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Text: These materials are available on the Ventas website at ir.
This earnings call does not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any securities, also with depletion of any vote or approval in connection with the proposed acquisition of New Senior Ventas filed with the SEC a registration statement on Form S-4 that includes a preliminary prospectus for the Ventas common stock that will be issued in the proposed acquisition and that also constitutes the preliminary proxy statement for a special meeting of New Senior stockholders to approve the proposed acquisition.
The proxy statement prospectus and other documents filed by Ventas and New Senior with the SEC may be obtained free of charge at Ventas' Investor Relations website at ir.
ventasreit.com or in New Senior's Investor Relations website at ir.
You should review such material filed with the SEC carefully because they contain or will contain important information about the proposed transaction, including information about Ventas and New Senior and the respective Directors, executive officers and other employees who may be deemed to be participants in the solicitation of proxies in respect of their proposed acquisition and a description of their direct and indirect interests by security holdings or otherwise.
Sarah, well done, your first public company merger.
Ventas has delivered an outstanding second quarter and we have strong momentum across the board, in health and safety, capital deployment and access, realization of the benefits of prior successful investments, financial strength and most importantly in portfolio growth led by our high quality SHOP business with significant contributions from office and stability in our triple-net lease business.
We see a clear path to growth in our demographically driven diversified enterprise, capturing the embedded upside in our senior housing business, the benefit of external investments, reliable cash flow from our office and triple-net businesses and delivery and stabilization of ongoing developments, primarily in the life sciences research and innovation and Canadian senior housing areas.
Our experienced team is committed to winning the recovery for all of our stakeholders.
Let me first turn to our second quarter results.
We posted $0.73 of normalized FFO per share, which is above the high end of our previously provided guidance.
I'm delighted that our same-store property portfolio grew 3.6%, sequentially.
Our outperformance was driven by SHOP, which produced a $111 million in quarterly NOI, a recovery of $50 million of annualized NOI, representing industry-leading growth in same-store cash NOI and occupancy.
July continued these positive SHOP trends for the fifth consecutive month of occupancy growth.
Importantly, by the end of July, lease reached their highest levels since the pandemic began.
Justin will unpack these trends, more fully in his remarks.
As a result, we've never been more confident that the senior living business is supported by powerful demand that is growing and resilient, while supply remains constrained.
That said, given the macro uncertainty in the COVID-19 environment, particularly the national and regional rise in cases and the measures that have been taken or may be taken to contain COVID spread, the path to full recovery may not be a straight line, but we believe that will point inexorably upward.
In our third quarter outlook, we have assumed the increase in COVID cases throughout the US may have some impact on the velocity of leasing and expenses.
Rounding out our portfolio performance, office grew nicely in the quarter and our triple-net portfolio continued to stability.
Pete's efforts to increase leasing, keep high retention rates, improved customer relationships and grow NOI are showing results.
Our on-campus and affiliated MLP strategy with leading health system continues to shine.
Turning to health systems, our investment in Ardent also continues to deliver benefit.
In addition to strong cash flow coverage on our $1.3 billion leasehold position, our 10% equity stake in the Ardent enterprise is benefiting from excellent Ardent results and our prior purchase of $200 million of Ardent senior notes recently paid off with a $15 million prepayment fees, providing us with a 13% unlevered return on our investment in the Ardent notes.
With all is said and done I believe and hope that our Ardent investment in real estate, equity and debt will prove to be one of our best risk adjusted return investments.
Turning to other capital allocation priorities.
We certainly are on our front foot regarding external investments.
In total, in 2021, we have over $3.5 billion in investments completed, pending or underway with another $1 billion life science research and innovation pipeline with our exclusive development partner Wexford, right behind that.
Our team is also busy evaluating attractive deals across our asset classes.
This year-to-date, we have already reviewed about as many investment opportunities as we saw in all of 2019.
We will pursue those that meet our multi-factor investment philosophy, which is focused on growing reliable cash flow and favorable risk adjusted returns, taking into account factors such as cost per square footer unit, downside protection and ultimate potential for cash flow growth and asset appreciation.
