Q3 2020 Ventas Inc Earnings Call
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Ladies and gentlemen, please standby your third quarter 2020, Ventas earnings conference call well begin momentarily again. Please standby your conference will begin in about two minutes. Thank you.
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At this time all participants are in a listen only mode later.
Sure we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like turn the conference over to your host Mr. Woodford Investor Relations. Please go ahead.
Good morning, welcome to the van <unk> third quarter financial results Conference call earlier. This morning, we issued our third quarter earnings release supplemental and Investor presentation. These materials are available on the Ventas website at Www Dot Ventas Threet dotcom.
As a reminder remarks made today may include forward looking statements, including certain expectations related to cope in 19 and other matters Forwardlooking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from does [laughter].
For a more detailed discussion of these 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 in this call for a reconciliation of these measures to the most closely comparable GAAP measures. Please refer to the Investor Relations section of our website I will now turn over the call to Debra acre Farr, Chairman and CEO.
Thank you Sarah good morning to all of our shareholders and other participants we want to welcome you could that impact third quarter 2020 earnings call.
The Ventas team is dispersed that you're not fighting spirit as we join you for todays call.
I'd like to provide an overview of our consistent strategy discuss our third quarter results.
I like how we are driving our research and innovation business for where describe our competitive advantage and managing institutional third party capital and touch on the positive senior housing operating trends that continue into October.
Our enterprise continues to benefit significantly from our steady commitment over a decade and various cycles.
Okay class, operator, and geographical diversification.
We aim to generate reliable growing cash flows from a high quality diverse portfolio of assets on a strong balance sheet.
We've seen that staying disciplined about diversification has protected the downside and also provided myriad opportunities for our stakeholders.
The current environment is certainly proving out the merits of this strategy.
First our diversified portfolio is enabling the company to remain strong and stable. Despite the disruption occasioned by the COVID-19, pandemic, which has affected our different asset classes and geography in non correlated way.
Medical Office research and innovation business, and our health care Triple net lease business now represents over half our enterprise.
During the quarter. These asset classes have continued to perform well and lead our third quarter performance, enabling us to deliver 75 cents of normalized FFO per share.
Second our diversified asset base with five vertical has given us the ability to continue successfully allocating capital overtime and to recycle sport.
For example, following the spin off of our skilled nursing business, we invested in high quality health systems with order, which is currently performing very well as hospitals have asserted there's been traveling to the health care delivery system in the U.S.
Also just as we did when we allocated capital to the medical office building business a decade earlier in 2016, we entered the research and innovation business and we have found significant opportunities to drive that business forward. Since then through both ground up development and asset acquisition.
The addition of life Sciences to our enterprise has provided an uplift to our results our investment activity and our enterprise value.
Two recent examples of the benefit of our diversified strategy include our investment in a $1 billion class Day Trophy life Science portfolio located in the Premier South San Francisco Life Science cluster at a forward cap rate of 5% on cash and away.
That's kinda I'd say, it's a nice mix of public company and a diverse group of early to mid stage life science companies.
The south San Francisco market consistently ranks as one of the elite life Science cluster.
Spurred by record capital flows into the life science sector. This market has less than 2% lab vacancy unparalleled access to a large concentration of life science firms.
An extensive venture capital network going after the world class talent pool.
We also recently read commence construction on a 400000 square foot stayed at the our life Sciences project known as one your city and that's driving research Submarket of Philadelphia book ended by Penn and Drexel. This project is designed to be LEED certified and total estimated project costs.
There are over $280 million.
Similarly, weve invested on a geographically diversified basis with over 30% of our shop portfolio now in Canada.
Last year, we acquired the high quality live group marine portfolio and come back.
Building on the strong performance LTM has delivered and its history of successfully developing and leasing up senior communities for vibrant older. Adults. We are also investing nearly $420 million in ground up development of new consumer focused senior living communities, which are well under.
Away.
We do see areas, where we can recycle capital too we have recently sold or placed under contract certain portfolios of senior living assets that are not long term holds for us.
