芬塔 (VTR) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ventas First Quarter 2021 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Sarah Whitford, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the Ventas First Quarter Financial Results Conference Call. Earlier this morning, we issued our first quarter earnings release, supplemental and investor presentation. These materials are available on the Ventas website 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 well-being 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 revised, and we 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 190 basis points through April 30 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 2 consecutive months when SHOP move-ins exceeded both prepandemic 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 3 of the top 5 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 4 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 #1 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 2 most recently completed high-end communities with LGM opened in the fourth quarter and have already achieved 87% occupancy. We have 3 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 footer 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 executed, 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 prepandemic 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 continue 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 5 years, more than double the rate witnessed during the 5-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 an 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 3 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 1 quarter in arrears, is 1.3x 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 a 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, ex 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 is 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 this 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 4 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 3.5x 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 1.7x 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, 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 noncash 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 brands 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 31 to June 30 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 receipt 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 remain very difficult to predict.

I'll close our prepared remarks with our liquidity, balance sheet and capital activity. We continue to enjoy robust liquidity with $2.7 billion as of May 5. 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 7.1x, 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. (Operator Instructions) With that, I'll turn the call back to the operator.

(Operator Instructions) Your first question today comes from the line of Amanda Sweitzer with Baird.

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

Amanda, this is Debbie. I just want to welcome you. I think this is your first time participating in our calls, 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 and move-in and move-out and calling them this time with the prepared remarks. And 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. It's been benefited from leads driven through referral agencies. Those referral sources should persist.

But what we're looking to see come back and what has started to come back are those other referral sources. It's personal and professional referrals, which convert at 20% to 25% each versus the overall 10% conversion rate that we experienced plus respites. But to put all this together, respites have, during the pandemic, ran at about a 25% of prepandemic level run rate. They're back to 50% now. Personal referrals ran at 50% to 60%. They're back to 94% now. Those will grow because that's simply residents and relatives referring their friends, which is phenomenal. And that will grow as our occupancy grows.

And then professional referrals, if you want a leading indicator for that category, look toward health care activity. As health care and skilled nursing picks up, that's a driver of professional referrals. And those are still running at only 50%. So given that and given where our performance is and the strong net activity we have, we do feel comfortable that there's opportunity for more move-ins over time. And that's why we've highlighted that. We could see a pickup in 10%, 20% of our move-in volume over time as those leases come back. And we started to see it come back. You'll notice on the slide that we highlighted in Q1, and we know that in March and April that there's -- particularly respites and the personal referrals are playing a bigger role in the leads and therefore driving more move-ins.

That's helpful. And then following up, can you talk more about trends you're seeing within U.S. SHOP specifically across different acuity 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 Debbie mentioned in her 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 the most part of March to the end of April. So -- but I think the bigger point is that across the U.S., it's really every asset class and geography is contributing to the recovery thus far.

Your next question comes from the line of Rich Anderson with SMBC.

Rich, this is not your first radio for some time. So welcome, too, also.

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?

Great. Well, in the disposition, we've commented that we expect it to be a combination of office and senior housing. And again, Justin's here to exercise his professional judgment in terms of how we can make dispositions, enhance our portfolio. And so a year later, he's finally getting to that. But Justin, I don't know what you've been doing in between now and then. But he's finally -- so that's how we're looking at the disposition side.

And then on the investment side, I would say, clearly, our priorities have been the Le Groupe Maurice ground-up development, which is a great business model and has done consistently, really well. It's been, obviously, the life science with the South San Francisco and Hopkins investments as well as the ground-up developments that our opening kind of seriatim here with the pipeline behind that. And of course, we continue to look at other health care asset classes and senior housing. So I think we really are on our front foot across our asset classes, Rich.

I guess the question is, is senior housing a bigger piece of the puzzle 2, 3 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 ghost question is, like what would that 13% be if you'd 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.