Our $2.3 billion pending investment in New Senior, announced in the second quarter is a great example.
In this deal, we are acquiring over a 100 high-quality independent living communities that are well invested and located in advantaged market, at compelling pricing.
The per unit cost is estimated to be 20% to 30% below replacement cost.
The 5% cash going in cap rate is expected to grow to a 6% cap rate on expected 2022 NOI with upside as the senior housing recovery continues, and the FFO multiple of less than 12 times post synergize 2022 estimated FFO are all attractive valuation metrics.
I commend Susan Givens and her team for doing a tremendous job creating and realizing value for their stakeholders.
We are also confident that Ventas shareholders will receive immediate and long-term accretion and upside from the deal as senior housing recovers and the large middle market demographic expands significantly in the near term.
As Justin will describe, the new senior portfolio also fits in with our senior housing strategy and framework.
New senior also performed well in Q2 and into July, with occupancy increasing in the same-store portfolio for five straight.
A unique strategic advantage of the New Senior transaction is a long-standing relationship we have with the principal managers of the portfolio, Atria and Holiday, two leading operators who recently combined to form the second largest senior housing manager.
Congratulations to Atria for pulling together this industry changing transaction.
Switching to our attractive life science research and innovation business, it continues to provide us with value-creating opportunities to invest capital.
The Ventas life science portfolio now exceeds 9 million square feet.
It's located in three of the top five cluster market, includes three ongoing development projects and is affiliated with over 16 of the nation's top research universities.
We also have an incremental $1 billion in potential projects we are working on with Wexford.
The first and largest new life science project in the pipeline totaling about $0.5 billion in costs is gaining steam.
Expected to be 60% pre-leased to a major public research university that rank in the top 5% of NIH funding, this project will be located on the West Coast and should break ground in the first half of 2022.
Wexford with this exceptional reputation among universities is also exploring significant additional life science potential projects beyond those in our existing pipeline.
North of the border, we continue to invest capital in high-end large scale independent living communities with our partner, Le Groupe Maurice in Quebec.
We have always tried to create value through both internal and external growth, and we're pleased that we've returned to being a net acquirer in 2021.
Our team is active and engaged beyond our announced deals and our pipeline of potential investments across asset classes.
To fund new investments, we have access to significant liquidity and a wide array of capital sources, including the asset dispositions and receipt of loan repayments, as Bob will describe in greater detail.
The demand for senior housing has been robust and sustainable, proving out the value proposition of communities and care providers offered to seniors in their families.
The sharp recovery has begun and we've started capturing the significant upside embedded in our existing senior housing portfolio from both pandemic recovery and the 17.5% growth in the senior population projected over the next few years.
Our diversified business model continues to provide uplift and stability to our enterprise.
We are investing nearly $4 billion and announced deals and development projects and our access to and pricing up capital are positive.
In closing, the US is in the midst of an impressive economic recovery that together with demographic demand for all our asset classes will benefit our business.
We embrace the opportunity to take on any near-term challenges that are temporarily caused by the strength and speed of this recovery, especially because now unlike last year and the beginning of 2021, our employees, residents, tenants and caregivers are largely safe and healthy.
As a team at Ventas, we're incredibly pleased about the results we've delivered and the strength and momentum we've demonstrated.
Justin, over to you.
We remain excited about delivering industry-leading occupancy and NOI growth, and we are encouraged about recent trends in the senior housing portfolio.
Although we are still in the early stages of the recovery, we are off to a very strong start.
Ventas is well positioned to benefit from significant senior housing tailwinds, including the sector recovery upside, supportive demand fundamentals and continued improvement in leading indicators.
I'll review three topics today.
First, our second quarter performance.
Second, our perspective on the senior housing operating environment.
And third, our continued execution of our senior housing strategy.
I'll start by covering our second quarter performance.
In SHOP, leading indicators continue to trend favorably and accelerated during the quarter, as leads and move-ins each surpassed 100% of 2019 levels, while move-outs remain steady.