We want to continue making senior housing 80 part of our diversified portfolio because of the operational asset class Upsides post pandemic. The demographically driven demand that is in front of us and the continued improvement on the supply side.
There remains a strong bid from private capital for senior living which support our conclusion.
On the other side of the ledger through our growing third party institutional capital management platform. We also continued to diversify our capital sources augment our investment capacity expand our footprint leverage our team and industry expertise and improve our financial flexibility and look.
Entity.
All of which are positive for our public shareholders.
[noise], having additional partners and tools to use at appropriate times and for customized situation provides a significant competitive advantage for events.
And adds an incremental incremental source of earnings.
We already have over $3 billion in assets under management in our institutional third party capital management platform.
These forms include our successful open end fund launched in March of this year that has already grown to nearly $2 billion and 2 million square feet in assets under management.
Following the South San Francisco Life Sciences portfolio closing when we raised over 600 million of discretionary new equity our fund exceeds $1 billion in equity capital and continues to have additional committed capital to accommodate new investments.
We've also today announced a new joint venture with GE I see one of the most respected global real estate investors.
This joint venture covers for research and innovation development projects currently in progress with approximately 930 million and estimated project cost.
Our joint venture with GE I see may be expanded to over $2 billion with other pre identified future are a nice development projects currently in our pipeline.
If they go forward.
While maintaining a majority interest in all these projects and receiving market based compensation, our g. I see joint venture enables us to align with the strategic partner improve our liquidity and financial profile and accelerate our research and innovation development pipeline, including.
The recent construction commencement of the one used city project in Philadelphia.
The success of our open end fund and a G.I.P. partnership demonstrate the tremendous market opportunity within life Science Medical office and senior housing real estate and also they are a testament to Ventas is excellent team and investment track record.
Turning to the here and now I'd like to provide some key observations about our U.S. senior housing operating portfolio.
Importantly in the third quarter, our operators continued to build on the improving trend that began in the second quarter.
Our communities demonstrated sustained increases in leads and move ins, which continued through October.
Well, we are sober and clear eyed about the recent increase in COVID-19 cases nationally.
To a record level of nearly 120000 confirmed cases today.
We believe in the strength of the senior living business as we look toward the post pandemic environment.
We are also appreciative that HHS has recognized the crucial role senior living play and protecting vulnerable older Americans age.
HHS has allocated terrorist acts funding to the assisted living communities to partially mitigate the losses directly suffered because of the COVID-19 pandemic.
Finally, we are encouraged by the progress being made by scientists and doctors on vaccines and treatments for Cobi 19.
Older Americans, including our residents will be prioritized for vaccine distribution.
Great and just behind first responders and frontline health care providers most.
Most of our operators have already registered with pharmacy distribution sources to administer the Tobin 19 vaccine as soon as it becomes available.
[noise] and effective widely distributed vaccine will further improve condition for a senior housing recovery.
We are glad that we have significant embedded exposure to that upside in our diversified portfolio.
Today, we published our corporate sustainability report that showcases our long standing commitment to and leadership in E. G.
Among other things. This report this closes our new environmental goals are consistent and growing investments in sustainability improvements in our portfolio and our principles and practices, which is a series of case studies, showing our actions on health and safety and COVID-19.
Describing our emergency preparedness.
And demonstrating our customized framework to achieve greater gender and racial equality and social justice.
In closing, let me reiterate that the long term demographically driven thesis for health care real estate and for Ventas remains in place.
I'm incredibly proud of our Ventas team.
Our consistency and cohesion are great assets for all our stakeholders.
All of us at Ventas haven't abiding commitment to stay strong and stable and when the recovery.
Justin.
Thanks Debbie.
I'll start by mentioning the encouraging trends, we continue to see in our shop portfolio.
We are pleased to have first net positive move in month since the start of the pandemic in October and the majority of our portfolio is delivering moved in at levels that are equal to or more more than typical levels across the us and Canada.
The underlying demand for need driven senior housing in the U.S. and independent living services in Canada persists.
