芬塔 (VTR) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2020 Ventas Earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Sarah Whitford, Investor Relations. Please go ahead.

Good morning. Welcome to the Ventas Third Quarter Financial Results Conference Call. Earlier this morning, we issued our third quarter earnings release, supplemental and investor presentation. These materials are available on the Ventas website at www.ventasreit.com.

As a reminder, remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those cautioned by such statements. For a more detailed discussion of these factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website.

Certain non-GAAP financial measures will also be discussed on this call. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the Investor Relations section of our website.

I will now turn over the call to Debra A. Cafaro, Chairman and CEO.

Thank you, Sarah. Good morning to all of our shareholders and other participants. We want to welcome you to the Ventas Third Quarter 2020 Earnings Call.

The Ventas team is dispersed but unified in spirit, as we join you for today's call. I'd like to provide an overview of our consistent strategy, discuss our third quarter results, highlight how we are driving our Research and Innovation business forward, describe our competitive advantage in managing institutional third-party capital and touch on the positive senior housing operating trends that continue into October.

Our enterprise continues to benefit significantly from our steady commitment over decades and various cycles to asset class, operator and geographical diversification. We aim to generate reliable growing cash flows from a high-quality, diverse portfolio of assets on a strong balance sheet. We've seen that staying disciplined about diversification has protected the downside and also provided myriad opportunities for our stakeholders. The current environment is certainly proving out the merits of this strategy.

First, our diversified portfolio is enabling the company to remain strong and stable, despite the disruption occasion by the COVID-19 pandemic, which has affected our different asset classes and geographies in non-correlated ways. Our Medical Office, Research & Innovation business and our health care triple-net lease business now represents over half our enterprise. During the quarter, these asset classes have continued to perform well and led our third quarter performance, enabling us to deliver $0.75 normalized FFO per share.

Second, our diversified asset base with 5 verticals has given us the ability to continue successfully allocating capital over time and through cycles. For example, following the spin-off of our skilled nursing business, we invested in high-quality health systems with Ardent, which is currently performing very well as hospitals have asserted their centrality to the health care delivery system in the U.S.

Also, just as we did when we allocated capital to the Medical Office building business a decade earlier, in 2016, we entered the Research & Innovation business. And we have found significant opportunities to drive that business forward since then through both ground-up development and asset acquisitions. The addition of life sciences to our enterprise has provided uplift to our results, our investment activity and our enterprise value.

Two recent examples of the benefit of our diversified strategy include our investments in a $1 billion Class A trophy life science portfolio located in the premier South San Francisco life science cluster at a forward cap rate of 5% on cash NOI. The tenant base is a nice mix of public companies and a diverse group of early to mid-stage life science companies.

The South San Francisco market consistently ranks as one of the elite life science clusters. Spurred by record capital flows into the life science sector, this market has less than 2% lab vacancy, unparalleled access to a large concentration of life science firms and an extensive venture capital network going after the world-class talent pool.

We also recently recommenced construction on a 400,000 square foot state-of-the-art life sciences project, known as One uCity in the thriving research submarket of Philadelphia, book-ended by Penn and Drexel. This project is designed to be LEED certified, and total estimated project costs are over $280 million.

Similarly, we've invested on a geographically diversified basis, with over 30% of our SHOP portfolio now in Canada. Last year, we acquired the high-quality Le Groupe Maurice portfolio in Québec. Building on the strong performance LGM has delivered and its history of successfully developing and leasing up senior communities for vibrant older adults, we are also investing nearly $420 million and ground-up development of new consumer-focused senior living communities, which are well underway.

We do see areas where we can recycle capital, too. We have recently sold or placed under contract certain portfolios of senior living assets that are not long-term holds for us. We want to continue making senior housing a key part of our diversified portfolio because of the operational asset class upside post-pandemic, the demographically driven demand that is in front of us and the continued improvement on the supply side. There remains a strong bid from private capital for senior living, which supports our conclusion.

On the other side of the ledger, through our growing third-party institutional capital management platform, we also continue to diversify our capital sources, augment our investment capacity, expand our footprint, leverage our team and industry expertise and improve our financial flexibility and liquidity, all of which are positive for our public shareholders.

Having additional partners and tools to use at appropriate times and for customized situations, provides a significant competitive advantage for Ventas and adds an incremental source of earnings. We already have over $3 billion in assets under management in our institutional third-party capital management platform. These forms include our successful open-end funds launched in March of this year that has already grown to nearly $2 billion and 2 million square feet in assets under management.

Following the South San Francisco Life Sciences portfolio closing, when we raised over $600 million of discretionary new equity, our fund exceeds $1 billion in equity capital and continues to have additional committed capital to accommodate new investments.

We've also today announced a new joint venture with GIC, one of the most respected global real estate investors. This joint venture covers 4 Research & Innovation development projects currently in progress with approximately $930 million in estimated project costs. Our joint venture with GIC may be expanded to over $2 billion with other pre-identified future R&I development projects currently in our pipeline, if they go forward.

While maintaining a majority interest in all these projects and receiving market-based compensation, our GIC joint venture enables us to align with a strategic partner, improve our liquidity and financial profile and accelerate our Research & Innovation development pipeline, including the recent construction commencement of the One uCity project in Philadelphia.

The success of our open-end fund and the GIC partnership demonstrates the tremendous market opportunity within life science, Medical Office and senior housing real estate. And also they are a testament to Ventas' excellent team and investment track record.

Turning to the here and now, I'd like to provide some key observations about our U.S. senior housing operating portfolio. Importantly, in the third quarter, our operators continued to build on the improving trends that began in the second quarter. Our communities demonstrated sustained increases in leads and move-ins, which continued through October.