June marked the best month for leads and move-ins since the start of the pandemic and July has sustained a strong momentum.
Strong sales activity has now driven five consecutive months of occupancy growth, inclusive of July.
In the second quarter approximate spot occupancy from March 31 to June 30 increased 229 basis points, led by the US with growth of 313 basis points and accelerating leads and move-ins.
In Canada, the transfer more muted due to a slower vaccine rollout, for the approximate spot occupancy still increased during the second quarter, driven by 33 basis points of growth in June.
Leading indicators remain strong in our portfolio as the digital footprint of our operators has significantly expanded over the past year, casting a wider net as traditional high converting lead sources such as personal referrals, respite and professional referrals continue recovery.
Turning to SHOP operating results.
Same-store revenue in the second quarter increased sequentially by $3.5 million as strong occupancy growth was partially offset by the impact of a new resident move-in incentives on pricing, specifically at Atria.
I will touch on that more in a minute.
Operating expenses declined sequentially by $9.2 million or 2.3% excluding the impact of HHS grants received in the first quarter, driven by a better than expected reduction of COVID-19 operating costs, partially offset by a modest increase in routine operating expenses.
For the sequential same-store pool, SHOP generated approximately $111 million of NOI received in the first quarter, which represents a sequential increase of $12.4 million or 12.6% when excluding the impact of HHS grants.
This marks the first quarter of sequential underlying NOI growth since the onset of COVID-19 and approximates a nearly $15 million NOI improvement on an annualized basis.
During the quarter, we saw solid contribution to sequential NOI growth in both revenue and operating expenses as average occupancy increased 110 basis points and COVID-19 costs declined substantially and ahead of expectations.
Sequential same-store cash NOI was largely stable in the second quarter and 98% of all contractual triple net rent was received from the Company's tenants.
Our trailing 12 month cash flow coverage for senior housing, which is reported one quarter in arrears is 1.2 times and down versus the prior quarter, reflecting the timing associated with coverage reporting which now includes effectively four full quarters of operations impacted by COVID.
Moving onto the current operating environment, which is full of green shoots.
Our market leading operators continue to demonstrate their strong market position through broad occupancy gains.
Sunrise led the way with 627 basis points of spot occupancy growth in the low point in mid-March to the end of July, benefiting from a rejuvenated management team, significantly well invested communities and a balanced approach demonstrating very strong occupancy gains and pricing power.
We would like to congratulate Sunrise's CEO, Jack Callison for adding experience and depth to his management team with this recently announced hires.
Atria which benefits from a higher absolute occupancy of 81.8% at July end continues to deliver solid volume growth.
Spot occupancy in July increased 529 basis points since the low point in mid-March, resulting from the combination of their industry-leading vaccine mandate and strategic price incentives to capture movements.
Atria anticipates tightening incentives moving forward as pricing power recovers and occupancy stabilizes.
Supporting all of this is Atria's industry leading vaccination rates, which are impressively high at nearly a 100% of both residents and employees.
Looking ahead, as Debbie mentioned, the third quarter is off to a strong start with July spot occupancy increasing 74 basis points versus June and lease continuing to stand strong at 105% of pre-pandemic levels.
Our operators have been prioritizing resident safety and weathering several near term headwinds, including the Delta variant and transitory wage pressures from staffing shortages in select markets.
Underpinning our leading operating partner relationships and recent sales momentum is our attractive market footprint, which positions us to benefit from the compelling supply and demand outlook in the senior housing sector.
Our communities in the US are poised for improving performance over time due to our strong presence in submarkets that outpaced the US national average in aging population growth and wealth demographics, but with significantly lower exposure to new construction starts and construction as a percentage of inventory.
Approximately 30% of our SHOP portfolio on a stabilized basis is located in Canada.
The senior housing sector in Canada has performed exceptionally well, with occupancy exceeding 90% every year from 2010 to 2020 and demand outpacing new supply in eight of that last 11 years.
