You don't know me. I'm Josh [inaudible] . Down at the far end is Jeff Spector .
Absolutely. Where are you going?
There were a lot of changes on the team, and that's one that we kind of kept under the rug.
Yeah, no, it's fantastic. Debra Cafaro, Chairman and CEO of Ventas, CFO Bob Probst, Executive Vice President, Senior Housing Justin Hutchens, and BJ Grant as well. With that, I'll turn it over to Deb for opening remarks, but also to the Q&A and for them to interact with us.
Thank you, Josh and Jeff. It is a pleasure to be together with everyone again, and we appreciate the opportunity. As all of you know, Ventas, of course, we are at the intersection of healthcare and real estate, a diversified business model that is unified really by serving this large and growing aging demographic and with great opportunity. I look at us at the present time and really see how well-positioned we are as you look forward. We have a great opportunity with the senior housing recovery underway. And that opportunity is really twofold. One is from the recovery from COVID, and the second is really a very favorable supply-demand backdrop that is better than we've ever seen with limited new construction and senior housing, and of course, a 23% expected growth rate in the over-80 population as we look forward.
That recovery is manifesting itself as we look at the third quarter in very strong pricing power in revenue rate and a positive releasing spread that we mentioned in our new materials this morning. We do continue to see persistent broad inflationary pressures in the expenses in senior housing. We'll talk a little bit more about that. But in terms of the demand that we're seeing, May to September of this year is outpacing in a net move-in basis what we saw in the pre-COVID 2019 period. Again, so we feel really good about the demand side. We feel good about affordability. We like the fact that seniors are starting to earn on their savings and get significant increases in their Social Security, and the product, again, is very affordable.
I hope some of you had a chance to go on the tour with Justin and BJ of West 86th Street yesterday. When you go from the macro really to the micro, we have the benefit at Ventas of the marriage of Ventas' strong analytics, Justin's operating expertise, and that is translated into something we call Ventas OI. He'll talk a little bit more about it. But it's really executing and making database decisions around the assets and the operations that, with Justin's background and experience, we use to influence improved performance at the assets. The other points I want to talk about really is our science business. As you know, we're up to 11 million sq ft. We're in six of the seven top cluster markets. We have 75% credit tenancy.
Really, with Wexford, our exclusive development partner, we have the single best business in this elite research university space, that top 5% of NIH-funded research institutions. We are seeing really great opportunities on the development side. We've announced three great projects recently. We're seeing really broad and deep demand from the universities at existing projects as well as new projects to take space for their researchers. I think most of these universities really see their life science and research arms as a real competitive advantage. We love our positioning there. I'll mention a couple other points. We have new disclosure in the deck about our Ardent investment. We invested back in 2015 or 2016 about $1 billion for Ardent. Most of that was on the real estate. That investment has gone really well.
It's over three times covered, and it's over a 9% yield at this time. And I really want to focus on the OpCo, which is the operating company tenant there where we're a 10% investor with Sam Zell and management. A recent transaction was announced for a new investor to come in and make a minority financial investment in the OpCo that will be over four times our investment and a very favorable mark-to-market multibillion-dollar valuation on the operating company. So we hope that comes to fruition, and we're very positive about the value creation of the Ardent investment, which continues to be demonstrated. On ESG, environmental social governance, I'm proud to say we published our corporate sustainability report today. Ventas has invested for a long time in the E, the S, and the G, and we are a leader. We've made a net zero commitment by 2040.
We're well along in our planning to meet that goal, and we'll be giving updates as we go along. On the governance side, important news that we announced yesterday, that we continue to refresh, elevate, and diversify our board with the addition of Sumit Roy from Realty Income to our board. We're now 50% diverse, and we continue to drive excellence in governance as we diversify. So very proud of that as well. And we continue to find areas to allocate capital effectively. We're picking our spots, but we have some great opportunities, and we've demonstrated that focused really on the development of the university-based life science and then also in selective senior housing investments. So with that, I will close and ask my colleagues to join in the Q&A section. We welcome your questions.