While we are sober and clear-eyed about the recent increase in COVID-19 cases nationally to a record level of nearly 120,000 confirmed cases today, we believe in the strength of the senior living business as we look toward the post-pandemic environment.

We are also appreciative that HHS has recognized the crucial role senior living plays in protecting vulnerable older Americans. HHS has allocated tier-stacked funding to the assisted living communities, to partially mitigate the losses directly suffered because of the COVID-19 pandemic.

Finally, we are encouraged by the progress being made by scientists and doctors on vaccines and treatments for COVID-19. Older Americans, including our residents, will be prioritized for vaccine distribution slated just behind first responders and frontline health care providers.

Most of our operators have already registered with pharmacy distribution sources to administer the COVID-19 vaccine as soon as it becomes available. An effective, widely distributed vaccine will further improve conditions for a senior housing recovery. We are glad that we have significant embedded exposure to that upside in our diversified portfolio.

Today, we published our corporate sustainability report that showcases our long-standing commitment to and leadership in ESG. Among other things, this report discloses our new environmental goals, our consistent and growing investments in sustainability, improvements in our portfolio and our "Principles in Practice", which is a series of case studies showing our actions on health and safety and COVID-19, describing our emergency preparedness and demonstrating our customized framework to achieve greater gender and racial equality and social justice.

In closing, let me reiterate that the long-term demographically driven thesis for health care real estate and for Ventas remains in place. I'm incredibly proud of our Ventas team. Our consistency and cohesion are great assets for all our stakeholders. All of us, at Ventas, have an abiding commitment to stay strong and stable and win the recovery.

Justin?

Thanks, Debbie. I'll start by mentioning the encouraging trends we continue to see in our SHOP portfolio. We are pleased to have had our first net positive move-in month since the start of the pandemic in October, and the majority of our portfolio is delivering move-ins at levels that are equal to or more than typical levels across the U.S. and Canada. The underlying demand for need-driven senior housing in the U.S. and independent living services in Canada persists.

While we are encouraged about these positive trends, we are mindful that the pandemic causes ongoing uncertainty in choppy waters in the senior housing business. I will also add that in spite of the near-term pressure on the sector, we remain committed to the senior housing business and excited about the supportive underlying supply-demand fundamentals that should persist for years to come.

Now I'll review our third quarter senior housing results in the SHOP and triple-net portfolio and follow that up with some comments on our latest trends and outlook.

First off with SHOP. For the quarter, SHOP results were in line with the company's expectations. Our 395 asset sequential same-store pool, comprising over 90% of our SHOP NOI, posted cash NOI of $109 million, which is effectively flat versus the second quarter. Average occupancy was 130 basis points lower sequentially, with improving trends intra-quarter, while REVPOR declined 30 basis points and grew 50 basis points in our U.S. and Canadian operating portfolios, respectively.

Leading indicators, such as leads and move-ins also saw a consistent and positive trend intra-quarter, both in absolute numbers and relative to prior year, highlighting the resilient demand for senior housing. In September, leads and move-ins were 85% and 94%, respectively, as compared to the prior year.

Third quarter revenue declined 3.6%, which was offset entirely by 4.5% lower operating expenses sequentially, primarily driven by lower COVID-related expenses. As a reminder, all COVID-19 impacts, including elevated testing, labor, cleaning and supply costs have been reflected in property operating results.

As with last quarter, I'll highlight our Canadian portfolio, which represents 33% of our SHOP portfolio and demonstrates the benefits of our diversification and a well-orchestrated public health response. The 72 communities within our sequential Q3 same-store pool, including our LGM investment, was 93.2% occupied, which compares to an average of 93.7% for the second quarter, outperforming the U.S. on an absolute and relative basis. Same-store cash NOI on a sequential basis grew in Canada by over 10%.

Moving on to our triple-net senior housing portfolio. In the third quarter and through October, Ventas received all of its expected triple-net senior housing cash rent. Our underlying triple-net senior housing portfolio performance continues to be impacted by COVID-19, which we have been collaboratively addressing with our tenant partners. As a result of our proactive steps to improve coverage through mutually beneficial arrangements with Capital Senior, Holiday, Brookdale and other smaller tenants, our trailing 12-month cash flow coverage for senior housing is 1.4x. We also expect triple-net senior housing tenants will receive CARES Act funding, which will be a positive development.

Now I'll address recent trends. As described earlier, demand characteristics supporting senior housing remains solid and leads and move-ins continue to improve since the low point in April and month-over-month in the third quarter. These trends persisted into October as we experienced net positive move-ins, helped in part by selective movement incentives.

Our operators' successful execution of screening, protecting and testing protocols has been up supporting a living environment that's more open and more robust than earlier in the pandemic. Currently, 96% of our communities are accepting move-ins.

Moving on to our clinical results. As a result of the diligent efforts of our operators executing, testing and preventative protocols, new resident COVID-19 cases, more than 75% better than the peak seen in April, in spite of broader market trends of increased new infection rates among the U.S. general public.

In regards to the Q4 outlook for SHOP, due to the uncertain environment, it is too hard to predict. However, we would expect occupancy to soften, and we would expect expenses to be relatively flat at the current elevated levels as the health and safety of the residents and frontline caregivers is the biggest priority.

In summary, we are encouraged by continued improvement in leading indicators through the third quarter in October, and we remain committed to the senior housing business moving forward. We are proud of our operators' efforts in the third quarter to successfully execute COVID-19-related protocols, while focusing on the health and safety of frontline caregivers and residents.

With that, I'll hand the call to Pete.

Thanks, Justin. I'll cover the Office segment third quarter results and trends. Our Office segment, which now represents over 30% of Ventas' NOI continues to produce strong results and show its value proposition and financial strength amidst the pandemic.

