Q2 2020 Ventas Inc Earnings Call
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I would now like to hand, the conference over to your Speaker today, Sarah Woodford Investor Relations. Thank you the floor is yours.
Thanks, Tina good morning, and welcome to the Ventas Conference call to review the company's announcement today regarding its results for the second quarter ended June Thirtyth 2020.
As we start let me express it all projections and predictions and certain other statements to be made during this conference call maybe considered forward looking statements within the meaning of the federal Securities Law. The company cautions that these forward looking statements are subject to many risks uncertainties and contingencies and stockholders and other should recognize that actual results.
May differ materially from the company's expectations, whether expressed or implied.
Ventas Expressway disclaims any obligation to released publicly any updates or revisions to any forward looking statements to reflect any changes in expectations.
Additional information about the factors that may affect the company's operations and results is included in the company's annual report on form 10-K for the year ended December 31st 2019, and the company's other SEC filings.
Please note that quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measures as well as the company supplemental disclosure schedule are available in Investor Relations section of our website at Www Dot dentistry dotcom.
Before I hand, the call after Deborah acre Farro, chairman and CEO of the company I'd like to know that we posted an investor presentation. This morning on our web site, which includes helpful information that the team will reference in our prepared remarks with those formalities out of the way I'll hand, it over to Debbie.
Nicely done Sarah and thank you good morning to all of our shareholders. Another participant and welcome to the event that second quarter 2020 earnings call.
I sincerely hope that you were safe and healthy and staying positive as the Kogas 19 pandemic persist in our country.
I'm proud to say that the Ventas team has been cohesive skill and enormously hardworking as we've addressed key issues and whether it be initial store created by the 10 day, we still have a long way to go and conditions remain highly uncertain uneven.
But we are encouraged by second quarter performance, then trend, which has continued into July.
Our enterprise benefited significantly in the second quarter from our longstanding commitment to asset class, operator and geographical diversification.
We delivered 77 cents of normalized FFO per share in the quarter led by our medical office building research and innovation and health care Triple net business, which collectively represent nearly half of our enterprise.
As a result at the pandemic, we recorded a number of noncash charges in the quarter, primarily focused on senior housing.
These items reflect the conditions affecting senior housing we shared with you in late June and our expectations remain unchanged regarding our business prospects and potential from that point.
As expected and consistent with those communication that Kelvin 19 pandemic significantly affected our senior housing financial results in the corner.
Our shop portfolio experienced the maximum occupancy impact from mid March through April, particularly in our large high quality high rate, New York, and New Jersey community.
Since then we're heartened to see the resilience of demand for senior living and the recognition of the value our industry provides to seniors and their families.
We saw us this gain intra quarter improvement and we intend to events and clinical results for our residents that continues into July.
Atria has led the way.
And as we previously anticipated operators at virtually all of our communities are currently open to new residents move in and the vast majority of our communities are offering residents and then rich living environment.
The focus of our operators now is to safely increased move in and stabilized occupancy and then seek to rebuild occupancy toward pre pandemics level.
We are proud of our early and rigorous focus on health and safety and our leadership in adopting testing protocols to keep seeing here and frontline caregivers today.
We have also taken decisive action during and after the quarter to keep Ventas strong and stable for all those two dependent upon us.
These include adjusting our cost structure by $25 million to $30 million annualized to further enhance our efficiency and effectiveness, while preserving our core competencies of capital raising investment asset management and service in the field.
[noise], increasing our liquidity, which currently stands at three and a half billion dollars and maintaining a strong balance sheet.
Conserving capital to the reduction of capital expenditure and our dividend.
Taking proactive steps to address the financial impact of the pandemic with our two largest senior housing tenant brookdale and holiday, resulting in mutually beneficial transaction with both large operators.
For holiday, we're pleased that we converted our 26 independent living community operated by holiday to shop.
And we recently announced a deal with Brookdale that provide centex shareholders with certainty flexibility and the opportunity for upside on industry recovery and creates better lease coverage and a stronger tenant.
We appreciate our constructive relationship with both companies and management team.
And continuing to advocate for seniors with federal policy makers.
Because of the crucial role senior living care provider play in protecting our vulnerable senior population and the impressive clinical record in our industry. We remain respectfully hopeful that HHS will provide much deserved and needed financial support to mitigate.
The impact of Kogan 19.
We also continue to explore opportunities to grow our enterprise and our investment team is being active yes selective.
Hi leg in particular, the strategic advantage of the open end funds, we successfully launched in March with access to institutional capital and a well performing core of quality assets under management. The fun is another tool that will enable us to expand our footprint leverage our team in industry.
Expertise and create value.
We also continue our capital allocation focused on our expanding research and innovation business.
While the existing organized portfolio continues to deliver outstanding performance. We also have two major projects well underway with leading research institution at the University of Arizona, and the University of Pittsburgh, both expected to deliver next year.
In addition, we just broke ground on drexel's academic tower in the U.S city market of Philadelphia.
Together these three developments represent over $600 million in aggregate investment and our over 80% prelease two highly rated tenants.
Our team continues to work with our development partner Wexford to build our pipeline of organic projects that will be actionable as soon as the time is right.
We were pleased to welcome Marguerite Nader to our diverse independent and experienced board in July.
Mark or beat to the top notch CEO and real estate executive and we look forward to benefiting from her insights as we move the company through the pandemic and forward.
In closing the long term demographically driven thesis for healthcare real estate and for Ventas remains in place. Despite the near term disruption caused by the pandemic.
We see resilient demand and strong performance in our different business line.
It has taken decisive actions so ventass can successfully navigate through current condition and capture opportunities.
We will continue working together for the benefit of all our stakeholders.
And now I'm pleased to ask Justin to discuss our senior housing business.
Thanks Debbie.
Let me start by noting that we witnessed an impact from call. It 19 on the senior housing industry in the second quarter that is truly unprecedented.
That said I am proud of how our industry came together in a crisis to protect health and safety for the most vulnerable segment of our population.
I'd like to publicly acknowledge all the hard work dedication and skill of our employees operators tenants and their teams in front line care providers for their core courageous efforts throughout this pandemic.
