Q2 2021 Welltower Inc Earnings Call
Good day, and thank you for standing by and welcome to the Q2.2021 well Tower, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session and you would need to press star 1 on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero and I would now like to hand, the conference over to your first speaker today, Mr. Matt Mcqueen General Counsel. Please go ahead.
Thank you and good morning, as a reminder, certain statements made during this call today may be deemed forward looking statements and the meaning of the private Securities Litigation Reform Act.
We call it and well tower believes any forward looking statements are based on reasonable assumptions. The company can give no assurances that its projected results will be a day factors that could act could cause actual results to differ materially from those and the forward looking statements are detailed on the company's filings with the SEC and with that I'll hand, the call over to Sean for his remarks, Sean.
Thank you Matt.
Although good morning, everyone I hope that all of you on our families are safe and healthy.
Before I make some introductory comments on the speed on senior housing and on capital allocation environment I wanted to welcome Jon Barker, our Chief operating officer to this call.
John joined Walt on our last week after an illustrious 20.
5 year career and to ethics, we believe he will make a tremendous long term impact on our platform.
Following my remarks as usual <unk> will walk you through our operating and financial results.
And we're cautiously optimistic on the senior housing business and occupancy is starting to build and we're encouraged by nearly 200 basis points of.
And we spot occupancy growth and second quarter, which clearly exceeded our expectations momentum in the U S continued to be strong with lead generation and returning to pre COVID-19 levels, resulting in a 280 basis points of occupancy gain in the quarter and the UK remained resilient. Despite the rise in the Delta V.
And cases being driven by the younger cohorts.
Though we are monitoring the situation closely we have seen very little impact to the portfolio. So far as the UK case counts more broadly appear to be decreasing rapidly after a recent spike while.
Canada was a drag on occupancy we're witnessing some green shoots.
Sparkling and material decline and Covid cases in fact towards almost doubled in June from April and May and Canada as provinces and remove moving restrictions and are now part of meeting in person tours.
For our overall portfolio June was particularly impressive month with moving exceeding 2019.
And following for the first time since the beginning of pandemic.
I'm also encouraged that our operators were able to achieve these occupancy gains while holding rate, reflecting the need based nature of our asset class and strong value proposition of this business year over year same store Revpar is up 3.2% and.
And across our assisted living properties to 8% across our independent living properties and 5.3% across our wellness housing communities. The strength in same store Revpar was primarily driven by our highest and luxury product and primary coastal market, having said that I'll caution you that there is still significant.
And level of uncertainty and many unknowns related to the path of Covid and it is too early to signal and also here.
However, we're very pleased with the progress that we're making towards achieving net substantial embedded NOI growth and our short portfolio last quarter, we provided details off nearly half.
Inefficient and some NOI upside, which assumes a return to fourth quarter 2019 occupancy and margin levels. We are pleased to report that we not only achieved $71 million towards this.
Total goal in 1 quarter, but also added another 29 million on potential upside.
Through the second quarter, our acquisition and development deliveries going forward, we'll still have and in that $430 million of NOI upside in that business again. This only assumes a return to pre COVID-19 occupancy with potential upside from higher rates and return to frictional vacancy, which is mid to high single digits.
Turning to capital allocation last fall when we have made a significant pivot from defense to offense, we made and explicit bet that consumers will return to this nutrient business with 400 basis points of occupancy ramping and U S from March trough with healthy rates. It appears that we're on the right.
Side of that bet.
For the past 3 quarters, we have deployed $4 billion for capital at extremely attractive pricing during a time when others are fearful, but we remain paranoid optimist and our humility and lack of complacency and pushing us to test our hypothesis and underwrite everything.
And we look at with conservatism.
And you can rest assured that we look at pretty much everything in our space and therefore, we are only willing to pay a price per unit that does not require everything to go right for our owners to make a reasonable return net.
Second quarter was 1 of the best quarters and from a capital deployment.
I meant perspective, having closed approximately $1.4 billion on growth investments Q3 will likely toward Q2, and we are anticipating that it will be another record quarter of investment activity for the company. We started Q3 with a bang and so far in July we have already closed $230 million of growth.
Growth investments and expect our previously disclosed holiday transaction to close and third quarter as well while it is fun to talk about large transactions like holiday, which I'll get to in a minute I want to point out that our core strategy and strength is granular transaction with a diverse group of ARPA operating partners.
And is supported by our data analytics platform, our Covid clause, which I define as anything we bought since turning to offense in Q4 of last year now exceeds $4 billion of gross investment activity, including holiday across 37 transactions with 24 unique partners in the U S that.
And on average be and $16.6 million for a community or $161000 per unit, which we believe represents a significant discount to replacement cost.
Our pipeline remains very strong with many owners and operators eager to join our operator and data platform. Let me give you some.
Some examples first on.
I'm very pleased to announce that will expand our relationship with John Moore and his team and at Atria, while Lilly and her team and holiday will join our platform. We're buying 80, nearly identical holiday independent living assets and more approachable and a senior living spectrum with an addition of 6 more.
More combination al IL assets for a total consideration of $1.5.8 billion.
Our $152000 per unit, our base instruments compelling even after our anticipated investment of $1.5 million to $2 million of Capex by community to bring them to tomorrow standards while this.
While the lease up on this portfolio from the compelling basis <unk>, a double digit unlevered IRR. We believe there are few opportunities to enhance our return number 1 our underwritten rent growth is 2.5% per year. Despite a heavy investment in the portfolio that will improve.
Asset quality and marketability, our 'twenty 'twenty 6 underwritten rent remains 7% to $800 below feasibility rent to make development pencil.
2 we have a significant expansion opportunity and 10 plus assets, which we expect will generate a double digit return on invested.
Capital 3 the optimization of fixed L billings under ATM platform and for there are at least 5 and higher and better use opportunities and a couple of them are so significant that they may generate and our proceeds to pay for a significant portion of the capex investment for the whole portfolio.
If we are successful and this effort will have a completely renovated portfolio at roughly are going and basis, which will enhance our IRR materially.