MOBs and Research & Innovation centers, the 2 lines of business within our office portfolio, play a key role in the delivery of crucial health care services and research for life-saving vaccines and therapeutics. The Office portfolio continued to provide steady growth delivering $126 million of same-store cash NOI in the third quarter. This represents 40 basis points of sequential growth.

You will note that the same-store cash NOI declined 2.2% year-on-year for the third quarter. However, we lapped a large $4.7 million termination fee in the third quarter of 2019. Normalizing for this fee, the same-store cash NOI grew 1.5% from the prior year. Normalizing for the paid parking shortfall and increased cleaning costs due to COVID, same-store cash NOI grew by 2.8%.

In terms of rent receipts, office tenants paid an industry-leading 99% of contractual rent in the third quarter, in line with the second quarter. This is without deducts or deferrals, which were de minimis, substantially all granted second quarter deferrals that came due have been repaid and new granted deferrals were negligible. As of November 6, our tenants have paid more than 99% of October contractual rents.

Receiving 99% of total rents without deducts is a direct reflection of the quality of our tenants and the quality of our buildings. The solid result underscores the durability and quality of our tenant base. Remember, 88% of MOB NOI is from investment-grade tenants or HCA. And 97% of our MOB NOI comes from tenants affiliated with major health systems, including some of the nation's most prestigious not-for-profit health systems.

Most tenants have received significant amount of federal support through a variety of programs designed to assist health care providers in small businesses. As an example, we estimate that our top 10 health system tenants have collectively received nearly $5 billion in CARES Act relief and $10 billion in Medicare Advanced Payments.

For our R&I portfolio, 76% of our revenues are received from investment-grade organizations and publicly-listed companies, a very solid foundation. Third quarter 2020 office occupancy for the same-store portfolio was 91.1%, a sequential decline of 40 basis points due to several small tenants not reopening post-COVID. This was partially offset by the lease-up of Research & Innovation assets associated with the University of Pennsylvania in Philadelphia and Washington University in St. Louis. Lab space continues to be in high demand, and the R&I portfolio is now 97% leased, an outstanding result.

Medical Office had a record level of retention at 90% for the third quarter of 2020 and for the trailing 12 months. Driven by this retention, total office leasing was 1.2 million square feet for the quarter and 2.7 million square feet year-to-date. This is 400,000 square feet higher than our third quarter of 2019 leasing and 300,000 square feet higher than the third quarter 2019 year-to-date leasing.

We also saw positive space utilization trends that mirrored admissions in surgery volumes reported by the health systems. These trends have continued through October. As an example, paid parking is more than double from the depths of COVID, but has recovered to 65% to 70% of pre-COVID levels, climbing, but still below historical levels.

All of our MOB buildings are open for business and 100% of our MOBs are in counties that are restriction-free for elective procedures. All R&I buildings are also open, supporting multiple critical research organizations in fighting the pandemic. We have over 15 major university relationships, all of which opened in the Fall with some level of on-campus in-person learning and plan to do the same for the second semester.

As Debbie mentioned, we are pleased to have added 3 R&I buildings in South San Francisco. Since going under contract, we have signed a large renewal and are experiencing a high level of leasing activity. This gives us confidence that our occupancy will soon build from the current state, which is already 96% leased.

During the third quarter, we received the results of our annual tenant satisfaction survey. I am pleased to report that this year's results were significantly higher than in prior years. In fact, when compared to our MOB portfolios by an independent third party, our tenant satisfaction is in the top quartile. One of our highest-rated scores was how our team supported our tenants during the pandemic. These essential field personnel, who serve our tenants on-site during the pandemic, have done a terrific job. We are grateful for their effort and commitment, and we continue to focus on the health and safety of these personnel and our tenants.

In sum, our tenant satisfaction, leasing, NOI and cash receipts were positive during the third quarter, a clear bill from the second quarter. And we look forward to continuing the normalization of health care and research operations as we enter 2021.

With that, I'll pass the time to Bob.

Thanks, Pete. I'll touch on our health care triple-net lease portfolio, before I close with some enterprise level commentary. During the third quarter, our health care triple-net assets showed continued strength in resilience, as evidenced by receiving 100% of third quarter, October and November rent from our triple-net tenants.

Further, trailing 12-month EBITDARM cash flow coverage '20, the latest available information, improved sequentially for all of our health care triple-net asset classes despite COVID-19.

Both acute and post-acute providers have had early access to significant government funding to create liquidity and to mitigate losses related to the pandemic. Acute care hospitals' trailing 12-month coverage, was a strong 3.1x in the second quarter. Nationally, hospital inpatient admissions and surgeries continued to rebound in Q3, and third quarter admissions approached over 90% of prior year levels. Ardent continues to perform extremely well despite the challenging market conditions and is benefiting from over 90% of its hospitals residing in jurisdictions that are open for elective procedures.

IRFs and LTACs coverage improved 20 basis points to 1.5x in Q2 on the heels of government funding and significantly improved census. LTACs have increasingly proved their importance in the care continuum, with or without COVID. And finally, within our loan portfolio, our Colony, Holiday and Brookdale loans are all fully current.

Turning to our third quarter financial performance, and let me start with Q3 GAAP net income, which includes $0.06 in noncash charges as a result of COVID impacts. Most notably, the write-off of straight-line rents across 5 tenants, with Genesis being the largest. These tenants are now on a cash basis and represent approximately $50 million of annual cash rent.

Notwithstanding the write-offs, all these tenants are current, and we will endeavor to collect all our contractual rents going forward. These non-cash charges are excluded from third quarter normalized FFO. We provided additional information in our supplemental on Page 34.

In terms of normalized FFO per share, we delivered $0.75 in Q3 2020 versus $0.77 in the second quarter. SHOP and Office NOI were stable sequentially with the $0.02 reduction in FFO in the third quarter as compared to the second described by the Brookdale rent reset in the third quarter.