I'll start with a quick overview of our results in the shopping triple net portfolio.
It seems like Asia history, but we began the year at Shaw with a strong first quarter performance with annualized growth of 6% versus fourth quarter 2019, when excluding told it impacts.
The second quarter was a different story as our shop operators battles that pandemic.
Second quarter 20.8 average monthly occupancy came in approximately 470 basis points lower than first quarter average roughly occupancy for our same store a senior living operating porcari portfolio cool.
We ended the second quarter occupancy stood at 80.6%.
Coalescing related operating expenses totaled 42 million and after netting $15 million estimated mitigating cost savings the opex impact totaled 27 million and therefore total operating expenses grew 3.4% sequentially, which improved from previous expert.
Patients.
All colder 19 expenses, including testing labor and supplies have been reflected in property operating results.
Rob for declined 2.9% sequentially due to the disproportionate clinical impact and New York and New Jersey. When these high rent for communities were locked down and occupancy loss was most pronounced in the northeast net net as expected cash NOI for 390 asset sequential same.
Core portfolio declined from 165 million in the first quarter 206 million in the second quarter, a reduction of 59 million.
I will highlight or Canadian portfolio, which generated 30 percentage of our shop NOI.
It demonstrates both the benefit of our diversification strategy and a well orchestrated public health response.
Our 68 communities within our sequential Q2 same store pool, including our recent investment in late group, Murray's, where 94.2% occupied which compares to an average of 96.3% in the first quarter outperforming the us on an absolute and relative basis.
Additionally, our independent living portfolio more broadly inclusive partly of labor at Murray's at holiday retirement.
The demonstrated resilience during the pandemic significantly outperforming assisted living.
Specifically I'd like to highlight our holiday portfolio.
Since converting the shop NOI as approximated 7 million 589 in May and June representing a 1.1% improvement over prior year and ahead of our pre cobot budget.
Moving to our Triple net senior housing portfolio in the second quarter and through July that's off received all of this expected triple net senior housing cash rent.
Our underlying triple net portfolio performance broadly followed the same trends as our shop portfolio and as a result, we have been taking actions to proactively address certain leases.
I really happy we've been able to reach mutually beneficial arrangements with capital senior living holiday retirement, and Brookdale senior living already this year.
I really look forward to working with these management teams to optimize each respective portfolio.
Now I'll address recent trends.
First and foremost I'm pleased to report that the demand characteristics supporting senior housing remains solid even in the face to the pandemic as we have seen leads and move is improved since the low point in April and it's important to note. This trends persist in markets that have long said space the virus.
Such as New York, and New Jersey, and those that are still experiencing high new cases per day, such as California, Texas, Florida and Arizona.
As we reported to investors in June the key leading indicator if demand is communities loosening restrictions.
And allowing for a richer resident experience.
And most crucially allows structured families visits and small group dining and activities.
It is very encouraging to see that 86% of our communities are offering this lifestyle, which with appropriate infection control practices and testing protocols is getting much closer to the pre cultivated living experience.
We are pleased support a proactive industry, leading testing program, including our partnership with Mayo Clinic Labs that served as one component of a thoughtful reopening approach and has yielded over 69000 resident and employee test today.
In regards to our clinical results, although lessening we are still facing pockets of increased virus activity, which has caused some of our communities to reversed course and increase restriction throughout recent weeks. However.
As Debbie noted we currently have the highest number of communities accepting movements since the beginning in the pandemic at 96% New resident cases per day in the Ventas portfolio piece in April at 26 per day.
Averaged only eight per day in May through July and thus far in August we are only averaging four and a half new resident cases per day.
89% of our communities have either never had a confirmed resident case.
And or have not had a case in 14 days.
As a reflection of the diligent efforts by our operators, we have continued to see improvement in our leading indicators.
We ended July occupancy at 80.1%, which is approximately a 50 basis point decline since June as the deceleration in occupancy decline continues.
The improving lead and moving trend through July also persist, our move ins or 72% in our leaves or 74% versus prior year respectively.
Our move ins, however have not yet cover our move outs and therefore resulted in lower occupancy occupancy.
While we are encouraged by the improving leading indicators and evidence of strong demand drivers and moderating expenses, we do not expect experienced stabilized NOI performance until our movements and move outs level out all things considered we're steadily making progress toward a stabilized performance.
In summary.
We are cautiously optimistic regarding the positive leading indicator trends, we're seeing and our senior housing portfolio.
The efforts and success of our operators and providing more robust safe living environments for seniors.
And the meaningful improvements to move ends and leading indicator as we've seen since April.
However, we remain measured and our outlook because of the uncertainty or the pandemic.
Discontinuing financial impacts on our senior living business and the cost of stabilizing and recapturing occupancy in our communities, while focusing on the health and safety of frontline caregivers and residents.
With that I'll hand, the Florida Pete.
Hey, Thanks, Justin I'll cover the office segment second quarter results in trends, our office segment, which now represents 30% of Ventass is an ally.
Continues to show its value proposition financial strength and growth admits that pandemics.
MBS and research and innovation centers, the two lines of business within our office portfolio play a key role in the delivery of crucial healthcare services and research for lifesaving vaccines and therapeutics.
For the second quarter of 2020 reported office same store cash NOI increased.
2.7% year over year.
This outstanding result was led by our Anite portfolio, which grew 14.4% driven by strong lease up.
And with occupancy improving by 500 basis points and rent growth of 6.1%.
Strong performance in our University base developments affiliated with University of Pennsylvania in Washington University fueled our growth.
This growth was partially offset by a modest 40 basis point decline in the medical office portfolio.
Is driven by a difficult comparison period.
Lower paid parking receipts and increase cleaning expenses caused by cobot 19.
After adjusting for these factors office in the MLB same store cash NOI versus prior year would have grown by 5.7% in 2.3% respectively, respectively.
These results exceeded our expectations for the quarter.
Office occupancy grew by 20 basis points sequentially in the second quarter with occupancy in our 361 asset sequential same store pool, reaching 91.4% as of June Thirtyth.
And we'll be retention has increased to record levels at 97% for second quarter.
2020.
