Earnings Call Transcript - VTR Q3 2020

Operator, Operator

Good day ladies and gentlemen, and welcome to the Third Quarter 2020 Ventas Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. 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.

Sarah Whitford, Head of Investor Relations

Good morning, and 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 Web site 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 expectations. 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 Web site. Certain non-GAAP financial measures will also be discussed in this call. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the Investor Relations section of our Web site. I will now turn over the call to Debra A. Cafaro, Chairman and CEO.

Debra A. Cafaro, Chairman and Chief Executive Officer (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 occasioned by the COVID-19 pandemic, which has affected our different asset classes and geographies in a non-correlated way. Our medical office, research and innovation business and our healthcare triple-net lease business now represent over half of 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 of normalized FFO per share. Second, our diversified asset base with five verticals has given us the ability to continue successfully allocating capital over time and through cycles. For example, following the spinoff of our skilled nursing business, we invested in high quality health systems with strong fundamentals, which are currently performing very well as hospitals have asserted their centrality to the health care delivery systems in the U.S. Also, just as we did when we allocated capital to the medical office building business a decade earlier, in 2016, we entered the research and innovation business, and we have found significant opportunities to drive that business forward since then, through both ground-up development and asset 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 investment 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 this thriving research sub-market of Philadelphia, bookended by University of Pennsylvania 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 senior housing portfolio now in Canada. Last year, we acquired the high-quality Le Groupe Maurice portfolio in Quebec. 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 in 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 is 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 have 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 four research and 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 and 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 a tremendous market opportunity within life science, medical office and senior housing real estate and also they are a testament to Ventas's excellent team and investment track record. Turning to the here and now, I'd like to provide some key observations about our U.S. senior housing operating portfolio. Importantly, in the third quarter, our operators continued to build on the improving trend that began in the second quarter. Our communities demonstrated sustained increases in leads and move-ins, which continued through October. 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 CARES Act funding to 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 longstanding 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 and 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 healthcare 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?

Justin Hutchens, President & Chief Operating Officer (COO)

Thanks, Debbie. I'll start by mentioning the encouraging trends we continue to see in our senior housing portfolio. We are pleased to have had our first net positive move-in month since the start of the pandemic in October and a majority of our portfolios delivered move-ins at levels that are equal to or better 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're mindful that the pandemic causes ongoing uncertainty and 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 will review our third quarter senior housing results in the senior housing operating portfolio and triple-net portfolio and follow that up with some comments on our latest trends and outlook. First up, the senior housing operating portfolio: for the quarter, senior housing operating results were in line with the company's expectations. Our 395 assets sequential same-store pool comprising over 90% of our senior housing operating 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 supplies costs have been reflected in property operating results. As with last quarter, I'll highlight our Canadian portfolio, which represents 33% of our senior housing operating 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, were 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 months 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 remain 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 move-in incentives. Our operators' successful execution of screening, protecting and testing protocols has been 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 are 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 the senior housing operating portfolio, due to the uncertain environment, it is too hard to predict. However, we would expect occupancy to soften and we would expect expenses to be relatively flat at the current elevated levels as the health and safety of the residents and frontline caregivers is the biggest priority. In summary, we are encouraged by the continued improvement in leading indicators through the third quarter and 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.

Pete Bulgarelli, EVP, Head of Office and Research & Innovation

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, financial strength and resilience through 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 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 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 rents in the third quarter in line with the second quarter. This is without D-docs for 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 rent without D-docs 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 a significant amount of federal support through a variety of programs designed to assist healthcare providers and 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 and 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 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 and surgery volumes reported by the health systems. These trends have continued through October. As an example, paid parking has more than doubled from the depths of 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 many are influenced to do the same for the second semester. As Debbie mentioned, we are pleased to have added three 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 other 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 build from the second quarter, and we look forward to continuing the normalization of healthcare and research operations as we enter 2021. With that, I'll pass the baton to Bob.

Bob Probst, Executive Vice President & Chief Financial Officer (CFO)

Thanks, Pete. I'll touch on our healthcare triple-net lease portfolio before I close with some enterprise-level commentary. During the third quarter, our healthcare triple-net assets showed continued strength and resilience as evidenced by receiving 100% of third quarter, October and November contractual rent from our total healthcare tenants. Further, trailing 12 months EBITDARM cash flow coverage for the second quarter of 2020, related to the available information, improved sequentially for all of our healthcare 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 continue to rebound in Q3 and third quarter admissions approached over 90% of prior year levels. Arden 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. Health system coverage improved approximately 20 basis points to 1.5x in Q2 on the heels of government funding and significantly improved census. Health systems 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 non-cash charges as a result of COVID impacts. Most notably was the write-off of straight-line rents across five 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. Senior housing operating 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 are 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 at 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. Before we start with Q&A, we're limiting each caller to one question with one follow-up to be respectful to everyone on the line. Also given the fact that we continue to be remote, I'd ask Debbie to do her Roethlisberger impression and quarterback our Q&A. With that, I'll turn the call back to the operator.