In the third quarter, we saw the results of the decisive actions taken earlier in the year to ensure a strong and stable Ventas. These included reducing our corporate cost structure by 25%, resulting in $30 million in annualized SG&A savings in Q3. We were also active in managing our balance sheet and liquidity, including paying down substantially all borrowings under our revolving credit facility, successfully tendering for $236 million of near-term bonds and issuing under our ATM to help fund the South San Francisco investments.

Net-net, we feel good about our financial flexibility. Our liquidity is strong at $3.2 billion between available revolver capacity and cash on hand as of November 5. We have limited near-term debt maturities, access to diversified capital sources, strong fixed charge coverage and debt-to-gross asset value of just 37%.

To close, we're pleased with our performance in the quarter and the continuing improving trends in senior housing. The entire Ventas team is sharply focused on taking the actions that will enable us to win the recovery when the pandemic is finally behind us.

And that concludes our prepared remarks. (Operator Instructions) Also given the fact that we continue to be remote, we'll ask Debbie to do her best Roethlisberger impression and quarterback our Q&A.

With that, I'll turn the call back to the operator.

(Operator Instructions) Our first question comes from Steve Sakwa with Evercore ISI.

I was wondering if you could talk a little bit more about the formation of the GIC joint venture. And you guys have talked a lot about the R&I and how excited you are. And I'm just curious have you thought about bringing in a partner and giving up some of the upside in these developments versus maybe selling other assets in the portfolio to kind of fund that?

Steve, I'll take that one. I think that we're very excited about the GIC joint venture. We really believe it's helping us to accelerate our commitment to growing our R&I business and really moving that business forward. Basically, again, we've restarted our Philadelphia development of a significant life science building. We've got the 3 projects further underway. GIC is a great strategic partner, whether it's with this joint venture or on other potential activities. We're very happy to be partnered with someone of their expertise and quality. And it gives us a really great way to continue to own a significant portion of those developments and their upside and move the whole R&I business forward.

Okay. And then just a quick follow-up for Bob. I just wanted to make sure I heard you correctly. Did you say that you issued stock in the quarter to help fund the San Francisco purchase?

Right. Steve, so just step back a little bit on the $1 billion of the transaction, the vast majority of that was $600 million of new equity across the fund and ourselves included newly-raised equity. Within that, our equity portion, we funded really 2 ways: one, through some dispositions of senior housing; and second, some modest ATMs. So ultimately, that was the source of uses for the deal overall.

Right. And the debt piece was about $400 million attractive debt piece.

And your next question comes from Nicholas Joseph with Citi.

Debbie, you mentioned the senior housing asset sales there's some on the market. Can you give some color on what the size of those portfolios are and then also what sort of pricing you're seeing in the market today?

Right. Yes. I mean, the main point is really, we continue to believe in senior housing and think it's an important part of our diversified business model. We definitely are open to recycling capital. The dispositions that I'm talking about are really over a couple hundred million dollars of assets, some of which are sold, some of which are under contract. And those -- the kind of blended cap rate is around a 6.

And then just back to the GIC development JV. How did you think about getting paid or compensated for the value that you've created in the existing development assets?

Yes. That's a great question. And I think we were very focused on, again, partnering with a strategic partner. For us, this is much more than just about capital, which we can get in a myriad of ways, as you can see. But having that strategic partnership And getting compensated with market-based measures, keeping half of the upside, certainly, and then generating, as I mentioned in my remarks, additional income and profit sharing that are market-based that give us a lot of confidence that we not only have a great partner, but we are preserving much of the upside as we move forward.

Our next question comes from Jonathan Hughes with Raymond James.

Does the potential for federal oversight and regulation seniors' housing make that business a potentially less attractive avenue for growth for Ventas going forward relative to some of your other businesses?

I mean I think we -- as I said, we believe in the business. The demographic demand is in front of us. The supply is continuing to improve. We -- so we think there's upside there operationally. And in terms of the business, we are benefiting, obviously, from some of the government financial support available to assisted living communities under the CARES Act, and we're grateful for that. With that, there certainly could be reporting or other requirements that I think would be appropriate about the clinical record and performance of senior housing, which, frankly, compares incredibly well overall to the skilled nursing business, and we welcome that transparency.

Okay. And then just one more for me. Can you walk us through why you raised equity via the ATM when you have plenty of liquidity? I understand the desire to manage the leverage, but it was a very small amount. And the willingness to seemingly give shares away at a significant discount to the last time that was done a year ago, sends a bit of a mixed signal, in my opinion. I'd just love to hear your views rationale on how you thought about that.

I'm going to ask Bob to answer that and, again, talking about access to public and private capital. So Bob, can you take that question for Jonathan?

Yes. Sure. I think the main point to start with is the $600 million of equity for that transaction was principally sourced from new third-party capital and principally via the fund. So demonstrating the ability to acquire an attractive set of assets like the San Francisco assets with partners through the fund vehicle. And that's the main -- in the majority source of the funds.

Within that, Ventas has a portion, I mentioned, call it, $120 million. And we took a balanced approach to that, Jonathan, frankly. Part of that equity was through attractive dispositions and part of that is through the ATM. It's small sized. And frankly, we have to keep our eye on leverage and think about our risk overall.

So a balanced approach, but the majority, of course, of the equity coming from the third-party private capital.

Right. But I mean, had you just pulled it on the line, leverage would have gone up by, I think, like 0.04 turns. So it just -- it seems kind of inconsequential as to why tap equity and why not just pull it down?

Good math. I think that's currently Biden's lead in Georgia. Yes. Again, it's a balanced approach. We continue to be active across all capital sourcing in -- it's just like the asset side of the balance sheet. We want to stay disciplined, keep in these different markets. And I think you could make a case either way for the ATM in that size, but we decided it was an appropriate way to fund part of that and the other part, as Bob mentioned, with the private capital and then with asset sales.