Yeah, maybe we could actually start with Justin and Ventas OI. Kind of for those who joined yesterday at the. More kind of a little bit of a deep dive there, but it'd be benefit everyone. It'd be great to kind of go into a little more detail on that platform initiative.
Sure. So Ventas OI, it really, well, let me start with my background just in case you don't know. I am self-described as an operator in a retail building. In my 28 years of career, I've had 18 years in operations, and I've had 10 in the retail sector. Within the operations experience, I've had nine years of either being a chief operating officer or a chief executive officer of very large national senior housing companies in the U.S. and in the U.K. So that's been my background. Taking that and some team members that we've added and marrying that to data science and operational analytical capabilities to produce really a few things. One is information that is operationally driven insights so that we can help operators to focus where they're going to have the best opportunity to create value in specific markets, specific communities through specific actions.
The other is on the real estate side, we have the opportunity to make big decisions that are data-driven, so that might be a decision to transition a community from triple-net to SHOP, transition to a new operator, sell something, buy something, invest CapEx or redev. We're starting with the deep analytics. We're driving the process, and then we're bringing the manager and insights into it at the end of the process to decide ultimately where to create value, and then another area is just areas of kind of specialization. And one recently was digital marketing where leads are overwhelmingly derived digitally now. We did an analytical review and technical review of our websites, so starting with the technical website review, then we did a UX audit, which was the user experience involving websites.
Then we analyzed hyperlocal SEO, which is really the ability to source leads from the right neighborhoods in terms of where your website is facing. What was interesting about that, for instance, is we ranked 25 senior housing companies, some of which we own, some we don't. We included hotels, apartments, included aplaceformom.com, Caring.com, and one operator, actually, we were very pleased with this. It came out on top. It was actually Atria. They're better than everybody. But even Atria, through our interactions, found a lot of value creation opportunity through a hyperlocal SEO approach, and so we've had a lot of follow-up in the refining, the way the website's targeted. Other operators had more upside, but everyone benefited. A
And what's interesting too is if we have the in-house expertise. Most operators, if they neither have in-house expertise in this regard, they're doing marketing or they're using a third-party firm. None of these people are used to being measured. And so we've brought accountability to an area where usually they are the experts in the room. And so now we bring accountability and focus to it. And the intent is to continue to measure this on a monthly basis. So moving ahead, I'd say someone asked earlier, where have you made impact with this? And I'd say number one area is absolutely pricing. And we started on this last year with in-house rent increases. You can see there's a page in our deck where just across the board, whether it's level of care increases, rent increases, releasing spreads, we're demonstrating pricing power.
There's a compounding impact with this approach. What I mean by that is we're now in the season again. We're planning the upcoming rent increases. Last year, we had a lot of push, and we were really pushing our analytics and the high standards. This year, we're pushing on an open door because the operators have been through this with us. They're trying to get ahead of us, and we're looking to have even better results next year in terms of pricing.
Kind of. Federal market impact with Ventas. Yes. Maybe, how long can you walk us through how long this may take us to see that impact?
The first big impact was pricing. In terms of, and that's already played out, in terms of margin expansion, there's a page in the deck that we pointed to. It's really more of an illustration of operating leverage. It's on page 26. What this points to is it separates assisted living and independent living. We're always talking about how much we love the operating leverage in the business and how that plays to your favor as you increase occupancy. This is organized by occupancy band. You can see that there's an 89% group that has a 20% margin in assisted living. This illustrative portfolio is huge. There's hundreds of communities in each of these. So it's a really good sample size. You can see that as your occupancy goes up from 90 to 100, you're getting 900 basis points of margin expansion. Same with independent living.
I should point out the absolute margins too. It's 29% in AL and 43% in independent living. So your question is, how are we going to know if it's working? How is it getting faster? That's a little bit of a gray area in terms of it's not as clear as.
Well, I guess, wins and losses per se. Could be all else equal, w ould you be able to like for the same level of occupancy, you think you'll be able to achieve higher margins as a result of this initiative?
It's intended to drive performance. And so, yes, we do. The quantification of it is a little bit more of an art, but.
Yeah. So I was wondering, first of all, what did you identify in your analysis that led you to focus on pricing as a metric? And then I'll look at this. It suggests that really the lever is occupancy. I'm just wondering how those two?
