakeholders. These steps include making smart portfolio and capital allocation decisions, capturing the embedded upside in our high-quality senior housing portfolio, focusing on operational excellence and initiatives, investing in value-creating development and acquisition opportunities across our demographically driven asset classes, attracting 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, I’m thrilled to report that our confirmed new resident cases in SHOP have fallen to literally a single person per day out of a resident population of 40,000. And all our communities are now open to new move-ins and most have reintroduced expanded visitation and communal activities. As a result, the natural, resilient and demographically based demand for senior living has revived, and we’ve reached the cyclical pandemic occupancy bottom in our SHOP portfolio in mid-March. Since then, led by our U.S. SHOP community, which posted 280 basis points of growth, we grew SHOP spot occupancy by 190 basis points through April 30th to nearly 78%. Our Canadian SHOP portfolio, which has maintained occupancy of over 91%, tempered the full SHOP occupancy growth because Canadian clinical conditions and regulatory measures are currently lagging those in the U.S. We do expect those to catch up over time. Notably, for the whole portfolio, March and April were the first two consecutive months when SHOP move-ins exceeded both pre-pandemic move-in levels and move-outs since the start of the pandemic. In fact, move-ins during April at 1,880 totaled more move-ins in a single month than we’ve experienced at any time since June 2019. While many of these positive trends began in the first quarter and therefore did not fully benefit first quarter results, we are also pleased with those results. Our first quarter normalized FFO 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 communities and the crucial role care providers play in facilitating longer, healthier lives for this portion of the nation’s population, which is set to grow by over 2 million individuals over just the next few years. Supply trends in 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, as 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 in the second half of this year, and those are expected to enhance our enterprise. On the investment side, our attractive life science, research and innovation business continues to provide us with value-creating opportunities to invest capital. The Ventas portfolio, which now exceeds 9 million square feet, is located in three of the top five cluster markets and is affiliated with over 15 of the nation’s top research universities. We are also investing in our active and just delivered ground-up developments in life science, research and innovation, which totaled nearly $1 billion in project costs. And I’m pleased to report that we also have another $1 billion in potential projects 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 in 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 in the U.S., Hopkins is a global leader in 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 in senior housing with our partner, Le Groupe Maurice in Quebec. LGM maintains a first-class brand, product and financial model for success. Our two most recently completed high-end communities with LGM opened in the fourth quarter and have already achieved 87% occupancy. We have three additional developments underway with LGM, representing nearly $300 million in aggregate project costs. Looking at the broader investment market, deal volume is again trending toward normalized levels. In a typical year, our deal team reviews over $30 billion in investment opportunities. Our pipeline of potential investments across our asset classes is 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 an important corner. And key metrics in our business are showing meaningful improvement. The positive investment thesis for all of our demographically driven asset classes and for Ventas is pointing firmly positive. As a team at Ventas, we’re really happy about the strength and stability we’ve shown and the recent upswing in economic, clinical and operating environment. We have an abiding commitment to win the recovery for all our stakeholders, and we are confident we’re taking the right steps to do so. Thank you. Now to Justin.