Your next question comes from Michael Carroll with RBC Capital Markets.

I want to talk a little bit about your near-term seniors housing outlook. I believe Justin mentioned in his prepared remarks that you expect occupancy will soften. Now what is this driven by? Is this driven by the third COVID wave typical, seasonal trends? And like what type of volatility should we expect over the next few months to quarters?

I'm going to ask Justin to answer that with the overview that, of course, we're in a very dynamic environment with the clinical trends nationally. And so that's just something to keep in mind as you think about our near-term outlook.

Yes. I would just add that we're certainly encouraged by the trends. They've been consistently going up in leads and move-ins. We had the net positive month in October that I mentioned. And the contributors to that were operators across the board in the U.S. and in Canada. So the trends are positive, but the macro environment is concerning. So it's difficult to predict the continuation of positive trends in the face of just the increased infections across the broader public in the U.S. And so that's the -- really the biggest driver for our hesitancy to make predictions about continued positive improvements.

Okay. And then what type of competition are you seeing, I guess, from other operators in forms of rent cuts or rent concessions? And I know Atria has kind of highlighted on its website that they're offering some free rent right now. I mean is that widespread throughout that portfolio? And will that weigh on near-term results?

Yes. So I'll start with Canada because that's the easy one. Canada has performed really well. Their occupancy only dropped 50 basis points sequentially. All 3 of our Canadian operators contributed to NOI growth in Canada with LGM leading the way with more than -- with double-digit NOI growth, hitting 10% overall. So -- and there's less supply/demand dynamics there and the virus was less impactful. So set Canada side.

Then you get into the U.S. And what's been interesting in the U.S., if you look at what's the performance we've had throughout the pandemic, early on, the Northeast was impacted because of the prevalence of the virus and we had to add more expense to deal with that from a PPE perspective and also had an impact on our move-out and move-in activity. So the Northeast was impacted early.

Since then, geographically, as we've started to see these improving trends, the improving trends have been relatively equal across all geographies and across the operators for the most part with some exceptions. But what operators are now facing as they want to continue these trends is some competition. And so in certain markets and in certain asset classes, operators are starting to use some move-in incentives. And in an environment where you have a high fixed cost business that benefits greatly from increased occupancy, you would expect to see that. And that's what we're seeing in the early stages at this point.

And your next question comes from the line of Rich Anderson with SMBC.

So on the life science purchase, it's kind of a departure from your university-based business, which I guess is -- it partially explains why it goes to the fund, maybe, maybe not, but you can respond to that. But also, is there any kind of redevelopment angle in that portfolio, understanding there's some -- maybe some awkward orientation of some of the assets that need -- that could be addressed? Or is it pretty much a turnkey sort of situation?

Rich, the asset is essentially new asset that leased up to its current 96% area in a very short period of time. We really like the asset, and I'll turn it over to Pete to talk about why we like the asset.

In terms of the capital, I would say, the fund was really designed to be a competitive advantage for us in these really highly sought-after trophy assets where there's a huge amount of capital available to acquire them, but the cap rate is something -- in this case, it's a forward cap rate of 5 that may not always work perfectly in size with the public capital markets. And so that's why having these different pools of capital is really advantageous for us as we continue to expand our life science footprint.

And I'll just say one other thing. I mean we really have from 2016 just incredibly built out this business to a point where it's about 9 million square feet. And not only do we have a presence on over 15 major research campuses that represent like 10% of all the life science university research in the nation, just our customers, but also we've been in Cambridge for a couple of years now. And so we're now in 2 of the largest life science clusters with both the Mass Ave that we acquired a couple of years ago and now the South San Francisco investment. So those are some of the more capital answers, but I would ask Pete to address why we like the portfolio.

Yes. We feel very fortunate, Rich, to be able to enter the South San Francisco market on scale. This is 800,000 square feet. So it's a terrific start for us. We also like the fact this building is highly differentiated from the competitors. It's got great views. It's got fantastic accessibility from the expressway, it's on the proper side of the expressway, and it's very close to the BART stations in Caltran. It's got on-site amenities. And as Debbie said, it's largely new -- it's -- they're new buildings and were 96% leased. It really drives towards a niche market, 10,000 to 50,000 square foot tenants, this fits perfectly for. And we have opportunity to enhance the 96% occupancy rate. We've got a lot of activity, and we think that we'll be very close to 100% leased in a short period of time.

Now as you refer to an infrastructure, they are new and they are high-quality buildings, but there are several floors in the buildings that are not built out for life sciences. So as those office tenants leave, we will do some construction to convert those floors into life sciences floors in the lab space.

Thanks, Pete. And yes, the tenants -- in the work that we did, the tenants really like the location and the characteristics of the building. So that's kind of proving itself out by the occupancy and leasing activity.

Your next question comes from John Kim with BMO Capital.

I was looking at the R&I joint venture developing in the low 7%, and I think you're contributing the assets at cost. How would this compare with cap rates, if you were to sell these assets in the open markets for these assets?

So again, in terms of the strategic benefits of this transaction, the stabilized level of cap rates is about a 7% when they're fully leased and developed over time. And as I mentioned, we are keeping 50% of the assets and are generating kind of market-based compensation in profit sharing as it relates to the upside.

Okay. It seems like a similar cap rate is -- when you bought the platform. My second question is on Brookdale Battery Park. Can you discuss how you expect occupancy to be impacted given new competition from some of your peers in Manhattan? And also, if you could discuss the ground lease potentially being reset as far as the timing and potential outcome?