Operator, Operator

Your first question comes from Steve Sakwa with Evercore ISI.

Steve Sakwa, Analyst, Evercore ISI

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

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Good morning, Steve. I'll take that one. 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, we've restarted our Philadelphia development of a significant life science building, and we've got these three 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. It gives us a great way to continue to own a significant portion of those developments and their upside, and to move the whole R&I business forward.

Steve Sakwa, Analyst, Evercore ISI

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?

Bob Probst, Executive Vice President & Chief Financial Officer (CFO)

Right, Steve. Just to step back a little bit on the $1 billion 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 two ways: one through some dispositions of senior housing and second some modest ATM. So ultimately, those were the sources of funds for the deal overall.

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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

Operator, Operator

And your next question comes from Nicholas Joseph with Citi.

Nicholas Joseph, Analyst, Citi

Deb, you mentioned the senior housing asset sales are 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?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Right. Yes. 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 of assets, some of which are sold, some of which are under contract. The kind of blended cap rate is around a 6% cap.

Nicholas Joseph, Analyst, Citi

Thanks. So 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 developmental assets?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Yes, that's a great question. We were very focused on partnering with a strategic partner. For us, this is much more than just about capital, which we can get in a myriad of ways, 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 gives us a lot of confidence that we not only have a great partner but we are preserving a significant portion of the upside as we move forward.

Operator, Operator

Your next question comes from Jonathan Hughes with Raymond James.

Jonathan Hughes, Analyst, Raymond James

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

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

I mean, I think, as I said, we believe in the business. The demographic demand is in front of us, the supply is continuing to improve. So we think there's upside there operationally and in terms of the business. We're benefiting, obviously, from some of the government's financial support available to assisted living communities under the CARES Act, and we're grateful for 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.

Jonathan Hughes, Analyst, Raymond James

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 leverage, but it was a very small amount. The willingness to seemingly give shares away at a significant discount the last time that was done a year ago sends a bit of a mixed signal, in my opinion. I'd love to hear your views, rationale and how you thought about that. Thanks.

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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

Bob Probst, Executive Vice President & Chief Financial Officer (CFO)

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. Demonstrating the ability to acquire an attractive set of assets, like the San Francisco assets, with partners through the fund vehicle is the main point. Within that Ventas had a portion, call it $120 million. We took a balanced approach to that. Part of that equity was through attractive dispositions and part of that was through the ATM in small size. We have to keep our eye on leverage and think about our risk overall. So a balanced approach, but the majority of the equity came from third-party private capital.

Jonathan Hughes, Analyst, Raymond James

Right. But I mean, how did you justify it? Leverage would have gone up by I think like 0.04 turns. So it just seems kind of inconsequential as to why tap equity and why not just pull it down.

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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. It's just like the asset side of the balance sheet—we want to stay disciplined and keep in these different markets. 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, along with private capital and asset sales.

Operator, Operator

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

Michael Carroll, Analyst, RBC Capital Markets

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

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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 something to keep in mind as you think about our near-term outlook.

Justin Hutchens, President & Chief Operating Officer (COO)

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. 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. It's difficult to predict the continuation of positive trends in the face of increasing infections across the broader public in the U.S. And so that's really the biggest driver for our hesitancy to make predictions about continued positive improvements.

Michael Carroll, Analyst, RBC Capital Markets

Okay. And then what type of competition are you seeing from other operators in the form of rate cuts or concessions? I know Atria has highlighted that they're offering some free rent right now— is that widespread and will that weigh on near-term results?

Justin Hutchens, President & Chief Operating Officer (COO)

So I'll start with Canada, because that's the easier one. Canada has performed really well; their occupancy only dropped 50 basis points sequentially. All three of our Canadian operators contributed to NOI growth in Canada with LGM leading the way with double-digit NOI growth, getting 10% overall. So there's less supply/demand disruption there and the virus was less impactful. In the U.S., early on the Northeast was impacted because of the prevalence of the virus and we had to add more expense for PPE and also saw an impact on move-outs and move-in activity. Since then, the improving trends have been relatively equal across geographies and across operators, with some exceptions. Operators are now facing some competition, and in certain markets and in certain asset classes operators are starting to use move-in incentives. 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.

Operator, Operator

And your next question comes from Rich Anderson with SMBC.

