Ventas Inc

NYSE:VTR

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Ventas 2022 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded.

I will now hand today's call over to BJ Grant, SVP of Investor Relations. Please go ahead.

[BJ Grant, SVP of Investor Relations]

Good morning, and welcome to the Ventas second quarter financial result conference. Yesterday, we issued our second 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 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 be also 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.

And with that, I'll turn the call over to Debra A. Cafaro, Chairman and CEO.

[Debra Cafaro, Chairman and CEO]

Thanks, BJ, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas second quarter earnings call. I'm delighted to be joined by my colleagues, including our newest addition, BJ Grant, who has already made many contributions to Ventas in a short tenure.

Today, I'll recap our strong second quarter results, highlight the momentum in our life science, research and innovation business and address the macro trends in the economy and labor markets. We believe that Ventas is in an advantaged position to deliver value in this dynamic business environment because of our high-quality diversified portfolio and our team's industry insights and deep experience. Let's start with results.

Ventas delivered a very positive second quarter with $0.72 of normalized FFO at the higher end of our guidance range. Property performance was at or above our expectations led by 9% year-over-year SHOP same-store net operating income growth. I'm excited to showcase our differentiated life science, research and innovation business, which now spans 11 million square feet and accounts for 10% of our property portfolio. This portfolio has significant momentum in deliveries, leasing and investment activity.

With our strategic partner, Wexford, Ventas enjoys the nation's leading track record and reputation at the large and growing intersection of research, medicine and universities. Importantly, 77% of our rent is from high credit tenancy with 50% from universities with a weighted average credit rating of AA and the balance from investment-grade or $1 billion market cap companies. I'm really proud of what we've accomplished since 2016 when we began to invest in this business and how we've grown it since then.

Here are some examples of our strong R&I momentum. Starting with deliveries, we recently delivered the 100% leased Drexel University Health Science Building on budget and ahead of schedule. This $280 million-plus project located in the thriving uCity Innovation District in Philadelphia was developed by our strategic R&I partner, Wexford. Drexel's Health Science Building is ready to welcome Drexel School of Nursing and Health Professions, its School of Medicine and its graduate programs for biomedicine, when school opens this fall. The project is expected to provide a 7% cash and 10% GAAP yield.

We also intend to deliver One uCity Square by year-end. This 400,000 square foot multi-tenant lab and research building continues to expand our presence in the uCity Innovation District in Philadelphia, adjacent to University of Pennsylvania, and it is already 80% leased. We expect the building to exceed 90% leasing with highly-regarded life science and institutional research tenants in early 2023. The lease-up pace and rental rates are both substantially ahead of our pro forma, and the project is now expected to deliver over a 7% stabilized cash yield on cost of nearly $300 million.

We also see terrific leasing momentum across other portions of our life science R&I portfolio. Our portfolio caters to the top 5% of research universities in the nation, and these institutions are aggressively expanding their research functions, creating incremental demand for lab space. We are currently in discussions with a handful of universities about taking significant amounts of additional lab space.

In addition, we are leasing space quickly, and demand is high from commercial tenants who are attracted to university innovation centers. For example, at Pitts Phase II scheduled to open shortly, we recently signed a lease for 66% of the building with a premier global technology company. In Miami, we've already leased or committed 80,000 square feet that expired mid-2022 to new tenants at higher rates. Finally, we have momentum in R&I investment opportunities that will create value and deliver future growth.

Today, we announced two exciting new developments that are great examples. With these two projects, we currently have $1.6 billion of total R&I development in progress, all leverage our significant competitive advantage with Wexford at the intersection of research, medicine and universities. The first new project is the Pearl located in fast-growing Charlotte, North Carolina. Sponsored by Atrium Health, a top 10 health system, the Pearl project will house research, lab, medical and academic uses, including the Wake Forest University School of Medicine. Atrium Health, which is rated Aa3 is leasing 70% of the project and will be our 37% partner. The Pearl will also serve as the exclusive North American headquarters for IRCAD, the French Training Institute in advanced surgical techniques and robotics for world-class surgeons. We expect delivery of the Pearl in 2025.

On the West Coast, Wexford and Ventas have been selected by the University of Washington to develop a 300,000-plus square foot project anchored by the university for its research programming in clean energy, medicine and life science. UDub, rated Aaa by Moody's, is a world-class research university that receives more federal research funding than any other U.S. public university. Seattle is the #6 life science market in the U.S., and this project will expand our R&I footprint to six of the top 7 life science markets. We look forward to sharing more details with you as this exciting project progresses.

Behind these new projects, our R&I development pipeline contains an additional $1 billion of potential development opportunities. I hope that gives you a picture of the momentum we see in our attractive life science R&I business. It is a great example of our ability to enter a new space thoughtfully, expand and grow it successfully through different market conditions and align with excellent partners.