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

My question really comes back to the move-ins. And Justin, I wanted to come back to your comments about the "turn the lights on" scenario. So if you look across the portfolio, what would that scenario -- and you overlay sort of what happened in 2019, right? So the 2019 move-ins and then 2019 move-outs as a percent of in-place occupancy. What does that suggest net absorption could look like in 2021?

Yes. Just basically turning the lights on, 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 the 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. And so I would expect there to be acquisitions as well, Jordan.

Your next question comes from the line of Nick Joseph with Citi.

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 a 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.

And then maybe just on senior housing. You've obviously talked a lot about the forward demand drivers and the demographics. Just from an industry perspective though, when would you expect starts to start to accelerate? Obviously, they're well down from their previous peak. But just given kind of the forward runway that you and the industry is looking at, when would you expect that to attract additional development starts?

Yes. I mean we are evaluating that closely. And I would say that it is a matter of judgment and experience to make such a prediction.

Here's what's interesting. Again, starts are dramatically better in the sense that, as Justin said, the first quarter was down gigantically from the peak and then the lowest level since 2011. So that's really, really good. We know that really when you look forward in the near term, that the most important thing is even if over the next couple of years, things start to get on the drawing board, you're going to have this window of opportunity where you're going to have 3% to 4% CAGR on over 80 population, which ultimately spikes in '26, '27, over 6%, as you know. And you're going to have this window of time where the kind of embedded communities are going to have some really great supply-demand tailwinds in this sort of intermediate term.

So hard to say when they would pick up again. We know there are increased construction costs. We know there are supply chain issues. Those will probably delay some of the things that would start. And we also know that rents right now may not be supportive of those higher construction costs. So when you put all those things together, we like the forward runway as we come out of -- we really emerge post-pandemic into the recovery.

Your next question comes from the line of Daniel Bernstein with Capital One.

I'm going to stick with seniors housing here. So I was listening to Brookdale call this morning, they indicated that they were looking at maybe more flat margins in 2Q 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. So it's Justin. You would definitely expect to see the NOI growth really lagged the occupancy. Revenue comes first and then there's a dynamic occurring now where you have COVID expenses should come 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 kind of the lagging -- 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, 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?

Well, I would say that we get the advantage of the highly leveraged business on the way up. So it's really a volume game right now, and operators are using discounting and price incentives to try to encourage volume. And we would definitely expect that to continue for a period of time. One thing that just 2 months into this recovery, though, that we're starting to hear is more selectivity around discounting, focusing in on certain markets and -- but until we start to see consistent recovery and occupancy a little higher, I would expect price to be a tool operator used to go for 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.

Your next question comes from the line of Juan Sanabria with BMO Capital.

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 -- from an asset management perspective of the seniors housing business, whether it's by geography or partner or things you've stamped on the enterprise. And then kind of secondly 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 business. You've previously talked about joint venture in that. Is that something that's still on the table? Or are you thinking about that relationship?

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 actions that I described in my remarks.

In regards to Eclipse, there's really the 3 operators I highlighted were 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 that 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, the -- 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 and 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 providing demand for our service.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Thanks for all the data on the -- on, I think, Slide 8, 9 and 10, a lot of useful information. Maybe just first one, on the -- just going back to the margin and the expense side, maybe just if you can walk us through how operators are prepping for this potential increase over 2Q and potentially 3Q from a labor perspective and all the other sort of bigger line items in terms of food and maybe even PPE.

Just like how have the operator already staffed up? Do we anticipate margins inflecting in near term, at least? And then if you could just extend that to talk about labor.

Sure. Yes. So in the near term, margins, we expect to be relatively flat because in total expenses, COVID coming down, the other operating expenses coming up. If you look ahead at our quarter, we're projecting around $7.5 million of expense growth. Half of that is just an extra day in the quarter. The rest is a mix of just labor costs and other expenses. So it's not really a big mover in the near term. And then after -- as we get into more occupancy recovery, of course, we would expect the expenses to lift a bit, but we would expect a very high margin on that incremental revenue.

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 maybe 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 equality 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.

Your next question comes from the line of Lukas Hartwich with Green Street.