Rich Anderson, Analyst, SMBC

So on the life science purchase, it's a kind of a departure from your university-based business. Is that partially why it goes to the fund or not? Also, is there any kind of redevelopment angle in that portfolio—some of the assets might have awkward orientations that need addressing—or is it pretty much a turnkey situation?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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

Pete Bulgarelli, EVP, Head of Office and Research & Innovation

Yes. We feel very fortunate to be able to enter the South San Francisco market on a scale—this is 800,000 square feet—so it's a terrific start for us. We also like the fact this portfolio is highly differentiated from the competitors. It has great views, fantastic accessibility from the expressway, is on the preferred side of the expressway, and is very close to BART and Caltrain. It has onsite amenities. As Debbie said, the buildings are largely new and we're at 96% leased. It really targets a niche market of 10,000 to 50,000 square foot tenants and this fits perfectly. We have opportunity to enhance the 96% occupancy rate; we've got a lot of activity and we think we'll be very close to 100% leased in a short period of time. Regarding infrastructure, there are several floors in some buildings that are not yet built out for life sciences. As office tenants leave, we will do some construction to convert those floors into lab space.

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Thanks, Pete. The tenants we met with liked the location and the characteristics of the buildings, which is proving out by the occupancy and leasing activity.

Operator, Operator

Your next question comes from John Kim with BMO Capital Markets.

John Kim, Analyst, BMO Capital Markets

I was looking at the R&I joint venture—you're contributing asset cost. How does this compare to cap rates if we were to sell these assets in the open market once stabilized?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Good morning. In terms of strategic benefits of the transaction, the stabilized level of cap rates in these markets is around 7%. We're keeping 50% of the assets and are generating market-based compensation and profit sharing related to upside.

John Kim, Analyst, BMO Capital Markets

Okay. 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? Also, can you discuss the ground lease potentially being reset as far as timing and potential outcome?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

So I'll ask Justin to speak to the operations, but I want to remind you that we acquired that asset below replacement cost. It has been a successful asset in the market for a long time and it's a great physical plant. In terms of the ground lease reset, we underwrote that quite carefully. It's possible that the current environment and COVID-19 may give us a benefit on the rent reset when it becomes applicable. Justin, do you want to talk about the operations and upside post-COVID at Battery Park?

Justin Hutchens, President & Chief Operating Officer (COO)

Sure. The Battery Park community has been a very strong performer consistently for us before COVID. It is now seeing more competition in the Manhattan area, and that competition has entered at a higher price point. We are positioned within our own price point with an intelligent product and we have a strong history of solid performance there. We expect demand to continue, and it's a community that we've evaluated closely. We'll continue to consider actions to keep it competitive moving forward.

Operator, Operator

Your next question comes from Omotayo Okusanya with Mizuho.

Omotayo Okusanya, Analyst, Mizuho Securities

Congrats on the solid quarter. Question around university-based life sciences: again, you paused projects and are now restarting—do you see what's happening with universities, amid COVID and tightening budgets, impacting demand going forward for university-based life sciences?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We've built a strong business where capital flows into life sciences are at record highs and demand for life science real estate is robust. We feel good about being situated with universities and in key cluster markets like Cambridge and South San Francisco. Universities, as leaders in research with significant government and other funding, have continued to pursue research and development throughout the pandemic. Clearly, if the pandemic continues at very high levels there are potential consequences, but our base case is that a vaccine will be developed and distributed and help us be in a post-pandemic environment before the academic year begins in 2021. In that case, we continue to like the life science business and are glad to be associated with leading research institutions.

Omotayo Okusanya, Analyst, Mizuho Securities

Okay. That's helpful. And then just one quick follow up: how do you think the election outcome—seems like a Democratic president, a Republican Senate, and a Democratic House—would help or hinder additional government help for senior housing?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We are grateful that HHS has recognized the role senior living plays for vulnerable older Americans during this pandemic. My guess—with a moderate Democratic president, a Democratic House and what will likely be a closely divided Senate—that would push toward more consistency and moderation in policy, which would be a favorable backdrop for Ventas and for the country.

Operator, Operator

Your next question comes from Vikram Malhotra with Morgan Stanley.

Vikram Malhotra, Analyst, Morgan Stanley

Maybe first on growing the senior housing platform from here: how should we think about potentially using the fund or other fund structures to grow the senior housing business? Whether it's contributing properties or using the fund to acquire senior housing—do you have both options, like you have on-balance-sheet?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We like the embedded upside in senior housing. In terms of additional investments, we'd look at their characteristics and choose the appropriate capital source. The fund is designed to be an open-end vehicle for core and core-plus real estate—typically low cap-rate, highly stable, low-leverage assets, including senior housing. If assets fit that profile, they could be suitable for the fund. If they are more value-add or opportunistic, those could be on-balance-sheet and/or financed with other private capital. We also have pension fund capital that likes opportunistic, value-add and ground-up development in senior housing, which is another pocket of capital available for such opportunities.