Regarding our capital allocation approach and activities, we've shown $1.3 billion of investment activity year-to-date, consistent with our stated priorities and balanced approach. We've also announced additional investments in the senior housing space at an attractive yield with future growth potential and a fully-leased medical office building, utilizing capital from our fund to acquire this stable MOB.

As we look forward in the third quarter of 2022, we are again projecting that our earnings will benefit from outstanding year-over-year growth in our SHOP segment, which is expected to increase NOI 12% at the midpoint, higher than second quarter's 9% year-over-year SHOP NOI growth rate. We do expect expenses and wages in Q3 to remain elevated, reinforced by today's jobs report.

We will also recognize the benefit of $20 million of HHS grants in the third quarter, which we received to reimburse us for a portion of the expenses we incurred to keep residents and workers safe during the pandemic, although that benefit will be muted by a $0.02 impact we expect from higher interest rates as a consequence of the Fed tightening.

The demographic backdrop is supportive of our business, and we believe we are well positioned to succeed. First, supply and demand conditions are favorable with acceleration in the growth of the 80-plus population. Our senior housing product is highly affordable and need-based, and the senior market we serve has significant resources. With senior housing starts and inventory under construction well below cyclical highs particularly in independent living, our senior housing business is set up for continued net absorption and pricing power. With this favorable supply-demand backdrop in senior housing, we will use the power of our high-quality diversified portfolio and our team's commitment, experience and insights to continue to create value for stakeholders.

Thanks for your time, and I'll turn it over to Justin.

[Justin Hutchens, Executive Vice President, Senior Housing]

Thank you, Debbie. I'll start by highlighting how well positioned our senior housing portfolio is within this sector, which is benefiting from very strong demand drivers. We are the second largest owner of senior housing in the world with communities located in 47 states, seven Canadian provinces and UK managed by 37 distinct market-leading operators.

As Debbie mentioned, the supply-demand fundamentals in senior housing are compelling. We have experienced an acceleration in the 80-plus population growth over the past two years, and 2023 will represent the highest increase in 80-plus population on record.

We also have outsized affordability in our respective markets where our target customer net worth is 4x the average cost of a stay in our setting. The senior population has significant savings and home equity that are utilized to pay for our services if the need arises.

On the supply side, according to the National Investment Center for Senior Housing, units on our construction as a percentage of inventory of 4.8% has not been this low since the first quarter of 2015, and deliveries of 4,600 units is down 49% from the second quarter of 2017 peak. And aside from the second quarter of 2020 has not been this low since 2016. 99% of Ventas senior housing markets are not exposed to new starts as we face an aging demographic, which is the strongest we have seen. These facts point to considerable upside in our well-positioned senior housing portfolio.

We are seeing early evidence of the benefits of our strong market position. For instance, year-to-date through July, net move-in activity continues to grow. And we have had positive net move-ins for 16 of the past 17 months, and NOI has been solid as our year-over-year same-store SHOP portfolio grew 14.2% in the first quarter and 8.7% in the second.

Turning to the second quarter SHOP results and our year-over-year same-store pool. We are pleased to report another quarter that was consistent with our expectations while delivering solid year-over-year and sequential NOI growth. Pricing power has been impressive. At 5% year-over-year growth, RevPOR is the strongest we've seen in the last 10 years, primarily driven by in-house rent increases, which are running approximately 8% in the U.S. and 4% in Canada, care rate increases at 10% and re-leasing spreads that have improved from negative 14.7% since the low point in the first quarter of 2021 to nearly flat in June. Same-store average occupancy grew year-over-year by 390 basis points to 83.7%, which was in line with our guidance. Leads, move-ins continued to perform above pre-pandemic levels.

The key selling season of May to September is off to a strong start. We have netted 470 move-ins through July, which is 307 higher than the same period in 2019. July average occupancy grew 30 basis points over June. These positive results in occupancy and rate drove same-store revenue to increase by over 10% versus the prior year.

Turning to expenses. As we anticipated, expenses were $3.8 million per day. Same-store operating expenses grew 6.1% on a per occupied unit day basis and 11.3% overall year-over-year driven by higher occupancy and continued macro inflationary impacts on labor and other operating expenses. Labor expenses remained elevated as expected as we navigated the inflationary wage pressure and macro staff shortages.

I am encouraged that our managers have successfully implemented a number of labor initiatives that we identified last fall. These initiatives include centralized line staff recruiting, applicant tracking technology enhancements and application process improvements. The result is an advancement in net hiring and the stabilization of our workforce. We have had 11 months in a row of positive net hiring, and we experienced a double-digit reduction in contract labor costs in the second quarter. Net hiring is critical to our ability to stabilize the workforce and reduce reliance on more costly and less reliable contract labor.