Thank you, Debbie. I am very excited that senior housing recovery is underway. As we’ve mentioned before, the lifestyle offering in our communities will be a leading indicator of performance. Now that vaccines have been administered, activities are picking up again, communal dining is coming back and all of our communities are open to visitation from relatives, the underlying demand for our services should continue to strengthen. As we have visited communities recently, the enthusiasm expressed by residents, their relatives and employees is compelling as communities are literally coming back to life again. As Debbie noted, we are pleased with the improvement in leading indicators in 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 2019 move-in levels, while at the same time, move-outs to 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 2019 and apply that percentage to the current lower resident occupancy, the outcome is lower move-outs than pre-pandemic levels. That, in combination with a 2019 move-in run rate, results in projected net positive occupancy gains. I refer to this as the 'turn the lights on' scenario, 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 lead sources, which include respites and personal referrals. As these lead sources and professional referrals continue to recover, we could see move-in rates grow. Moving on to macro drivers. We remain optimistic on our long-term supply and demand outlook. Construction starts continued to decelerate in the first quarter to the lowest level since the first quarter of 2011, and were down 77% from the peak in the fourth quarter of 2017. Fewer starts should translate into materially lower deliveries in 2022 and 2023. In addition, we expect strong demographic tailwinds 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 Ventas just over a year ago, one of my first priorities was to assess the overall quality of our portfolio. Now that we are traveling again and visiting communities, I’m pleased to verify we benefit from a well-invested, highly diversified portfolio of market-leading senior housing communities with service offerings that range from active adult, independent living, social assisted living, and assisted living and memory care. We are well located in 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 a high-quality portfolio in mind, moving forward, we are actively reviewing opportunities to optimize our portfolio through pruning, strategic CapEx investment, transitioning communities, new developments and pursuing new acquisitions to maintain our strong market position in senior housing. Moving on to triple-net senior housing. Given the proactive measures taken last year where we addressed a substantial portion of our portfolio and additionally paired with government subsidies and other tenant resources, our tenants continue to pay, as expected, in the first quarter and through April. Ventas 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. I have high confidence in our ability to compete in 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’ NOI. They continue to produce solid and reliable results. First, I’ll cover office. The core office portfolio, excluding parking, performed well. Core office grew 1.7% year-on-year and 1.1% 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, our strong record continued during the quarter and into April. This outstanding record is enabled by the mission-critical nature of our portfolio and our high-quality creditworthy tenancy. In our medical office portfolio, 88% of our NOI comes from investment-grade rated tenants and HCA. In our life sciences portfolio, 76% of our revenues come directly from investment-grade rated organizations and publicly traded companies. All of our MOB properties are in elective surgery restriction-free locations and clinical activity and building utilization are rebounding. A clinical rebound provides confidence to health care executives in making business decisions. We’re certainly seeing that on the real estate side. As an example, we are finishing negotiations on a 10-year, 160,000 square foot renewal with a 16,000 square foot expansion with a leading health system in the southeast. And another example, we relocated and extended several hospital offices on a Midwestern campus to accommodate the addition of a 50,000 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 retention of 91% for the first quarter and 86% for the trailing 12 months. Driven by this retention, total office leasing was nearly 1 million square feet for the quarter. This includes 160,000 square feet of new leasing. The result is that MOB 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. In 2019, we hired a head of leasing. In 2020, we hired a digital marketing lead. In 2020, we redeployed 30% of our third-party brokers. And in 2020, we increased the number of third-party brokers by 70% to impact the local coverage. Our digital marketing program focused on local market awareness and virtual touring of vacant suites is fully in place and making a difference. Average length of term for new leases was 7.3 years, 5 months higher than the 2019 average. Renewal term length also exceeded 2019 averages. Average escalators for new leasing was 2.7%, higher than our average in-place escalator of 2.4%. All of this represents growing health care community confidence in 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 in 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 in the R&I space. We continue to make progress on our recently announced $2 billion pipeline of development opportunities with Wexford. We’ve publicly announced four projects in that pipeline, Arizona State University in Phoenix, which opened in the fourth quarter and is soon to be over 70% leased. Drexel University College of Nursing in Philadelphia is 100% leased. The project, in partnership with the University of Pittsburgh for immunotherapy is 70% preleased. And our new development in the thriving uCity submarket of Philadelphia between Penn 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 have driven occupancy to 100%. In some cases, the mark-to-market has exceeded 30%. At our newest life sciences acquisition on the Johns Hopkins Campus in Baltimore, we are in lease negotiations to take the buildings from 96% to 100% occupancy. Demand far exceeds our current capacity. Now, let’s turn to health care triple net. During the first quarter, our health care triple-net assets showed continued strength and reliability with 100% rent collections in April and May. Trailing 12-month EBITDARM cash flow coverage through 12/31 improved sequentially for all of our health care triple-net asset classes. Acute care hospitals’ trailing 12-month coverage was a strong 3.5 times in the fourth quarter, a 20 basis-point sequential improvement. Ardent has performed extremely well in this dynamic market. IRF and LTAC coverage improved 10 basis points to 1.7 times in the first quarter, buoyed by strong business results and government funding. Census levels were high at year-end and continued into the first quarter. During this period, Kindred has been able to demonstrate their expertise in treating complex respiratory disorders to their health system partners. Regarding our loan portfolio, it is fully current. Finally, I want to extend a word of thanks to our 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 in safety. With that, I’ll turn the call over to Bob.

