Ventas, Inc.

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas 2022 Third Quarter Results Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's 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 again. At this time, I would like to turn the conference over to B.J. Grant, SVP of Investor Relations. Please go ahead.

Thanks, Audra. Good morning, everyone, and welcome to the Ventas third quarter financial results conference call. Yesterday, we issued our third quarter earnings release, supplemental investor package, and presentation materials, which are available on the Ventas website at ir.ventas.com. As a reminder, remarks made today may include forward-looking statements in other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call, and for reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental posted on the Investor Relations website. And with that, I'll turn the call over to Deborah A. Cafaro, Chairman and CEO.

Thanks, BJ, and good morning to all of our shareholders and other participants. Welcome to the Ventas Third Quarter 2022 Earnings Call. We're very pleased with our enterprise and property results this quarter, led by our shop growth. Let's begin with some highlights. Normalized FFO per share was 76 cents, right in line with our forecast, with 13% shop growth, led by an outstanding 9% increase in year-over-year revenue, and nearly 5% total company year-over-year same-store cash NOI growth. Our 71-cent normalized FFO, ex-HHS grants, grew 3% from last year's comparable period. We are very pleased that we have delivered on our guidance once again, and more importantly, that we continue to realize sustained growth in our senior housing business that is accelerating. With year-over-year shop growth of 9% in the second quarter, 13% this quarter, and 15% to 21% projected in the fourth quarter, this is what we have been waiting for. Our strong numbers validate our longstanding commentary that we are at the start of a multi-year recovery and growth period in senior housing, driven by positive and improving supply-demand fundamentals, and propelled by the actions and decisions we've taken, Justin and the team's experience, accuracy, insights, and credibility, and, of course, our operators' efforts. I'd like to take this opportunity Opportunity to thank them. Looking ahead to the fourth quarter, in addition to shop growth, our normalized FFO guidance of 71 cents at the midpoint represents 4.5% growth versus Q4 2021, excluding material unusual items, overcoming the macro, interest rate, and FX headwinds that we and virtually all other real estate companies are experiencing. Turning to capital allocation, we continue to focus on our priorities of life science, research and innovation, and select senior housing, and working with long-time partners. We are driving and expanding our differentiated life science, research and innovation investment business. We have $2.3 billion in R&I projects recently delivered and in progress. Recently, we delivered core and shell of our new state of the art 400,000 square foot lab building in Philadelphia's premier life science ecosystem at one U City Square. It is on time and on budget and currently over 90% leased or committed to leading gene and cell therapy companies and a premier research university. We are very proud of what we and our partner Wexford have created in service of the major universities, research companies, and innovators in this growing life science market. We own significant additional land in One U City available to meet robust demand. Recently, we also began a new 255,000 square foot lab building to be anchored by the University of Maryland Baltimore. UMB, part of the University of Maryland system, is rated AA+, and they rank in the top 15 of U.S. universities for R&D spend. The project enhances our existing position in a market with the nation's most favorable ratio of current life science tenant demand to under-construction lab space. The project is projected to produce a stabilized cash yield of 7.5%, and open in 2024. Universities, which represent half of our consolidated R&I portfolio tenancy, continue to demonstrate significant demand for lab space, and our portfolio is well located and positioned to capture it. Before I wrap up, I'd also like to highlight two strategic investments we've made that demonstrate value creation in unique ways, connected to our core real estate investments as we've built valuable businesses and aligned with quality partners. Notably, we've seen the success of our Ventas Investment Management, or VIM, platform, which is Ventas' third-party institutional capital management business with over $5.5 billion of AUM. VIM has proven to be an effective strategy to continue to grow in attractive asset classes and build a valuable business and create a recurring revenue stream. We expect to earn the first promote revenue from VIM, approximating one cent per share, in the fourth quarter of this year. We intend to continue growing our VIM business, which provides strategic benefits to our public shareholders and leverages our platform and industry expertise. Second, our $1.4 billion strategic investment in Ardent, a high-quality health system, has been very successful. In addition to our well-performing Ardent real estate, we have a $50 million investment in a 10% equity stake in the Ardent Opco alongside Sam Zell's EGI. Recently, EGI entered into an agreement to sell a minority equity investment in Ardent to new investors, at a valuation representing over a four-time equity return. As a 10% owner, we expect to sell a 2.5% stake. Because the transaction remains subject to regulatory review, we have not included any potential gains in our guidance. ARDN demonstrates the importance of creating valuable partnerships and carefully choosing successful operating partners. Finally, we believe we are in an advantage position to succeed. Demographic demand fuels all our asset types, and senior housing supply-demand fundamentals are highly favorable and improving. While we, like most companies across the real estate space, are affected by higher interest rates, we are happy to be in a business that has pricing power, upside from occupancy and margin expansion, and has been historically resilient in a variety of economic environments. Thank you, and I'll now turn the call over to Justin.