As a foundation to these attractive fundamentals, the 75-plus population in Canada is projected to grow more than 20% over the next five years about twice the pace of the US.
The Ventas team has been busy executing our senior housing strategy, driven by our experiential operating expertise and underpinned by our analytical capabilities to further strengthen our senior housing business.
The underlying goal of our strategy is simply to execute portfolio actions that ensure we are located in the right markets, with the right operator, with assets, with strong local market positioning.
A notable example of our strategy execution is the New Senior transaction.
New Senior has a track record of strong operating performance, benefits from a geographically diverse footprint with favorable exposure to compelling market fundamentals and demographics, and represents a well invested high quality portfolio catering to an attractive market segment.
The acquisition also represents an excellent opportunity to further expand our relationships with two long-standing operators in Holiday Retirement and Atria Senior Living and with new relationships such as Hawthorne Senior Living.
New Senior will strengthen our existing senior housing business from several strategic perspectives.
Operationally, New Senior will enhance Ventas' cash flow generation profile.
Its margin has remained resilient in the 35% plus range during the COVID-19 and occupancy has weathered the pandemic, headwinds of approximately 80 basis points better than the NIC industry average.
Most recently, New Senior has seen strong sales trends as we progress through the early stages of the senior housing recovery with powerful upside as the portfolio occupancy grew 100 basis points in June.
Geographically, New Senior has a diverse presence across 36 states, which includes exposure to markets with high home values and high household income levels, ideal proximity to premium retail in high visibility locations and favorable supply outlooks versus industry averages.
This transaction is a reflection of our focus on adding high-quality assets to our senior housing platform and maintaining balance across independent living and assisted living product types.
We see New Senior's independent living assets is complementary to our existing high end major market portfolio as it provides a lower average resident age and longer length of stay at an accessible price point, with RevPOR of approximately $2700.
The purpose-built nature of these communities, which include consistent layout with 120 units per building also will strengthen our ability to effectively and efficiently redevelopment -- redevelop and invest in these assets over time.
Moving on to new developments.
We continue to drive value from our development pipeline through our relationship with Le Groupe Maurice, where we have opened three communities, with more than 1,000 units over the past year.
Two of the three developments were delivered in the fourth quarter of 2020.
Both projects had substantial pre-leasing activity and have already stabilized at approximately 95% occupancy.
The third project, a 287 unit expansion of an existing Le Groupe Maurice community in Montreal, was delivered in June of this year.
Initial leasing activity has been strong with more than half of the new units occupied as of the end of July.
Our plans across our broader SHOP portfolio includes significant deployment of refresh and redevelopment capital, strengthening our market leading position, where we expect to realize occupancy growth and pricing upside over the next few years.
We continue to actively manage our portfolio with the disposition of non-strategic assets, and the transition of operators in select markets to position our senior housing business for long-term success.
In summary, our recovery is off to a strong start.
We are well positioned in markets that benefit from outsized aging and wealth demographic, with rapid use of [Technical Issues] we are executing our senior housing strategy to help ensure success in the near and long term.
I will now hand over to Pete.
I'll cover the office and healthcare triple-net segments.
Together these segments represent over 50% of Ventas' NOI.
We continue to produce positive and reliable results.
Within these segments, we're seeing a changing business climate.
Health system and university business confidence is rising, leading to longer-term commitments and strategic growth investments.
During the pandemic, we kept our business confidence.
We remain focused on growth and we continue to invest in incremental leasing resources and in creating a leasing center of excellence, led by an industry veteran.
She is now two years in.
We've built a technical engineering team to assist our local property teams and running our buildings more efficiently.
Also led by an industry veteran.
He is now 18 months in.
We doubled our capital invested in our MOBs to ensure their competitiveness, including major redevelopments in Phoenix, Atlanta and Austin, Texas.
We expanded our tenant satisfaction programs under the leadership of our new property management leader.
He is also 18 months in.
Because of this focus, I'm proud to say that our MOBs now rank in the top quartile of tenant overall satisfaction as surveyed by Kingsley, the national real estate survey leader, happy tenants equals higher occupancy.
