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. 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.

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 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. And with that, I'll turn the call over to Debra A. 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 the 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 a 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 leveraging 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 the 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.

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 the 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 the 80-plus population on record. We also have outsized affordability in our respective markets, where our target customer net worth is four times 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 under construction as a percentage of inventory at 4.8% has not been this low since the first quarter of 2015, and deliveries of 4,600 units are down 49% from the second quarter of 2017 peak. And aside from the second quarter of 2020, it has not been this low since 2016. Ninety-nine percent 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 and 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. COVID conditions have remained relatively consistent over 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 three-quarters 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.

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 the 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.

Your first question comes from the line of Steve Sakwa from 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?

Sure. So I'll just reinforce a few of those positives first. So the one thing I mentioned is that for 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.

Your next question is from the line of Joshua Dennerlein with 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?

It's Justin. Canada is currently 94% occupied, making it a very stable and consistent performer for us. We saw growth in the second quarter. According to Bob's guidance, we expect cash NOI growth in Canada for the third quarter to be between 2% and 5%. This includes a year-over-year revenue increase of 6% and an improvement of 200 basis points in occupancy. We anticipate further growth in Canada, although we experienced limited COVID-related impacts in the second quarter. When we did face restrictions on move-ins, they had a notable effect on Canada. In contrast, the U.S. remains our growth driver, with projected cash NOI growth of 13% to 21% in the third quarter, a year-over-year revenue increase of 9%, and 320 basis points of occupancy. Canada is a strong, stable performer, while the U.S. acts as our growth engine.

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

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 will continue in the back half and into next year. Do you want to touch on transactions?

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.

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

In relation to care, we have increased the care rate by 10%, which is a significant move towards aligning with inflation. Additionally, as the needs of residents increase, care charges will also rise to cover the costs associated with providing necessary support. This marks the highest increase we've observed in care charges, which typically occur once a year, although there is potential for more frequent adjustments. It is positive to see the implementation of these care price increases alongside robust in-house rent growth and overall rising rates.

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

I want to focus on the sequential comparison, specifically looking at same-store versus total. The same-store pool achieved an increase of 70 basis points, which I believe is correct. However, when considering the total portfolio, which includes a significantly larger number of assets, the sequential rate increase was somewhat lower. Justin, could you differentiate between the 546 total assets and the 321 same-store assets? Is the difference representing additional potential for Ventas beyond what we're seeing in the same-store figures? Or are there aspects regarding new senior living properties and recent acquisitions and transitions that will require more time before we see the expected occupancy growth?

Yes, that's a good observation, Rich. There are a couple of hundred communities that fall into the non-same-store category, and they have some unique characteristics. One is that they're lower occupied, running below the rest of the pool, around the mid-70s. This gives them more upside potential. Additionally, they have been growing faster, showing double-digit sequential growth from Q1 to Q2. The performance is good, and we expect this group to grow and significantly contribute to the U.S. growth engine that I previously mentioned.

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

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.

Yes, I'll respond to that, Juan. First, we were very pleased to see all three agencies upgrade their rating to BBB+. The basis for this across the board was the favorable trends we are observing in senior housing. As you know, we have performed above the range due to the effects of COVID. The impact on SHOP NOI and its recovery remains crucial for us to return to that range. In the meantime, we have been making strategic decisions, such as selling assets to enhance the portfolio and reducing short-term debt, which are examples of our approach. We will continue these actions based on market conditions. Ultimately, the key to getting back into that range is the growth of SHOP NOI.

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

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

I want to take a step back and examine a broader trend that you can help clarify. You mentioned strong operating income with over 4 percent NOI growth, and that the medical office buildings are stable. Additionally, you explained why the senior housing portfolio is well positioned for 2023. Considering all of this, if I were to simplify it to focus on long-term earnings growth and funds available for distribution over a multi-year timeline, I’m not looking for 2023 figures specifically. I’m trying to understand if it would be inaccurate to assume an average of over 5 percent FAD growth over three years. The core of my question is whether all of this converts into cash earnings.

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.

Your next question is from the line of Steve Valiquette with 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 on 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?