Right.
Right. Yeah, that's great. So the analytics we started with last year was cost growth by market and what price would need to be to offset that. It was a necessity, and so where operators typically—I think everyone knows there's no price transparency in senior housing, so you don't know what your competitors are charging, and there's been a bit of a routine process of putting around a 5% rent increase in place, which is actually, considering where CPI has been, not bad, and the operator's point of view as well, we have a lot of recovery to go after from an NOI standpoint. Maybe I'll do 6%. We said, "That's not going to be enough. Look what's happening with the agency. Read into what's being projected in terms of inflation.
Right.
We need a lot more." So it was actually started with expenses by market, and that really made the case for the rent increase.
I think this is where, again, this environment that we're in is extremely dynamic. One of the best indicators that we have right now of optimism in the space is what Justin just touched on, which is we're driving these, and this is what the operators were hesitant to do. They said, "Well, we've never been able to increase rate 8% when we have 80% occupancy." We were able to demonstrate logically with information about why those rates were appropriate and even though there was 80% occupancy and why they would be accepted by the customer. We were right, and we actually affected the whole market because we were the first people kind of to come out with that publicly.
And then the second part of it was the reason why we were so comfortable was the demand was so strong and growing. So it combined the necessity with demand, and it was the right call. And it continues to be.
So the view isn't that those price increases.
Right.
The occupancy growth, as I mentioned, yes, has been very strong and continues to, net movements continue to be outpacing 2019 levels, and the in-place increases are also rising, and that's given the operator's confidence to push there as well.
So there's always, as part of the regular OI analysis, there's price elasticity. So we'll look at markets now and say, "Okay, are there certain markets where we shouldn't put pricing as much because there's a volume trade-off?" There's others that volume and price is just rolling. So we want to keep pushing on those. And that's all part of the analysis and then ultimately the institution.
And so can you elaborate on the digital movements? I was surprised to hear that.
Good.
Yeah, sure. Let me just pull up. There's a token here on the, so it's our first.
18.
18.
Yeah, it's page 18.
Okay. So here's the and a lot of this, like a lot of sectors, the pandemic really pushed technology a lot faster. 90% of the total lead volume now is derived digitally in the sector. And that's up 800 basis points from where it was pre-pandemic. So there's been a shift to digital leads. So the importance of this is you couldn't find a bigger priority than your lead source. So therefore, what can we do to be sure we're being most competitive from a digital lead standpoint? And it all starts with a couple of things. One source of digital leads is Place for Mom and Caring.com. It's your referral agencies. They charge per placement. They have a pretty good market share. Then there's your website. And we've been investing into the websites. We then measured it.
The first thing you do when you do a technical website audit, you're checking to see you want to be as appealing to Google search as you possibly can. When you audit it, you'll find discrepancies. Where am I showing duplicates? Is there duplicates? Is there confusion in terms of which page to go to? It will identify the errors, and it will show it to the operators and the third-party managers that manage with digital marketing. They'll clean it up. It was cleaned up the website to be as appealing to Google as possible to be as competitive as possible. There's like 140 issues that usually pop up when you do these audits. The second part was, what's the experience of actually using this? If I'm a consumer and I want to pursue a placement, is it easy? Does it have the right information?
Is pricing disclosed, which we're pushing? And because we want transparency in the space, and we know consumers want it, I can't remember ever buying something on Amazon that didn't disclose the price. So we need to move the sector into what the consumer wants, which is transparency around pricing. And then all the other aspects of using the website, how does that stack up to other senior housing operators, but also how does it stack up against Marriott and apartment companies, etc.? And then the hyperlocal SEO analysis is probably the one that was most powerful because you could have all of this in place and still have a shotgun approach. And what you really want is if I'm sitting here and I'm Googling, Google searching for a hotel near me, Conrad should show up number one, and it probably always will.
