Ventas, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Ventus earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will 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 0. I would now like to hand the conference over to your speaker today, Sarah Whitford, 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 30, 2020. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be 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 others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release 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 31, 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 measure, as well as the company's supplemental disclosure schedule, are available in the Investor Relations section of our website at www.ventosreit.com. Before I hand the call off to Deborah A. Cafaro, chairman and CEO of the company, I'd like to note that we posted an investor presentation this morning on our website, 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 and other participants, and welcome to the Ventas second quarter 2020 earnings call. I sincerely hope that you are safe and healthy and staying positive as the COVID-19 pandemic persists in our country. I'm proud to say that the Ventas team has been cohesive, skilled, and enormously hardworking as we've addressed key issues and weathered the initial storm created by the pandemic. We still have a long way to go and conditions remain highly uncertain and uneven. but we are encouraged by second quarter performance and trends, which have 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 Healthcare, TripleNet Business, which collectively represent nearly half of our enterprise. As a result of the pandemic, we recorded a number of non-cash 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 communications, the COVID-19 pandemic significantly affected our senior housing financial results in the quarter. 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 communities. Since then, we are 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 sustained intra-quarter improvement in leads and move-ins and clinical results for our residents that continued into July. Atria has led the way. And, as we previously anticipated, Operators at virtually all of our communities are currently open to new resident move-ins, and the vast majority of our communities are offering residents an enriched living environment. The focus of our operators now is to safely increase move-ins and stabilize occupancy, and then seek to rebuild occupancy toward pre-pandemic levels. We are proud of our early and rigorous focus on health and safety and our leadership in adopting testing protocols to keep seniors and frontline caregivers safe. We have also taken decisive actions during and after the quarter to keep Ventas strong and stable for all those who depend upon us. These include adjusting our cost structure by $25 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. Increasing our liquidity, which currently stands at $3.5 billion, and maintaining a strong balance sheet. Conserving capital through the reduction of capital expenditures and our dividends. taking proactive steps to address the financial impact of the pandemic with our two largest senior housing tenants, Brookdale and Holiday, resulting in mutually beneficial transactions with both large operators. For Holiday, we are pleased that we converted our 26 independent living communities operated by Holiday to shop. And we recently announced a deal with Brookdale that provides CENTOS 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 teams and continuing to advocate for seniors with federal policymakers. because of the crucial role senior living care providers 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 COVID-19. We also continue to explore opportunities to grow our enterprise. and our investment team is being active yet selective. I'd highlight in particular the strategic advantage of the open-end fund we successfully launched in March. With access to institutional capital and a well-performing core of quality assets under management, the fund is another tool that will enable us to expand our footprint, leverage our team and industry expertise, and create value. We also continue our capital allocation focus on our expanding research and innovation business. While the existing R&I portfolio continues to deliver outstanding performance, we also have two major projects well underway with leading research institutions 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 youth city market of Philadelphia. Together, these three developments represent over $600 million in aggregate investments and are over 80% pre-leased to highly rated tenants. Our team continues to work with our development partner, Wexford, to build our pipeline of R&I 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. Marguerite is a 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 lines and have taken decisive action so Ventas can successfully navigate through current conditions 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 COVID-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 and frontline care providers for their courageous efforts throughout this pandemic. I'll start with a quick overview of our results in the SHOP and TripleNet portfolio. It seems like ancient history, but we began the year in SHOP with a strong first quarter performance, with NOI growth of 6% versus fourth quarter 2019 when excluding COVID impacts. The second quarter was a different story as our shop operators battled the pandemic. Second quarter 2020 average monthly occupancy came in approximately 470 basis points lower than first quarter average monthly occupancy for our same store senior living operating portfolio pool. At the end of the second quarter, occupancy stood at 80.6%. COVID-19 related operating expenses totaled 42 million And after netting $15 million of estimated mitigating cost savings, the OPEX impact totaled $27 million, and therefore, total operating expenses grew 3.4% sequentially, which improved from previous expectations. All COVID-19 expenses, including testing, labor, and supplies, have been reflected in property operating results. REV4 declined 2.9% sequentially due to the disproportionate clinical impact in New York and New Jersey when these high REV4 communities were locked down, and occupancy loss was most pronounced in the Northeast. Net-net, as expected, cash NOI for our 390 asset sequential same-store portfolio declined from $165 million in the first quarter to $106 million in the second quarter, a reduction of $59 million. I'll highlight our Canadian portfolio, which generated 30% 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 Le Groupe Maurice, were 94.2% occupied, which compares to an average of 96.3% in the first quarter. outperform in the U.S. on an absolute and relative basis. Additionally, our independent living portfolio