Well, we are encouraged by these positive trends were mindful that the pandemic causes ongoing uncertainty in choppy waters in the senior housing business.
I will also add that in spite of the near term pressure on the sector. We remain committed to the senior housing business and excited about the supportive underlying supply demand fundamentals that should persist for years to come.
Now I'll review, our third quarter senior housing results in the shop, and Triple net portfolio and followed that up with some comments on our latest trends and outlook.
First off the shelf.
For the quarter shop results were in line with the company's expectations.
Our 395 sequential same store pool, comprising over 90% over shop and aligned.
Posted cash NOI of 109 million.
Which is effectively flat versus the second quarter ever.
Average occupancy was 130 basis points lower sequentially with improving trends intra quarter, while ROE or declined 30 basis points and grew 50 basis points in our us and Canadian operating portfolios respectively.
Leading indicators such as lease and movements also saw a consistent and positive trends intra quarter, both in absolute numbers and relative to prior year, highlighting the resilient demand for senior housing and.
In September leads and move ins were 85, and 94% respectively as compared to the prior year.
Third quarter revenue declined, 3.6%, which was offset entirely.
By 4.5% lower operating expenses sequentially.
Primarily driven by lower credit related expenses.
As a reminder, all COVID-19.
Facts, including elevated testing.
Labour cleaning and supplies cost have been reflected in property operating results.
As with last quarter.
I like our Canadian portfolio, which represents 33% of our shop portfolio and demonstrates the benefits of our diversification and a well orchestrated public health response.
The 72 communities within our sequential Q3 same store pool, including our LTM investment was 93.2% occupied which compares to an average of 93.7% for the second quarter outperforming the U.S. on an absolute and relative basis same store cash NOI.
Actual basis grew in Canada by over 10%.
Moving onto our Triple net senior housing portfolio.
The third quarter and through October that's off to receive all of its expected triple net senior housing cash rent.
Our underlying triple net senior housing portfolio performance continues to be impacted by COVID-19, which we have been collaboratively addressing with our tenant partners.
As a result of proactive steps to improve coverage through mutually beneficial arrangements with most senior holiday Brookdale and other smaller tenants are.
Our trailing 12 month cash flow coverage for senior housing is 1.4 times.
We also expect Triple net senior housing tenants will receive cares act funding, which will be a positive development.
Now I'll address recent trends.
As described earlier demand characteristics supporting senior housing remains solid and lease and move and continue to improve since the low point in April and month over month in the third quarter.
These trends persisted into October as we experience net positive move and helped in part by selective move in incentives.
Our operator successful execution of screening for testing and testing protocols has been supportive.
Supporting it.
Living environment, that's more open and more robust than earlier in the pandemic.
Currently 96% of our communities are accepting move ins.
Moving on to our clinical results.
As a result of the diligent efforts of our operators executing testing.
Testing at preventative protocols, new resident COVID-19 cases more than 75% better than the peak season in April in spite of broader market trends of increased new infection rates among the U.S. general public.
In regards to the Q4 outlook for shop.
Due to the uncertain environment it is too hard to predict.
However, we would expect occupancy to soften and we would expect expenses to be relatively flat at the current elevated levels as the health and safety of the residents and frontline caregivers is the biggest priority.
In summary.
We are encouraged by the continued improvement in leading indicators through the third quarter in October and we remain committed to the senior housing business moving forward.
We are proud of our operator's efforts in the third quarter to successfully execute COVID-19 related protocols while.
While focusing on the health and safety of frontline caregivers and residents with.
With that I'll hand, the call to Pete.
Hey, Thanks, Justin.
Cover the office segment third quarter results and trends.
Our office segment, which now represents over 30% has been tested and Hawaii continues to produce strong results and show its value proposition and financial strength admits the pandemic.
Movies, and research and innovation centers, the two lines of business within our office portfolio play a key role in the delivery of crucial health care services and research for life saving vaccines and therapeutics.
This portfolio continued to provide steady growth delivering a $126 million of same store cash NOI in the third quarter.