Our focus on the fundamentals and growth is showing results, let me describe them now.
Office, which includes our medical office and research and innovation segments performed well, delivering 10.5% sequential same-store growth.
Office quarterly same-store growth was 12.6% year-on-year.
The R&I portfolio benefited from a $12 million termination fee from a large tenant in the Winston-Salem innovation center anchored by Wake Forest.
Adjusted for the termination fee, office sequential same-store growth was 90 basis points and 2.8% per year-on-year same-store quarterly growth, a strong quarter.
Medical office same-store sequential growth was 80 basis points and year-on-year quarterly same store growth was 2.4%.
For the quarter, we executed 230,000 square feet in Office new leasing and 460,000 square feet year-to-date, a 78% improvement from prior year.
Medical office had strong same-store retention of 94% for the quarter and 85% for the trailing 12 months.
The result is the total MOB occupancy increased 20 basis points sequentially.
Total office leasing was 750,000 square feet for the quarter and 1.8 million square feet year-to-date.
We are also pleased that our annual escalators for the new MOB leases, averaged 2.9% for the quarter, which caused MOB same-store portfolio, annual rent escalators to increase from 2.4% to 2.6%.
Our R&I business continues to excel as it strives to provide effective facilities to support the record level of investment into life sciences research.
Same-store sequential growth was 38.9%.
Adjusted for the termination fee, same store sequential growth was 1.1%.
Year-on-year quarterly same-store growth was 42.6%.
Adjusted for the termination fee, year-on-year quarterly same store growth was a strong 3.9%.
Quarterly same-store occupancy was now standing 94% with sequential occupancy increasing by 10 basis points.
Looking forward, we have three R&I buildings comprising of 1.2 million square feet of space under construction.
Collectively, they are 78% leased or committed.
Of the two buildings in our uCity complex, Philadelphia, the Drexel building is 100% leased, while one uCity Square is over 55% leased or committed.
We are oversubscribed for the remaining space with 11 above pro forma proposals currently outstanding.
In Pittsburgh, our new building is 70% pre-leased, University of Pittsburgh and UPMC was significant activity on the remaining space.
At our recently opened project with Arizona State University in Phoenix, we are 86% leased or committed and expect to be 100% leased shortly.
These performance numbers reflect the quality of our well located R&I assets.
Now let's turn to healthcare triple-net.
During the second quarter, our healthcare triple net assets showed continued strength and reliability with 100% rent collections.
Second quarter same store cash NOI growth was 2.5% year-on-year.
Trailing 12 month EBITDARM cash flow coverage through June 30 was strong across the portfolio.
Health systems trailing 12 month coverage was an excellent 3.6 times in the first quarter, a 10 basis point sequential improvement.
As Debbie mentioned, Ardent continues to perform extremely well in this dynamic market.
IRF and LTAC coverage improved 20 basis points to 1.9 times in the first quarter, buoyed by strong business results.
Although skilled nursing declined 10 basis points to 1.8 times as the pandemic continued to impact centers, total post-acute coverage increased sequentially by 20 basis points to 1.9 times in the first quarter of '21.
Finally, several of our partners have an approach for M&A opportunities.
Kindred is expected to merge with LifePoint, and Spire recently entertained multiple offers by Ramsay.
It is a testament to the underlying value of our healthcare operators and the associated real estate.
In my remarks today, I'll cover our second quarter results, our recent liquidity balance sheet and capital activities and finally, our expectations for the third quarter of '21.
Starting with our results in the second quarter.
Ventas recorded strong second quarter net income of $0.23 per share, normalized funds from operations of $0.73 per share.
Normalized FFO per share with $0.02 pennies above the high end of our initial guidance range of $0.67 to $0.71 for the quarter and is consistent with our June update to be at the high end or better than that original range.
The Q2 outperformance was driven by growth in Office, continued stable performance from triple-net, strong results from Ardent and better than expected NOI in our SHOP portfolio.