Moving from from holiday I would like to make few operating specific comments on this call first we continue to be encouraged by Jack Callison leadership.
At Sunrise Jackie's refocusing the organization as a premier senior living brand in North America.
Excited about this focused growth strategy and a broad sunrise in to run and recently acquired community in the Philadelphia Metro area. This is our first acquisition initiated with Sunrise in several years and believe we will.
And opportunities to grow together.
In the U K Sunrise platform and our portfolio will be our core by signature and <unk> UK signature is and existing willpower operating partner, which runs our highest and communities in the UK. We're tremendously excited to welcome Cary UK to our platform, which is 1 of the most well respected.
Have many and largest senior living operators and the UK with the addition of 81 on the value and and care U K on the higher and along with our existing operating partners that barbell approach to portfolio construction that we have taken and the U S, which is all and which we always aspired to be in the U K is beginning to take.
And we're very excited about <unk> technology and management platform. We're also thrilled to welcome pathway living to warehouse operating platform, which we believe opens another avenue for growth for us.
Next I'm excited to announce our expanded partnership with Oakmont management group, which is 1 of our strongest and best operating.
<unk> shareowners.
And this expanded partnership with Courtney and her team is expected to result in a nearly doubling of our current portfolio together and California. We're also embarking on a long term exclusive development program together to meaningfully expand our relationship and the next decade contract Oakmont is our first operating.
Operating and our portfolio to return to the 90% occupancy Mark post Covid and reflection of oak once operating acumen and market strength. Finally, I am excited to announce our new partnership with Chris Smith and his team at aspect health will recap aspects existing and will be portfolio, and Connecticut and New York.
Operating fared into a long term development partnership with credit we believe a combination of our data and operating capabilities with aspects relationships and to help and talent will create significant opportunities for growth for both the companies were already on our first development together, which will be a 60000 square feet outpatient medical billing.
Building located at a very attractive market and the New York Metropolitan area. The property will be master lease for a leading health system for 20 years and is expected to start construction early next year.
Speaking of growth opportunities and I'm pleased to announce our continued growth with our Bremner organization and the next in the second quarter our partnership.
And then closed on the first building of a large development near normal and Oklahoma with normal regional health system. The total development cost for phase 1 of this multi phase development is expected to be in excess of $100 million <unk>.
<unk> are 181000 rentable square feet of class a outpatient.
And medical facilities, our significant and will be development platform pipeline, which is 100% leased is now in excess of 1 million square feet and will.
Create significant value for our shareholders.
And a very tight acquisition market.
All of these operating and development partnership.
And make us the foundation for our core belief that centralized capital allocation and decentralized execution releases entrepreneurial energy, while keeping cost and politics that base and we're very proud that we have formed 50, new operating and deliberate relationships since the beginning of the pandemic.
And we have a handful more in the works the implication of a rapidly growing operator and developer platform, our vast including and network effect. Whereby addition of more operators create exponentially richer datasets, and thus stronger and attractive and analytics platform. This dramatically.
Medically enhances the informational advantage were already processes through our best in class data analytics platform, which forms the basis of our capital allocation decision Needless to say these relationships create foundation for significant capital deployment opportunities at each 1 of them are attracted growth vehicles on their.
And our own rights. This lollapalooza effect of intertwining operating and data platform has created a wide and increasingly deeper mode for wall tower.
As Tim will speak to you and a moment, we're very pleased to with our progress to further strengthen our balance sheet and liquidity profile more specifically our sequential.
<unk> adjusted EBITDA growth of roughly $50 million indicates that we're on our way to deleverage organically and senior housing recovery unfolds and overall, we're very happy with our execution. So far in the year to create core share value for our shareholders. We're cautiously optimistic about the fundamental environment and excited.
Cited about our opportunities set to acquire and develop talent create new relationships and.
And attract quality partners, which should result, outsized internal and external and growth for years to come after our retooling, our asset and portfolio, operator and building a formidable breakthrough analytics.
<unk> from and talent base and growing with conviction following 2 negative cycles superimposed on each other resulting from oversupply and Covid I'm happy to say that we're emerging as a partner of choice and employer of choice and and Investor of choice on the other side of this pandemic.
I'll pass it.
Thanks, Tim and Jim.
Thank you Sean.
My comments today will focus on our second quarter 2021 results the performance of our investment segments and the quarter, our capital activity and finally, our balance sheet and liquidity update and addition to our outlook for the third quarter.
The time of our last earnings call on April 29.
Over to you, we're 6 weeks into and occupancy recovery and our senior housing operating portfolio, which is seeing total portfolio occupancy increased 67 basis points on.
March 12 loans for an average increase of 11 basis points per week.
And the 13 weeks that have followed we have seen the occupancy recovery accelerate adding an additional 204 basis points.
The third and average pace of 16 basis points per week.
For the portfolio wide occupancy recovery since March 12 to 271 basis points.
The recovery continues to be uneven across the portfolio with the U S, leading and 401 basis points since March 12.
Followed by the UK at 275 basis points.
And lastly, Canada, which has seen a net decrease of 88 basis points over this time period.
We believe these geographic discrepancies will normalize over time as the reopening and both Canada and the U K catch up to the U S.
Looking forward despite the uncertainty around the path of Covid and the near term, particularly the spread of the new variance we continue.
July 20.
<unk> evidenced that the vaccines are exceptionally effective and protecting our residents and staff from this evolving virus and gain confidence that the permanent demand impairment thesis that surrounded the senior housing asset class through much of the last year and a half to becoming significantly less probable.
Now turning to the quarter.
And <unk>.
Reported net income attributable to common stockholders of <unk> <unk> per diluted share and normalized <unk> of 79 per diluted share versus initial guidance of 72 to <unk> 77 per share and.
And our June guidance update of 75 to $79 per share, which included a $5 million benefit.
And from HHS provider relief funds.
We ultimately recognize that $5 million benefit from HHS funds and also recognized an additional $4.9 million of reimbursement payments for similar programs in Canada and the U K.
After adjusting for the impact of these funds are normalized <unk> per diluted share in the quarter of 77.
Now turning to our individual portfolio of components.