This represents a 40 basis points 40 basis points of sequential growth.
You will note that the same store cash NOI declined 2.2% year on year for the third quarter. However, we lapped a large $4.7 million termination fee in the third quarter of 2019.
Normalizing for this fee the same store cash NOI grew 1.5% from the prior year normal.
Normalizing for the paid parking shortfall increased cleaning costs due to covance same store cash NOI grew by 2.8%.
In terms of rent receipts office tenants paid an industry, leading 99% of contractual rent in the third quarter in line with the second quarter.
This is without the docs were deferrals, which were de Minimis substantially all branded second quarter deferrals that came due have been repaid and new granted deferrals were negligible as of November six our tenants have paid more than 99% of October contractual rents.
Receiving 99% of total rent without de Ducs is a direct reflection of the quality of our tenants and the quality of our buildings to solid result, underscores the durability and quality of our tenant base for.
Remember, 88% as MLB in Hawaii is from investment grade tenants or HCM, and 97% of our MLB and alike comes from tennis affiliated with major health systems, including some of the nation's most prestigious non for profit health systems.
Most tenants have received significant amount of federal support through a variety of programs designed to assist healthcare providers in small businesses.
As an example, we estimate that our top 10 health system tenants have collectively received nearly $5 billion and Cures Act relief in 10 billion in Medicare advance payments.
For our Anite portfolio, 76% of our revenues are received from investment grade organizations and publicly listed companies a very solid foundation.
Third quarter 2020 office occupancy for the same store portfolio was 91.1% a sequential decline of 40 basis points due to several small tenants not reopening post coded. This was partially offset by the lease up of research and innovation assets associated.
Great and with the University of Pennsylvania in Philadelphia, and Washington University in St. Louis last space continues to be in high demand and the our Nye portfolio is now 97% leased an outstanding result.
Medical office had a record level of retention at 90% for the third quarter of 2020.
And for the trailing 12 months driven by this retention total office leasing was 1.2 million square feet for the quarter and 2.7 million square feet year to date. This is 400000 square feet higher than our third quarter of 2019 leasing.
In 300000 square feet higher than the third quarter 2019 year to date leasing.
We also saw positive space utilization trends that mirrored admissions in surgery volumes reported by the health systems. These trends have continued through October as an example paid parking has more than doubled from the depths of coated but has recovered to 65% to 70% of pre corporate levels.
Climbing the still below historical levels.
All over Imobile buildings are open for business in 100% of our MBS are in counties that are restriction free for elective procedures.
All are an i. buildings are also open supporting multiple critical research organizations in fighting the pandemic, we have over 15 major University relationships all of which opened in the fall with some level of encore on campus in person learning and plan to do the same for the second semester.
As Debbie mentioned, we are pleased to have added three our nine buildings in south San Francisco since going under contract. We have signed a large renewal and are experiencing a high level of leasing activity. This gives us confidence that our occupancy will soon build from the current state which is already 96.
At least.
During the third quarter, we received the results of our annual tenant satisfaction survey I am pleased to report that this year's results were significantly higher than in prior years in fact, when compared to other MLB portfolios by an independent third party.
Our tenant satisfaction is in the top quartile.
One of our highest highest rated scores with how our team supported our tenants during the pandemic.
These essential field personnel, who serve our tenants onsite during the pandemic have done a terrific job we are grateful for their effort and commitment and we continue to focus on the health and safety of these personnel and our tenants.
In sum.
Our tenant satisfaction leasing and online in cash receipts were positive during the third quarter, a clear builds from the second quarter and we look forward to continuing the normalization of health care in research operations as we entered 2021.
With that I'll pass the baton to Bob.
Thanks Pete.
I'll touch on our healthcare Triple net lease portfolio before it closed with some enterprise level commentary.
During the third quarter, our health care Triple net assets showed continued strength and resilience as evidenced by receiving 100% of third quarter October and November.
Hello.