more broadly, inclusive partly of Le Groupe Maurice and holiday retirement, have demonstrated resilience during the pandemic, significantly outperforming assisted living. Specifically, I'd like to highlight our holiday portfolio. Since converting the shop NOI has approximated $7,589,000 in May and June, representing a 1.1% improvement over prior year and ahead of our pre-COVID budget. Moving to our TripleNet Senior Housing portfolio. In the second quarter and through July, Ventox received all of its expected TripleNet Senior Housing cash rent. Our underlying TripleNet 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'm 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 am pleased to report that the demand characteristics supporting senior housing remain solid, even in the face of the pandemic, as we have seen leads and move-ins improve since the low point in April. And it's important to note this trend persists in markets that have long since faced the virus peak, 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 of demand is communities loosening restrictions and allowing for a richer resident experience, and most crucially, allows structured family 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-COVID living experience. We are pleased to 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 69,000 resident and employee tests to date. 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 reverse course and increased restrictions throughout recent weeks. However, as Debbie noted, we currently have the highest number of communities accepting move-ins since the beginning of the pandemic, at 96%. New resident cases per day in the Bentos portfolio peaked in April at 26 per day, and have 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. Eighty-nine percent 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 move-in trend through July also persist. Our move-ins are 72% and our leads are 74% versus prior year respectively. Our move-ins, however, have not yet covered our move-outs and therefore resulted in lower occupancy. While we are encouraged by the improving leading indicators and evidence of strong demand drivers and moderating expenses, we do not expect to experience stabilized NOI performance until our move-ins and move-outs level out. All things considered, we are steadily making progress toward a stabilized performance. In summary, we are cautiously optimistic regarding the positive leading indicator trends we are seeing in our senior housing portfolio. The efforts and success of our operators in providing more robust, safe living environments for seniors and the meaningful improvements to move-ins and leading indicators we've seen since April. However, we remain measured in our outlook because of the uncertainty of the pandemic, its continuing financial impact on our senior living business, and the cost of stabilizing and re-capturing occupancy in our communities while focusing on the health and safety of frontline caregivers and residents. With that, I'll hand the floor to Pete. Hey, thanks, Justin. I'll cover the office segment, second quarter results and trends. Our office segment, which now represents 30% of Ventas' NOI, continues to show its value proposition, financial strength, and growth amidst the pandemic. MOBs 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 life-saving vaccines and therapeutics. For the second quarter of 2020, reported office same-store cash NOI increased by 2.7% year-over-year. This outstanding result was led by our R&I portfolio, which grew 14.4%. driven by strong lease-up and with occupancy improving by 500 basis points and rent growth of 6.1 percent. Strong performance in our university-based developments affiliated with the University of Pennsylvania and Washington University fueled our growth. This growth was partially offset by a modest 40 basis point decline in the medical office portfolio. It was driven by a difficult comparison period lower paid parking receipts, and increased cleaning expenses caused by COVID-19. After adjusting for these factors, office and MOB same-store cash NOI versus prior year would have grown by 5.7% and 2.3% 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 30th. MOB retention has increased to record levels at 97% for second quarter of 2020. Total office leasing, which includes renewals and new leasing, was 860,000 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 R&I portfolio, which is currently 97% leased. This is a clear opportunity area. In terms of rent collections, office tenants paid an industry-leading 99% of contractual rent in the second quarter. This is without deducts for deferrals. which were de minimis. And actually, half of those deferrals have already been repaid. Collecting 99 percent 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 healthcare providers and 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 payments. As of August 6, 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. Eighty-eight percent of MOV NOI is from investment-grade tenants or HCA, and 97 percent of our MOV NOI comes from tenants affiliated with a major health system. For our R&I portfolio, 76 percent of our revenues are received from investment-grade organizations and publicly listed companies, a very solid foundation. We also saw positive space utilization trends inter-quarter that mirrored admissions and surgery volumes reported by the health systems. For example, in our MOB portfolio, essentially all of our physicians were back to work in June. Patient visits and paid parking activity more than doubled in June from the depths of April. These trends have continued in July, although still below historical levels. All of our MOB buildings are open for business. and 94% of our MOVs are in counties that are restriction-free for elective procedures. To ensure the safety of our tenants, their patients, and our employees, we have set up screening at certain building entrances and enhanced our cleaning protocols. All R&I buildings are also open, supporting multiple critical research organizations in fighting the 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 who have continued to serve our tenants onsite through the pandemic have done a terrific job. We're grateful for their effort and commitment, and we continue to focus on the health and safety of these personnel and our tenants. Finally, I'm pleased to let you know that our doctor center medical office building associated with an Emory Hospital in Atlanta, Georgia placed second at the BOMA International Tobii Awards in the best 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, NOI, and cash payment results and trends were outstanding during the second quarter. During this difficult time, we are honored to be caring for the caregivers, the physicians, the hospitals, scientists, and researchers who bring hope and comfort to those in need. With that report, I'll pass the baton to Bob.