NOI grew 8.7% year-over-year, near the high end of our SHOP guidance range led by the U.S. at 14%, while Canada demonstrated positive growth again with 1%. The incremental margin from Q1 to Q2 was 80%, while overall margin expanded 60 basis points from 23.8% to 24.4%. NOI grew 6.1% in the sequential same-store pool.

Bob will cover our Q3 SHOP guidance shortly.

COVID conditions have remained relatively consistent the last few months. We still have new cases occurring for staff and residents causing marginal impacts on move-ins and staffing most notably in Canada, where the regulatory environment is more stringent.

Before I wrap up, I'll give a quick update on Ventas OI. We continue to utilize Ventas operational insights to engage with our operating partners more closely using our operational and analytical expertise. This quarter, we addressed digital marketing capabilities in three modules: technical website audits; UX audits, which are user experience evaluations; and hyper local SEO. This initiative is meant to optimize our digital lead bank, which is the fastest growing of all our lead sources and now represents over 3/4 of all lead volume. I am pleased with how well received Ventas OI has been among our operating partners since we introduced it at the beginning of this year, and we continue to develop it to be a model for mutually-beneficial capital partner and operator relationships.

I'll summarize by saying that we have made significant progress to our post-COVID NOI recovery opportunity with a lot of upside remaining. The occupancy low point was 78% in March of 2021. We've already grown significantly since then to 84%. And given our strong market position and supportive macro backdrop, we are excited about the continued organic growth opportunity in our senior housing portfolio.

Bob?

[Robert Probst, Chief Financial Officer]

Thanks, Justin. I'll start with an overview of our second quarter office and enterprise results before closing with our outlook for the third quarter. Our office segment, which includes our medical office and research and innovation businesses, performed well in Q2, delivering 3.2% year-on-year same-store growth. Medical office year-on-year quarterly same-store growth was 2.8% led by contractual escalators, strong retention, new leasing and favorable expense controls. MOB occupancy rose 50 basis points from prior year and 10 basis points sequentially.

R&I increased quarterly same-store 4.6%, also benefiting from escalators, leasing and higher parking. Same-store occupancy in R&I is a strong 93.2%.

We were very pleased with our overall enterprise performance in the second quarter with results top to bottom at the higher end or better of our guidance range. Notably, we delivered FFO of $0.72 per share, which is at the higher end of our guidance range of $0.69 to $0.73. And that result was led by SHOP, where cash NOI grew nearly 9% year-over-year, as Justin described, with occupancy revenue and NOI where we called it a quarter ago despite a challenging backdrop. When combined with strong performance in office and triple net, total property same-store NOI increased 3.5% year-over-year, above the high end of our guidance range.

Our performance trajectory and proactive steps to deliver results are being recognized. For example, all three rating agencies have made positive ratings moves in the last month to BBB+ stable, and 20 of our lending relationships provided a $500 million five-year term loan refinancing and upsizing the prior term loan at better pricing. We're very pleased that we took smart steps to enhance our portfolio quality and to reduce near-term debt, extend maturities prior to the run-up in rates and now have 89% fixed rate debt. Debt duration exceeds six years. Our average cost of debt is 3.5%. We have limited near-term maturities and robust liquidity of $2.5 billion.

In terms of Q3 guidance, we expect net income to range from $0.04 to $0.09 per fully diluted share. Q3 normalized FFO is expected to range from $0.73 to $0.78 per share. The bridge from Q2 FFO per share of $0.72 to $0.76 at our Q3 midpoint is as follows: a net increase of $0.03 from $0.05 of HHS grants received in July, less $0.02 from higher interest rates on our floating rate debt and a stronger U.S. dollar; plus $0.01 of property growth led by the opening of the Drexel R&I development Debbie described earlier. A note: to enhance comparability, we now present SHOP same-store and cash NOI results excluding the benefit of HHS grants received in all periods.

Let's drill into the SHOP assumptions for Q3. We expect SHOP cash NOI to grow in the range of 9% to 15% year-over-year or 12% at the midpoint, which represents an acceleration from the 9% year-over-year NOI growth posted in the second quarter. Revenue is forecast to grow 8% at the midpoint led by occupancy increasing 250 basis points to 300 basis points as well as through improving rates. Despite continuing broad inflationary expense pressure, our NOI guidance growth of 12% at the midpoint implies margin expansion.

Our SHOP Q3 revenue is expected to grow sequentially led by average occupancy, which is forecast to increase 100 basis points versus the Q2 average and incorporates a continuation of positive occupancy growth trends observed in July. This revenue growth is effectively offset by sequential operating expense increases in Q3, notably including broad inflationary pressure and an extra day in the quarter. Therefore, SHOP cash NOI, though ahead of seasonal patterns, is effectively flat.