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.

Well, we talked about it a little bit, and good morning and welcome to you also. We talked about it a little bit. Construction costs are relatively high. We do know we have the growth in the 80-plus population, which is really fueling this demographic demand that we have. And right now, I think really with the existing investment basis that we have in senior housing, again, the big opportunity is to recover that. There's an opportunity to invest in this great business model that we have in Canada with LGM.

We certainly would look at senior housing ground-up development in the U.S. because we do think there's -- because of the demand. But from a cost standpoint, I think we -- as we discussed, I think you'd have to be cautious to make sure that the returns penciled out commensurate with the risk.

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

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

Sure. So one of the big priorities is to make sure that we're well positioned for recovery. I mentioned some of the operators. There's certainly communities that have probably less potential to contribute to the recovery or maybe 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.

And your next question comes from the line of Steven Valiquette with Barclays.

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. But just using round numbers, you lost about 1,000 bps of occupancy, close to 1,000 bps 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 prepandemic? Just want to confirm the longer-term view around that dynamic.

It's Justin. I'll just mention that the answer is yes. There's -- there was a question earlier on the call that talked about pricing power and pricing is going to be volume first. And then as pricing returns, that's going to help margin get all the way back to prepandemic levels.

Together with the underlying fundamentals, we need to keep pointing to 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.

Your next question comes from the line of Nick Yulico with Scotiabank.

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 2 comments together, because it seems like the move-ins are that 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 there are -- go ahead, Justin.

Well, I was just going to say there's one other point that I've mentioned earlier, and that's really the -- I mentioned in the prepared remarks, the move-outs being lower as well. So see, there's a certain amount of just kind of structural netting that's going to occur. And then you have the resurgence of the higher conversion leads. They're not all the way back yet. That's why just -- that, combined with the feedback from the operators in terms of what they're seeing at their door, just -- it's not something we necessarily characterize as pent up.

It just in the -- probably one of the biggest indicators of that, I think I mentioned earlier, is the personal referrals. These are relatives and residents referring their friends again, like as they did (inaudible) the overall demand fundamentals are recovering, not necessarily pent-up demand.

Okay. And I guess as we think about the guidance for the second quarter, 150 to 250 basis points of spot occupancy benefit. How should we think about that as a sequential benefit in future quarters? Meaning, is this an unusually large benefit that you're expecting in the second quarter because -- and your move-outs are low and eventually move-outs will pick up? You have sort of this high level of move-in activity right now, which is a high conversion rate, but we'll see how that moves going forward. Just trying to think about, as we're thinking about the sequential occupancy build going forward here, is the second quarter number a reasonable number to think that carries through in the future? Or are there some unusual benefits in the second quarter?

I'd highlight what Justin described as the "turn on the light" scenario, which is the lower occupancy means lower move-out at the same rate of move out. That, over time, goes away, obviously, as occupancy goes up. So in that regard, that's temporal. The move-ins in the sort of 110%, before some of these incremental referrals, would suggest there should be continued move-in opportunity over time. That's -- this isn't and so much as just real demand. And so put those together and it not only benefits the second quarter, but should benefit the future.

And your next question comes from the line of Michael Carroll with RBC Capital Markets.

Just off of, I guess, Nick's question on pent-up demand and I'm sorry, I think my phone break 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 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 really good. And whether it's pent-up or not, we aren't hearing from good sources that if 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 2 months, so 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 levels. And we had 20% of our communities closed at any given time. And so people continue to move in as they have the need.

Yes. I was actually looking at that on Page 9 of the deck. And you can see that. There is -- and that's why I think we keep using this word resilient, which I know we use frequently, but it really is sustained need-based demand from a growing demographic, and that is very positive.

Okay. I was just trying to get to this, like we expect pent-up demand could enter the market as these other referral sources come on, and we could see some of those leads and move-ins even move higher from this point.