Thanks, Pete. I'll touch on our healthcare triple net lease portfolio before I close with some enterprise-level commentary. During the second quarter, our healthcare triple net assets showed continued strength, as evidenced by receiving 100% of second quarter, July, and August rents from our healthcare triple net tenants. Acute and post-acute providers have had access to significant government funding to create liquidity and mitigate losses related to the COVID-19 pandemic. In terms of rent coverage through Q1, acute care hospital coverage was strong three times. Nationally, hospital inpatient admissions and surgeries rebounded in Q2, with differences by market. 100% of Arden's hospitals are in states or counties that are open for elective procedures. Arden continues to perform extremely well, despite the challenging market conditions. LTACs have proven their value proposition in the pandemic, and Census has benefited from the increasing need for hospital capacity due to COVID-19. as well as the ultimate discharge of patients into this important care setting. The majority of this benefit began to accrue in the second quarter, so it's not yet reflected in the coverage stats reported today. IRF census initially declined due to lower surgeries and acute care volumes, but census has improved since mid-April and has benefited from rate enhancements. SNFs experienced notably higher mortality rates, with census down dramatically and 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 assessed the go-forward collectability of future rents in the context of COVID. We also took the appropriate step in the quarter of evaluating 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% of our total net real estate asset base of nearly 21 billion. Second, Though we collected substantially all of the expected triple net senior housing rent in the second quarter, we wrote off $54 million of accrued straight line rent receivables in Q2, primarily representing eight tenants in our triple net senior housing business, and converted those senior housing tenants to a cash basis with annual cash rent of approximately $80 million. Notwithstanding the reserve, we'll endeavor to collect all our contractual rents going forward. Third, We took a non-cash tax charge in Q2 of $56 million. And fourth, though our loan portfolio is fully current through the second quarter, we took a $40 million allowance for credit losses against our investments in a handful of small loans, as well as a charge for unconsolidated entities. I note that we did not take credit allowances against our holiday or colony loan investments. The aforementioned holiday transaction and non-cash 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 20 cent change was a function of the reduction in shop NOI. As we showed you in June, Shop NOI in the second quarter was on average 20 million lower per month in Q1. Our second quarter FFO, same-store NOI, and shop REVPOR results reflect the full quarter impact of the early and significant loss of shock applicancy in March to April in the important high REVPOR New York and New Jersey markets. As Debbie described earlier, we took decisive actions in Q2 to ensure Ventas is in a 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 a stable capital markets backdrop, we paid down substantially all borrowings under our revolving credit facility. As a result, as of August 5th, the company has available liquidity of approximately $3.5 billion. including $2.9 billion of undrawn revolver capacity, $600 million in cash, no commercial paper outstanding, and minimal near-term unfunded obligations. Finally, debt-to-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' operators. This compares to a Q2 average monthly occupancy decline of approximately 150 basis points. If current conditions hold, we expect shop occupancy and NOI to sequentially decline in the third quarter, albeit at an improved pace versus the 20 million per month average NOI reduction we saw in the second quarter. Nonetheless, the environment remains uncertain. Our operator's continued emphasis in Q3 is on keeping residents and staff safe and building leads and move-ins with a goal of stabilizing occupancy. We'll account for the Brookdale transaction in the third quarter, which we estimate as a two to three cent per quarter impact going forward versus the second quarter results. In Q3, We expect to fully realize the benefits of reducing our G&A 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 this storm. Looking further ahead, healthcare real estate continues to offer compelling, demographically driven growth potential. and Ventas is well-positioned to benefit from these powerful tailwinds. That concludes our prepared remarks. Before we start with Q&A, we are limiting each caller to two questions to be respectful to everyone on the line. Also, given the fact we're still remote, we'll ask Debbie to act as quarterback for the Q&A and to pass the football to the 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 1 on your telephone keypad. Again, that is star 1 to ask a question. And your first question comes from the line of Michael Carroll with RBC Capital Markets.