Yes. Yes. Great. So I'm going to ask Justin to talk about operations, but I just want to remind you that we acquired that asset at below replacement costs. It has been a successful asset in the market for a long time. It's a great physical plan.

And in terms of the ground lease reset, we underwrote that quite carefully. And as is always the case, there's a silver lining to everything. And it's quite possible that the current environment and COVID-19 may give us a benefit on the rent reset when it becomes applicable.

So Justin, do you want to talk to John about how you see the operations and upside post-COVID in the Battery Park asset in Manhattan?

Sure. So the Battery Park community has been a very strong performer consistently for us before the COVID environment. And it's been -- it's now seeing more competition in its direct market, but in the New York, Manhattan area, and that competition has entered at a higher price point. So we are positioned within our own price point as an independent living product. We have a strong history there. Solid performance. We expect there to be demand moving forward. It is a community that we've evaluated very closely, and we'll continue to consider actions that could be taken to help us to be -- continue to be positioned and competitive moving forward.

Your next question comes from Omotayo Okusanya with Mizuho.

Congrats on the solid quarter. A question around university-based life sciences. Again, you paused the project. You're restarting it. I think that's a good thing, but I think the broader concern is what's happening with universities amidst COVID, tightening budgets and things like that. Do you see that impacting demand going forward for university-based life sciences?

Good. I mean, again, we've now built this really nice business where the capital flows into life science are at record highs. And with those record highs of capital flows, also demand for the life science real estate. So we feel really good about getting in the business, and we feel good about being situated now both with the universities and in the cluster markets of Cambridge and South San Francisco.

Obviously, I mentioned that we really like diversification. We know that COVID is affecting different segments of our portfolio differently. Currently, life science, including the university-based life science, is in great demand. And the universities, in general, as leaders in research with significant government and other funding have continued to pursue research and development throughout the pandemic. Clearly, as the pandemic continues at really high levels, there are all sorts of potential consequences to that. But we're looking forward to the fact that, frankly, within our buildings and elsewhere, we're hopeful that a vaccine is going to be developed and distributed. That is going to help us, coupled with a sound public policy, public health response so that we will be post pandemic in the -- before the academic year begins in 2021. So that's our base case. And in that case, we continue to like the life science business, and we continue to be glad that we're associated with these research leaders at these universities.

Okay. That's helpful. And then just one quick follow-up. Kind of elections, it seems we're heading to Democratic President, Republican Senate, Democratic House. How do you think that helps or hinders the drive or the fight for additional help for senior housing from a government perspective?

Well, thank you. Yes, I mean, we are grateful that HHS has understood what a crucial role senior living plays for vulnerable older Americans during this pandemic. And my guess is -- and it's only a guess, obviously, because we don't even know what the results of the election are yet. But with a moderate Democratic President, a Democratic House and what will certainly be a closely divided Senate that, that will push us toward more consistency in policy, more moderation in policy, more likely to be steady as she goes, and that -- that's quite of a favorable backdrop for Ventas and hopefully for the country as well.

And your next question comes from Vikram Malhotra with Morgan Stanley.

Maybe just first one on growing kind of senior housing in the platform -- growing the platform from here. How should we think about potentially using this fund or other fund structures on kind of senior housing business, whether it's contributing properties or just in the fund acquiring senior housing kind of -- have kind of both ends of the spectrum like you have on balance sheet?

You kind of broke up. I'm sorry, but could you repeat your question?

Can you hear me? Is it better now?

Yes.

I hope -- why don't you continue?

What I was asking is, how do you think about growing the senior housing platform using the fund structure like you've grown kind of the MOB life science for the O&I business as well, whether it's contributing properties from Ventas into the fund or just using a fund structure to grow senior housing?

Yes. Okay. I did hear that. Again, we really like the fact that we do have embedded upside in our business from senior housing. In terms of additional investments, we would obviously look at those investments depending on what their characteristics were. And now we have various tools at our disposal to figure out what would be the customized capital source for that type of acquisition. And the fund is really designed to be an open-end vehicle for a core and core plus real estate that's typically low cap rate, highly stable, low leverage assets, including senior housing. So in the case assets fit that profile, they could obviously be suitable for the fund. To the extent they are more value-add or opportunistic, those could either be on balance sheet and/or you could use some other form of private capital for them. Right now, we do have pension fund capital that really likes to do opportunistic value-add and ground-up development in senior housing. So that's another pocket of capital that we've had available for a while that we could use for those type of opportunities if we wanted to do so.

Okay. Makes sense. And then just a follow-up. Say, you get a vaccine at the end of the year and its distribution plan is well laid out, how do you think about regaining the lost occupancy in senior housing between sort of the levers of occupancy and rent growth and any other levers? I'm just trying to get a sense of the -- on the rent side of the equation, how you would pull that lever.

Yes. And that -- I'm going to turn that over to Justin. That's really been the key, obviously, of having move-ins exceed move-outs in which we've attained, as Justin described, in October, and then how to gain back the occupancy. So Justin, would you take that on?

Sure. So just to back up, the big change that occurred across our portfolio, and you've seen this across the sector, throughout the pandemic, really was the operator's ability to safely offer a more robust living environment. That was the big driver. And what's the key driver being the residents desire to be able to visit with their relatives once they move in and also enjoy some amount of amenities that you would typically enjoy in senior housing. And throughout the pandemic, that's obviously improved and you can see leads and move-ins and demand has persisted.

In the case where there's a vaccine and the virus is either eliminated or less impactful, then you can restore the lifestyle back to where it was pre-pandemic. And you would expect that to be very supportive of senior housing, and you're doing it at a time when you have -- your demographics are really supportive, too. I mean the 75-plus CAGR is going to be 10x that of the remaining population over the next 5 years. New starts that are a 9-year low. Deliveries are down by half year-over-year. So there's a lot of support, especially if we can get a vaccine.