Total office leasing, which includes renewals and new leasing was 860000 square feet for the quarter and nearly 1.5 million square feet year to date.
Lab space continues to be in high demand in our NIE portfolio, which is currently 97% leased.
This is a clear opportunity area.
In terms of run collections.
Office tenants paid industry, leading 99% of contractual rent in the second quarter.
This is without the ducks, where deferrals, which were diminutive de minimis and actually half of those referrals have already been repaid.
Collecting 99% of total rent is a direct reflection of the quality of our tenants and the quality of our buildings.
Most tenants have received significant amount of federal support from a variety of programs designed to assist health care providers in small businesses. As an example, we estimate there are top 10 health system tenants have collectively received nearly 3 billion in cares Act relief and 10 billion in Medicare advance payment.
Yes.
As of August six 2020, our tenants have already paid more than 97% of July rents.
This is a faster collection pace than experienced during the second quarter.
This solid result, underscores the durability and quality of our tenant base, 88% of MLB in Hawaii is from investment grade tenants or HCV.
The 97% of our MLB and Hawaii comes from tenants affiliated with a major health system.
For our NIE portfolio, 76% of our revenues are received from investment grade organizations and publicly listed companies very solid foundation.
We also saw positive space utilization trends intra quarter did mirrored admissions in surgery volumes reported by the health systems. For example, in our MLB portfolio essentially all of our physicians were back to work in June.
Patient visits in paid parking activity more than doubled in June from the depths of April these trends of the continued in July although still below historical levels.
All of our MLB buildings are open for business and 94% of our ammo. These are in counties that our restriction free for elective procedures.
To ensure the safety of our tenants their patients in our employees, we have set of screening at certain building entrances and enhance our cleaning protocols.
All our nine buildings are also open.
Supporting multiple critical research organizations in fighting that pandemic.
We have 16 major university relationships, all of which anticipate opening in the fall with some level of on campus in person learning scheduled.
Essential field personnel will continue to serve our tenants onsite through the pandemic they've done a terrific job.
We are grateful for their effort and commitment that we continue to focus on the health and safety of these personnel and our tenants.
Finally, im pleased to let you know that are Dr. Center medical office building associated with an Emory hospital in Atlanta, Georgia placed seconds as the BOMA International Toby Awards in the vast renovated all office building category.
Amongst all submissions across the globe, an extraordinary example in utilizing our capital to reinvigorate a well located medical office building associated with a strong health system.
In sum, our occupancy and NOI in cash payment results and trends were outstanding during the second quarter. During this difficult time, we're honored to be caring for the caregivers to physicians the hospitals scientists and researchers who bring hope in comfort to those in need was.
That report I'll pass the baton to Bob.
Thanks Pete.
I will touch on our health care Triple net lease portfolio before it close with some enterprise level commentary.
During the second quarter, our health care Triple net assets showed continued strength.
As evidenced by receiving 100% of second quarter July and August trends from our healthcare Triple net tenants.
Acute and post acute providers the fed access to significant government funding to create liquidity and mitigate losses related to the Kobin 19 pandemic.
In terms of rent coverage through Q1 acute care hospital coverage was a strong three times.
Nationally hospital inpatient admissions and surgeries rebounded in Q2 with differences by market.
100% of Arden's hospitals are in states, where counties that are open for elective procedures.
Our team continues to perform extremely well despite the challenging market conditions.
Elteks has proven their value proposition in the pandemic.
Consensus has benefited from the increasing need for hospital capacity due to covert 19.
As well as the ultimate discharge of patients into this important care setting.
The majority of this benefit began to accrued in the second quarter, who has not yet reflected in the coverage stats reported today.
Per census, initially declined due to lower surgeries and acute care volumes, but census has improved since mid April and has benefited from rate enhancements.
SNIS experienced notably higher mortality rates.
With census down dramatically in the most profitable rehab patients also down.
But have also benefited from significant government support.
Turning to our second quarter financial performance.
Let me start with Q2 GAAP net income.
In the second quarter, we recognized net income of $50 million for the holiday transaction.
And even though our second quarter rent collections were robust across the business.
We assess the go forward collectability of future rents in the context of Covance.
We also took the appropriate stuff in the quarter.
Valuating the values of certain of our assets as a result of the material impacts of the pandemic.
As a result, we took several non cash charges in the quarter largely driven by senior housing.
First we wrote down the value of select senior housing real estate assets by 109 million included in DNA.
This reduction represents less than a half of 1% Bartolom that real estate asset base of nearly 21 billion.
Second.
So we collected substantially all of the expected Triple net senior housing rents in the second quarter.
We wrote off 54 million of crude straight line rent receivables in Q2.
Primarily representing eight tenants in our triple net senior housing business.
And convert those senior housing tenants to a cash basis with annual cash rent of approximately 80 million.
Notwithstanding the reserve will endeavor to Clecs, Paul our contractual rents going forward.
Third we took a noncash tax charge in Q2 of 56 million.
And fourth no our loan portfolio is fully currently the second quarter, we took a 40 million allowance for credit losses against our investments and a handful of small loans.
As well as a charge for unconsolidated entities.
I'd note that we did not take credit allowances against our holiday for colony loan investments.
The aforementioned holiday transaction and noncash charges are excluded from our normalized FFO.
We provided additional information in our supplemental on page 35, and in our press release.
In terms of normalized FFO per share we delivered 77 cents in the second quarter versus 97 cents in the first.
The Twentyth century change was a function of the reduction in shop and alive.
As we showed you in June shop in NOI in the second quarter was on average 20 million lower per month in Q1.
Our second quarter EFO same store NOI and shop Revpar results reflect the full quarter impact of the early in Signet significant loss of shock occupancy in March to April in the important higher Ed for New York, New Jersey markets.
As Debbie described earlier, we took decisive actions in Q2 to ensure ventas isn't as strong and stable financial position to weather the impact of the pandemic.
Including adjusting our cost structure, lowering our dividend and enhancing our liquidity.
In July as a result of these actions and stable capital markets backdrop, we paid down substantially all borrowings under our revolving credit facility.