Thanks, Pete. In 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 in the first quarter. Ventas reported first quarter net income of minus $0.15 per share, driven by non-cash charges in the quarter as we transferred assets to held for sale. Normalized funds from operations in the first quarter was $0.72 per share, a $0.01 beat versus the high end of our prior guidance range of $0.66 to $0.71. As previously communicated and included in our Q1 guidance range, we received $0.04 in HHS Grants in SHOP in Q1. Adjusted for these grants, Q1 FFO per share was $0.68. 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 in SHOP. As a result, same-store SHOP NOI declined sequentially by 8% in the second quarter versus the first. Turning to our Q2 guidance. Second quarter net income is estimated to range from flat to $0.07 per fully diluted share. Our guidance range for normalized FFO for Q2 is $0.67 to $0.71 per share. The Q2 FFO midpoint of $0.69 is $0.01 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 31st to June 30th is forecast to increase between 150 to 250 basis points, with the midpoint assuming the occupancy improvement in 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, are forecast to be flat with lower COVID 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 receipts of HHS Grants in SHOP in our Q2 guidance. In our Office and Triple-net segments, we expect stable NOI in Q2 relative to Q1. And finally, we continue to assume $1 billion in proceeds from property dispositions in the back half of 2021. I’d like to underscore that we’re still in a highly uncertain environment. Though trends in SHOP are positive, the pandemic’s impact on our business remains 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 total debt to gross asset value at 37% in the first quarter. Q1 net debt-to-EBITDA was 7.1 times, as EBITDA continued to feel the impacts of COVID in the quarter. We expect net debt-to-EBITDA will reach its peak in the first half of ‘21 and then begin to improve in the second half as senior housing rebounds and we reduce debt with asset sales. On behalf of all my colleagues, Ventas is committed to continuing to take the actions to win the post-pandemic recovery, which finally is appearing in our sights. That concludes our prepared remarks. Before we start with Q&A, we’re 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.

Thanks. Good morning. You highlighted the opportunity for further improvement in move-ins as higher conversion lead sources and respite stays return. Can you quantify that opportunity at all? Where could it take your conversion rate or index move-ins?

Amanda, this is Debbie. Good morning. I just want to welcome you. I think this is your first time participating in our call. And we want to welcome you. But I’ll 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, where we articulate our lead in move-in and move-out trends. What I’d like to highlight is that the typical primary driver of lead conversion comes from professional and personal referrals. That’s historically been a very strong driver. Throughout the pandemic, the business has been resilient. It’s benefited from leads driven through company internet and 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: personal and professional referrals, which convert at 20% to 25% each versus the overall 10% conversion rate that we experienced, plus respites. To put all this together, respites during the pandemic ran at about 25% of pre-pandemic levels. They’re back to 50% now. Personal referrals ran at 50% to 60%. They’re back to 94% now. These will grow because that’s simply residents and relatives referring their friends, which is phenomenal. And that will grow as our occupancy grows. Professional referrals, if you want a leading indicator for that category, look toward health care activity. As health care and skilled nursing pick up, that’s a driver of professional referrals. And those are still running at only 50%. So, given that and our performance, we feel comfortable that there’s opportunity for more move-ins over time and that’s why we highlighted that. We could see a pickup in 10%, 20% of our move-in volume over time as those leads come back. We’ve started to see it come back. You’ll notice on the slide that we highlighted Q1, and we know that in March and April, that particularly respites and personal referrals are playing a bigger role in leads and therefore driving more move-ins.

Thanks for that detail. That’s helpful. And then, following up, could you talk more about trends you’re seeing within U.S. SHOP specifically across the productivity levels, either in terms of occupancy improvement or movements relative to 2019? Have you seen a return of a more lifestyle-driven customer in 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 concentration of independent living and social assisted living, which is otherwise known as AL Light. They have played a big role in the recovery that we mentioned in the prepared remarks. There’s also a little bit of a geographic 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 part of March to the end of April. But I think the bigger point is that across the U.S., really every asset class and geography is contributing to the recovery thus far.