Yeah, thanks. I want 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 leads trend is flat, or are we continuing to see an increase as we go through July and beyond?

Good morning, Mike. Justin will take that one.

Good morning. So if you look closely at the numbers, you'll see this is on page 13 of the investor deck that we shared. The total number is up. We had over 13,000 leads in July. We had close to 12,500 in June. There was a little bit of slowness around the 4th of July, as reported by our operators, but altogether, we really view this as an improving trend. The percent versus prior year is just there for reference.

Okay, that's helpful. And then can we talk a little bit about the move-outs? I mean, honestly, they're 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, kind of as we move through the post-COVID environment, or do you think it will stay low until a vaccine actually comes through it?

Well, in regards to move-outs, they've been relatively consistent, you know, 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, you know, pent-up move-outs or any really notable drivers that would change the trend. So we expect move-outs really to be relatively stable, as in any external, you know, circumstances we're not aware of today. And the big focus is really just to see leads and ultimately move-ins to overcome the move-outs over time.

Okay, great. Thank you.

Thank you. And your next question is from Nick Joseph with Citi.

Thanks. Debbie, you mentioned the potential potential. continued government support on the senior housing side or kind of the need for it. How do you view the probability, timing, and potential structure of any support that could come about?

Well, the industry has a very strong case to tell. Essentially, the senior living care providers care for the largest group of seniors in The vast majority of the seniors are 85 and over. Many have significant comorbidities. And importantly, the clinical record of the senior care providers in keeping seniors safe has been far superior than in other sectors that have received significant support. So all of the policy predicates for receiving support from HHS to mitigate the financial costs of the COVID pandemic are there. And really, it's just a question of continuing to educate the policymakers on those key points and continuing to, again, respectfully request their financial support. And we're hopeful but remaining cautious around our outreach.

Thanks. And then just on the senior housing portfolio, I think you talked about the sequential same store pool outperforming. You mentioned LGM. For July, what's 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'll ask Justin or Bob to take that question.

I just want to clarify the question. Was that the – you wanted the 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 one she talked about was for the 390 properties and includes LGM.

It is because the sequential pool contains that. So, Nick, we don't have that broken out, but we can take that offline with you.

Thank you.

Thank you.

Our next question is from Jonathan Hughes with Raymond James.

Hey, good morning. Looking at 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 you're going to try to collect the rents, like you said, but any – Any plans to sell or maybe re-tenant those properties? Just curious about the outlook there.

Thanks. We are really happy, as we said, that we have reached these attractive transactions with our biggest triple net senior housing operators, Capital Senior, Holiday, and Brookdale. And I will turn it over to Justin to address the remaining 40%.

Thank you, Debbie. This other pool contains many operators. There's only one operator within it that's more than 1% of our NOI. The rest, really, it's very diverse, too. They're diverse from a geographic standpoint. They're diverse from the standpoint of how the pandemic has impacted performance. There are certainly different product types mixed in, and then there's also different credit profiles within each of the operators, and they all have slightly different coverage ratios. So there's a lot of moving parts that we've been evaluating. Certainly it's something we've kept a very close eye on. There are a 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 the key takeaway is the bigger and higher priority leases have 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 one more from me, and I say this with all due respect to you, Debbie, but has the board discussed succession planning for the day when you maybe decide to take a step back from running the business and laid out who will be filling your shoes. I would just appreciate any color there if you can share it as the only board member on the call.

Thank you. Sure. As I can tell you that our board, we have a great board. Our board is very experienced and very independent. Obviously, succession planning, regardless of the tenure or age of a CEO, is one of the core functions of any board, and I can assure you that our board performs all of its duties in an exceptionally positive and good way, and that would include succession. And I've always been really proud of the deep and experienced Ventas team that we have and that we've continued to augment this year. So you should feel really good about that.

Okay, got it. I appreciate the answer. Thanks for the time this morning.

You bet. Thanks. Your next question is from Rich Anderson with SMC Global.

Thanks. Good morning. Bob, you mentioned the 20 million NOI monthly average in decline during the second quarter, and then you thought there would be improvement in the third quarter from that run rate. What does that imply in the third quarter as you're looking at this, if you break it out between occupancy and rate?

Yeah, well, qualitatively, Rich, sorry, qualitatively, the story in the third quarter, we expect a sequential decline on occupancy and in the bottom line. And it really will be led by two things that will determine that. One is the pace of the occupancy decline, which we've seen good trends there, as you see in the deck. And then secondly, REV4. And REV4 really a function of the pricing environment in the markets. Those will be the key drivers. Cost, sequentially, we expect will not be a key driver. It's really going to be revenue-driven. But all in, expect that sequential decline, the pace of that decline, to improve versus that $20 million you referenced.

Right. And so I'm asking if you can break out the occupancy assumption in that decline. Is it 50 basis points?

Yeah. I mean, it's really going to depend on how August and September play out, Rich.

All right. Fair enough. Second question. So listening to your closest peers, Peak has sort of said their area of growth going forward is more in life science and medical office. Welltower has been more, you know, thinking about growing in senior housing. So two different choices there, which is good for investors. You always want choice. Where does Ventosh stand on that on a go-forward basis based on, the experience you had, is senior housing still something that you would consider a vital growth area for the company, or will you sort of turn your attention incrementally elsewhere? Not saying you'll abandon, but just what you're thinking going forward from this.

Thanks. I mean, obviously, capital allocation is something that's extremely important. We start out with a view that We prize 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 MOB-like science and R&I development business, and that has been a capital allocation priority and, again, is serving us really well. Our team is active really across sectors. Although I would say that we would likely prioritize, again, the life science, R&I development, and MOB businesses. While at the same time, I would say we have terrific exposure to upside in senior housing in a variety of ways. It is a significant part of our business. So we're happy about that for when the business turns. But we would continue to be very selective in our business. senior housing investments, were we to make any at this time?