As a result as of August Fiveth. The company has available liquidity of approximately 3.5 billion.
Including 2.9 billion of Undrawn revolver capacity.
600 million in cash.
Commercial paper outstanding and minimal near term unfunded obligations.
Finally, that's the gross asset value in the second quarter was 37%.
I'll close with a few comments on the third quarter.
As Justin described in shop.
Spot occupancy at the end of July is estimated as 80.1% representing approximately a 50 basis point decline over the course of the month.
Based on interim information provided by Ventas is operators.
This compares to a Q2 average monthly ask occupancy decline of approximately 150 basis points.
If current conditions hold.
We expect shop occupancy and NOI to sequentially declined in the third quarter.
Albeit at an improved pace versus the 20 million per month average and why reduction we saw in the second quarter.
Nonetheless, the environment remains uncertain.
Our operators continued emphasis in Q3 is on keeping residence Inn staff safe.
And building leads and move ins with a goal of stabilizing occupancy.
We will account for the Brookdale transaction in the third quarter, which we estimate as the two to three cents per quarter impact going forward versus the second quarter results.
In Q3, we expect to fully realize the benefits of reducing our June at cost structure as well as paying down our revolver.
To close this quarter has underscored like never before the importance of a diversified model operated by leading providers.
We are confident that we have the portfolio operators and tenants and team to weather the storm.
Looking further ahead healthcare real estate continues to offer compelling demographically driven growth potential inventus is well positioned to benefit from these powerful tailwinds.
That concludes our prepared remarks before we start with Q and Ed we're limiting each caller asked two questions to be respectful to everyone on the line.
Also given the fact, we are still remote well that's debbie that this quarter back for the Q in a.
In the past the football to the then PUC ventas team as needed.
With that I'll turn the call back to the operator.
As a reminder to ask a question simply press star one on your telephone keypad again that is star one to ask a question.
And your first question comes from the line of Michael Carroll with RBC capital markets.
Yes, Thanks, I wanted to talk a little bit about the seniors housing trends I guess, the leading indicators. It looked like in July the improvement of up 70% over the prior year is similar to June.
Does that mean that the liens trends is flat or we are continuing to see an increase as we go through through July beyond.
Good morning, My second question, Okay Catlin.
Good morning.
If you look closely at the numbers you'll see this is on page 13, investor deck that we share.
The total number is up.
So we have 13000 over 13000 leads versed in July we had over that will close to 12.5 thousand in June.
There was a little bit of slowness around the fourth of July as reported by our operators.
But altogether, we really view this as an improving trend.
The percentage versus prior year is just there for reference.
Okay. That's helpful. They can we talk a little bit about the the move outs I mean, obviously there is still below the historical trend do you expect some of those voluntary move outs to kind of pick up as we kind of hit the stabilized level.
Thanks, Jamie through the postcode environment or do you think it will stay low until a vaccine actually comes through.
Well in regards to move outs, there they've been relatively consistent versus prior year levels, except for the month of April which we've mentioned was driven by New York New Jersey.
And we're not getting any reports of pent up move outs or any really notable drivers that would change the trend.
So we expect move outs really to be relatively stable asps in any external circumstances were not aware of today and the big focus is really just to see leads and ultimately move as to overcome the move outs overtime.
Okay, great. Thank you.
Thank you.
And your next question is from Nick Joseph with Citi.
Thanks.
You mentioned the potential continued government support.
On the senior housing side or kind of the need for it how do you view, the probability or timing of potential structure or funding support that that could come about.
Well.
Industry has done very strong Cape town.
Wow.
Essentially that senior living care providers care for their largest group of seniors.
Thats maturity in the seniors are 85, Hanover, let many had significant co morbidity and importantly, the clinical a record.
The senior care providers, and keeping senior cell type spend far superior than in other sectors that have received significant support set apart all of the policy predicate for receiving support from 18 chat to mitigate the financial.
Cost of the carbon pandemic are there and really it's just a question that's continuing to educate the policy makers.
On as key points and continuing to again respectfully request.
Our financial support and then where were hopeful that remaining cost share.
Around our outreach.
Thanks, I understand the senior housing portfolio I think you talked about for sequential same store pool outperforming you mentioned LTM.
For July.
The sequential occupancy change for the annual same store pool. So for the smaller pool I think you quoted 50 basis points on the sequential side.
I will turn out I'll ask jetson archive could take that question.
Got to clarify the question was that the you want to year over year occupancy change.
No the sequential change in July for the 340.
Same store pool, that's on the annual basis, because I think the 50 basis points you talked about was for the 390 properties and includes LTM.
It is because the sequential pool contains bad so net we don't have that broken out that we can take that offline with you.
Thank you.
Thank you.
Our next question is from Jonathan Hughes with Raymond James.
Hi.
Hey, good morning.
The slide deck on.
Page 17, and Bob I believe you referenced this other triple net senior housing portfolio in your remarks.
What's the plan there I know youre going to try to collect the rents like you said, but any.
Any claims to sell or maybe retenant those properties just curious about the outlook there.
Thanks, and we are really happy as we said that we have.
Receive.
Attractive transactions, where our biggest.
Triple net senior housing operators capital senior holiday and Brookdale and I will turn it over to Jeff spend to address the the remaining 40%.
Thank you Debbie and so the other call contains many operators there is only one operator within Ed that's more than 1% of our ally.
The rest.
It really is very diverse too I mean, the diverse from a geographic standpoint, the diverse from the standpoint of how's the pandemic has impacted performance.
There there are certainly.
The product types mixed in and then there's also different credit profiles.
Within usually operators and they all have slightly different coverage ratio. So there's a lot of moving parts said we've been evaluating.
Certainly it's something we've kept the very close eye on there are few operators in particular that we've been more focused on and there's just one that has a little bit more than 1% of the NOI and that's that's had most of our focus and we anticipate having a resolution with them relatively soon but I think what I think.
The key takeaway is that the bigger and.
Yes.
Higher priority leases I've been addressed already.
We have a track record of taking action and then we have certainly.
A close eye on and all the dynamics I just described to determine any actions we may take moving forward.
Okay.
Fair enough that's helpful and then just.