Now predicting what that's really going to deliver is nearly impossible. All we can really point to is the moving parts and the lifestyle and the care delivery that residents are accessing and the availability of it. And I think in a post-vaccine environment, it's very supportive of growth.

Your next question comes from Jordan Sadler with KeyBanc Capital Markets.

I wanted to just start -- so Bob, you mentioned keeping an eye on leverage. So first, given your development funding commitments, should we expect you to continue to fund with equity raised under the ATM? And then maybe along the same lines, have you had conversations with the rating agencies surrounding your leverage at 6.8x net debt to EBITDA? And are they receptive to looking at pre-COVID NOI on the seniors housing portfolio?

Sure, Jordan. So let's start with the rating agencies. We're in consistent dialogue with the rating agencies, as you would expect. They're an important stakeholder. Clearly, for the whole of the sector, ourselves included, there's been a lot of attention paid and rightly so to the senior housing trajectory. And so the main focus of our conversations with them, as it is with you, is what does that trajectory look like? And we've been encouraged, as we've said numerous times today, by the trends thus far. So that's good.

In the meantime, of course, being smart, being prudent, managing the balance sheet appropriately and demonstrating our commitment to financial strength and flexibility is what we're doing, whether that's accessing third-party capital, selling assets, things like that to make sure we stay in the right ZIP code. And so that's our approach. At the end of the day, the senior housing recovery is going to be very helpful to the leverage situation. But in the meantime, being smart about how we manage things.

Okay. And then maybe as a follow-up, just on the GIC JV, I was also struck by what it has contributed essentially what seems to be cost even though you've got all this pre-leasing and you seemingly have created some value. Have you just considered monetizing the stabilized R&I portfolio? Or would you consider monetizing that?

This is Debbie. Look, we're constantly evaluating our capital sourcing, as we've talked about sort of at length this morning. We're really happy to have a variety of ways to source public and private capital, debt capital. If you'll recall, when we launched our fund in March, we actually seeded it with some stabilized R&I and MOB assets at attractive cap rates at a significant profit. And as I've mentioned, with respect to the R&I development JV, here, we have a strategic partner. We've retained 50% of the assets, and we also have kind of market-based compensation that all of which together, including our retained interest, gives us a significant part of the upside while also managing our financial strength and flexibility and our risk profile.

So we feel good about that all on balance. And certainly, we can -- we'll consistently evaluate the portfolio for capital recycling opportunities and profit-making opportunities of all types.

Your next question comes from Josh Dennerlein with Bank of America.

You mentioned GIC was brought in not just as a capital partner, but also for strategic reasons. Can you maybe elaborate on what they bring strategically to the JV?

Right. I mean I would just say that we're very particular about who we would be partners with. GIC is obviously one of the world's leading real estate investors. We have a good relationship with them. We've known them for a long time. And we like the optionality or we like having a relationship with them because we certainly -- in the case of other types of investments or activities, they could be a good strategic partner for us across asset types if we felt that, that was appropriate. So we think establishing a good relationship with them could benefit our entire enterprise and public stakeholders over time.

Okay. I appreciate that, Debbie. And then you mentioned potential additional, I guess, senior housing asset sales. I think you mentioned -- you said they were being marketed at 6 cap or that's what they're expected to sell at. Are those SHOP or net lease assets? And then is that cap rate you're quoting, is that a trailing 12-month basis or more current NOI?

So that's really a combination of assets that we sold in the third quarter and a portfolio that we have under -- that we have targeted for sale. And it's -- they're both triple-net lease assets and, again, very consistent with other market data. And that's based more on sort of current NOI and trends in today's environment.

Your next question comes from Nick Yulico with Scotiabank.

So I just wanted to follow up on the senior housing portfolio, the move-in trends you talked about and the spot occupancy benefit so far in October. Is the message though -- I know you talked a little bit about this, but is the message though that occupancy is up in October, but we shouldn't necessarily assume that, that occupancy benefit lasts through the fourth quarter because of it's weaker move-in period historically, et cetera?

Yes. I mean I think, look, we had good results. We have good results. Our trends are good. Those trends have been sustained improvement in demand and move-ins from the nature of the pandemic in April. And it's been month-over-month, consistent traction, showing that demand and value propositions for senior living. And I think that it's important to take a moment on that and appreciate that and celebrate it. On the other hand, we know that we are in a pandemic that creates a lot of uncertainty and unpredictability. And so we want to discuss the facts, share how really positive, what evidence -- positive evidence that is of the benefits of the asset class and what kind of recovery the asset class can have but at the same time, be humble about the fact that the virus creates unpredictability as does normal fourth quarter history, as you mentioned.

Right. Okay. That's helpful. I guess in terms of this year, you're thinking about fourth quarter, first quarter, next year, I mean, typically, they -- the business will experience some sort of sequential occupancy pressure because of flu. I mean is that going to be a dynamic again coming up? Or -- since some of that occupancy pressure has obviously already happened. I guess I'm just trying to figure out in terms of an occupancy rebound here, if we should be thinking more about the spring as really kind of the earliest opportunity for occupancy benefit given what historically happens in the fourth quarter and first quarter.

Well, again, let's talk about that when it's the right time to do so. I'll be very happy when we're talking about the flu again and not COVID.

Your next question comes from Daniel Bernstein with Capital One.

Two quick questions on senior housing. One, how do you view the threat of home health to seniors housing? There's been I guess a number of CMS initiatives to more at home care and we'll see what happens given the new administration. But how do you see the threat of home health to senior housing? And two, how do you see the CapEx needs for senior housing going forward in a kind of a post-COVID environment? There's been a lot of talk about needs for smaller dining rooms or I guess more medical care or higher acuity, especially post-COVID. So just trying to think about those 2 items on health and CapEx.