Thank you, Debbie. I'll start by covering the third quarter shop results in our year-over-year same store pool. We are pleased to report another quarter that was consistent with our expectations while delivering strong year-over-year growth. NOI grew 13% year-over-year, which is above the midpoint of our shop guidance range, led by the U.S. at 17.4%, while Canada demonstrated positive growth again with 5.9%. Same-store average occupancy grew year-over-year by 260 basis points to 84.7%. Same-store shop revenue in the third quarter grew ahead of expectations, increasing nearly 9% year-over-year due to continued acceleration in REV4 growth and positive trends in occupancy. Pricing power has been impressive. At 5.4% year-over-year growth, REV4 is the strongest we've seen in the last 10 years, primarily driven by in-house rent and care increases and releasing spreads that have improved to positive 1.4% in Q3 from negative double digits during the low point in the first quarter of 2021. Underpinning the releasing spreads are improvements in street rates, which increased 11% year over year in the third quarter. This pricing power is being driven in a U.S. portfolio that is only around 80% occupied, which is a real testament to the underlying demand for senior housing and bodes well for future pricing. As expected, expenses were $3.1 million per day. Operating expenses remained elevated as contemplated in the company's guidance for the third quarter. Year over year, same-store operating expenses grew 7.6%, driven primarily by occupancy growth and continued macroinflationary impacts throughout the quarter on labor, utilities, repair and maintenance, and food costs. Leading indicators in the U.S. remain very strong as we experience leads as a percent of 2019 at 109%, move-ins at 107%, and outs at 98%. Canada continues to deliver growth and high occupancy at 94%. We are benefiting from positive operating leverage. SHOP NOI margin expanded 90 basis points in the third quarter due to stronger than expected revenue growth that outpaced continued elevated expenses. I have to say a big thank you to our operating partners, including Atria, Le Groupe Maurice, Sunrise, and our regional operators who are delivering great results. Now, I will cover Q4 shop guidance and our expanded same store year-over-year pool, which includes 478 communities. We are pleased that our strong year-over-year growth expectations are reflected in this much larger pool, which represents 87% of our shop portfolio. This larger pool includes assets that have transitioned from triple net transition from other operators, and acquisitions made in the prior year. Both the legacy same-store communities and the new entrants to the pool are expected to contribute attractive growth, with the pre-existing pool showing the strongest performance. SHOP's same-store cash NOI is expected to accelerate from 13% growth in the third quarter to grow in the range of 15% to 21% year-over-year in the fourth quarter. We anticipate year-over-year revenue growth of approximately 8% at the midpoint of the same store cash NOI guidance range, driven by continued strong rate growth and occupancy growth of 100 to 150 basis points. Year-over-year revenue growth is expected to be partially mitigated by continued broad inflationary expenses. At the guidance midpoint, operating expenses are expected to be consistent on a per day basis with the third quarter in 2022. The bottom and top ends of the NOI range are principally driven by variability and operating expenses. Our guidance assumes attractive margin expansion. Moving on to asset management, Ventas OI, which is our approach to collaborative oversight where we leverage our operating expertise and best in class data analytics, to the benefit of our operating partners continues to differentiate our platform and is creating tangible value in our senior housing business. I'm pleased to report that we had a very productive third quarter, engaging with our operators on the underlying fundamentals and two important deep dive topics, rate increases and recruiting. Rate increases this coming year will be our highest on record. We started our process early and collaborated with our operators to develop recommendations down to the unit and resident level. These customized rate recommendations are grounded in data, should limit controllable move outs, and will be a huge contributor to revenue growth. It's really important to note that pricing power is greatly enhanced when we are delivering care and services resulting in highly satisfied residents and families. Historically, we have seen around 5% in-house rent increases in the US. We saw 8% in 2022. and we expect over 10% in 2023. Certain operators, notably Sunrise, have already implemented early in-place rent increases, and the results are positive and a good preview of what should be successful execution in the first quarter and beyond. We continue to address labor challenges in innovative ways. Our recent focus has been on community-level staff recruiting to help our operators compete for talent more effectively. In doing so, We secret shopped over 50 job titles across 15 different operators to evaluate reputation, career websites, the application process, and application follow-up. While I was pleased to see that our operators scored well relative to industry benchmarks, we came away with several actionable recommendations to attract fresh talent to our communities. Ventas OI also continues to be a powerful tool in the capital allocation process. Our asset management teams are leveraging access to extensive industry and market specific data to help drive decision making around revenue generating CapEx projects. Portfolios are evaluated on an asset by asset basis with communities prioritized based on near term occupancy and rate upside, as well as long term supply and demand outlook. A significant investment of time and capital into this process has resulted in over 100 individual renovation projects currently underway within our shop portfolio, with a material number of those completing in the next several months. I'll conclude by highlighting my continued confidence in the growth opportunity in our senior housing business. There are very encouraging facts that continue to support this view. The supply demand outlook remains very strong. The growth rate of the 80-plus population will be the highest on record. As we've noted before, 99% of Ventos senior housing markets are free from competitive new starts. We have had positive net move-ins for 18 of the past 19 months, and pricing power is consistently demonstrated through in-house rents and street rate increases, all working together to drive NOI growth. Now, I'll hand the call over to Bob. Thank you, Justin.