Just one more for me and I.
I'd say this with all due due respect to you Debbie but has the board discussed.
Succession planning for the day when you maybe they decide to take step back from running the business and laid out who will be in filling your your shoes I would just appreciate any color. There. If you can share at the on board member on the call.
Thank you sure as I can tell you that airport, we have a great Board our board is very experienced and very independent obviously succession planning.
Regardless of that tenure or age of the CEO is one of their core functions of any forward and I can assure you that our board perform.
All of next duty and an exceptionally positive and good way and that would included succession and I've always been really proud that deep and experience fantastic team that we have and that we've continued to men.
Here, So you should feel really good about that.
Okay got it I appreciate the answers thanks from times money.
You bet. Thanks.
Your next question is from Rich Anderson with FMC global.
Thanks, Good morning.
Bob You mentioned.
20 million and Hawaii monthly average and.
Decline during the second quarter, and then you thought there would be improvement and the third quarter from that run rate.
Does that imply a third quarter after as you're looking at this.
You break it out between occupancy and rent and rate.
Ill call it candidly rich.
Sorry, qualitatively the story in the third quarter, we expect a sequential decline on occupancy and on and the bottom line and it really will be led by two two things that will determine that one is the pace of the occupancy decline, which we've seen good trends there as you've seen the deck and.
And secondly, revpar and drug for really a function of the the the pricing environment in the market.
Those will be the key drivers costs sequentially, we expect will not be a key driver, it's really going to be revenue driven.
But all and expect that that sequential decline the pace of that decline to improve versus a 20 million you referenced right. Then so I'm asking if you can break out the occupancy assumption in that and that decline.
Okay.
Yes, really even if it depend on how you know I missed in September play out rich [laughter], Alright fair enough.
Second question, so listening to your closest peers.
Peak has sort of set their area of growth going forward is horn lifestyle medical office Welltower has been more.
Thinking about growing in senior housing so two different choices, there, which is good for investors you always want choice or does that stand on that on a go forward basis based on the experience you had his senior housing still something that you would consider.
Growth area for the company or would you sort of turn your attention incrementally elsewhere, not saying, you'll abandoned but just what you're thinking going forward from this.
Thanks, I mean, obviously capital allocation is something that's extremely important we started out with a view that.
We price diversification by geography by asset class by operator, we found it to be a tremendous strength.
Over a long period of time over the past several years, our focus really has been on growing the MLB life science, and our Anite development business and that.
Has there any capital allocation priority and again is serving us really loud.
Our team is active really across sectors.
Although I would say that we would likely prioritize again life science, our Anite development and MLB businesses, while at the same time I would say we have terrific exposure to upside in senior housing in a variety of way if it's a significant part of our business.
So we're happy about that for when the business turn that we would continue to be very select skus in our senior housing investments, where we can make us.
Great.
Great color. Thanks, Debbie thanks, everyone.
Alright, well.
Our next question is from Vikram Malhotra with Morgan Stanley.
Thanks, Tim to question. Good morning, everyone, just maybe first on seniors housing.
Thanks for all the color and the detail you provided the deck.
Are you spoke I just want to instead on slide 13, where you show kind of the spot point to point movements and moving move outs.
Typically does need sort of end of the month benefit from just lower move move outs, meaning is it somewhat.
So the contractor when the when people move out.
And I'm just trying to send the 10 bips increases it more of a function of it seems like move ins were higher but I just wanted to clarify that more of a function of move ins outpacing move outs or or vice versa.
I'm I'm going ask Jeff and it takes that and then he he will well school all of US on me yes.
Operating trends.
Thank you as the first thing I'd say is it's not really a direct connection between the chart on the bottom right and the movement as a move outs reflected on the left move ins move outs are really recording a month for the bottom right is really showing a weekly trended so if you're trying to.
Do some math and correlate the two is going to be difficult.
But I will point this out of US hopefully is helpful. Too, it's really an age old rule in the sector that the vast majority of move in activity happens on the last say them up.
And then the math vast majority of move out activity happens on the first set them up.
And so that as you look across this trend here and you can see it on a weekly basis. It clearly plays out that way and that just gives you a feel for how.
How the how the to work together to ultimately.
Net occupancy.
Okay. Okay. That's helpful. Then just I guess second question.
Sure on senior housing maybe sticking with your Justin.
You talked about the you've given us not a data on the needs.
But maybe you can just citing the so called pent up demands for AWS.
Yes.
You know percent of occupancy just how should we think about and how should we think about that in terms of them when it impacts.
Is it a public what the impact assuming everything remained Marines opened as it just a gradual kind of bumped do whatever move and move out activity. We see how should we think about this pent up demand.
Well I'll say the short answer is we really don't know for sure.
And there is encouraging trends you know us as we've all mentioned.
I think the one that I was most encouraged about quite frankly was the clinical outcomes as the U.S. had increases and new cases with coal the 19, our portfolio resisted that trend and all the credit sales to our operators for protecting health and safety of all of their our residents and.
Thats a real credit.
Bring that up because the virus is a bit unpredictable as well and that's the big backdrop that we're facing we are encouraged though by two things. One is the fact that we're starting to offer a lifestyle off in our communities that more residents are attracted to where they can move about and do activities and participate in.
And dining and visit most importantly visit with their loved ones and we're really encouraged to see the improvement and leads so the demand characteristics are improving and they look good.
But it but it's a little bit too early to to start making predictions about about additional demand that that's at this stage.
Okay, but just to clarify the lead if we I'm just trying to understand the need based nature up assisted living and then independent living it's probably a little bit less needs based but if you take the leads and think about just said the percent of the whole resident population is that a rough way to think about the occupancy impact or maybe just help us site.
A bit.
Yeah, I'm not really sure how to size in more than what we've shown you here.
You can see yeah. If you look at page 13, and that you just look at you know that you can see the trend, particularly in the top two boxes you can see the leads you can see how the leads are translating into to move ins.
You know there things, we look at and look at conversion ratios, we look at lead volume and there has been.