Further trailing 12 month EBITDARM cash flow coverage for the second quarter of 20, the latest available information improved sequentially for all of our health care Triple net asset classes. This spike over 19.
Both acute and post acute providers have had early access to significant government funding to create liquidity and to mitigate losses related to the pandemic.
Acute care hospitals trailing 12 on coverage was a strong 3.1 times for the second quarter.
Nationally hospital inpatient admissions and surgeries continue to rebound in Q3.
And third quarter admissions approach over 90% of prior year levels.
Ardent continues to perform extremely well despite the challenging market conditions.
And is benefiting from over 90% of its hospitals residing in jurisdictions that are open for elective procedures.
Personnel tax coverage improved 20 basis points to 1.5 times in Q2.
On the heels of government funding and significantly improve census.
Elteks of increasingly prove their importance in the care continuum.
With or without coated.
And finally within our loan portfolio, our KONI holiday in Brookdale loans are all fully current.
Turning to our third quarter financial performance, let me start with Q3 GAAP net income.
Which includes six cents a noncash charges as a result of cobot impacts.
Most notably the write off of straight line rents across five tenants with Genesis being the largest.
These tenants are now on a cash basis and represented approximately $50 million of annual cash rent.
Notwithstanding the write offs. All these tenants are current and we will endeavor to collect all our contractual rents going forward.
These non cash charges are excluded from third quarter normalized FFO.
We provided additional information in our supplemental on page 34.
In terms of normalized FFO per share we delivered 75 cents in Q3 2020 versus 77 cents in the second quarter shop.
Shop in office NOI were stable sequentially with the two cents reduction in FFO in the third quarter as compared to the second described by the Brookdale rent reset in the third quarter.
In the third quarter, we saw the results of the decisive actions taken earlier in the year to ensure a strong and stable ventas.
These included reducing our corporate cost structure by 25%.
Resulting in 30 million in annualized as DNA savings in Q3.
We were also active in managing our balance sheet and liquidity includes.
Including paying down substantially all borrowings under our revolving credit facility six.
Successfully tendering for through $236 million of near term bonds.
And issuing under our ATM to help fund the South San Francisco investments.
Now that we feel good about our financial flexibility our liquidity is strong at 3.2 billion between available revolver capacity and cash on hand as of November 5th.
We have limited near term debt maturities access to diversified capital source is strong.
Strong fixed charge coverage and debt to gross asset value just 37%.
To close we are pleased with our performance in the quarter and the continuing improving trends and senior housing.
The entire Ventas team is sharply focused on taking the actions that will enable us to win the recovery when the pandemic is finally behind us.
And that concludes our prepared remarks before we start with today, we're limiting each caller to one question with one follow up to be respectful to everyone. On the line also given the fact that we continue to be a remote.
Thanks, Debbie to do our best Rothlisberger impression and quarterback are queuing day.
With that I will turn the call back to the operator.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone.
If your question has been answered or you wish for movies. So from the queue. Please press the pound key.
Okay.
Your first question comes from Steve Sakwa with Evercore ISI.
Thanks, Good morning.
I was wondering if you could talk a little bit more about the formation of the GE Si joint venture and.
You guys have talked a lot about the arginine how excited you are and I'm just curious.
How you thought about bringing in a partner and giving up some of the upside in these developments versus maybe selling other assets in the portfolio to kind of fund that.
Good morning, Steve I'll take that one I think that you know we're very excited about the GE Si joint venture.
We really believe that it's helping us to accelerate.
Our commitment to growing our eni business and really moving that business forward.
Basically again, where we are we've restarted our Philadelphia development.
Significant life Science building, we've got the three projects further underway.
He is a great strategic partner.
Whether it's with this joint venture or on other potential.
Potential activity, we're very happy to be partnered with someone of their expertise and quality.
And.
You know it gives us.
Really great way to continue to own a significant portion of those developments and their upside.
And that moves the coal our Eni business forward.
Okay, and then just a quick follow up for Bob I, just wanted to make sure I heard you correctly did you say that you issued stock in the quarter to help fund the San Francisco.