Thanks. Good morning.

Hi, Rich. This is not your first for Ventas. So, welcome, too.

Yes. Actually, it is my 100th earnings season. A few of us on the call.

Congratulations.

So, on the disposition side, and maybe a more broad 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 your area of growth for the Company was much more aligned with life science and medical office. With what you’re seeing now in terms of recovery, has that mindset sort of meaningfully changed? And when you look at dispositions, where will that come out of in terms of how the pie chart might look down the road?

We anticipate that our dispositions will involve a mix of office and senior housing. Justin is utilizing his expertise to guide our disposition strategy and improve our portfolio. Now, after a year, he is finally moving forward on this front. Regarding our investment priorities, we remain focused on the Le Groupe Maurice ground-up development, which has proven to be a strong business model. Our life science investments in South San Francisco and Hopkins are also key, alongside the ongoing ground-up developments with a solid pipeline. Additionally, we continue to explore other healthcare asset classes and senior housing, ensuring we are proactive across our asset classes.

I guess, the question is, is senior housing a bigger piece of the puzzle two, three years out, now that you’re seeing what you’re seeing? That’s the crux of the question.

Well, I believe, first of all, the most important embedded upside that we have in 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, you could see external growth coming from that as well.

Okay. And just a quick one. On the triple net number, down 13%, you kind of listed a few good things on the IRF and LTAC side and the hospital side. What was it? What’s the noise in that number that created that 13% downward number on a same-store basis year-over-year? Since you’re just collecting rent.

I’ll take that one, Rich. That’s the Brookdale restructure we did, as you know, in the second half of last year. So, you’ve seen that lap.

Right. And even though, yes, as you recall, we essentially collected 2.5 years’ worth of full rent upfront. It gets run through the financial statements differently. And just a gratuitous comment, we’re very pleased to see how Brookdale’s reported numbers today and glad we have the warrants.

Yes. I guess, I was asking, again, my question is, like what would that 13 be if you normalize those types of things out? That’s what I’m asking.

Well, normalized for the big rocks that we addressed last year, you’ll see escalator type growth, Rich, it’s the nature of it.

My question really revolves around the move-ins. Justin, I wanted to revisit your comments regarding the 'turn the lights on' scenario. Looking across the portfolio, what would that scenario indicate, particularly when considering the move-ins and move-outs as a percentage of in-place occupancy from 2019? What could that imply for net absorption in 2021?

Yes. Just basically turning the lights on, as I described it, you show up to work, based on that structural advantage, 30, 40 basis points a month. Obviously, we’re performing well above that for the reasons I described earlier.

Okay. That’s helpful. And then, maybe as a follow-up non-sequitur, on the sort of investment opportunity that you guys are seeing. Where would you say it’s more heavily weighted right now? I know you guys have flagged some of the R&I opportunity. But is there more development to come there, or is it more of an acquisition story?

It’s both. I think it will be a mixture of ground-up development in senior housing, as we talked about, as well as life science and research and innovation. And we’ve always been an effective consolidator as we’ve grown, and we’re starting to see that deal volume as we talked about. I would expect there to be acquisitions as well, Jordan.

Thanks. Maybe following up on the expected dispositions. Where are those assets right now in terms of marketing and just being identified?

They’re in the pipeline at different stages. Some are already kind of out there, others are almost out there, and others are kind of on the way. So, it’s going through the system.

We’re reiterating, Nick, that we expect to close, to get the proceeds in the back half of the year. So, it gives you a sense that they’re well underway in many cases.

Yes, we are closely evaluating that. It really comes down to judgment and experience to make such a prediction. What’s interesting is that starts are significantly better. The first quarter saw a notable decrease from the peak and reached the lowest level since 2011, which is encouraging. Looking ahead in the near term, it's crucial to recognize that even if development starts take shape over the next couple of years, there's a window of opportunity where the population over 80 is expected to grow at a compound annual growth rate of 3% to 4%, with a spike anticipated in '26 and '27, exceeding 6%. This provides a favorable supply-demand balance in the embedded communities during this intermediate period. However, it's challenging to determine when starts will increase again. We are aware of rising construction costs and supply chain issues, which may delay potential projects. Additionally, current rents may not support these higher construction costs. All these factors combined lead us to feel optimistic about the future as we emerge from the pandemic and enter the recovery phase.