But who's going to show up second, third, and fourth? And if I'm two blocks away, am I still in the top three, or did I fall back down to the top 10? So you want to make sure that your community within that local market is scoring high from every part of the market where you think you have potential customers. And that's an art and a science. And so we've assessed that. We've given the feedback back, and then we can measure it every month, see where we stand. Well, the net result is more leads, and most importantly, though, higher quality leads. That's the intent. And stay competitive and try to get ahead of this.
Thanks. And does this program help with making capital improvement decisions at all, or?
Yeah, it definitely does. And so if you think about the evolution of real estate management from the standpoint of senior housing, the old way in the triple-net is that really the operators are responsible for deploying capital to the asset. Now it's our asset. It's our P&L. It's our licensed operation. We invest in real estate. And we want the operator's feedback, but we want to make sure we're making good capital allocation decisions. And so we have a just picture of a funnel, all these different screening criteria to say, "Where can we put capital to have the best impact?" We saw West 86 yesterday. Great example. You have a good asset, really strong historical performer, faces new supply, higher price supply, which actually raised the ceiling in the market.
We vested into the units and the common area corridors, and the units are getting—they're getting 20% more, and it's a two-year payback on the capital spent. And we're taking the same approach, the same decision across our Holiday portfolio, other Atrias, transition 88 around the country. Where can we put capital to make the most impact the fastest? And then we bring the operator in. We said, "Give us advice on how to design it. Give us advice on what improvements can be most competitive." And so they certainly play a role, but we're driving it first through this analytical process and avoiding the kind of subjective decisions.
My last question is, do you have your team in place? Or is this platform still being built out?
It is in place. We have a fabulous team. There were some investors that came through. We had a meeting in Chicago and got a flavor. I think some are actually in the room today, but we were able to showcase our teams, our data scientists and our head of the senior housing analytics, and then a couple of other resources. And everyone was really impressed. And so the goal is to try to get a little bit more exposure so that you can see the depth of the talent. And then we'll talk more about this moving forward because it's a big part of what we're focused on.
I'm going to talk to Paul on that, so to put that in perspective, does this shift in digital leads change the competitive landscape for you guys and maybe big operators to small operators? Or does it change the customer acquisition costs that we look, almost like self-storage?
Yeah. So that's come up a lot. I mean, ideally, you want to actually take market share from the referral agencies. But the reality is, you still need them. And so what we recommend is just cast the wider net, get more from your website, and continue to get from them. If you can ever truly take their market share, then it's going to reduce your costs for acquiring a customer. But that's really not the goal. The goal here is to drive volume and also make sure that we're paying market rate when they move in. And that's the pricing side.
It sounds like you were pretty excited about the Ardent Health transaction. Kind of remind us of Ardent and Sam Zell, the cash-out for your investment or something else kind of.
Okay. So happy to do that because it's been a really good story on both real estate and on the OpCo side. The short answer is we do have a monetization. We have an opportunity to kind of mark the investment to over four times what we invested in, but we also have a monetization opportunity for a portion of the stake. And if it goes forward, realize a gain. But we structured the deal in a way where we would have the option to participate in any kind of monetization opportunity on a pro rata basis. And so that's a good structure for us and one where we can achieve some liquidity, some gain, and basically retain a 7.5% interest in a multi-billion dollar valued organization. So very good.
And then, as I mentioned, the real estate, which is where the lion's share of our capital was invested, is continuing to perform very well on the triple-net basis. And Ardent's just generally done well.
Just in relation to what I continue to grow, and I guess it's the hospital sector that it.
We definitely have thought that a good hospital that has market share and pricing power with commercial payers is kind of at the top of the food chain in healthcare. And they're not plentiful, frankly. And so we seized the opportunity with Ardent and are really happy with it. And we certainly would add to it if we found something of a similar risk-reward profile because you kind of have to get it right. And so in this case, I'm glad to say that so far we have and would certainly invest additional capital if we had the opportunity to do so, either with Ardent as they grow or with others of a similar quality and risk-return profile.
Can you start more broadly against the transaction markets? Changes you see across the different.