That's really a macro question. We're in a very dynamic macro environment that is changing constantly, as evidenced by today's jobs trends. Looking into the third quarter, we continue to experience inflationary pressures. It's important for policymakers to adopt a longer-term perspective in light of today's news regarding our expectations for consumer price index and wage trends over the next year. The $3.8 million is a direct result of the macro environment. We are doing everything possible, and our operators are fully committed to managing that growth, which includes the net hiring that Justin mentioned, which is quite fundamental.

Your next question comes from the line of Adam Kramer with 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?

This is Justin. First of all, the trend has been strong, especially regarding the re-leasing spread trend. You may recall that prior to the pandemic, the numbers were typically around mid-single digits in the negative. We are currently seeing much better outcomes. This illustrates the demand at the doorstep and shows our pricing power, as indicated by almost flat numbers in June, which is very encouraging. We already have some communities that are experiencing positive re-leasing spreads. However, we do need to consider price and volume as factors that will evolve over time, so the trend may not progress smoothly. Regarding care, it's essentially another pricing mechanism. The in-house rent increases have boosted confidence in our pricing power, and the re-leasing spread supports this as well. Care, particularly in assisted living, is a key focus for pricing. Our ultimate goal is to maintain a gap between revenue increases and expense increases to drive NOI growth while ensuring we provide the best possible care for residents.

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

I would like to discuss the development program. I know you recently announced a new collaboration with Le Groupe Maurice and also have a new R&I development. Can you remind us about the size of incremental starts as we look ahead? When you first mentioned Le Groupe Maurice, you indicated there would be two to three development starts each year. I understand R&I can be more variable, with a significant project in this quarter. Additionally, could you clarify how we should view the funding for these projects? Are there already construction loans established within the joint ventures to cover the majority of these costs?

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 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 66% of the building. 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.

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

I would like to know how long ago you began discussions on the two new development announcements. Have your return expectations changed over the last few months?

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.

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

I want to go back to Steve and Rich's question about the trajectory of SHOP occupancy. So 100 basis points 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 basis points, 200 basis points, 250 basis points type of trajectory of occupancy given the jump-off point we're coming from?

I would frame it as a matter of supply and demand. This isn't just a recent trend; we've been seeing these changes for the last 16 or 17 months. If there was some pent-up demand, I'd point to early 2021 when we saw a spike with the rollout of vaccines, especially in April. However, what we're observing overall is very strong demand fundamentals, which are continuing to grow, with even more growth expected for next year and beyond. We're well positioned to capitalize on this, and our portfolio has significantly outperformed the overall NIC data and sector data provided by the NIC industry. We are growing at a pace we haven't experienced before.

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.

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

Pete is very happy for the question. So Pete.

We've been experiencing significant success in medical office buildings and throughout the office sector in increasing occupancy. We were among the few to see occupancy growth last year, and that trend continued into the first and second quarters. We are delighted with our leasing achievements. Although we have less space to lease this quarter due to lease expirations, we are leasing considerably more space compared to this time last year, which is a positive trend. Both leasing spreads and escalators are rising notably. For our entire portfolio, the lease escalator has increased by 10 basis points this quarter. While we do not disclose re-leasing spreads as they can be complex and vary among our competitors, the outlook remains favorable.

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

Justin is going to take that, Tayo.

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 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.

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

I want to return to the topic of seniors housing and the projections for the third quarter. When examining the percentage of move-ins compared to 2019, we've noticed a decline over the past few quarters. Have you observed any signs of hesitation recently, particularly in relation to fluctuations in the stock market or a slowdown in home sales? Does this influence your expectations for the third quarter?

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.

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

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.

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

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.

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

I had to go….

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 we deliver a tremendous service to our residents. It's comprehensive, and it's very valuable. And they can afford it.

And they can afford it, bottom line, yes. 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.

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

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.

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

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?

Yes, thank you for your question, John. We have strong occupancy at 93% in our same-store pool for R&I. However, we have some tenants that are purely office tenants and in innovation space. Last quarter, we mentioned a few move-outs in that area as some companies reevaluate their space needs and types. This has actually created an opportunity for us to convert some of that space into high-demand lab space. Over the next quarter or two, we will be transitioning some of that space and filling those vacancies. We are optimistic about the full year and particularly about 2023 and beyond.

And as I mentioned, for example, in Miami, we've already backfilled 80,000 square 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 and 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.

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