I’m going to stick with senior housing here. So, I was listening to the Brookdale call this morning, and they indicated that they were looking at maybe more flat margins in Q2 and then a ramp-up in the second half of the year. So, I was trying to, I guess, pick your brains and how you’re thinking about the margin ramp in seniors housing might look like, given trends in occupancy?

Yes. Hi, it’s Justin. You would definitely expect to see the NOI growth really lag the occupancy. Revenue comes first and then there’s a dynamic occurring now where you have COVID expenses coming down and then some of the operating expenses will come back up. Obviously, the second quarter has an extra day in it. So, there’s some little extra expense coming from that. But as you run forward, you would see margin as the last lagging performance metric.

And then, maybe a related question is, how are you thinking about pricing power in the industry? Historically, we’ve had to be at 85% to upper 80s of occupancy to see pricing matching inflation. Have the dynamics changed at all in terms of the industry’s focus on acuity that might allow pricing power earlier than previous cycles?

I would say we benefit from the highly leveraged business as it grows. Currently, it's really about volume, and operators are offering discounts to drive that volume. We expect this trend to continue for a while. However, just two months into this recovery, we're noticing more selective discounting, with a focus on specific markets. Until we see consistent recovery and an increase in occupancy, I anticipate that price will primarily be a tactic used to achieve volume.

And as you know, once we build the volume, we get the benefit of the in-place increases when you turn the page to 2022. And we have really been able to see pretty strong pricing power in that environment, even this January 1. And so that’s really where you start to accrete in terms of the benefit of the volume that Justin is talking about.

A question for Justin. You’ve been in the seat about a year now. Curious if you’ve changed the approach or the management of 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 or related to that, I noticed you didn’t necessarily call out Eclipse as one of your top operators that constitute 90% of the SHOP that constitute 90% of the SHOP business. You’ve previously talked about a joint venture in that. Is that something that’s still on the table? Or are you thinking about that relationship?

Hi, Juan. I’ll start with the first question. In 2020, 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 of actions that I described in my remarks. In regards to Eclipse, there are really three operators I highlighted: Sunrise, Atria and Le Groupe Maurice. Together, on a stabilized basis, that’s 90% of our business. Eclipse is in the 10%, along with a handful of others.

Okay. And I’m just curious on the move-in 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 over 100% of what you saw in ‘19? 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?

Yes. That’s a great question. Throughout the past 12 months, we’ve actually seen length of stay go up. And part of the driver of that was that reduced respite business that I described earlier. So, length of stay has gone up a little bit. It will come down a little bit as we bring more short-term stays back into the pipeline. In regards to pent-up demand, if you look at the leads, it’s page 9 of the business update, you’ll notice that leads are 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 that’s not even fully supported by traditional lead sources. So, not so much pent-up. But certainly, we’re pleased with the recovery thus far. And one other thing I’d mention is that as we’ve spoken with operators, they’re not having leads come to the doorstep and say, I’ve been waiting for the vaccine or 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 closed, it was pretty consistent. So, we’re just seeing the community is open again and some lead sources come back and provide demand for our service.

Good morning. I appreciate the questions and the information provided on slides 8, 9, and 10. To start, could you discuss how operators are preparing for a potential increase in Q2 and possibly Q3 in terms of labor and other significant expenses like food and PPE? Have operators already increased their staffing levels? Do we expect margins to improve in the near term, at least? Also, could you elaborate on the labor situation?

In the near term, we expect margins to remain relatively flat. Although COVID-related expenses are decreasing, other operating expenses are beginning to rise again. For the upcoming quarter, we're anticipating around $7.5 million in expense growth, with half of that attributed to an extra day in the quarter. The remainder comes from increased labor costs and other expenses, so it won't significantly impact us in the short term. As occupancy improves, we do anticipate a slight increase in expenses, but we expect to maintain a high margin on any additional revenue generated.