Turning to capital, we've been busy proactively managing our capital structure, duration of debt and liquidity since our last earnings call.
First, following the announcement of the New Senior agreement, we raised $300 million of equity at an average gross price of approximately $58.60 per share under our ATM program.
The $300 million equity raise together with the $100 million of new equity to be issued New Senior shareholders for the fixed exchange ratio, and $1.2 billion of New Senior debt to be assumed or refinance constitutes the overall $2.3 billion funding of the New Senior transaction.
Second, through August 5th, we received $450 million of disposition proceeds through receipt of loan receivable.
Included in the $450 million received today, this repayment of two well structured loans in July, part of the investment of $200 million of 9.75% Senior Notes due 2026 and Holiday's repayment of $66 million or 9.4% notes due in 2025.
Medical office fully sold in the second quarter also resulted in proceeds to approximately $107 million.
Using proceeds from this division, in the third quarter, Ventas will improve its near-term debt maturity profile further by fully repaying as little as $664 million and 3.25% Senior Notes due August 2022, and 3.13% notes due June of 2023.
As a result of recovery senior housing NOI capital structure actions we're seeing strengthening credit metrics.
Reported Q2 net EBITDA was better than expectations improving 10 basis points sequentially to 7 times.
Within SMB point improvement underlying SHOP annualized EBITDA improved nearly $50 million or 25 basis point beneficial impact of the ratio in just one quarter.
This organic improvement was offset by the elimination of SHOP we did experience, we did experienced in Q2.
This provides a proof point of the anticipated material improving leverage resulting from the underlying recovery in senior housing over time.
Pro forma for announced ATM issuance of capital activities since of Q2 net debt to EBITDA on lower from 7 times to 6.8 times.
I would highlight that the New Senior transaction is expected to be 30 basis point level, are projected here 2020 NOI supported by the forecasted growth in cash flows from the New Senior portfolio.
Since assets liquidity totaling $3.3 billion as of our finished the Company at $2.7 billion of undrawn revolver capacity $600 million cash and no commercial paper outstanding.
Let's finish with our future guidance.
Third quarter net income was estimate range from flat to $0.05 per fully diluted share.
Our guidance range for normalized FFO for Q3 is $0.70 to $0.74 per share.
Q3 FFO $0.72 can be bridged from Q2 of $0.73 by $0.02 benefit from the loan prepayment fee in Q3.
[indecipherable] in Q2, offset by $0.02 from lost interest income on the loan repayments and the July equity raise.
Third quarter assumptions underlying our guidance as follows.
SHOP Q3 spot occupancy from June 30 to September 30 is forecast to increase between 150 to 250 basis points with the midpoint roughly continuation of occupancy growth trends there in July.
Third quarter is expected to be roughly flat sequentially.
And move in incentives are expected to narrow in the quarter.
SHOP strong revenue growth is expected to be offset by increase in operating costs.
Additional day in the quarter.
Higher occupancy, labor and retain seasonal items including repair deficiency utility costs.
Now we can test for interesting to you're seeing in the third quarter sales performance is expected in the office and triple-net segments we continue to expect $1 billion in asset sales and move-in payments for the full year 2021 with line of sight for the remaining balance in the second half of this year.
Fully diluted share count is now 383 million shares reflecting in anticipation of New Senior.
Guidance does not include any other announced capital markets activity.
Our Q3 guidance excludes any impact from the pending acquisition of New Senior.
New Senior transaction is expected to close in the second half of 2021 and the close is forecast to be between $0.09 to $0.11 accretive to normalized FFO per share in 2022.
I'd like to underscore that we're still in a highly uncertain environment, growth trends in SHOP are positive the pandemic impact on our business very difficult to predict.
As I'm excited about our business in the future and we believe we have the well-diversified portfolio, best in class operators and experienced team to win the recovery that is now underway.
Before we start with Q&A, we are limiting each caller to two questions to be respectful to everyone on the line.

user
sees q3 normalized ffo per share $0.70-$0.74.
qtrly normalized ffo per share $0.73.

assistant