First our triple net lease portfolios and.
As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter and arrears.
And these statistics reflect the trailing 12 months and a $3.31 and 2021 and.
Importantly, our collection rates remain high and the second quarter.
We collected 95% of triple net contractual rent during the period.
And our senior housing Triple net portfolio same store NOI declined 2.7% year over year as leases that were moved to cash recognition and prior quarters continued to comp against prior year full contractual rent received and.
Trailing 12 month EBITDAR coverage was <unk> 8.
And <unk>.
As I've stated in the past the timing and slow for the recovery and our senior housing up our senior housing portfolio will dictate whether or not disruption from COVID-19 and the underlying fundamentals generates a short term liquidity issue or solvency problem for our triple net operators.
Over the first 4 months of the recovery, we have observed occupancy.
Occupancy and EBITDA trends within this portfolio that are in line with our U S and UK operating portfolios.
And <unk> as these recovery trend strengthened the solvency restaurant operators has decreased and tandem and our continued strong cash rent collection and the quarter is the best evidence we have on this.
And the value of the collateral that sits behind many of our lease agreements.
And 8.9% due to allow us to work with our operators to enhance near term liquidity without impairing the value well towers real estate position.
Next on long term post acute portfolio generated negative 1.1% year over year same store growth and trailing 12 month EBITDAR coverage was 1 and 2.9 times.
And the quarter, we transitioned 40 of.
Of the 51 planned Genesis transition assets to new operators, including 9 power back assets transitioned to <unk> with.
And with the 11 remaining 11 and scheduled to transition and the third quarter.
35 of these assets are expected to be disposed of and the third quarter.
With the expected third quarter Genesis dispositions from the $75 million sales.
Sales and <unk> portfolio and the quarter, while towers percentage of in place NOI generated from long term post acute segment will be reduced to 5.6% and Genesis healthcare will represent less than 90 basis points of total company in place NOI.
Lastly, health systems, which is comprised of our probiotic and senior care joint venture.
Venture with the <unk> health system, and same store NOI growth of positive 2.7% year over year and trailing 12 month EBITDA coverage was 1.5 times.
Turning to medical office.
Our outpatient medical segment delivered 2.2% year over year same store growth due to improved platform profitability and increased property level expense.
Yeah.
Occupancy and our same store portfolio ended the quarter at 94, 8%.
A 20 basis point sequential increase versus first quarter.
This strong growth was driven by executed new leases totaling 178000 square feet for.
The highest quarter since the fourth quarter of 2019.
And supported by 94% retention and the quarter.
<unk> is consistent renewal activity was paired with reduced vacancies.
Also during the quarter, we delivered 1 purpose built medical office building for.
With the mom and for <unk> Medical Center in Brooklyn.
Along with 2 recently converted steadily our Mlps and Charlotte with atrium health. These buildings totaled 449000 square feet of fully occupied space.
And recovery highly credit health systems.
Now turning to our senior housing operating portfolio.
Before getting into this quarter's results on.
And I'll provide some color on the recently announced transfer of the Sunrise UK operating platform to 2 local operators.
Signature senior lifestyle and care UK.
And we're excited to take this opportunity.
And with deepened our local operator relationships.
Sunrise UK portfolio consists of 46 predominantly private pay properties located primarily in southern England.
The portfolio is being split largely by geographic focus and.
The property is located in greater London, moving to signature a premium operator with a dwell towers had and relationship since 2012.
And the rest of the properties moving to care U K.
A new member of the World power operating family and the <unk>.
Fourth largest independent care and home operating in the U K for the focus on the private pay market.
Turning to government grants.
And the quarter, we received approximately 5 million from department of Health and Human services Cares Act provide early funds.
As we've done and.
And any type orders. These funds are recognized on a cash basis and as such will flow through financials for the quarter. They are received.
And we're normalizing HHS funds out of our same store metrics. However, along with any other government funds received theyre not mastered expenses incurred in the period they were received.
And the second quarter were approximately $9.3 million and reimbursement is normalized out of our same.
Past for senior housing operating results.
Now turning to results for the quarter.
Year over year same store NOI decreased 17, 6% as compared to <unk> 2020.
Driven by a 670 basis point decrease and year over year average occupancy.
The COVID-19 related decline in occupancy that began in March of 2020.
Came to a halt and mid March of this year and portfolio wide occupancy increased by approximately 230 basis points from March 12 to the end of June.
And the 190 basis points, taking place in the second quarter.
The start of the occupancy recovery and the accompanying operating margin expansion is creating an inflection point for Bottomline results.
Store and same store NOI increased 11, 2% from the first to the second quarter.
Sequential same store revenue was up 1.8% and Q2.
And primarily by a 40 basis point increase in average occupancy and sequential monthly Revpar increase of 1.3%.
With respect to expenses.
The <unk> store expenses decreased 40 basis points sequentially and declined 2.9% year over year.
I will focus on the sequential change and this is more relevant to trends and the current operating environment.
The 40 basis point sequential decline and operating cost was driven mainly by lower COVID-19 costs as case counts remain near zero for all the second.
Quarter after spiking meaningfully and the first quarter.
Costs were also driven lower sequentially by seasonal utility costs as the spring and early summer have lower utility cost relative to Q1.
The net result for the resilient rental rates and rebounding occupancy combined with a decrease in total expenses for the sequential margin improvement and our same.
Total of 180 basis points to 21, 2%.
Looking forward for the third quarter and starting with July quarter to date data. We have already observed we've experienced a 40 basis point increase and occupancy through July 20 <unk>.
With the U S and the U K up, 60% and 30 basis points, respectively, while Ken and as flat.
Despite the strength and the recovery, so far particularly in the U S. We remain cautious on projecting and acceleration and trends from the second quarter to the third quarter.
Given the continued lack of historical precedence with which to forecast and also uncertainty around Covid Marion.
Despite seeing promising resilience and our UK portfolio over the last month as a surge and.
The delta various infections amongst the general population has not been echoed amongst our resident population there remains uncertainty, particularly around how national and local authorities may react in the coming months, if the surge continues or accelerates and our other geographies.