Final Q3 guidance assumptions include no new unannounced material acquisitions or capital markets activities and 404 million fully diluted shares. For more information on our guidance assumptions, I would direct you to the business update deck posted to our website.

To echo Debbie's comments, I'm excited to have BJ Grant on the Ventas team. BJ has hit the ground running, and the improved and streamlined supplemental package posted as part of Q2 earnings is the latest evidence of the IR enhancements that are underway at Ventas.

To close, we believe we are in an advantaged position in the dynamic macroeconomic backdrop with the portfolio and the team to deliver sustained value creation.

That concludes our prepared remarks. Before we start with Q&A, we ask each caller to state one question to be respectful to everyone on the line.

With that, I will turn the call back to the operator.

[Operator]

[Operator Instructions] Your first question comes from the line of Steve Sakwa from Evercore ISI.

[Steve Sakwa, Evercore ISI]

I guess maybe for Justin. You laid out a lot of positives, whether it's the re-leasing trends getting better, the care pricing, the move-in, the in-place rate increases. Everything seems great. And I guess I'm just wondering why your occupancy gain is less in Q3 than it was in Q2. What's sort of holding that back? Is that conservatism? Is there something that you sort of see about the occupancy gains? .

[Justin Hutchens, Executive Vice President, Senior Housing]

Sure. So I'll just reinforce a few of those positives first. So the one thing I mentioned is that 16 of the last 17 months we've had positive net move-ins. Our year-over-year comparison has been really strong. In fact, in the U.S., in the second quarter, it was 470 basis points year-over-year. We're expecting that to be 320 year-over-year in the third quarter. Canada, by the way, was 250 year-over-year in the second. We're expecting that to be 200 year-over-year in the third.

One thing I'll mention is that the sequential growth is expected to be 100 basis points. We were 70 basis points in the last quarter, so we do have some sequential occupancy growth as well. But everything has been pointing up, and we're certainly benefiting from that, and we have a lot of upside ahead of us over time.

[Operator]

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

[Joshua Dennerlein, Bank of America]

A question on Canada. I guess it lagged in 2Q. What's the underlying assumptions for 3Q? And maybe just a little bit more color on kind of what was driving that underperformance?

[Justin Hutchens, Executive Vice President, Senior Housing]

It's Justin. So yes, Canada, first of all, it's 94% occupied. It's a very stable, strong, consistent performer for us. It did have growth in the second quarter. Just to break down the guidance that Bob gave, Canada in the third quarter is expected to have cash NOI growth of between 2% and 5%. And that includes revenue year-over-year 6%, and I mentioned already 200 basis points of occupancy on a year-over-year basis. And so we're anticipating growth in Canada. They've had -- we've had not a lot of activity that was COVID-related in the second quarter. But where we did have it, some restrictions on move-ins, it was disproportionately affecting Canada.

And then meanwhile, the U.S. is really the growth engine, where our cash NOI is expected to grow between 13% and 21% in the third quarter, revenue 9% year-over-year and 320 basis points of occupancy. So really strong, stable performer in Canada, growth engine in the U.S.

[Operator]

Your next question is from the line of Mike Griffin from Citigroup.

[Michael Griffin, Citigroup]

I just wanted to go on to the disposition guidance. I noticed that it declined $100 million quarter-over-quarter. Just curious if you can expand on that a bit, maybe assets you're targeting for sale and then what you might be seeing in the transaction market more broadly.

[Robert Probst, Chief Financial Officer]

Yes. I'll hit on the guidance. I can pass it to John on the second question. But we went from $200 million to $100 million in the back half. That's really a timing question as much as anything, frankly, in terms of expectations of when asset sales will close with various portfolios on the market. But the theme of looking for opportunities to upgrade the portfolio using those disposition proceeds to reinvest. We'll continue in the back half and into next year. Do you want to touch on transactions?

[John Cobb, EVP and Chief Investment Officer]

Sure. I mean, I think we had a good start in 2022. We've done roughly about $1.3 billion of new investments. I think we're seeing a fair amount of deal volume still out there. I think we're being careful in what we choose, but we are seeing -- still seeing a fair amount of volume of transactions that we do like.

[Operator]

Your next question is from the line of Michael Carroll with RBC Markets. .

[Michael Carroll, RBC Capital Markets]

I wanted to touch on the RevPOR growth expectations within your SHOP portfolio. I think we all understand the real estate part. But on the care part, with pricing up 10% in the second quarter, is that fully keeping up with inflation? And how often or can your operators pass those increases to residents given how quickly the inflation expectations are changing?