Strong conversions in the early based products are independent living benefits from longer length of stay so they've had less dependency that Tim to maintain occupancy on new move in traffic and all of this is working together and really to create the outcome that we've been reporting so while moving parts side and in a big diversified portfolio I don't I don't know lemon.
Quite slow pinpoint anything more.
On that okay, no noise like I can pull up the I mean, I think it'd be has forget that.
Maybe get a sense of the.
Correct me, how lead that what the conversion rates and just the timeline I'm more just interesting I understand is this a you know the lead is it a six month paying as a 12 month thing or is it just historically it needs to how long did that conversion taken place, but I can follow up offline.
Okay. Thank you.
Our next question is from Nick Yulico with Scotiabank.
Thanks.
Good morning, everyone for first question is just going back to this issue of.
Move ins being still.
Below where they were pretty Cove, and I'm wondering if there's any data that you're getting from prospective.
Residence on why they're doing move ins and for how long because you know clearly you've had a rebound off the bottom slide leads move ins are still down 20, 25% versus last year I think there's lot of the day right now about whether we should be looking at the.
These improvements in move ins and leave.
Versus the bottom and making it an interpretation that there's going to keep being linear improvement or the other way to look a is that you had pent up demand.
And capture in April happened in June July, but structurally they're still not as much demand for move ins.
There was a year ago and this could persist because of Cove, it's still being an issue. So is there any is there anyway.
The thing have you could share with us on that.
Yes. Good question, let me start and then I'll I'll I'll turn it over ingestion. So basically again as you say we are encouraged by the sustained improvement in demand that we saw from that April timeframe to where we are now and it has I.
I think it's more in a former category of your question rather than the latter it's a need based businesses demographically driven.
Obviously, if you just watch the news you know, there's going to be and a psychological impact on.
Individuals and families willingness and readiness tentative and then I think that has had and FX. What we are happy about seeing in places like New York, where that might be at the center and obviously early and where there was that.
Psychological and clinical impact.
The pandemic Atria for example had in July that was better than you had last July significantly style and better then again, so I don't let's think of it at the time series, where you start to see the you know that the virus.
At some point it affects it then late were lagging indicator, let me say and then then it may affect new then either because psychology or because the communities are restricted can you move assets Jackson said.
And then at some point the cases get under control and improvements are made communities move back into the Green you know and can offer a richer lifestyle and over time psychology improved people feel more confident we have testing protocol and then you can see an improved.
And then the trends and we're seeing that Sonic geographical basis as you know operating exactly as I've described.
HM.
You know we send me you asked at this time with New York You know at this point starting to show some some stronger trends I'm, having been a month or two or three away from.
There are real maybe or of the pandemic there.
And what's also encouraging is that in the regions, where the viruses more widespread to south and the way we've learned a lot clinically and treatments are better protocols are better and therefore clinical results are better which is keeping more communities opened two new new residents.
And so this is say this is a multifaceted situation. It as we've said remains uncertain, we have to be very humble and in our expectation about our ability to predict the future, but so far we're seeing these sustained positive trend.
So I hope that puts it in perspective for you and answers your question.
Yeah. That's that's helpful. Thank you.
My second question is just going back to that straight line rent receivable write off I just wanted to be clear that does that the 53 million that's on Fyseventeen.
Does that exclude.
Holiday and Brookdale and then also in terms of that read that we're starting to hear the $80 million of annual cash rent.
Did you actually collect a 100% of that rent in the second quarter.
Yes, I'll take that one.
Ill answer the first question is holiday Inn, brookdale or not.
In that 53 million.
And the second question is we have collected all of the rents.
We expect it on these.
Tenants. So this is really a go forward assessment of future rents.
[noise] thing that were fully current.
Okay. So there's no if we're just looking at a cash NOI number for the quarter. There's no one just adjustments we need to make for those tenants nothing material now okay. Thank you.
Yes.
And our next question is from Tayo Okusanya with Mizuho.
Hi, Good morning, everyone. Bob is just sounds like plan is about football season.
Now he's more.
[laughter] alright.
So my first question is really around the senior housing portfolio, both shop and Triple net.
So you've adjusted the holiday a brookdale leases.
You've moved some of these smaller tenants to a cash basis. So it sounds like a lot of things people were expecting to happen up happen.
The two things I wanted to focus on first of all yes. So that you guys have kind of indicated a couple of quarters ago.
To be struggling more so than some of the shop operators.
Anything being done at that and kind of improve things that DSL.
What kind of all further diversification of the shop portfolio operator.
Any update on that.
Justin.
Hi.
Good morning, let me start with DSL and I'll revisit a comment I made on the last earnings call, where I referenced the the improvement the sequential improvement and first quarter performance versus the fourth quarter and SL was a contributor to that improvement.
So that was a good indicator certainly they they have it's a relatively young company, but as a company that has strengthened their management team that a lot of experience at the senior management level and we've observed really good access that they've made to strengthen the accompanying the platform. We've also noted that.
During this pandemic was obviously completely changes the performance profile of every company that they've done really well you know they have navigated the pandemic well and just as well as the rest of our operators in the portfolio and we're very pleased and very proud of the DSO management team for their contribution.
Once.
In regards to the second part in terms of diversification the other shop operating.
Platform really where we spent focus in this this stage of the pandemic is supporting existing operators in every way that we can.
We've been out.
The last four looking as we've been dealing with leases that you mentioned that we've been given a lot of support to the shop operating platforms. So.
Thats, where our focus has been at this time.
Okay Thats helpful. My second question is around leverage.
Do we.
Net debt to EBITDA, that's a little bit higher than your peers, just kind of curious target leverage for the company.
Any of the additional plans going forward to de lever or whether it's not really by an improvement in EBITDA growth post pandemic or how do you kind of think about.
Leverage overall in regards to our target leverage ratio.
Well that would be our first choice, it's improving EBITDA I'll turn it over [laughter] right right.
Right that's planned hey.
At this is this is the same question I'm sure you're asking everybody in the read sector tile because we're all seeing the same sorts of leverage pressure just due to the EBITDA. So no degradation, which ultimately we believe the timing.
And we believe in the stabilization of the recovery in senior housing, particularly and so thats the key.
In the meantime, the focus is on liquidity first and foremost in weren't a great spot there.