On a spot basis, we are currently projecting and approximately 190 basis point increase in occupancy.
As of June 30th through September 30th.
We expect monthly revpar to be up 1 to 1.5% sequentially and up 2.5% year over year.
Lastly, we expect total expenses to be up 1 and a half of 2% sequentially driven.
Driven by a combination of occupancy driven labor utilization and seasonal utility.
Costs offset slightly by continued declines and COVID-19 costs.
The net result, the sequential changes will be expected flow through margins and the mid sixties inclusive of the seasonal utility increase and mid seventies normalizing for the seasonality of utility costs.
Turning to capital market activity and June we expanded our existing unsecured credit.
<unk> for the $4.7 billion after closing on a 4 billion unsecured revolving line of credit, which replaced our previous $3 billion revolver.
Our revolving facility bears interest at LIBOR, plus 77, 5 basis points, representing a 5 basis point improvement from pricing under our previous revolver.
The facility was reported by 31 incumbent and new banks and highlights the incredible.
<unk> of our banking partners.
On June 28, we completed the issuance of $500 million senior.
Senior unsecured notes due January 2029 bearing interest at 2.0% to 5%.
Proceeds from the offering were used to pay down borrowings on our revolving line of credit and to pay down the remaining balance of our Covid term loans put in place and April of 2000.
Additionally, in the quarter, we extinguished $674 million and senior unsecured notes due 2023 using proceeds from our March 'twenty, 5.2020 1 bond issuance.
Improving our weighted average maturity across senior unsecured notes to 8.2 years.
We continue to enhance our balance sheet strength and position the company to efficiently capitalize.
<unk> supports a robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to fund those near term transactions.
And having sold $20.1 million shares beginning on the second quarter via forward sale agreement and the initial weighted average price of approximately $80 per share for expected gross proceeds of $1.6 billion.
<unk> at the beginning of the year, we have sold a total of $22.3 million shares of common stock via forward sale agreements, which are expected to generate and totaled $1.8 billion and proceeds.
Of which 5 million shares were settled during the second quarter, resulting in $372 million of gross proceeds.
As capital deployment opportunities continue to materialize, we will look to fund those opportunities.
And these while maintaining ample liquidity and balance sheet flexibility.
We ended the second quarter and 6.8 times net debt to adjusted EBITDA for <unk>.
6.8 times, when adjusting out $5 million of HHS funds received in the quarter.
This HHS adjusted <unk> 21 leverage number represents a 2.5 times declined from the prior.
Near quarters, 7.1 and 3.
EBIT adjusted <unk> adjusted.
Last quarter I highlighted the impact for the recovery and senior housing fundamentals would have on underlying EBITDA and cash flow based leverage metrics.
We're encouraged to see this trend takes shape and the 15% sequential improvement in EBITDA contribution from senior housing operating drilled the entire.
Entirety of the HHS adjusted improvement and debt to EBITDA.
With total portfolio occupancy is sitting at 74, 6% at quarter and.
And 12, 6% below pre COVID-19 levels, and approximately $16, 6% below peak levels achieved prior to last decade supply wave.
We believe the stage is set for powerful EBITDA recovery as occupancy upside.
Outside his coupled with margin expansion of a very depressed base.
Lastly, moving to our third quarter outlook.
Last night and provide an outlook for the third quarter of net income attributable to common stockholders of per per diluted share of <unk> 44 to 49 and.
Normalized <unk> per diluted share of <unk> 78 to 83.
This guidance does not take into consideration any further HHS funds for similar government programs and the UK and Canada.
When comparing it sequentially for a second quarter normalize that flow.
Per share and be better to use the as adjusted 70, <unk> 77 per share number I mentioned earlier, and my comment which excludes the outer period benefits of those programs as well.
On this comparison, the midpoint of our third quarter guidance.
<unk> per share represents a 3.5% sequential increase from <unk>.
This 3 and half cents increase is comprised of a 3.
<unk> per share increase from our senior housing operating portfolio, driven by an increase and sequential average occupancy and expected reduction.
Got it.
And <unk> per share increase from strong net investment activity highlighted by the expected closing on the holiday senior living portfolio during the third quarter results and dilution from dispositions related to our previously communicated reduction exposure to Genesis.
And a half penny increased NOI from recently converted developments, mainly 2 fully leased.
And in Covid, and Charlotte, North Carolina and Brooklyn.
These increases were offset by <unk> <unk> per share increase and sequential G&A, driven mainly by new hires and.
And <unk> <unk> dilution from share settled and the second quarter.
And with that I will turn it back ill turn the call back over to Sean.
Thank you Tim I wanted to conclude.
By expanding on a team that I mentioned before.
We're engaged and 2 small transaction with 2 other Reits and our sector that are not material to any company that involved or buying a handful of assets and 1 transaction and selling a handful of assets and other transaction that dollar involved are too small to even.
<unk> mentioned on and we mentioned on this call, but I bring them up as I think they reflect a new era of collaboration amongst public REIT. Both of these transactions will result, and favorable outcomes for all of our respective shareholders on a transactional basis.
But whats important to focus is on emerging team.
Crude once public REIT.
It doesn't have to be a zero sum game with that operator, we'll open it up for.
Questions.
Thank you Sir as a reminder to ask a question you would need to press star 1 on your telephone to withdraw your question press the pound key.
And we ask that you please limit yourself.
Yourselves to 1 question and re queue for follow ups. Please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks, so much and good morning, everyone.
I guess.
PMM on contain 1 thing that sort of surprised me.
The core growth that you saw on a like for like basis, I think most people would have anticipated in this period of still.
And through recovering and low occupancy there'll be more discounting.
So I guess just on the expense side 2 questions.
1 day.
Did this surprised you and what drove that and second if revpar continues.
Into kind of the next few quarters, what does that say about sort of the margin and the cash flow recovery into 'twenty 2.
Thanks.
Okay, and I'll try to take a stab at that so there.
And it surprised us as it did and if you think about last quarter call I said.
And despite all the noise of discounting on other through and I said that our operators have a very special product and if a special value proposition that we're just we're not willing to discount.