I'll start with an overview of our third quarter office and enterprise results before closing with our outlook for the fourth quarter. Starting with office, same-store cash NOI grew 3% year over year, which represents a beat to our third quarter guidance. MOBs led the way with growth of 3.4%, driven by 90 basis points of occupancy gain. Quarterly retention was strong at 93% in the quarter, supplemented by new leasing exceeding 200,000 square feet. Medical office same store occupancy is now at 91.8% and has increased year-on-year for five straight quarters. MOB same store quarterly performance has now exceeded 3% for four of the last five quarters. For R&I, year-to-date same store cash NOI performance is a strong 4.8%. While we posted same store growth of 1.5% for the third quarter. As we told you earlier in the year, we're in the process of converting space into labs where we have seen opportunities from tenant departures as a result of COVID. At the enterprise level, despite the market volatility, we're very pleased that we once again delivered results that were in line or better than our original guidance ranges. Our total property same-store cash NOI increased 4.8% year-over-year at the high end of our guidance range. And that result was led by SHOP, where same-store cash NOI grew 13% year-over-year as Justin just described, with the SHOP P&L top to bottom where we called it a quarter ago. Q3 normalized FFO of 76 cents per share is right in line with our guidance. And as a reminder, we received 5 cents of HHS grants in the quarter which were included in our initial guidance. From a balance sheet perspective, we saw our leverage improve to 6.9 times in the quarter. As we look ahead, we're benefiting from the proactive steps we took prior to the run-up in interest rates to reduce near-term debt and extend duration. Some VENTAS stats to call out include $2.5 billion of available liquidity, 2023 consolidated debt maturities and amortization is just $500 million, or less than 2% of enterprise value, and 11% of our consolidated debt is at floating rates. Let's talk Q4 guidance. We expect net income to range from $0.06 to $0.12 per fully diluted share. Q4 22 normalized FFO is expected to range from $0.68 to $0.74 per share, which represents nearly 4.5% growth at the midpoint when compared to the fourth quarter of 2021, adjusted for unusual items in the prior year. SHOP is contributing $0.06 of growth year-over-year, while interest rates in FX are a $0.04 headwind. Total company same-store NOI growth year-over-year of 6% to 9% is expected, with accelerating SHOP same-store NOI midpoint growth of 18% leading the way. Bridging FFO from Q3 to the Q4 guidance midpoint is as follows. Starting with Q3 of $0.71, adjusted for the $0.05 of HHS in Q3. In the fourth quarter, we expect $0.02 of sequential growth from SHOP, materially outperforming normal seasonal trends. We also expect to earn our first promote of approximately a penny from our third-party capital business. The $0.03 of sequential good guys explained by SHOP in the promote are offset principally by a $0.02 reduction in FFO due to higher interest rates on our floating rate debt. Other notable assumptions in our fourth quarter guidance include no new or unannounced material acquisitions or capital markets activities, 404 million fully diluted shares, and finally, we do not expect to receive any HHS grants in the fourth quarter. For more information on our guidance assumptions, I would direct you to the business update deck and the supplemental posted to our website. To close, we believe we are in an advantaged position in a dynamic macroeconomic backdrop with the portfolio and the team to deliver sustained value creation. That concludes our prepared remarks. For Q&A, we ask each caller to state to one question to be respectful to everyone on the line. With that, I'll turn the call back to the operator.