Great. Great callers. Thanks, Debbie. Thanks, everyone.

All right. Be well. Our next question is from Bikram Malhotra with Morgan Stanley.

Thanks for the questions. Good morning, everyone. Just maybe first on seniors housing, thanks for all the color and the detail you provided in the deck, you know, very useful. I just want to understand on slide 13 where you show kind of the spot point-to-point movements and, you know, move-in, move-out, you know, typically does the sort of end-of-the-month benefit from just lower move-outs, meaning is it somewhat sort of contractual when people move out? And I'm just trying to understand the 10 BIPs increase, is it more of a function of it seems like move-ins were higher, but I just want to clarify, is it more of a function of move-ins? outpacing move-outs or vice versa?

I'm going to ask Justin to take that, and he will school all of us on the operating trends.

Thank you. The first thing I'd say is it's not really a direct connection between the chart on the bottom right and the move-ins and move-outs reflected on the left. Move-ins, move-outs are really recording a month. The bottom right is really showing a weekly trend. And so if you're trying to do some math and correlate the two, it's going to be difficult. But I will point this out, and this hopefully is helpful to you. It's really an age-old rule in the sector that the vast majority of move-in activity happens on the last day of the month. And then the vast majority of move-out activity happens on the first day of the month. And so 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 the two work together to ultimately net occupancy.

Okay. Okay, that's helpful. And just, I guess, second question, still on senior housing, maybe sticking with you, Justin. You've talked about the – you've given us a lot of data on the needs for But maybe you can just size the so-called pent-up demand for us, you know, maybe as a, you know, percent of occupancy, just how should we think about, and how should we think about that in terms of when it impacts? You know, is it a third-quarter impact, assuming everything remains open? Is it just a gradual kind of bump to whatever move-in, move-out activity we see? How should we think about this pent-up demand?

Well, I'll tell you the short answer is we really don't know for sure. And there's encouraging trends, 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 in new cases with COVID-19, our portfolio resisted that trend. And all the credit goes to our operators for protecting the health and safety of all of our residents. And That's a real credit, but I 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 within our communities that more residents are attracted to, where they can move about and do activities and participate in dining and visit, most importantly, visit with their loved ones. And we're really encouraged to see the improvement in leads. So the demand characteristics are improving and they look good. But it's a bit too early to start making predictions about additional demand at this stage.

Okay, but just to clarify, the leads, I'm just trying to understand the needs-based nature of assisted living and independent living is probably a little bit less needs-based. But if you take the leads... and think about this as a percent of the whole resident population. Is that a rough way to think about the occupancy impact or maybe just help us size it a bit?

Yeah, I'm not really sure how to size it more than what we've shown you here. You know, you can see, you know, if you look at page 13 and you just look at, you know, 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 move-ins. You know, things we look at, we look at conversion ratios, we look at lead volume, and, you know, there has been, you know, strong conversions in our need-based product. Our independent living benefits from longer length of stay, so they've had less dependency to maintain occupancy on new move-in traffic. And all of this is working together to really create the outcome that we've been reporting. There's a lot of moving parts in a big diversified portfolio. I don't know if I'm in a place to really pinpoint anything more on that point.

Okay, no worries. I can follow up. I think it would be helpful just to maybe get a sense of just historically how leads are, what the conversion rates, and just the timeline. I'm more just interested in trying to understand is this a, you know, the lead, is it a six-month thing, is it a 12-month thing, or is it just, you know, historically at least, how long has the conversion been? taken place, but I can follow up offline.

Okay, thank you. Our next question is from Nick Yolico with Scotiabank.

Thanks. Morning, everyone. First question is just going back to this issue of move-ins being still below where they were pre-COVID, and I'm wondering if there's any data that you're getting from prospective residents on why they're delaying move-ins and for how long. Because clearly you've had a rebound off the bottom, but leads, move-ins are still down 20%, 25% versus last year. And I think there's a lot of debate right now about whether we should be looking at these improvements in move-ins and leads versus the bottom and making an interpretation that, there's going to keep being linear improvement, or the other way to look at it is that you had pent-up demand that you didn't capture in April, happened in June, July, but structurally there's still not as much demand for move-ins as there was a year ago, and this could persist because of COVID still being an issue. So is there any way, anything you have you could share with us on that?