[Justin Hutchens, Executive Vice President, Senior Housing]

So as it pertains to care, we are seeing the actual care rate that's charged has been raised 10%, and that is a huge step in the direction of keeping up with inflation. The other thing that occurs is I'm sure you know is that as resident at on place and their needs grow, we'll have we'll have care charges increase in conjunction with resident needs, which helps to pay for the labor required to take care of residents. And so this is the -- it's really the highest we've seen in terms of care charge increases. That can happen more than one time a year. They tend to only happen one time a year, but there's -- it was encouraging to see the execution on care prices on top of the strong in-house rent increases, plus The Street rates are growing as well.

[Operator]

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

[Richard Anderson, SMBC Nikko]

So I want to talk about the sequential again and specifically looking at same-store versus total. So you did 70 basis points on the same-store pool. I think I had that right. And -- but when you look at the total portfolio, which is substantially more assets, the increase was -- I'm looking at the sequential rate, excuse me, the increase was somewhat less. So what is the -- maybe Justin, can you bucket the 546 assets that are total versus the 321 that are same-store and whether or not the difference is an incremental upside to Ventas beyond the same-store picture? Or is there something about new senior and some of the new acquisitions and transitions that are going to take more time for you to see the occupancy build that we're all anticipating? .

[Justin Hutchens, Executive Vice President, Senior Housing]

Yes. That's -- it's a good observation, Rich. There's a couple of hundred communities that are in that kind of non-same-store category. They have some unique characteristics. One is that they're lower occupied. So they run below the rest of the pool, kind of mid-70-ish. They have more upside therefore. They also have been growing faster. They had double-digit sequential growth Q1 to Q2. So the performance is good, and we do expect that pool to grow and be a big contributor to that U.S. growth engine that I mentioned.

[Operator]

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

[Juan Sanabria, BMO Capital Markets]

I just wanted to change tack a little bit notwithstanding the credit affirmation by the rating agencies. I just wanted to get a sense of the plan for the balance sheet with the leverage kind of ticking up at 7.3x. What the plan is? And when do you expect to be kind of back to within your target range, which is definitely lower than that? So just curious on visibility there and timing.

[Robert Probst, Chief Financial Officer]

Yes, I'll take that one, Juan. First off, we were really pleased to see all three agencies take that positive rating action to BBB+. And really, the predicate of that across the board was the trends we're seeing in senior housing. And you'll know the fact that we've been above the range due to COVID. It's the impact on SHOP NOI and the recovery, therefore, of the NOI has been -- continues to be the key to get back in the range. In the meantime, we've been doing smart things along the way. I mentioned asset dispositions to upgrade the portfolio, reducing near-term debt as an example. We continue to do those types of things depending on market conditions. But fundamentally, the predicate of getting back into that range is SHOP NOI growth.

[Debra Cafaro, Chairman and CEO]

Right, right. The net debt to EBITDA, the EBITDA growth is an important component of getting back in the range.

[Operator]

Your next question is from the line of Vikram Malhotra from Mizuho.

[Vikram Malhotra, Mizuho Securities]

So I guess I just want to step back and think about maybe a little bigger picture trend that you can maybe help us walk through or tell me where I'm wrong. You just laid out O&I really strong. You're producing 4-plus percent NOI growth. MOB is steady. You just -- and Justin, you laid out why the senior housing portfolio is very well set up into '23. So given all of this, if I want to boil it down to underlying earnings growth of FAD growth over a multiyear period, and I'm not asking for '23 numbers, what I'm trying to understand is, where would I be wrong if I take all of that and say over a three-year period, you can average 5% plus FAD growth. But ultimately, the underlying question is, does all of this translate into cash earnings?

[Robert Probst, Chief Financial Officer]

Well, the short answer is, yes, we do feel across the portfolio with different drivers, non-correlated drivers of demand and growth that we will see portfolio, cash flow growth and NOI growth, FFO and FAD to your point. Not giving you a forecast, of course, on timing and slope. But absolutely, that is the portfolio view. The organic growth opportunity is better than I've seen in my eight years at Ventas, and I think some time before that, and so growing reliable cash flows certainly is the projection.

[Operator]

Your next question is from the line of Steve Valiquette with Barclays.

[Steven Valiquette, Barclays]

Just on Slide 6 in the presentation where you show the $3.8 million per day of SHOP operating expenses in 2Q. That should be the same number in 3Q. I guess I just wanted to unpack that a little bit further when there could be more favorable operating leverage if that does come down. And I guess, at the end of the day, the question is, on an absolute basis, will that $3.8 million number actually come down? Or does it just stay flat to up, hopefully just grow at a slower pace maybe as you exit '22 and move into 2023?