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll take our first question from Juan Santabrio at BMO.

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

Sure.

In fact, one, there's a page in the deck we put out that is page 12 that describes this a little bit. And on the bottom right, we actually estimate the percentage of units that are eligible for increases. And we mentioned that 7% were actually pulled forward. So they would have normally been a first quarter increase. They've been pulled forward to before that. That includes Sunrise, which is mostly a fourth quarter increase. Sunrise targeted around 9%. They were really, you know, responding to, you know, the need to create value. And one thing we're very pleased with is that our revenue growth is outpacing expense growth. And Sunrise took an action to ensure that that continues to happen. They'd made the decision to pull early. We also have other operators, obviously, that are targeting increases that are over 10%, as we're stating on this page. And those start in the first quarter. And then there's a big group, about 42%, that get them in the first quarter. And then throughout the rest of the year, we'll see another 39% that are eligible for anniversary rent increases. And then the remaining just moved in late in 2022, so they don't get a 2023 increase. So, obviously, we're very focused on this, and we'll continue to be, and the pricing power has just been superb.

Thank you.

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

Yeah, good morning, everyone. Hi. I wanted to explore the dynamic with – it looks like leads had fallen but move-ins had risen during the quarter as a percentage of 2019.

Could you kind of explain what's going on there? Hi, sure. This is Justin.

So I think what you're referring to is just the percentages that we're reporting as a percentage of 2019, which has been – really good, you know, because we've been outperforming the pre-pandemic levels. And it's a good metric because, you know, obviously we're in a recovery mode post-pandemic, and it's been interesting to see how we've performed relative to 2019. But trending is really on an absolute basis. And I think a stat that might help you is from Q2 to Q3, our leads were down 1%. Our move-ins on an absolute basis were up 4%. So I would basically say not much to report there.

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

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

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

Great. Thanks, guys.

Thank you. We'll take our next question from Michael Carroll at RBC Capital Markets.

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

Hi, it's Justin. So the process I described in prepared remarks was really designed to, first of all, make sure that we're getting us right. And we're down to the community level and looking at units and residents, a number of factors to consider what is the right increase. That was most important. Secondly, it's how is this being communicated and the process that our operators are using to make sure that there's a feedback loop that's really strong and well executed and We have an early look, obviously, with Sunrise pulling forward. We have rate letters going out as well for some of our operators that are giving increases in January. And so far, so good.

It's been relatively quiet, which is really encouraging.

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

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

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

We'll move next to Michael Mueller at J.P. Morgan.