And then, maybe just Debbie, bigger picture. Given this recovery and the potential now you’re citing over a multiyear period, maybe give us some color on whether you’re rethinking the acquisition focus in terms of buckets. Is there an opportunity for Ventas to get more aggressive on senior housing in certain areas, or are you sticking sort of a more balanced approach?

Again, we do highly subscribe to the benefits of diversification, Vikram. It has served us incredibly well over the years and particularly over the last year. We have always been big believers in the senior living business. We’re excited that we have this recovery upside opportunity embedded in our portfolio now, and we intend to capture that. And also, we totally do intend to invest and acquire senior housing, assuming we find assets of quality and in markets where we think it’s really going to provide good risk-adjusted return. But yes, we would certainly expect to have that in our acquisition buckets.

Thanks. So, when it comes to capital allocation, can you just provide an update on the house view on senior housing development in the U.S.? I’m just curious what the opportunity set looks like in terms of size and maybe returns.

We touched on this briefly. Good morning and welcome. Construction costs are currently quite high. We recognize the growth in the population aged 80 and above, which significantly drives this demographic demand. At this point, the major opportunity lies in recovering our existing investments in senior housing. There is potential for us to invest in our effective business model in Canada with LGM. We're open to considering ground-up development in senior housing within the U.S. due to the continued demand. However, from a cost perspective, we need to be cautious to ensure the returns align with the associated risks.

That’s helpful. And then, on the disposition guidance. When it comes to the SHOP, I’m just curious how you’re thinking about selling now versus waiting to let the story on fundamentals improve in that business?

Yes. Very important question. Justin, why don’t you address that?

Sure. One of the big priorities is to make sure that we’re well positioned for recovery. I mentioned some of the operators. There are certainly communities that have probably less potential to contribute to the recovery or may not be a long-term fit for us or maybe a better fit in the hands of a different operator. And so, there’s a lot of review underway and actions that we’re considering that should net really positive in terms of the overall quality and growth of our portfolio.

So, just using round numbers here. Well, first, my question also relates to the operating leverage within the SHOP portfolio that was touched on earlier. Just using round numbers, you lost about 1,000 basis points of occupancy, close to 1,000 basis points of NOI margin when we take stimulus out of the equation. That’s pretty much in line with the industry averages. You did talk about the lag in the NOI margin recovery versus occupancy recovery this year in ‘21. 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? Just want to confirm the longer-term view around that dynamic. Thanks.

Hi. It’s Justin. I’ll just mention that the answer is yes. There was a question earlier on the call regarding pricing power. It will be volume first, and as pricing recovers, that will assist margins in returning to pre-pandemic levels.

Together with the underlying fundamentals, we need to keep pointing to the supply-demand equation. And again, as occupancy begins to rehydrate, the in-place increases, more pricing power. So, I don’t think there’s any reason to believe anything other than we’ll get back to normal over time.

So, just going back to the move-in data and the topic of pent-up demand. I think you cited earlier in the call that April was the most move-ins you’ve had in a single month since June of 2019. And then, you’re also saying that you didn’t think that there was that much pent-up demand. I’m just trying to square those two comments together, because it seems like if the move-ins are high, there is some level of pent-up demand that’s benefiting move-ins right now.

Yes. That’s really not what we’re hearing, and it very well could be just organic demand. So, go ahead, Justin.

I wanted to reiterate a point I made earlier about the lower move-outs. There will be some structural netting happening. Additionally, we are seeing a resurgence in higher conversion leads, although they're not fully back yet. This, along with feedback from our operators regarding their observations on the ground, doesn't suggest it's pent-up demand. One of the strongest indicators is the rise in personal referrals, where residents and their families are recommending friends again. The overall demand fundamentals are improving, but it's not necessarily indicative of pent-up demand.

Yes. Thanks. Just off of, I guess, Nick’s question on pent-up demand. And I’m sorry, I think my phone broke out. So, you might have answered this already, if I missed it. But, I know you haven’t 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?

I mean, our bias really, Mike, is that this is organic demand that is based upon the need-based nature of the communities and the availability of the communities, then it is strong, resilient organic demand, and that’s strong. Whether it’s pent-up or not, we aren’t hearing from good sources that there’s anything other than move-ins that would have moved in now anyway. I don’t know if that makes it more clear, but go ahead, Justin. Yes.