[Debra Cafaro, Chairman and CEO]

I mean that's really a macro question. And obviously, we're in a very dynamic macro environment changing by the minute, as we saw with today's jobs trends. I think looking into the third, we do continue to see those inflationary pressures. I think we need to incorporate in policymakers' minds a longer-term view now with the new news today of where we expect to see CPI and wage expectations over the next year. But that is -- the $3.8 million is really a function of the macro. We are doing everything we can. Our operators are doing everything they can to manage that growth, including the net hiring that Justin talked about, which is pretty fundamental.

[Operator]

Your next question comes from the line of Adam Kramer with Morgan Stanley.

[Adam Kramer, Morgan Stanley]

Just wanted to maybe kind of drill in on Slide 9, and I appreciate kind of the disclosure there around pricing in RevPOR. Looking at kind of the releasing spread trends, really kind of positive trends here in the last year plus. I guess kind of the question is, where can we go from here? And again, not asking you to kind of drill down on the specific timing for when this may turn positive. But how kind of how much can you kind of push re-leasing spreads? And where can we kind of take that from here? And then on the care side, 10% is a really strong number. How high can you kind of push that number as well?

[Justin Hutchens, Executive Vice President, Senior Housing]

So this is Justin. So first of all, yes, the trend has been great, particularly the re-leasing spread trend. You might remember that even before the pandemic, that was typically a negative number around kind of mid-single digit negative. We're doing much better than that now. That really helps demonstrate the demand at the doorstep and the pricing power and see that number actually -- we're showing the second quarter on the slide you mentioned, but it was almost flat in June. It was -- that's really encouraging.

We do have groups of communities that are positive already from a re-leasing spread standpoint. And that's certainly possible, but there's always going to be a consideration around price and volume that will come over time. So this doesn't necessarily -- it's not necessarily going to look like walking up a set of stairs. There could be some movement in the trend.

And then on care, that's really -- it's just another form of pricing. The in-house rent increases really gave confidence around the pricing power. The re-leasing spread helped as well, and care is an important component in the assisted living business. So that’s an area that gets focused as well in terms of pricing. And the -- really the goal and opportunity is really just to keep a differential eventually between that revenue increase and that expense increase and drive the NOI growth and doing that in a way that's taking the best possible care of people.

[Operator]

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

[Nick Yulico, Scotiabank]

So I want to turn to the development program. I know you announced a new start with Le Groupe Maurice. You also have a new R&I development. Can you just remind us from a size standpoint, how we should think about incremental starts going forward? I think when you did Le Groupe Maurice originally, you talked about two to three development starts per year. And then R&I I know is sort of lumpier. You got a big one this quarter. And then I guess, just reminding us as well, just from a funding standpoint, how we should think about this? Is this all -- are there already construction loans set up within the joint ventures to fund most of this?

[Debra Cafaro, Chairman and CEO]

Well, thanks. Good to talk to you. I would say, yes, you're correct about Le Groupe Maurice. This has been a great investment for us both in terms of the as the existing operating assets that we acquired and then the development pipeline. And you're right, we have grown that at about two to three a year and did announce a new deal. These are really outstanding assets. And one thing we really like about the developments there is that when they open they're already significantly pre-leased, and that's a unique model that's been really effective.

In terms of the R&I business, these two new projects are super exciting. We'll continue to fund those. Optimally, I would say, in general, we do get construction financing for 50 to -- 50% to 2/3 of the building. And some of them we do on balance sheet and some of them we do under our Ventas Investment Management platform. And with these new developments, we would expect to optimize that capital structure for the best way we can for Ventas.

[Operator]

Your next question is from the line of Mike Mueller with JPMorgan.

[Mike Mueller, JPMorgan]

Curious, for the two new development announcements, how long ago did you start discussions for those? And did your expected returns -- I guess your return expectations evolve over the past few months?

[Debra Cafaro, Chairman and CEO]

These discussions with these major research universities are long processes. The good news is, again, this demand from universities for state-of-the-art lab space is just voracious, and we're able to continue with Wexford to target really this top 5% of research universities. The yields continue to be, I think, very attractive on a risk-adjusted return basis. And we've been successful in delivering projects on time, on budget. And so we have a very good track record there and an ability to modify yield based upon ultimate costs working with those universities. So it's a very good model with significant pre-leasing. And the risk/reward is quite good, which is why we keep doing it. We're lucky that we have this competitive advantage in this business.

[Operator]

The next caller -- will come from John Pawlowski with Green Street.

[John Pawlowski, Green Street Advisors]

I want to go back to Steve and Rich's question about the trajectory of SHOP occupancy. So 100 bps sequential improvements very good in a normal year, but we're still coming out of the basement. So I guess we're all wondering what's holding back specifically in the U.S., the trajectory of occupancy given we should have a lot of pent-up demand? And why aren't we seeing 150 bps, 200 bps, 250 bps type of trajectory of occupancy given the jump-off point we're coming from?