Yeah, hi. I was just wondering, Keith, Excuse me. Talk about what you're seeing or thinking about in terms of private market pricing changes for life science and MOBs.

Hi, Mike. This is Debbie.

And I think that we still are in a period of volatility as far as capital costs. And as you well know, and historically when we see this type of volatility, there's a period of price discovery, which we are still in. I would tell you that the life science market in particular continues to have very tight cap rates expectations, and that's because there's really good demand continuing for certainly our types of lab buildings, and so that's showing through. and is holding up, frankly, very well in the context of the volatility we've seen on capital costs. And MOBs, I think we're still seeing in the low to mid fives. But I will close and say there's very limited data yet. And we still are in the price discovery period. And so more to follow once we get to a point where people are transacting more frequently. We'll have more data to report on.

Thanks.

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

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

Hi, it's Justin.

So, you know, first of all, actually, our length of stay has been very stable. You know, there's been – I remember, you know, we had questions last year. Is it shortening? Is there some kind of higher acuity person coming in? That never happened. And so it's pretty consistent with where it was even before the pandemic, and it's been consistent. So not much to really report on from a length of stay standpoint. One thing I'll also mention, which is indicative of the man at the doorstep and the pricing power, is that Our releasing spreads have been so good. So as residents have been moving in, they've been paying more than the last resident that occupied that unit. And as I mentioned in my prepared remarks, that actually went positive in this past quarter. You know, pricing power has been great internally through in-house increases, but it's also been really strong from a street rate standpoint as well.

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

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

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

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

And then can I just follow up just to clarify the trajectory? I know you said Sunrise has or one of the operators already has a 10% bump in place or expected to be 10%. If you see the similar level of pricing power into next year, just given where an expensive, let's say, remains flat, meaning your reliance on temp labor is where it is today and you see modest growth just given inflation-wise, Shouldn't the gap between revenue and expense growth in other ways, shouldn't the margin see material expansion next year?

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

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

Thank you.

We'll move next to Michael Griffin at Citi.

Great, thanks. Justin, in your conversations with operators, have you noticed that there's been any improvement in the turnover of the workforce? And then I just want to clarify something. On the contract labor side, I noticed it moved up to about 3% of the expense deck versus 2.5% less quarter. Should we read into that that there's more contract later utilization, or is that just a rounding issue?

Well, let me start with the first part. One thing I mentioned, I prepared remarks that we've had 12 quarters now of positive net hiring. Excuse me, 12 once. Four quarters of positive net hiring. And so that's obviously a really good indicator given the backdrop. One thing I'll mention is that Contract as a percentage of total labor has actually been coming down. You'll see it on that same page you mentioned. It's page 13 of the deck. We were as high as 8.7% in the first quarter of 22. It's down to 5.9% in the third quarter. So it's good to see that there's some relief in terms of agency. Overall labor expense, you can see off to the right, it's indicated on these bar charts, has been relatively stable after initial period of being elevated. And we are seeing agency reduce in certain key markets that we've highlighted before that are big users of agency, and we're starting to see that come down. North Carolina is one that jumps out. I know we've mentioned before Philadelphia as well. They both had double-digit reductions in agency. The LA MSA has also had a double-digit reduction in agency. And so where we've had heavy users, we're starting to see some softening and improvement. It's been a relatively slow process, though, but it's a process that yields improved results.

Great. Thanks.

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

All right. Thanks. I see you guys show on page 9 in the slide deck that the same store shop pool will change dramatically from 3Q to 4Q with the increase in the properties. So I guess with the same-store cash NOI accelerating from that 13% to 15% to 21%, I'm guessing that probably even the 3Q same-store pool would probably see acceleration just with the price increases you're talking about. I just want to reconcile kind of what the trend would be without the S&R and transition assets. as far as an acceleration. How much does that impact acceleration?

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

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

Okay. That's helpful. Thanks.

We'll move next to Rich Anderson at SMBC.

Thanks. Good morning. Can you hear me okay?

Yes, Rich.