And.
But having said that I didn't expect this kind.
Kind of pricing strength yet.
It was entirely driven by the our highest and luxury product and coastal markets as I said do we expect it to continue yes, we do in fact, we as Tim pointed out and answer prepared remarks, we expect that to accelerate into Q3 on.
So look I mean from the perspective of the.
The stage is set for a very powerful recovery of margin and cash flow increase as we come through but we're very very excited about what's going on and at the same time.
There's a lot of uncertainty we're not in this for next quarter next month. This is a long term business. We're excited about what we're seeing.
But most importantly, as Tim pointed out.
And we think that.
And with increasingly getting to a point.
That is really.
Validating our belief that the business, which we frankly it was when we said this last year and on their side.
And that is validating our belief that the product is needed and it and the consumers will be back and we're seeing that.
Yes.
Thank you I'll share. Our next question comes from the line of Amanda Sweitzer from Baird. Please go ahead.
Thanks, Good morning.
I wanted to start with a quick clarification on your occupancy.
And then when I think about your spot occupancy guidance versus where average occupancy will end up for the quarter. It looks like it might be a different set up from recent quarters and average occupancy could actually end up exceeding spot occupancy and the third quarter and set the right way to think about it.
That's correct Amanda.
The world.
And thinking about is <unk>.
And the first quarter because of the decline in occupancy we saw that lasted for 2.5 months of the quarter. We actually finished for spot occupancy was below average occupancy and <unk>, we have the opposite effect and <unk>, where the increase particularly in June.
And it's driven spot occupancy above average for second quarter, so thinking about our spot occupancy.
Guidance for 190 basis points on kind of a spot spot basis equates to 210 basis points on an average change from <unk> to <unk>.
Thank you on next question comes.
I wouldn't think of Josh worked and a line from Bank of America. Please go ahead.
Yeah. Good morning, everyone, just kind of curious to hear about your MLP pipeline and then just aspect health.
Other sharpshooters out there who would be interested in working with.
Just thank you for the cushion on our MLP.
Pipeline, if you of course, you're asking on what acquisition.
And that pipeline and zero.
And if you are asking about development pipeline, it's actually 1 million plus square feet fully leased 100% and east pipeline.
We continue to believe that the pricing that we're seeing and then will be market doesn't.
From the like any sense for and longtime on IRR perspective.
So we remain out of the market.
We did this transaction specifically.
Because we see and very significant growth opportunity with Chris and his team and are we willing to partner with more sharp local sharpshooters, absolutely, yes, but on a.
Other than make on a transactional basis.
Not a lot of interest in that space right now.
And we think what we are seeing the opportunity to deploy capital and make significant on a return for our shareholders and the senior housing space is compelling and that's where the capital deployment opportunities in the near term will be focused on.
Thank you I show on next question comes from the line of Steve <unk> from Evercore ISI. Please go ahead.
Yes. Thanks, Good morning shock I was just wondering if you could talk about what youre operator policies are with respect to vaccination and so you know there's been a lot written about health care workers, some not wanting to get it and.
Purely I just wonder does this create any kind of hang up in terms of move ins or when youre marketing asset. So maybe just kind of provide a around the horn or kind of a broad update on kind of where your operators stand and whether you've seen any issues.
Yes, Steve It certainly differs across operators I'd say as far as the questioner.
Turning around and hang up on move ins.
The effectiveness and the vaccine and the lack of cases, we've seen and the buildings across all 3 of our geographies. At this point is really is it really from the marketing around the operator policies that being said the large majority of our theme.
And the employee.
On the property level are vaccinated, along with 90 upper 90% of our resident and so it's a highly vaccinated.
And our facility environment across the board.
Thank you.
I'm showing next question comes from the line of Michael Carroll from RBC capital market.
Please go ahead.
Yes. Thanks, I wanted to go back to the Revpar growth I know that your operators have done a good job driving modest growth even at these occupancy levels.
How does this dynamic change from an occupancy gets back to the high 80% range I guess I'm trying to understand how much does this rate growth very are changes generally more.
More muted both on the downside or upside or can we expect the total portfolio to generate significantly stronger revpar growth once occupancy comes back to stabilization.
Yes, that's a very very good question and now you're asking me to speculate and so I will speculate but it's the speculation on the list, but if you think about.
And the occupancy as we get back sort of to the more stabilized occupancy level you just call. It high 80% I think you will see significant pricing power even above what you have seen.
Sort of this quarter. So this particular quarter, let me remind you through the supply cycle.
I'll leave it from 15% to 19, when and on occupancy has gone down we are still raise rates and about 4% right.
In face on the supply cycle, we tell you expect.
The setup is completely different this.
And this cycle. This decade forward, where you have better demand and probably.
And a better environment for supply as well. So is it should we see 1 stabilization happens greater pricing power, we absolutely should.
But it remains to be seen as I will tell you 1 of the things that we interestingly watch is very tight correlation of housing price.
Sort of conversation and pricing power and the senior housing industry and.
And we have seen a significant increase.
Record household wealth.
Wealth growth.
And that Hasnt really translated so far into senior housing pricing, we'd probably starting to see some of that this quarter, but it will come through.
Thank you.
Thank you.
Sure. Our next question comes from the line of Rich Anderson from <unk>. Please go ahead.
Thanks, Good morning.
No.
And you take into account the embedded NOI that you go through and the deck.
And you hold and everything else constant.
So kind of 50% shop, and 20% senior housing adjusted for all of that I noticed on absolutely precision, but youre clearly.
<unk> focused on on the senior housing business and I know Youre thesis has always been youre on.
IRR investors and think more about that and.
Sure and asset classes, but.
You are the right senior housing REIT relative to your peers like it or not at least for now.
Curious as you are underwriting deals and kind of tailoring.
Other than yourself to the business what are you thinking about and in terms of the next supply cycle, we have seen.
And that.
And to be the risk for this business and the past lumber prices are coming back down and I'm wondering how you are underwriting the future for supply and how youre, making sense of the <unk>.
Growth in this side of the business.