Yeah, good question. Let me start, and then I'll turn it over to Justin. So basically, again, as you say, we are encouraged by the sustained improvement in demand that we saw from the April timeframe to where we are now. And I think it's more in the former category of your question rather than the latter. It's a need-based business. It's demographically driven. Obviously, if you just watch the news, you know, there's going to be a psychological impact on individuals and families' willingness and readiness to move in, and I think that has had an effect. What we are happy about seeing is in places like New York that was the epicenter and obviously early and where there was a deep psychological and clinical impact of the pandemic, Atria, for example, had a July that was better than it had last July, significantly so, and better than June. So I almost think of it as a time series where you start to see the virus. At some point, it affects we're a lagging indicator, let me say. And then it may affect move-ins either because of psychology or because the communities are restricted to do move-ins, as Justin 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 improves. People feel more confident. We have testing protocols. And then you can see an improvement in the trends. And we're seeing this on a geographical basis operating exactly as I've described within the U.S. at this time with New York at this point starting to show some stronger trends having been a month or two or three away from the real nadir of the pandemic there. And what's also encouraging is that in the regions where the virus is more widespread, the south and the west, we've learned a lot clinically, and treatments are better, protocols are better, and therefore clinical results are better, which is keeping more communities open to new residents. And so this is a multifaceted situation. It, as we've said, remains uncertain. We have to be very humble in our expectations about our ability to predict the future. But so far, we're seeing these sustained positive trends. So I hope that puts it in perspective for you and answers your question.

Yeah, that's helpful. Thank you. My second question is just going back to that straight line rent receivable write-off. I just want to be clear that the $53 million that's on slide 17, does that exclude Holiday and Brookdale? And then also in terms of that rent that was cited here, the $80 million of annual cash rent, did you actually collect 100% of that rent in the second quarter?

Yep, I'll take that one. The answer to the first question is Holiday and Brookdale are not in that $53 million. And the second question is we have collected all of the rents that we expected on these eight tenants. So this is really a go-forward assessment of future rents, seeing that we're fully current.

Okay, so if we're just looking at a cash NOI number for the quarter, there's no adjustments we need to make for those tenants.

Nothing material now.

Okay, thank you.

Thank you. And our next question is from Teo Okusanya with Mizuho.

Yes, good morning, everyone. Bob, it sure sounds like you're excited about football season. Debbie's more excited than me. All right. So my first question is really around the senior housing portfolio, both shop and triple net. So you've adjusted the holiday and 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 have happened. The two things I wanted to focus on, first of all, ESL that you guys had kind of indicated a couple of quarters ago, seem to be struggling more so than some of the other shop operators. Is anything being done at that end to kind of improve things at ESL? And second of all, further diversification of the shop for your operator group. Any update on that?

Jessica? Hi. Good morning. Let me start with ESL, and I'll revisit a comment I made on the last earnings call. where I referenced the sequential improvement in first quarter performance versus fourth quarter, and ESL was a contributor to that improvement. So that was a good indicator. Certainly, it's a relatively young company, but it's a company that has strengthened their management team. They have a lot of experience at the senior management level, and we've observed really good steps that they've made to strengthen the company and the platform. We've also noted that during this pandemic, which obviously completely changes the performance profile of every company, that they've done really well. They've 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 ESL management team for their contributions. In regards to the second part in terms of diversification, the shop operating platform, really where we've been focused in this stage of the pandemic is supporting existing operators in every way that we can. We've been a little less forward-looking as we've been dealing with the leases that you mentioned, and we've been giving a lot of support to the shop operating platforms. So that's where our focus has been at this time.

Okay, that's helpful. My second question is around leverage at about 63 net debt to EBITDA. That's a little bit higher than your peers. Just kind of curious, target leverage for the company and any other additional plans going forward to delever, whether it's naturally 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, is improving EBITDA. I'll turn it over to Bob to answer.

Right, right. Right, that's plan A. This is the same question I'm sure you're asking everybody in the REIT sector, Tayo, because we're all seeing the same sorts of leverage pressure just due to the EBITDA degradation, which ultimately we believe is timing. And we believe in the stabilization and the recovery in senior housing particularly, and so that's the key. In the meantime, the focus is on liquidity first and foremost, and we're in a great spot there. You know, 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've found a way back in for net.tbitda. So it's, I'm sure, a conversation in every boardroom, but it's really a timing issue in my mind.

Okay. Okay. That's helpful. And then just if you could indulge me with one more question. Again, acquisitions, right now, again, not a lot going on industry-wide, but can you kind of tell us a little bit about what you're seeing out there, cap rates or some of your major kind of sectors you're interested in? Is that changing? Is that moving? Is nothing really happening?

You're an abuser, but I'll give you one tidbit. So, I mean, obviously we're very pleased that we got into the life science business and have expanded that part of our business and have a longstanding commitment to hospital-affiliated medical office buildings, mostly on campus, as Pete described. And, you know, the cap rates for research and innovation or life science have continued to stay strong and in many cases have even strengthened further. So that's a little tidbit for you that has enhanced the value of our portfolio.