Okay. Great. Thanks. So I guess I want to ask about the asset class that hasn't been mentioned much in this call, which is medical office. You know, your priorities are senior housing and life science. You even mentioned senior care as a possible, you know, area to look at, but not medical office so much. And I'm curious, you know, you mentioned your price discovery commentary. Could we see some change there of substance for Ventas, maybe MOB conversions to life science, maybe MOB to the VIM fund, maybe MOB sales. I'm certain you have an audience for that portfolio that's 20% of your business. Can you comment at all on where things might go with MOBs for Ventas in the next year or two or three? Thanks.

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

Okay. Sounds good to me.

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

hey good morning i'm justin i was hoping you could talk about the shop occupancy guidance is there any impact in there for potential increasing covet and or flu cases weighing on occupancy meaning that you know without that potential for a spike in case counts like we've seen the past two winters and the spike we're currently seeing in europe that guidance might have been higher um or is there a little impact in that guidance since your residents today are Mostly vaccinated, pandemic is more endemic, and move-in restrictions seem unlikely.

Sure.

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

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

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

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

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

Thank you.

Thank you.

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

Hey, just going back to the same store in Hawaii guide for shop, and I appreciate that the pool changed a little bit slightly. But, yeah, I guess the first question is just when I think about the acceleration from 3Q to 4Q, how do we break that out between sort of the occupancy versus the pricing? You know, what's driving most of that? And then as we look into 23, not really asking for guidance there, but how do we think about the comp? for this year and potentially into next year.

Thanks. Sure.

Let me break down the price volume question, I think, inherent to the fourth quarter guidance. We've got occupancy growing 100 to 150, revenue growing eight. Implied in that is something like six revenue, i.e., rev pour growth. So rate growth is really a strong contributor to the revenue growth. That's flowing through not only offsetting inflationary pressure, but driving margin expansion. And that's pretty much the playbook for the fourth quarter, led by the legacy pool, as Justin was describing, but the new entrants contributing as well. So that's the way it plays out. Clearly, what we've seen this year from a baseline, if you're thinking about year over year, is significant HHS grants. I'd start there. We got 54 million of HHS in the current year, notably in the first and third quarter. Nothing in the fourth, no expectation of any more HHS. But more importantly, we've seen this nice trend of occupancy, very nice pricing power, and this expense dynamic that is a macro dynamic. And that's been what we've seen really for the last few quarters.

Great, thanks. You bet.

Next, we'll take Nick Ulico at Scotiabank.

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

Nick, this is Debbie. We tried to put the funnel in there for you that Justin described on pricing and how it affects the installed base. Obviously, street rates and care also affect kind of your rev pour. Those are the components of it. And in terms of, you know, really, you know, I want to turn it over to Bob because pricing is his favorite, his absolute most favorite topics. I would just point out that seniors are seeing, you know, Social Security and COLA increases that were nearly 9% this year, and that's really supportive of the continued pricing. And most importantly, you would expect, regardless of conditions, as we take capacity out of the system, as supply is low, demand is high, we increase from the 80% occupancy level where we are today, that pricing should get stronger, even, you know, irrespective almost of economic conditions. And so that is where you really could see some additionally positive momentum if you're able to price higher, but there's a softening of operating expenses and labor. That is the, you know, that would be a, a very favorable backdrop. Bob, do you want to talk about pricing?

I would just add that the move-in versus move-out rate is fundamental. And you mentioned this earlier, but as we're increasing in-place rates at 10% plus, all else equal, the street rate needs to rise consistent with that to keep you neutral on the releasing spread on Rev4, right? And so the encouraging support to that is, as Debbie describes, occupancy. Going up means scarcity of rooms. That gives you pricing power. But that's the dynamic that needs to hold true. You then get into subtleties in REVPOR, things like change in acuity, for example. The in-place increase does not equate to REVPOR growth. There's both the street rate versus move-out rate. There's the acuity mix. There's geographic mix. Those tend to tick down the headline REVPOR number. But we have not seen REVPOR growth like this in a decade. So we are in somewhat uncharted territory, but those are all considerations to take into account.