[Justin Hutchens, Executive Vice President, Senior Housing]

Well, I guess the way I would frame it is it's a function of supply and demand. We've had -- it's not just kind of a recent phenomenon that we've been experiencing these new movements. It's been happening for last 16 or 17 months. If there was some pent-up demand, I think I would point to the early part of '21 where we had a pop when vaccines were executed and April stands out, for instance. But I think what we're seeing overall is just really strong demand fundamentals. And like I mentioned, it's growing, and we have even more growth ahead of us in next year and beyond. So we're well positioned. We're playing into it. Our portfolio has been significantly outperforming the overall NIC data, the sector data that the NIC industry puts out. So we're growing and we're growing at a pace we haven't seen before.

[Debra Cafaro, Chairman and CEO]

And the sequential occupancy projected growth is higher than the second quarter sequential occupancy growth. So we're pleased by that and good year-over-year growth projected in the third.

[Operator]

Your next question is from the line of Dave Rodgers with Baird.

[David Rodgers, Robert W. Baird]

I wanted to drill down a little bit on commercial and leasing spreads a little bit for R&I and medical office. Can you kind of give us a sense for where those leasing spreads are coming in today? And I guess for MOB in particular, would be interested if you're seeing an increased level of spreads and those conversations and being able to push through additional escalators in the leases. So any additional color there would be helpful.

[Debra Cafaro, Chairman and CEO]

Pete is very happy for the question. So Pete.

[Peter Bulgarelli]

Yes. I got a question.

[Debra Cafaro, Chairman and CEO]

Yes, exactly.

[Peter Bulgarelli]

Yes, terrific. Well, we've been having a high degree of success in MOBs in particular and really all across office in growing occupancy. For MOBs, we were one of the few that had occupancy growth last year, also in the first quarter and then again in the second quarter. So we're very pleased with our leasing success. We have much less space to lease just based on the lease expirations in this quarter, but we're leasing quite a bit more space than we did last year at this time. So it's a great dynamic.

Leasing spreads and escalators are both increasing significantly. For the entire portfolio, the leasing -- lease escalator has gone up by 10 basis points just in this quarter. And we don't disclose the re-leasing spreads because I still haven't been able to make heads and tails of how it really works with some of our competitors, but it's positive.

[Operator]

Your next question is from the line of Tayo Okusanya with Credit Suisse.

[Omotayo Okusanya, Credit Suisse]

So a quick question about the triple net portfolio. And I guess the occupancy on the senior housing side, it's so well below your occupancy side. So kind of curious why that continues to lag as much as it does and if there's kind of any additional risk of having to address rents for some of the tenants that still have to kind of meet the weak rent coverage.

[Debra Cafaro, Chairman and CEO]

Justin is going to take that, Tayo.

[Justin Hutchens, Executive Vice President, Senior Housing]

Yes. So the occupancy is really just a function of the going in occupancy. So when I say that, I mean leading heading into the pandemic period, it was running lower already. We have higher absolute occupancy in our SHOP portfolio. The triple net portfolio is obviously a little lower occupied. It's carried a little bit more expense as well. But the kind of the credit situation and the stability of the cash flows have improved dramatically. We've put a lot of effort in over the last 1.5 years to improve our position with those leases. And we mentioned last quarter some COVID cleanup, that's occurred now. So if the trajectory of the sector continues in a positive way, we expect the triple-net portfolio to continue to improve and perform well.

[Operator]

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

[Daniel Bernstein, Capital One Securities]

So I actually want to go back to seniors housing and the projections for 3Q. When you look at the percentage of move-ins versus 2019, they've kind of been coming down over the last few quarters. Have you seen any -- and historically, we've seen some impacts from when move-ins right, when stock market goes down when home sales velocity kind of slows. Have you seen any evidence of that kind of deer-in-headlight effects in the last quarter or two and into 3Q? And does that play into your projections for 3Q?

[Justin Hutchens, Executive Vice President, Senior Housing]

Yes. So I mean one thing we do watch is consumer sentiment. It's something we keep an eye on because although it's not usually strongly correlated to senior housing because senior housing is more needs-driven, it's something that maybe could have impact on the fringes.

The growth we've experienced has been pretty consistent. We've had very consistent lead and move-in activity. We've also been relatively low, which is obviously helpful and supportive of net move-ins. So right now, I mean we just gave guidance on the third quarter. We're expecting growth, and there's good support for that. And we're always watching all the macro market kind of key indicators. Debbie mentioned a lot of them, and there's others as well. So we'll be mindful of the macro environment.

[Operator]

Your next question is from the line of Mike Griffin with Citigroup.