Yeah, we remain committed to a strong balance sheet, we have a long track record.
Of being within that five to six times range and when we've gone out we found a way back in for for net debt to EBITDA. So.
It's a I'm sure a conversation in every board room, but it's really a timing issue in my mind.
Okay Thats helpful. I'll, then just it's a good indulge me with one more question again acquisition.
Right now again, not a lot going on industry wide book on the telephone about what you see out there hop rates look them again, new just.
Kind of.
That does you're interested in is that changing is about moving there's nothing really happening.
You are in abuse, there, but I'll give you one I'll give you went into effect. So I mean, obviously, we're very pleased that we got into the lifetime fitness and have expanded that part of our business.
And I have a longstanding commitment to a hospital affiliated medical office buildings, mostly on campus at peak described.
And you know the cap rate for research and innovation or life Science has continued to stay strong them in many cases have even strengthened further so at that that's a little take that for years that that has enhanced the value of our portfolio.
Great. Thank you.
Alright gets there. Your next question is from Jordan Sadler with Keybanc capital markets.
Thank you good morning, and then we'll keep it to the two questions for sure.
First I wanted to follow up on the Triple net seniors housing.
Business.
In any business update on page 17.
There is a reference to the other all other triple net tenant at 1.3 can be done through.
One Q so I'm, assuming you know given the performance mirrors, what you're seeing the shop portfolio that continues to decline that's probably what precipitated the write offs.
But is there any incremental color you can give us around.
What those write offs portend for the $80 million give annual rent those a tenant for the rest of that portfolio.
So again, that's about 170 million net of cash rent its all relatively small tenants as Jackson said you know these tenants are performing and on an aggregate basis, you know substantially better than the capital senior Brookdale and holiday.
Tenants, where a prior to the pandemic. They certainly we'll feel that same pressures.
I've been sector that the shop operators are a CRM directionally that may have different you know credit profiles different geography different business models et cetera that could make the outcome you know very.
And and also I would just say that really and the the outcomes are going to be really dependent upon basically what's the trajectory of the property performance is going forward, whether there is some kind of government relief for the industry, what the credit supports that.
We have for the individual leases and honestly, where the pandemic goes and so so I think we've really demonstrated that connects to being decisive and proactive creative whatever words, you want to use and then you have our commitment to continue to do so but it's.
Bob said, you know, we will continue to try to collect our rent.
Okay.
Fair and then.
Bob I believe you you did touch base on the colony loan I heard a mention but I think the $40 million allowance.
Was unrelated to that can you maybe speak too.
What the assessment is they called the along at this point.
Bob I'll take that I mean, that's correct and I'm sure was not it was not that in the 40 million and the colony Len you know at the LIBOR based loans I think there continues to be at for the time being.
Very significant cushion between the cash flow of the collateral and the best service.
Okay. Okay.
Okay. Thank you.
Thank you.
Our next question is from Joshua Dennerlein with Bank of America.
Hey, good morning, everyone Thats. The question I I guess I'm curious to hear you pad <unk> has had any communities that maybe one from that kind of read like restricting move and to green.
Where they are allowing moving back now that cobot cases are rising across the country.
You know we.
Yes, and said we are glad that imminent green.
And that even the yellow we have record levels of community is now operating that richer environment 15 years really since the beginning of the pandemic ingesting can you talk about the news names that we've seen perhaps as the virus has moved.
The country sure.
So if we were to talk about the month of July one way to look at this is that.
99% of our communities at any given time were open and 1%, we're not taking move ins, but even within that there was movement and among the segments or movement. So France has I think there was around 30 communities that actually move backwards among the segments.
But then we had just as many are close as many improve so so that if there is little bit move it back and forth.
But very few communities quite frankly that are involved and the movement throughout the month of July and the net result of course is very positive to see sees the vast majority the portfolio offering that.
The more robust lifestyle.
Okay. Thanks, Okay sounds like sounds like the rising Cobra cases hasn't been a big impact.
And then maybe touching base on expenses going forward.
How should we think about operator's ability to flex labor.
I'm I'm, assuming a lot of folks cut their marketing budgets, what are their kind of expectation for ramping that back up and maybe how that might impact move ins at Leeds going forward.
Bob you want to take that.
Sure.
Kind of a gas in clutch answer I think to that question because.
Yeah, again, where do we saw $42 million a direct kobe costs in the in the second.
Labour and supplies and PPD and so on and we expect just because of the protocols necessary.
To keep resin safe that we're going to continue to see that.
That kind of.
<unk> expense at the same time.
Some of the offset and this really was it was better than we had expected for the last time, we talked.
Was on has another mitigating cost and you mentioned for example sales and marketing costs.
Which again as you have more communities in segments, one and two will have less marketing costs. So I would expect as we have more activity on the sales side, you'll see some some increase in the cost. There. Meanwhile, we can begin to dampen some of the pressure on the direct costs just because per unit costs are going down.
And they're managing the labor very efficiently. So I mentioned earlier to a question are you know kind of flattish if I thought about sequential opex.
I mean, it's really that gas and clutch phenomenon thats driving that.
Got it thank you.
Our next question is from Steve well equipped with Barclays.
Great. Thanks, Good morning, Debbie and Bob Thanks for taking my questions. So more and I just had a couple on the the Brookdale restructuring.
First I guess it seem to us at the Ventass was focused on getting some liquidity as part of that restructured Brookdale agreement with the turn out 35 million upfront consideration.
I guess first I wanted to get to speak to a little more of your thoughts on wanting to gain some upfront cash as opposed to maybe absorbing a smaller rent reduction.
Hi, I'm upset the mischaracterization of course, but and then alive.
Counting follow up question on Brookdale after after this one.
Sure thing so we think the Brookdale feel it's a really well balanced thoughtful structure, that's really customized to create some significant key benefits for ventass of course, but also for brookdale. So we're trying to balance creating certainty.
For our shareholder said sustainable rent stream and and that's really important you know over that you know as we still and the industry still in combating Kobe, we wanted to create significant opportunity for upside, which we then through the 8% Warren.