We'll go next to Teo Acasano at Credit Suisse.

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

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

Home price appreciation, like in market where HPA is flowing, is that changing demand at all?

So we've been tracking the housing market, and one thing that I think is a really good indicator of where the market stands is days on market. Obviously, I think most people know that during the summer months that houses were not sitting. They were moving really quickly. The normal days on market back in pre-pandemic eras is like 60 days. We were seeing low double-digit days on market for houses within our markets. Now that's closer to around 30 days or so. I think it's just above 30. It's been going up, and obviously you would expect that it would. I think what's important is that there's an enormous home equity. There's also other sources of income that our seniors are pulling from. The affordability in our markets is like four times over our average length of stay, so I We feel really comfortable that our residents have the ability to pay for our services and our care. And the indication on the ground is that that's continuing. And one of the good indicators is really the lead number, you know, which is running way ahead of pre-pandemic levels. And in the third quarter, we have it on here. It was, you know, 109%. Great.

That's helpful. Also, shout out to Pete on the MOB results.

Oh, he's smiling, Tayo. Thanks, Tayo.

We'll go next to Austin Werschmidt at KeyBank Capital Markets.

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

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

Note that the US is the 10%, right? And Canada is described as 7%.

And what is the timing of the increases in Canada throughout the year versus the U.S.?

Yeah, a lot of Canada is an anniversary.

Got it.

That's helpful. Thank you.

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

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

That's a great question. And it's something that we've been very interested in because obviously, you know, you're in a situation where we're growing occupancy. And on a year-over-year basis, you know, on a full year-over-year basis. I want to say we've added, another way to put it is since we're like halfway back to our pre-pandemic level, so we've added like 400 or 500 basis points of occupancy, and we continue to have the ability to care for people safely. One thing that definitely works in our favor is that operating leverage that we mentioned earlier. Bob highlighted it, I think, nicely in the Q&A, and that is important because we're Most of our operating expenses now are built in. You get in over 80% occupied labor, all the other expenses tend to start growing at a much slower rate and you have more flow through. That's the operating leverage working for you. So as we move into this next phase of growing from 80% occupancy up to 90 or wherever we land, you'll see less expenses needed to support those new residents. And that's one of the big benefits of this operating model is the operating leverage.

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

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

Okay. Thank you for the time.

Thank you. We'll take a follow-up question from Juan Santabria at BMO.

Hi. Thank you. Just two quick follow-ups given we're at the end of the call. First, could you comment on any expectations for Colony, I believe, that loan could be paid next year. And so just thinking about the modeling and the implications of that. And then secondly, maybe more broadly, any thoughts on Brookdale? Obviously, a large triple net tenant reports on the press and your appetite to have greater exposure there or not. So just any thoughts around Brookdale would be appreciated.

Thanks, Juan. In terms of the colony loan, You know, it's performing. It matures in 23. The borrower has a one-year extension subject to certain conditions, and it's freely prepayable and well-structured in terms of the way it could be prepaid. And so that's the update on Colony. And Brookdale, I think, you know, I'd refer any questions on that to Brookdale.

I tried.

Thank you. You're welcome. And we'll take our final question from Vikram Malhotra at Mizzou.

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

Well, thank you for the question, Vikram. We are very focused on delivering a strong end to the year of 2022 In line with our FFO growth and our shop growth projections, we're very excited about that and very focused on once again delivering those results in accordance with our projections. I would say that we embrace the opportunity to give full year guidance as and when it's appropriate for 2023. And as we sit here today, that's our expectation. The reason we embrace that opportunity, it will mean that we really are back to a normalized environment, and there's nobody around who welcomes that as much as we do. So thank you for the question. And with that, I'd like to really end and close the call and thank everyone very sincerely, both my colleagues as well as our participants here. We've been waiting a long time, as I said, be looking at such good results, good projections. I'm very proud of the team and we very much appreciate our relationship and dialogue with you. Look forward to seeing you soon. Thank you.

And that concludes today's conference call. Thank you for your participation. You may now disconnect.