Thank you rich that's a very very good question. So we.
We continue to believe as I said before that.
You will see some supply, but you will not see this cycle, we believe that supply will face demand instead of demand and teething supply and like you have seen non sticking.
If we see no supply we are bigger and issues right that says and what the only people who actually sees the business.
Everybody else is missing that's not how and he is going.
Going to happen.
But I wouldn't react to short term high frequency data on these things because these data is obviously comes with a lot of errors and noises.
Similar types of data and that we have and supply would have told you that occupancy for us for the quarter will be done with negative pricing now clearly.
Indian happened, so I wouldn't I wouldn't react too much to these high frequency data from 1 or 2 providers I will tell you that forget about what others are doing we are looking at a lot of development and Dev fee very hard to pencil.
Very hard to pencil given feasibility rent remains between.
And 30% below depending on different markets.
And that just that just a question of how much rent up sort of cost has gone up and down cost have gone up and a high frequency indicators like lumber price on your Bloomberg screen doesn't tell you that it has changed significantly you got to look at on long term.
2008, and peoples ownership of that and then hitting and the warehouses and it hasnt shown up yet.
Will it show up probably it will show up at some point, but at the same time, we are seeing a lot of other product cost is going up the country significantly under supplied on overall housing and you will see housing starts will continue to.
Average with the demand after different materials.
And I think there are a lot of lessons have been learned on the bank side, losing a lot of money and this space a lot of equity has lost a lot of money clearly you can see where we're buying product new product at significantly below replacement cost and that gap between where we are buying call. It.
Go on offense on the dollar and the 100 cents if somebody lost a lot of money right and so it was obviously theres lessons will.
And be remembered and the near term as the demographic catch on but we are very much very much aware of what you were saying. This is why we still focus on price per unit and.
And Thats why I made the point I made during my prepared remarks that we're not willing to buy anything and everything even if we think it's a decent deal because in many cases a lot of these things as a longtime investing this phase.
A lot of these things need to go right or for a period of time for us our shareholders to make money and that's not that kind.
And of investment I do make.
Thank you.
I share. Our next question comes from the line of Jonathan Hughes from Raymond James. Please go ahead.
Hey, good morning.
I do agree with rich you are the seniors housing REIT, but I wanted to ask about.
The health system portfolio.
Folio and what happened to EBITDAR coverage there is 1.
1 and a quarter turns now from 1.9 last quarter and then could you also and maybe talk about exposure to the operators at less than 1 times EBITDAR coverage without naming names are there any ongoing discussions with operators for rent deferrals or transitions.
Your triple net segments. Thank you.
And Jonathan So first is the coverage came down for obvious reasons right. You are youre still remember the NOI has trough last quarter is still coming down right from and trailing 4 quarter basis is how you report coverages, which means.
So credit quarters on getting out of numbers and worst quarters on getting in the non west due mostly speaking in a normalized net.
Stabilized environment coverage should give you the state of the business at inflection points like this where you've got sharp decrease and sharp increases it will not give you the state on the business.
That's just like our other offerings that you are seeing and shop and part of the portfolio.
Fundamentals have trough last quarter, and it's actually getting better and so for example, let's just talk about for America and want to get into this because frankly speaking for our investors and promoting our covenant debt to EBITDA element metric because.
For <unk> told you before that for America rent is guaranteed by that.
And by the health system, the mothership at the top and right. So it's really is a relevant metric for our investors. However, having said that let me let me make some observations about that topic.
The revenue if you think about.
The second quarter.
And the highest and actually preventing or for that specific business for Medicare was the highest and last 5 quarters. They have seen significant increase sequential increase and occupancy just this quarter about 400 basis points and the skilled nursing business and what is going.
And on his.
And in middle up as we <unk> and middle up selling and bunch of assets right and those asset base is going through it hasnt negative EBITDA as I talked about before when we announced the deal and that feels drilling to the number and creating significant noise on the number side.
So that is.
Absolutely.
And it creates a lot of issues and also on the same side you are seeing we added 9 far back Bill link that is getting integrated so we have a lot of noise.
I will tell you, let's take a step back and think about where the business is trending business as I said the second quarter revenue was the highest actually and last 5 quarters.
Business is getting better for Medicare team senior care team is doing exactly what we laid out that do what happened, which is creating new partnership with different system, we announced it they announced a new partnership Metro health and Cleveland Theres. Another 1 day signed a joint venture, which I am not the liberty and naming.
And right at this point for me.
<unk> system for the country business is moving forward, but as far as.
Whilst our shareholders a concern.
That trend is guaranteed by the mother ship, which obviously is a very significant system with 2 plus billion other cash and material and a 7 billion for a revenue so I don't want to get into.
And that conversation.
Remember at this point and juncture, just not just talking about for Medicare, but any triple net leases will not reflect the state of the business because of the 4 quarter trailing nature of how we report coverages.
From a standpoint of your second question I think Tim touched.
On it I will still say again, we have told you before that we believe that our leases are backed by a material amount of credit and assets that we owned and joint venture and and other assets owned by the operators. We do not believe there will be significant disruption of earnings and cash flow coming out of that and our belief.
If that statement is getting stronger and stronger every day, that's how much I am willing to stop or to any specific operator at this call. Thank you.
Thank you and show.
Our next question comes from the line of Mike Mueller from Jpmorgan. Please go ahead.
Oh, Hi, My question was just answered.
Thank you Sir.
Sir you plan.
I show. Our next question comes from the line of Juan Sanabria from BMO capital markets. Please go ahead.
Hi, Thanks for the time, just curious on the acquisition pipeline and you guys have done a tremendous amount of work and heavy lifting and kudos to you but.
Other markets are worried.
For about what comes next so just curious on your views of whats in the pipeline going forward.
And how long do you think you can take advantage of this COVID-19 dislocation and for the deals that youre striking now.
How should we think about windows were negotiated and I'm not sure. If you could talk to holiday of our broadly about.
And when those deals were really struck.
Versus.
Just to think about the runway for future <unk>.
Scouts at replacement cost opportunities.
Thank you Juan.