Well, they could because when you think about it, if you maybe -- whatever you want to call it is okay with us. But when you think about it, for example, when UnitedHealthcare reported and they said really that senior level medical procedures and surgeries and things really hadn't bounced fully back, okay? And you connect that with what Justin said earlier that really a leading indicator of those kind of professional referrals would be really health care procedures.

As those seniors start to have those procedures, if you look at that and then you see those professional referrals come back, you could characterize that if you want a pent-up demand as they had delayed those surgeries and so on. So you could -- I don't want to quibble over words. I think what's good is there's really good demand and we're seeing it come through and it's then 2 consecutive months, and we hope and are projecting for the second quarter that it will continue.

Okay. And then just one more real quick. The lead data that you have in the presentation, I guess, what's the breakout of that between U.S. and Canada? Obviously, Canada has been a little bit weaker due to the COVID outbreak. So is leads in the U.S. higher than Canada?

Yes. So the way I'd characterize Canada, maybe it's not around the age, it's more around just their move-in activity. Canada, a page you might look at is Page 7, where at the top, there's a purple #4. That really just marks when Canada had 75% of the communities vaccinated. You can see that's much later than the U.S. And the good news is we know once we got there in the U.S. that the trends have been phenomenally strong. We would expect the same thing in Canada. So there was a little bit of underperformance.

You can see that on the next page, where Canada in March was negative 20 basis points. Obviously, the U.S. was up 80 basis points during that time. So they're just lagging a little bit. The vaccines came later. They've been a good performer for us. We would expect them to come back as the vaccines are fully executed.

Okay, great. Thanks.

Mike, thanks. And again, compliments on your life science report.

Your next question comes from the line of Joshua Dennerlein with Bank of America.

Just 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 prepandemic levels kind of once we return to prepandemic 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.

Okay. So it does sound like once we get to like a prepandemic level, we should see the margins kind of hit roughly the same. Is that -- I guess what I'm asking is like, is there -- are you going to do anything differently on the operator front as far as like cleaning protocols that might be higher expenses going forward or anything like that?

Yes. I'd say on the margin, there might be some of that. But it's going to be relatively limited moving forward once we get out -- the pandemic gets further behind us. So we're definitely comfortable that margins come back.

Okay. And then I think another question has 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 1 month free? Or any kind of gauge there would be helpful.

There's basically -- you name it. There's 1 month free being given or there's waive in the community fees. There's just a kind of structurally lower rent being offered. Typically, care charges are never discounted. But rent and community fees are fair game and operators tend to give them upfront. So we can get the impact of the discounts behind us. But there's a wide variety of discounting right now 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 prepandemic 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.

Your next question comes from the line of Sarah Tan with JPMorgan.

I'm Sarah on for Mike Mueller. Just one 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, sure. There's been a wide -- I'd say the recovery has been experienced in every geography. And there's been a little bit of difference. The only real meaningful difference that we can point to is really the south and the southeast. If you dig down into local markets, New York is one that comes to the mind that we visited recently. I would say they had a very bad early experience with the pandemic.

Several of those communities have very, very high leads and move-ins, and so you're seeing some recovery happened in the northeast. It's going to vary by asset type and price point, and then there's a lot of shaking out to do, I think, before we really start calling markets or particular asset classes. It's still really early, but the widespread recovery is very encouraging.

And your last question for today comes from the line of Omotayo Okusanya with Mizuho.

Congrats on the great quarter. Justin, this one is specifically to you. Again, the occupancy gains [in your loan] in the past, let's call it, 60 days, have been really, really strong. Your 2Q 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 2, 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 and et cetera, there continues to be strong support for move-in. And then as I mentioned earlier, with move-outs being structurally lower, there's strong support for netting. So that's what we're seeing.

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

Right. And then from a recovery perspective, Justin, kind of thematically, is it the high end of the market that's recovering faster on the lower price points? Is it the -- is it the state that kind of got hit with COVID first that have kind of now recovered faster? I'm just curious if you can kind of share any kind of when you look at the data, things you're picking up.

That's a great question. And I can tell you that we're looking for those correlations, and we're not seeing them yet. 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.

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.