Well, the senior housing is supposed to be a social environment. And that's important when we think about the differences between home health and senior housing. But I'm going to turn it over to Justin, Dan, to take your questions.

Yes. As it pertains to home health, home health tends to be supportive of independent living, which is about half of our senior housing portfolio. It allows residents to receive any medical attention they might need, cared services within their independent living apartments. It's certainly been a service that's been offered for many years and a part of the continuum that's been offered to seniors.

In terms of assisted living, assisted living is well positioned to take care of residents that have higher acuity needs and memory care needs. And we would expect that, that need would continue as well.

And then in terms of the -- what was the follow-up question?

The CapEx means that may be needed within the portfolio. I mean -- or even redevelopment opportunities, the other way to look at is. Are there increased CapEx needs? And on the flip side, are there redevelopment opportunities that are coming out of COVID?

Yes. So I would say that the asset class certainly benefits from ongoing investment, and our portfolio has been well invested over time. And that's important to remain relevant and competitive within our markets, and I would expect that to continue. I would also expect to see certain markets that probably benefit from redevelopments or a broader refresh, and we definitely have a list of projects that are under review for -- when we get out of this pandemic. And definitely, the asset class benefits from the CapEx and should continue to moving forward.

Your next question comes from Lukas Hartwich with Green Street.

So for life science, now that Ventas has a JV for new development and acquisitions, how will the company evaluate new opportunities going forward? Are they all going to go into a JV? And if not, what determines whether they go in a JV or not?

Lukas, this is Debbie. That's a very clear answer. So the GIC joint venture is for basically these 4 projects that are underway, including the uCity development that we started construction on. And we believe the JV again is going to accelerate our ability to drive this business forward. And there's a handful of identified projects in our pipeline that could go in that JV, full stop period.

Then as we talked about when we launched the open-end fund in March, that is really designed to be able to capture low cap rate, high-quality core assets that would be very difficult for Ventas to buy on balance sheet and at this part of the cycle. And that's kind of how the segmentation is designed. It gives us lots of options, again, particularly at a time when the public markets may be disrupted as a result of COVID-19. And that creates significant value for our public shareholders and leverages our platform in a very positive way.

Your next question comes from Steven Valiquette with Barclays.

On the SHOP portfolio, you mentioned that the revenue decline in 3Q was offset by the lower COVID-related operating expenses, 4% to 5% lower. And for 4Q, you expect the SHOP operating expenses to remain flat at current elevated levels. So I guess the question is, hopefully, I didn't miss this, but was there any disclosure in the slides just on the total dollar amount of COVID-related expenses that Ventas and the -- your partners have absorbed in the SHOP portfolio? And if not, we're just looking for more data points you can give around that, either as a percent of revenues and therefore, just impact to NOI margins or even just -- again, any raw dollar amount of COVID expenses either in 3Q or prior quarters?

Sure. I'm going to ask Justin to answer that.

Yes. So the COVID expenses from -- sequentially from Q2 to Q3 went down by about half, but we're still carrying around $15 million of COVID expense. So it's -- we're still running at an elevated level, but we do think that the overall expenses sequentially will be flat.

Okay. Okay. One quick follow-up just on Slide 15 in the slide deck. I wasn't really sure what the point was of that slide other than just thank you for not using blue and red colors on that slide, but I just wanted to just get more color on kind of what the takeaway was from that particular...

Which page so we can...

That has the U.S. map.

Yes.

Oh, that's a -- yes. We're -- we like that slide. We will share that with -- it's supposed to show our -- the extent of our NOI in different markets where there is significant new confirmed cases of COVID, which is shown by the backdrop of green, red and yellow. So where are there more and less kind of COVID cases? Where do we have more or less NOI? And importantly, within those geographies, where do we see move-ins as a percent of last -- of prior year? So for example, you can see that in the New York area, the COVID pandemic confirmed cases are lower, New York is green. You can see we have a lot of NOI there because their bubble is large and that the move-ins are above 75% of our prior year level. So that's kind of -- we really love this map and think it gives investors kind of -- especially in the earlier parts of the pandemic where there was a little bit of -- and it continues to be a little bit of geographical movement of the virus and how that could be affecting the different markets where we have senior housing operating assets. I have to give Justin credit. It was his -- Justin's brainchild, but I really like it.

Your last question comes from Sarah Tan with JPMorgan.

So just once you have passed COVID and occupancy recoveries, do you think the operating margin of the senior housing business will be materially different from what it was heading to the pandemic just given all the moving parts of the COVID-19-related expenses? And I assume some of that will be carried forward with all the security measures in place.

Okay. I'm going to turn that over to Justin, and then we'll wrap up.

Yes. In regards to margin, I'll start with the expense side of the question. If we're in a post-pandemic situation, I would expect expenses to normalize. There may be a little bit, very small amount of carrying cost for PPE that wasn't used previously that's proven to be helpful combating the virus. But it's not going to be a material impact. The big help to margin is really going to be the revenue growth as it comes back. And like I said earlier, there's a lot of underlying drivers that support potential revenue growth when we get out of this pandemic. So as this is a very high fixed cost business when you get occupancies back up into the historical levels in the high 80s and move in certain markets in the 90s, margins go with it significantly. So there'll be a recovery period, but I would expect margins to be somewhat similar to previous levels once we get there.

Yes. And thank you for that question, Sarah, because there is a lot of operating leverage that will be fairly powerful to the upside off of these occupancy levels, as Justin said, when we get to the post-pandemic recovery of senior housing and the demographic demand.

So that is the end of our call today. I want to sincerely thank everyone for joining us and, as always, for your interest in and support of Ventas. We are all here working very hard for you, and we're committed to winning the recovery.

Thank you and I hope you stay safe. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.