Completely agree with you it's about what Thompson and that's the point I was trying to make on the coverage metrics right the state.
And what's happening now and whats happening next not what happened yesterday.
Having said that I'll tell you.
It's important to understand when we talk about acquisitions and.
Like many companies, we don't talk about what's under contract unless it is a very large.
Transaction that shareholders should know about the holidays.
Ladies and a good example, so the $4 billion or so of Covid clause is transactions, which we have closed we could have given you a significantly higher number of the transaction we have taken our hands on.
The pipeline I know you understand that but I wanted to make a very concerted effort to make that point again because.
And a different from how most other companies report their numbers.
Phil.
The pipeline, let's just talk about pipeline, which is where we have shaken hands. We have agreed on a transaction and interest going through the process and real estate transactions take a long time to close as you know we're pretty quick.
And a quicker than probably.
And most other organizations that you will meet but we're also extremely thorough right. So it takes time, we visit every property that we buy so it takes time. So let's just talk about let's just talk about that pipeline, which we define and that's something that's under contract.
On the visible.
That is significant and it's on their con.
So we feel very very good about continued momentum on the acquisition side, let's talk about the shadow pipeline, which I define as something that we are negotiating right now that is also significant and visible.
And I think you will see continued acquisitions at very very favorable.
Tracked.
Price and as I've said before going forward as I've said before we're driven by value of acquisitions not volume of it right. So as long as we can create value. We will continue to occur and if we see that market prices have moved to a place where it doesn't make sense, we will not.
And for it.
And it could be a lift service, but you can look at our history and you will see that we have exactly on that we have moved with market pricing and if market pricing and got into a place where we think it doesn't make sense we sold assets.
For <unk>.
Near term, we see a tremendous amount of opportunities by this August.
<unk> still in the market and we're seeing tremendous opportunity because there are several operators and developers want to join our platform to access the data that we've talked about for several quarters on this call. So Thomas altogether.
I am very very optimistic about capital deployment opportunities at very attractive price.
Disruption and coming quarters.
Thank you.
I show on next question comes from the line of Nick Joseph from Citi. Please go ahead.
Are you seeing any of your operators take additional preemptive measures with Delta variants and then are you seen any recent changes to state and local restrictions.
Thanks, Nick Good question, we have not seen.
Significant changes the state and local restrictions and my comments and my script for more towards kind of the uncertainty around that going forward Theres obviously.
On a lot of noise around kind of where.
Other things may change from where they've been the last and.
Price recent months.
On the operator front.
Our operators never you think thats suddenly on masked mandate our operators never left the mass mandate. So you think about just the general facility and the way that they've been being run and there has not and.
Likely we will not be much of a change.
Depending on obviously the path the virus, but kind of what's going on and the general public last few months because.
And the operators continued to run a very safe stringent environment when it comes to Covid.
Thank you I show on next question comes from the line of Jordan Sadler from Keybanc capital markets. Please go ahead.
Thanks, and good morning, guys, So Sean I wanted to come back to.
Your comment on moving swiftly.
And it's early and the pandemic is not over but your bet on seniors housing seems to be playing out better than expected.
With occupancy improvements accelerating.
Revpar growth coming through.
How is this impacting your underwriting and new investments and even on the asset management side of the portfolio hesitant and affecting your thinking.
Thank you Jordan look I mean, when we made last year this bet for us.
For example.
And this is exactly a year 1 year Mark when we first started this discussion.
With all from on how to grow this business significantly and the partnership yesterday marks exactly 1 year.
<unk>.
Time twice scary right I mean, there's no question about it occupancy was falling.
On test like Iraq, EBITDA, obviously was going down materially given on.
On the high operating leverage and the business, but we had unwavering belief that the product is needed and the consumers will return right.
Does it mean that we knew for sure that will happen and that's the best we made.
And at MIT actually made sense on a risk adjusted basis, and we talked about that for the last 4 calls and I am very pleased as we recognized that that seems to be.
Playing out.
So how is that changing look at the end of the day.
You have to think about real estate is a game on.
And Thats right no matter, how good the environment is or how bad the environment is theres, a floor and ceiling on value depending on what it costs to build so we are not going out to sea and it's all clear thinks that fantastic, let's just pay prices that are above replacement cost and at core as much asset because.
Beth can because we have a cost of capital that is not how we run displace cost just we havent cost of capital our owners have given us a cost of capital our bondholders have given us the cost of capital. So that we can accrue value to our owners not because we want to accrue value to.
Net sellers and that is how we have always run and displays and that is how will always run. This plant. There is no docs on opportunity, we're not significantly changing our underwriting and frankly speaking, we're a basis investor and IRR investor. So you might say okay.
Long term and pending on IRR.
For a 15 year IRR really hasnt changed has the on near term growth rates have changed yes. It has.
But that doesn't translate into higher prices, because we are still solving for the same IRR and we're still <unk>.
Really focused on what net price per unit price for 4 days hopefully that helps you to get a.
Glimpse of how we underwrite.
Thank you.
And I show on next question comes from the line of Nick <unk> from Scotia Bank. Please go ahead.
Thanks, just going back to the senior housing guidance for the third quarter, Tim I know you talked about this earlier that it shifts a little bit hard to.
Predict and acceleration.
But I guess I'm wondering how much how much did the July numbers sort of intact guidance right because I.
I think you said you were up 40 basis points. So for in July as of last week.
And I guess I'm, just wondering is that sort of running a little bit slower than.
And then June at the end of the day June was a very strong month. So I guess, we're just trying to figure out kind of the you know the sequential movement on occupancy here, which was strong and June.
And then July it feels like it's slowed down a little bit maybe you're putting on some conservatism about you know delta very.
And et cetera, and maybe just you can unpack that a little bit.
And that's a great question and.
Thinking about that relative to if you look at the second quarter. As you pointed out June was a very strong month, we've seen coming into July is actually very consistent on indicators like.
<unk> leads and interest and all of them is kind of leading indicators that we're strong in June and continued into July.
The biggest difference at this point, you'll get a July 4th holiday and.