Yep. Well, we're in a dynamic market across the board. And obviously, capital costs for public and private real estate companies are changing by the minute, as we saw this morning. And meanwhile, as we know from long decades of experience, cap rates take longer to adjust, right? And so our focus is really on picking our spots where this Life Science university business, where we have a huge competitive advantage. We can buy cluster-market Life Science with our fund that has kind of a lower cost of capital. That's been a big success story as well. And then really on senior housing, selective investments. We just acquired something at a six-cap cash going in with growth potential. That still works. And then, of course, we're finding ways to fund things through dispositions, through lower cost pockets of capital that make these transactions work.
Where do you think you've seen the most separating movement so far?
There hasn't been a lot of transaction data points, and that typically kind of will take a while to really get enough data to say, "This is really where it's moved.
On the senior housing side, on page seven, it's pretty interesting.
Yes. Bob loves that page.
I love page seven.
Question for Bob. Go ahead.
Is there a question in there? So you just want to admire it?
That's great.
Yeah. There's a green bar, the releasing spread.
The releasing spread is very positive. So one, is that historically where they've been positive? And where do you kind of expect them to go in the overall rate growth?
There hasn't been a positive releasing spread in at least a decade. Justin will tell you from a history lesson, there were two times in his career in the last 20-odd years that we saw that. One was just coming out of the financial crisis, and one was earlier in 2000, where you had this really positive supply-demand dynamic and a positive backdrop. Relative to that, we are light years better in terms of the fundamentals. So we would therefore expect that there is more opportunity here. And some examples of that clearly are the in-place increases. We mentioned we took 8% in the U.S. last year. Our move-outs, financial move-outs with 8%, were de minimis. So clearly, back to price discovery, there's an opportunity there as we think about the coming in-place increases.
Care is a second area, not only in terms of the amount of the increase, which we're seeing 10%, but also the frequency of that increase. And then, of course, street rates. All of those are working together in driving the RevPOR to over 5%, the highest we've seen again in years. And all of this, of course, necessary in light of the operating expense pressure we're seeing from an inflation perspective. But we have the pricing power. There's no question.
And then, Justin, you mentioned expenses. How do you think about that going forward and remind us where you are on the agency? I might throw that to Bob as well.
Expenses, sure, which is page 12. Look, we're seeing inflation, no surprise there, across the operating expense base. Let's just start with labor. There's a lot of discussion around labor. In our guidance, our expectations was continued inflationary pressure in labor. We are seeing that as we look at our performance thus far in the quarter. The mix within the labor bucket, which we look at overall, is changing a little bit. We had expected continued improvement in contract labor, i.e., lower. That was a trend we were seeing. That seems to have flattened out. I mean, these expenses have stayed higher. But meanwhile, the in-house labor has been slightly favorable. The net of those things effectively is putting us back in the same place versus our expectation, which again was to be higher due to inflation.
But where we are seeing things that are above expectation are things like repairs and maintenance, food, utilities. There is pressure really across all those buckets. So again, back to both the macro picture, as we think about labor, where is the market going in terms of the labor market? That will strongly influence the labor component and then inflation generally for the rest of the cost base.
Let me get to the flat arrow.
You should. Yeah, there was a down arrow if you looked at the last one. So yeah.
Yeah. But the main takeaway, as Bob said, is that labor in total, and the vast majority of the labor expense is outside of that line. It's in the installed base. That labor in total is consistent with our expectations, which was growing because we know we have wage inflation in the United States. So the mix is a little bit different between that installed base and the contract side.
With that, we're actually right out of time.
Oh, my goodness!
Oh, how we're doing?
We're just getting started.
Thanks.
But we do have a few rapid-fire questions that we've been asking all the management teams to get response. So the first one is, which of the following is the greatest macro challenge facing the U.S. public today? A, risk of higher rates, B, risk of a recession, or C, the rise in private equity and non-traded REITs?
Higher rates.
Second question is, which of the following is the greatest sector specific risk? One, labor issues, two, supply, or three, capital markets?
I mean, capital markets for us in our customer base is an opportunity. And otherwise, I would say within senior housing and healthcare providers, I would say it's labor.
The final question is, are you seeing any signs of weakening demand? Yes or no?
Our demand is above pre-pandemic levels. May it continue.
Awesome.
Thank you. Thank you very much, Josh.
Thanks, Josh.
You too.