[Mike Griffin, Citigroup]

Just a quick question on spot occupancy growth. I noticed the occupancy build is kind of late in the second quarter. Maybe that explains the higher average expected in the third quarter, but kind of curious about your thoughts there and maybe any expectations around that.

[Robert Probst, Chief Financial Officer]

Yes, Michael, I'd say the spot in the average are pretty close to each other. So yes, we had a nice end of the second, but hope for the same in the third. So average is a good proxy.

[Operator]

Our final question will come from the line Juan Sanabria of BMO Capital.

[Juan Sanabria, BMO Capital Markets]

Just a question maybe for Justin. If I look at Page 17 of the investor deck focusing on affordability, it looks like you have significant headroom to potentially push pricing. Is that something that the operators are receptive to? Or just curious if that is a push for the OI platform and an opportunity in your mind.

[Justin Hutchens, Executive Vice President, Senior Housing]

Those are so much of my favorite topics, Juan. I would say the first…

[Juan Sanabria, BMO Capital Markets]

I had to go….

[Justin Hutchens, Executive Vice President, Senior Housing]

I know you did. I don't even think we have time to go through at all. I would say on the first part on affordability, I know you know this, but the big opportunity in the sector is price transparency, which we really don't have today. So you'll hear language like price discovery, where we're pushing pricing in markets and just testing for resistance. And obviously, this year, there hasn't been much because we're pushing on all fronts. And the affordability really points to that as well. And our operating partners have been just magnificent, I think, in playing into that opportunity and having the confidence to push, and it's an area that we're definitely improving in.

And then from an OI standpoint, we definitely do focus on pricing. It's a huge part of the focus even before we called it OI officially. Last fall, we were highly engaged with our operators to plan for the pricing execution that we've seen this year. So it's always a hot topic, and it's a big opportunity for the sector over time as well because it -- we deliver a tremendous service to our residents. It's comprehensive, and it's very valuable. And...

[Debra Cafaro, Chairman and CEO]

They can afford it.

[Justin Hutchens, Executive Vice President, Senior Housing]

And they can afford it, bottom line, yes.

[Debra Cafaro, Chairman and CEO]

So that's the definition of a good situation. All right. Thanks, Justin. I think we do have a couple more follow-ons and we can take those before we close.

[Operator]

Your next question is from the line of Tayo Okusanya with Credit Suisse.

[Omotayo Okusanya, Credit Suisse]

Okay. Great. So thanks for taking the follow on. No one ever really seems to ask about post-acute but just kind of curious what's happening over there, a slight decline in coverage for you guys, a lot of kind of news in general on the hospital side in the kind of first half of 2022 industry-wise. So just curious, again, it's a small part of your portfolio, but curious what you're seeing on that side.

[Debra Cafaro, Chairman and CEO]

Well, you've seen from the public hospital operators, all the providers are in a transition period now, I think they are coming out of kind of a COVID period and going into a more normal kind of census and census environment and acuity environment. So as wage pressures abate, I think you'll see improvement there and volumes continue to increase. Certainly, higher employment there is beneficial to the acute care business. So that's positive. They just got a rate increase, obviously, that will take effect October 1. And then in post-acute, I think you're also sort of starting to see some normalization in both the volumes and the beginning of some normalization in wages, but a long way to go there. And that's going to take more time, I would say, than in the hospital business, which is always at the top of the food chain.

[Operator]

Our final question comes from the line of John Pawlowski from Green Street.

[John Pawlowski, Green Street Advisors]

Pete, I'm hoping you can expand on the line in the press release talking about frictional vacancy coming into life science. Could you help quantify that and what caused the move-out?

[Peter Bulgarelli]

Yes. Thanks for the question, John. So we have really good occupancy, 93% in our same-store pool for R&I, But COVID -- we also have -- we have some tenants that are pure office tenants and innovation space, and we disclosed this last quarter that we had a couple of move-outs in that area where people have just reconsidered the space they need and the type of space they need. It's actually caused -- created an opportunity for us to convert some of that space into the high-demand lab space. And so we have over the next quarter or two some transitions. We'll be converting to lab space and repopulating some of those tenants -- tenant vacancies. But we are bullish about the full year. We're bullish about '23 and beyond.

[Debra Cafaro, Chairman and CEO]

And as I mentioned, for example, in Miami, we've already backfilled [80,000] feet immediately at higher rates. So Pete's done a great job on that, and thanks for the question.

Is that it? All right. Well, I want to thank everyone for your time and attention for your interest in the company. We're all here and ready and committed to continue delivering value. We know it's a dynamic environment, but we're excited about the future. So thank you very much.

[Operator]

Thank you. This concludes today's call. Thank you for joining. You may now disconnect.