Great. Thank you.

All right. Your next question is from Jordan Sadler with KeyBank Capital Markets.

Thank you, good morning, and I will keep it to the two questions for sure. First, I wanted to follow up on the TripleNet Seniors Housing business. In the business update on page 17, there is a reference to all other TripleNet tenants at 1.3 times EBITDA through 1Q. So I'm assuming, you know, given the performance mirrors what you've seen in the SHOP portfolio, that continues to dip and 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 of annual rent for those eight tenants or for the rest of that portfolio?

So again, that's about $170 million of cash rent. It's all relatively small tenants, as Justin said. you know, these tenants are performing on an aggregate basis, you know, substantially better than the Capital Senior, Brookdale, and Holiday tenants were prior to the pandemic. They certainly will feel the same pressures of the sector that the shop operators are feeling directionally, but may have different you know, credit profiles, different geographies, different business models, et cetera, that could make the outcomes, you know, vary. And also, I would just say that really the outcomes are going to be really dependent upon basically what 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 is, and obviously where the pandemic goes. And so I think we've really demonstrated a commitment to being decisive and proactive, creative, whatever words you want to use, and you have our commitment to continue to do so. But as Bob said, you know, we will continue to try to collect our rents.

Okay, that's fair. And then, Bob, I believe 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 to what the assessment is of the colony loan at this point?

Bob, I'll take that. I mean, that's correct. It was not in the $40 million. And the colony loan, you know, is a LIBOR-based loan, and there continues to be, for the time being, very significant cushion between the cash flow of the collateral and the debt service.

Okay. So that's still current. Okay.

Thank you. Thank you. Our next question is from Joshua generally with bank of America.

Hey, good morning everyone. Thanks for the question. Um, I, I guess I'm curious to hear if you've had, had, have had any communities that maybe went from that kind of red, like restricting move-ins to green, uh, where they're allowing move-ins to back now that, uh, COVID cases are rising across the country. Um,

You know, as Justin said, we are glad that in the green and even the yellow, we have record levels of communities now offering the richer environment to seniors really since the beginning of the pandemic. And Justin, can you talk about the movement that we've seen perhaps as the virus has moved in the country?

Sure. 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% were not taking move-ins. Even within that, there was movement, and among the segments there were movement. For instance, I think there was around 30 communities that actually moved backwards among the segments. But then we had just as many or close to as many improve. So there is a little bit of movement back and forth, but very few communities, quite frankly, that are involved in the movement throughout the month of July. And the net result, of course, is very positive to see the vast majority of the portfolio offering the more robust lifestyle.

Okay, thanks. Okay, sounds like sounds like the rising COVID cases hasn't been a big impact. And then maybe touching base on expenses going forward. How should we think about operators ability to flex labor? I'm assuming a lot of folks cut their marketing budgets, what are their kind of expectations for ramping that back up and maybe how that might impact move ins and leads going forward?

Bob, do you want to take that?

Sure. Kind of a gas and clutch answer, I think, to that question because, again, we saw $42 million of direct COVID costs in the second labor and supplies and PPE and so on, and we expect just because of the protocols necessary to keep residents safe that we're going to continue to see that kind of expense. At the same time, some of the offset, and this really was better than we had expected from the last time we talked, was on other mitigating costs. And you mentioned, for example, sales and marketing costs, which, again, as you have more communities in segments one and two, we'll have less marketing costs. So I would expect as we have more activity on the sales side, you'll see some increase in the costs 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, you know, kind of flattish if I thought about sequential OPEX. And it's really that gas and clutch phenomenon that's driving that.

Got it. Thank you.

Our next question is from Steve Belliquette with Barclays.

Great. Thanks. Good morning, Debbie and Bob. Thanks for taking the questions. So I just had a couple on the Brookdale restructuring. First, I guess it seemed to us that Ventas was focused on gaining some liquidity as part of that restructured Brookdale agreement with the $235 million upfront consideration. So I guess first I'm wondering if you could just speak to a little more of your thoughts on wanting to gain some upfront cash as opposed to maybe absorbing a smaller rent reduction, unless that's a mischaracterization, of course. And then I'll have an accounting follow-up question on Brookdale after this one.

Sure thing. We think the Brookdale deal is a really well-balanced, thoughtful structure that's really customized to create some significant key benefits for Ventas, of course, but also for Brookdale. We're trying to balance creating certainty for our shareholders, a sustainable rent stream, and that's really important as we still and the industry still is combating COVID. We wanted to create significant opportunity for upside, which we did through the 8% warrants in Brookdale so that we have the opportunity to share an industry recovery. And in particular at Brookdale, not only on our own portfolio, but also on their own portfolio. So a broader base upside participation opportunity And of course, getting the cash upfront and all the upfront consideration really replaces over two and a half years of the cash rent reduction that we gave. And so we thought that was really great. And in the meanwhile, we did improve lease coverage and we created a better, stronger, more stable tenant overall. And that was really a very thoughtful, again, I think very mutually beneficial type of transaction that accomplished the objectives of both 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 Ventas expects to recognize the full value of the upfront consideration from Brookdale ratably over the remaining base term of the lease.