And it was a very low move and weak which is not surprising to us looking at June so up 40 were a bit more than 40 relative or sorry in July.
And we're a bit more than 40 month to date at this point in July we.
We were mid fifties, so we call it.
At 10, plus basis points and line kind of where we were in June and we are 10 to 15 basis points ahead of where we were in April and May. So we're continuing to see this improvement on a trended basis.
And we're trying not to read too much into kind of the micro trends.
Trends. So I don't think July start really plays a role and our conservatism I think you mentioned it the and uncertainty around Delta Varian and <unk>.
As I said on my script and ability necessarily forecast given still unpriced and nature of the the backdrop drive a little bit of our view and how we get.
The guidance there but.
And it doesn't have as much to do with the start in July.
Thank you.
Our next question comes from the line of Lukas <unk> from Green Street. Please go ahead.
Thanks, I have a core.
Question for John.
He just joined the company, but I'm curious what your key.
Studies are out of the gate.
Thank you.
It's day, Ken So my key priority is to seek first to understand aspect of things very excited to be here, but.
And those who know me know I don't give out my playbook, so definitely not doing that but very excited and see a lot of opportunity amazing people here.
<unk> is obviously amazing and that's as much as I'm going to give you today.
Thank you.
I show on next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.
Good morning, everyone I'm just back to the capital deployment front are.
And <unk> are getting creative with the mix, specifically and show how are you viewing independent living versus assisted living opportunities on how do the valuations Barry and the private markets for each segment for versus replacement cost today and of course wells appetite for each.
We are actually.
Are you changing the criteria it is yeah.
Usually the replacement cost of assisted living and for like for like.
Location is higher and sometimes significantly higher.
But we.
We always invest capital relative to.
For the replacement cost in IRR targets on non <unk>.
Not.
I will tell you that we have and Jal propensity.
To go with.
And micro market with a strong operator, and who have a strong core on a product type.
Going forward as you think about Ive said this before our portfolio has a barbell approach we want to be at a high price point.
<unk>.
Hi service areas high service products and great base for high barriers to entry market or we want to be on the lower sort of approachable and a lower price point low service right. That's kind of what our barbell approach is and we have not changed that so there is.
And sort of creativity in the shop.
But usually that's not on just the product selection and Thats, 1 way you want to play and the capital structure. How you wanted to structure a transaction that is non just.
1 transaction and have done for example, and we'd like to build data growth vehicles that we've continued to talk about.
And what we've talked about oakmont and aspect, but as you can see.
Go back and look at 5 quarters to go on 6 quarters ago, We probably talked about remnant organization and you see this quarter. We started 100 plus mill and also the Mlp's right. So our job is not only to see okay, where can we get that day.
Play.
This quarter. They don't play right now, which is the deep value and of the plate, but also create this growth vehicles that creates that changes that growth rate through the cycle right. That's what we're focused on and I'll be honest with you Derek.
And very proud of this team that has created this.
And this company will have on.
So dented growth that will be unmatched in its history and I think it is relatively understood the cyclical sort of bounce on that but I think it is fairly fairly misunderstood.
On what this cycle.
And then look like.
Thank you.
I show. Our next question comes from the line of Conor Seversky from Bear and Baird. Please go ahead.
Good morning, everybody. Thanks for having me great quarter.
A bit of and abstract question, maybe so operating under the assumption that the target demographic for seniors and there's a lot of networth tied up and home equity.
If we were to potentially see a blip.
And the housing market as prices, maybe come off peaks could that translate into some kind of transitory impacts on rate for rep for or do you think the demand environment. Currently is strong enough to offset that kind of dynamic.
If you believe that.
And housing prices can come down, 50%, which and I think is how much it's up last few.
<unk> hundred for years.
And many many places.
And yes, but also remember that you were talking about people, who are bogged on houses and the eighties and nineties.
Sitting on significant amount of household.
<unk> network that should not impact I will give you go back.
And how assisted living has done senior housing and gel has done and the during the global financial crisis, where you've got a massive crash of housing prices and see how the asset class has done.
As a hint I think that was.
Senior housing was 1 of the best performing asset class through the global financial crisis through that housing.
And look and so that should give you some hint I'm a student of history and.
And B cycle is different and I'm not going to CTO and pontificate hub might have been might play out, but I will tell you.
Housing has an impact on many aspects of the economy and it has a particular impact because senior housing.
Yes.
And it's not an income place and asset plan, mostly it is and.
Housing type of an asset, but remember who is their customer and its an 85 year old and she's sitting on and how's that probably she bought and 1988.
Thank you.
Sure on last question comes from the line.
The biannual Bernstein from capital 1 please go ahead.
Hi, good morning.
I guess I just wanted to see if we could drill down a little bit into the Canadian asset leading indicators.
That has trailed a little bit and your numbers would have been even better than.
And then you had posted if Canada had been.
It performed so just wanted to see if we could drill down a little bit on whats going on with the tours leads.
Some of those leading indicators on the Canadian senior sales team.
Okay.
And then I mentioned this on my prepared remarks.
April and May we have seen that drag that you were talking about.
And really possible ended up in June we've seen almost doubling up in person tours etcetera and June Canada.
But by and large open up.
Significantly and the beginning of July so we are seeing that is starting to reflect.
And we expect.
Fact that Canada will catch up right. So it's a drag today, but I would expect that you will see some significant sequential improvement in Canada.
As we get through the rest of the year.
Moving on to add anything you have said in July.
And I've mentioned.
Sure.
Interest, we've seen actually tours and inquiries reached 2019 levels. So if we look at how the.
And recovery occurred in the U S. There was about a month lag for for between when we kind of saw that start to happen in February and February when we started to see occupancy turn so.
Not saying it will follow the same.
Sure.
And.
We are seeing the first kind of a flattening of the decrease in occupancy and then we've seen as leading indicators move so.
And we're certainly hopeful that we'll start to see those fundamentals turn here and the third quarter.
Thank you.
This concludes our Q&A session and today's conference call.
Thank you all for participating you may now all disconnect everyone have a good day.
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This concludes today's.
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Thank you everyone for participating you may now disconnect.
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