One other point, on page 9, if you ignore the first two months, it’s April, May, 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, and we had 20% of our communities closed at any given time. And so, people continued to move in as they had the need.

Yes, I was looking at that on page 9 of the deck. There is sustained need-based demand from a growing demographic, which is very positive.

A question 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?

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. Timing of that to be determined, obviously. But again, the value proposition of senior housing, the demand that we’ve seen through the pandemic and that we’re seeing, especially now in the second quarter in pricing power, which will return over time, we believe will give some confidence in that.

It seems that once we reach pre-pandemic levels, we should expect the margins to be similar. Are you planning to implement any changes to cleaning protocols that could lead to higher expenses in the future?

Yes, I believe there may be some impact on margins, but it will be fairly limited as we move past the pandemic. We are confident that margins will recover.

Okay. And then, I think another question is kind of briefly touched on, but just wanted to ask kind of a little bit differently on new rate for move-ins. What’s like the current level of discounting going on? Like, is it one month free or any kind of gauge there would be helpful.

There are various forms of discounts being offered, such as one month free or waived community fees. There are also generally lower rents being provided. Typically, care charges are not discounted, but rent and community fees are often reduced, and operators usually apply these discounts upfront. This allows us to move past the impact of these discounts quickly. Currently, there is a significant range of discounting in the market.

Okay. Has that accelerated over the past months, or is it kind of holding just steady at this point?

It’s been relatively steady. Yes. It found its way into the system last fall, and it’s 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. One stat I’ll mention that kind of supports that is that 16% of our communities, at the end of April, are back to pre-pandemic occupancies. So, you would imagine that they have pricing power now moving forward again. And so, operators are identifying those communities. They’re starting to tighten a little bit on the discounting. And obviously, that will be supportive of NOI growth.

Hi. Good morning. I’m on Sarah for Mike Mueller. This one is for Justin regarding the senior housing operating portfolio specifically. I think you alluded to some demand differences between the southern and northern geographies. But what are you seeing in terms of similarities or differences between more urban assets and the ones in the suburb?

Yes, certainly. The recovery has been noticeable across all regions, although there are some differences. The most significant variation seems to be between the South and the Southeast. If we look closely at local markets, New York comes to mind, where we recently observed that they had a challenging start during the pandemic. Many of those communities are now experiencing high demand and move-ins. We're also seeing some recovery in the Northeast, but this will differ depending on the type of asset and its pricing. There's still a lot to clarify before we can accurately define specific markets or asset classes. It remains quite early in the process, but the general recovery trend is very promising.

Justin, this one is specifically to you. Again, the occupancy gains, since alluded, in the past 60 days have been really, really strong. Your Q2 guidance, your assumptions also are really, really strong. You have a peer out there who’s also seeing similar trends but doesn’t seem quite as strong as the numbers you’re seeing and the numbers you’re kind of forecasting. Can you talk a little bit about why that may be? Why is this kind of meaningful difference between the two, let’s call it, near-term outlook?

Yes. I really can’t comment on what the peers are seeing. But just within our own markets and what we’re seeing in terms of performance and leads, there continues to be strong support for move-ins. And then, as I mentioned earlier, with move-outs being structurally lower, the strong support for netting. So, that’s what we’re seeing.

Right. And also, we had strong outperformance in the first quarter, and that’s obviously helping that momentum.

From a recovery perspective, Justin, is the high end of the market recovering faster than the lower price points? Are the states that were impacted by COVID first recovering more quickly? I’m interested in any insights you can share based on the data you're observing.

That’s a great question. And I can tell you that we’re looking for those correlations, and we’re not seeing them yet. What we know is that in the U.S., there’s been widespread recovery. We know that Canada is lagging, but a traditionally very strong performer. And then, we’ll study it closely as the trends materialize.

Well, thanks for wrapping the call up in a bow. I want to thank everyone who joined us this morning. We sincerely appreciate your participation and your interest in Ventas. And we look forward to speaking with you again soon. Thank you.