Correct.

I just want to confirm, as you divide that $235 million and recognize that presumably, I guess, quarterly over the next five years or so, will that show up in one of the other income lines as opposed to property revenue? I'm assuming it will still flow into NOI, but I just wanted to make sure I understand which line that will flow into.

Thanks. Great question. I'm going to hand that over to Bob.

Yeah, it's treated as deferred revenue flowing through NOI. So that's and amortized over the remaining period of the least five and a half years.

I think of it as prepaid rent, but they won't let me write it that way. But that's sort of what I think of it as.

But will it show up as property revenue, though, in terms of how we should think about it? Okay. Okay. That's helpful. Okay. Thank you.

Thank you. Our next question is from Lucas Hartwich with Green Street Advisor.

Thanks. Good morning. I was hoping you could go a little bit deeper into MLB performance this quarter.

Oh, thank you, Lucas. I know that Pete Fulgorelli has been awaiting that question. So, Pete, I'm going to turn it over to you.

Yeah, thanks so much, Lucas, for asking your question. I appreciate that. Yeah, so this quarter, we're actually very happy with the MLB performance, particularly given COVID conditions. We have a substantial amount of paid parking that took, 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 we were aware of someone walking through our building, a patient walking through our building who is COVID positive, we would do a deep clean in the premises as well as the lobbies and all common areas So there was 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 it was a poor comparison, tough comparison in the second quarter on the expense line.

Does that answer your question? Excellent. Perfect, yep. And then, sorry, my next question is on senior housing, but I'm just curious. I'm curious what your senior housing operators in terms of how they're preparing for the fall, are they preparing to go back into quarantine mode or how are they thinking about it? I understand there's a lot of uncertainty, but just curious how they're preparing for it.

Good question. We sit here at the beginning of August and There's obviously a lot of uncertainty in schools and other types of settings, and I'll ask Justin to really comment on what the operators are doing as it relates to the fall protocols.

Thank you, Debbie. One thing I would just point to is just the approaches that our operators have used to keep our residents safe. You actually see it in the investor deck on page 15, and it falls into three categories. There's screening, which is something as a practice that really started right away that you're familiar with, daily temperature checks and symptom screening and the health questionnaires that happen. And then the protecting, which has to do with social distancing and PPE and resident cohorts and cleaning and disinfecting. And then testing has been widely utilized across our operators as well. So all of those things have been working together to create an environment that is safe for our residents and our employees. And as you can see, you know, really from everything we've shared both on the call and through the materials, the results have been good. And so as long as those trends persist, we would expect to see communities open and accepting move-ins and allowing for residents to move about safely in the community and have visitation with relatives that is really, really important to the residents and to have done so in a very safe way and in a 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 new infections that find their way into a community, they may reverse course a bit. But the overwhelming trend has really been more towards opening at this point.

It's also going to be interesting to see whether all of the processes that have been adopted and the heightened sensitivity is really going to have any measurable positive effect on the spread of influenza in the fall. And we don't yet know that. There are various hypotheses floating around, but that'll be an interesting, it'll be an interesting test case this year to see whether that 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 Tan with JP Morgan. Please go ahead.

Hi, this is Sarah for Mike Muller. This question is for Justin. Just wondering how sensitive has the move-in and toy trends been trending in markets where you see virus flare-ups and this progress stall when that happens?

That's a great question. And if you can look at one, if you have the deck, probably you go to page 14 and you can see that we've included a map that describes what I'm going to tell you. And that is that to Debbie's point earlier, where we had the most impact really from the virus or in the early stages was in New York and 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 and New Jersey. But having said that, away from that outlier, it's very consistently approving all across the country. And you can see it as we reflect it. You know, we have the size of the circle on this page that reflects the NOI concentration. The color really reflects that the state is reflecting the number of new cases for 100,000 population in the general population. So it indicates whether or not, you know, there's increased virus spread in the general population. And then the color of the circle is really about the movement versus prior year. And you can see there's a lot of green circles, and irregardless of what's happening externally with the virus. And 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 in the the more rich resident experience, which encourages move-ins. And again, it's a very unpredictable trend, and communities, as Justin said, are moving in and out of this frequently, depending on virus activity. But overall, I think the map presents the right picture at this moment in time, but again, We want to be cautious and humble about the predictive abilities going forward. So if there are no further questions, I really want to thank everyone for their attendance today, for their interest in our company, for their participation, and I hope you and yours stay Vigilant and safe 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