In Brookdale, so that we have the opportunity this year and industry recovery and in particular at Brookdale not only on our own portfolio, but also on their own portfolio still a brighter be upside participation opportunity and of course, getting the cash upfront and Oh all the upfront.
Consideration really replaced is over two and a half years of the cash rent reduction that we gave and so we thought that was really great and then the Meanwhile.
We did improve lease coverage and we created a better stronger you know more stable tenant overall NAV was really a very thoughtful again, I think very mutually beneficial type of transaction.
That accomplish the objective so those companies.
Okay. That's helpful and then the accounting question around this.
Separate from the rent reduction you had that statement in the press release that Ventass expects to recognize the full value of the upfront consideration from Brookdale ratably over the remaining base term.
Please correct I just wanted to frame as you divide that sort of 35 million or recognize that presumably I guess quarterly over the next five years or so.
Well that show up in one of the other income lines as opposed to property revenue estimate it will still flowing to add a lot, but I just wanted to make sure I understand which line that will flow into thanks, great. Great question, I'm going to him that over to Bob.
Yeah treated as deferred revenue flowing through end of why so that and amortized over there the remaining period of the of at least five and a half years.
I think of it prepaid rent, but they won't let me, let me write up that way, but that's sort of what I think that.
Well it show up as property revenue, though in terms of.
Yeah, how we should think about okay. Okay. That's helpful. Okay. Thank you.
Thank you.
Our next question is from Lukas Hartwich with Green Street advisor.
Thanks. Good morning, I was hoping you could go a little bit deeper into it and we'll be performance this quarter.
Oh, Thank you God I know that T phone rally has been awaiting that in question.
Pete I'm going to turn it over to you.
Yes, thanks, so much Lucas risking your question and I appreciate that.
Yes, this quarter, we're actually very happy with the and will be performance, particularly given koby conditions.
We have a substantial amount of pay parking that.
So as you might not be surprised took a hit in the second quarter, we were down in paid parking by over 2.6 million.
For the quarter.
In addition, we had premium cleaning costs. Our protocol was when when we were aware of someone walking through our building a patient walking through a building who is coated positive we would do a deep clean in the premises as well as lobbies and all common areas.
So there is substantial cleaning costs and then in addition in the second quarter of 2019, we had some.
Fairly large offsets on the operating expenses.
Such as real estate tax appeals that came in during the second quarter. So as a poor comparison tough comparison in the second quarter on the expense line.
Does that answer your question.
Yep, perfect Yep, and I'm, sorry, I'm on my next question is on senior housing, but I'm just curious [laughter].
I agree with what you're you put your your senior housing operators in terms of how they're preparing for the fall or are they preparing to go back into quarantine mode or how are they thinking about that I understand there's a lot of uncertainty, but just curious how they're preparing for it.
Hi, good good question were missing here at the beginning of I guess, then there's obviously a lot of uncertainty in schools and other types of settings, then I'll ask Jeff and you really comment on what the operators are doing as it relates to the fall.
The call. Thank you Debbie.
One thing I'll just point to its just the approaches that that our operators have used to keep our residents safe and you actually see an investor deck on page 15. It falls into three categories. You know the screening which is something that as a practice I really started or what the right away in a familiar with daily temperature checks and symptoms screening in the health.
Scenarios that happen and then to protecting which has to do a social dispensing and TV and residents cohorts and cleaning and disinfecting.
And that testing has been widely utilized across our operators.
As well so all of those about things have been working together to create an environment that is safe for our residents and our employees.
As you can see really from everything Weve Sheraton both on the call them through the materials. So that the results have been good and so as long as those trends persist we would expect to see communities open access to move ins and allowing for residents to move about safely among the in the community and have have visitation with.
Relatives that is that is really really important to the residents and but dumps on a very safe way and restricted manner.
So at this time the trend really is leaning more towards opening.
And certainly.
As we've seen in our own portfolio that if there is a new infection or or new infections that the find their way into community. They may reverse course event.
But the overwhelming trend is really been more towards opening at this point and it's also going to be interesting to see whether all of that the processes that have been adopted in the heightened sensitivity is really going to have any measurable positive effect on the spread of influenza in the fall and we.
Yes, no that their various hypotheses floating around but but that'll be an interesting it'll be an interesting test cases here to see whether data shows.
Better trends than usual, so we'll have to wait and see on that.
Thank you appreciate it.
Thank you.
And our final question comes from the line of Sarah can with JP Morgan. Please go ahead.
Hi, This is Dan on for Mike and all that I'm, just looking for Justin I'm, just wondering how some of the pickup in moving and torturing and trending in markets, where you see virus that this call list all of that happened.
<unk>, that's a great question and you can look at one P.M. today, primarily page 14, and you can see that we've included a map that describes what I'm, what I'm going to tell you and that is that the to David's point earlier, where we had the most impact really from the virus or in the early stages.
In New York, New Jersey, but the virus peak in that geography is well behind us as well and the highest lead and move in trend right now.
In recent weeks is really in the northeast primarily in New York, New Jersey, but having said that.
Away from that outlier, it's very consistently improving all across the country and you can see it.
As we reflected we haven't size of the circle on this page that reflects the NOI concentration the color really reflects that.
Oh, the state is reflecting the number of new case for 100000 population and the general population. So it indicates whether or not you know there's increased the virus spread in the general population and then the color the circles really about the move and versus prior year and you can see there's a lot of green circles and irregardless of what is high.
Happening externally with the virus and that's it that's a that's an indicator of the demand for our services and as I said, we're seeing that across all geographies.
And part of it also is the ability of the buildings to stay and the the more rich resident experience, which encourages new events and again, that's a theory, it's a very unpredictable trend and you know communities has just been set are moving in and out of this.
Frequently and depending on virus activity, but overall I think the map presents the right picture at this moment in time, but again, what we want to be cautious and humble about the predictive ability is going forward.
So if there are no further questions I really want to thank everyone for in their attendance today for their interest in our company for their participation and I look at you in yard stay.
Yes, you land and phase and we look forward to seeing you on the other side of this thing take care.
Thank you again for joining US today. This does conclude today's presentation you may now disconnect.
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