Vikram Malhotra, Analyst, Morgan Stanley

Okay, makes sense. And then just a follow up: say you get a vaccine at the end of the year and distribution plans are laid out—how do you think about regaining the last occupants in senior housing between levers of occupancy and rent growth and any other levers? How would you pull that rent cycle lever?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

I'm going to turn that to Justin—he's been leading the operational response and the initiatives around move-ins and resident confidence.

Justin Hutchens, President & Chief Operating Officer (COO)

So the big change across our portfolio has been operators' ability to safely offer a more robust living environment. The desire for residents to visit relatives and enjoy amenities is a major driver. Throughout the pandemic that has improved, and you can see leads and move-ins persist. In the case of a vaccine that reduces virus impact, you can restore lifestyle back to pre-pandemic levels which would be very supportive of senior housing. That comes at a time when demographics are very favorable—the 75-plus population CAGR will be significantly higher over the next five years. New starts are at a nine-year low and deliveries are down year-over-year, which supports demand. Predicting precise outcomes is nearly impossible, but the moving parts—lifestyle, care delivery and availability—are all supportive of growth in a post-vaccine environment.

Operator, Operator

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

Jordan Sadler, Analyst, KeyBanc Capital Markets

I'd like to start: Bob, you mentioned keeping an eye on leverage. Given your development funding commitments, should we expect you to continue to fund with equity raised under the ATM? And 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 senior housing portfolio?

Bob Probst, Executive Vice President & Chief Financial Officer (CFO)

We're in consistent dialogue with the rating agencies, as you'd expect. The main focus of those conversations is the trajectory of senior housing and we've been encouraged by recent trends. In the meantime, we are prudent in managing the balance sheet and demonstrating our commitment to financial strength and flexibility—accessing third-party capital, selling assets, etc.—to stay in the right range. The senior housing recovery will be helpful to leverage, but in the meantime we'll manage proactively.

Jordan Sadler, Analyst, KeyBanc Capital Markets

Okay. Then maybe the follow up on the GIC JV: you contributed essentially cost even though it was pre-leasing and you've created some value. Have you considered monetizing stabilized R&I assets or would you consider monetizing that?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We're constantly evaluating our capital sourcing. When we launched our fund in March, we seeded it with some stabilized R&I and MOB assets at attractive cap rates. With respect to the R&I development JV, we have a strategic partner, we've retained 50% of the assets, and we also have market-based compensation. That, combined with our retained interest, gives us a significant portion of the upside while managing our financial strength and flexibility. We will consistently evaluate the portfolio for capital recycling and profit-making opportunities of all types.

Operator, Operator

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

Joshua Dennerlein, Analyst, Bank of America

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

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We're very particular about partners. GIC is one of the world's leading real estate investors and we've known them for a long time. Having a relationship with them could be beneficial across asset types and over time. Establishing a good relationship with a global strategic partner like GIC could benefit our enterprise and public shareholders.

Joshua Dennerlein, Analyst, Bank of America

Appreciate that. You mentioned potential additional senior housing asset sales—are those shop or net lease assets, and when you mentioned a 6% cap rate is that a trailing 12-month basis or based on current NOI?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

That was a combination: assets we sold in Q3 and a portfolio we have targeted for sale. They include both operating and triple-net assets. The blended cap rate I referenced is reflective of current NOI trends in today's environment.

Operator, Operator

Your next question comes from Nick Yulico with Scotiabank.

Nick Yulico, Analyst, Scotiabank

I just wanted to follow up on the senior housing portfolio and the moving trends you talked about. In October you mentioned net positive move-ins—should we assume that occupancy benefit lasts through the fourth quarter, or given the typical seasonal softness in Q4, should we think more about the spring as the earliest opportunity for occupancy benefit?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

We've seen consistent improvements in demand and move-ins since the nadir in April. That's positive evidence about the asset class and its recovery potential. At the same time, we are in a pandemic that creates unpredictability, and there are normal seasonal patterns in Q4 that can affect the business. We want to share the positive evidence while remaining humble about ongoing uncertainty.

Nick Yulico, Analyst, Scotiabank

Right. So in terms of the fourth quarter and first quarter next year, historically there is some occupancy pressure because of flu—should we expect that dynamic again, or is spring the earliest realistic runway for occupancy recovery?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Well, again, it's the right time to be cautious. We will be very happy when we're talking about the flu again and not COVID. We are encouraged by the improving operational indicators but the timing of a full recovery depends on public health progress and vaccine distribution. Spring could be an inflection point in many scenarios, but there remains uncertainty.

Operator, Operator

Your next question comes from Daniel Bernstein with Capital One.

Daniel Bernstein, Analyst, Capital One

Two quick questions on senior housing. One, how do you view the threat of home health to senior housing? There have been CMS initiatives to move care to the home—does that threaten senior housing demand? And two, what do you view as the CapEx needs for senior housing going forward in a post-COVID environment? There has been talk of needed changes for dining, more medical capability, higher acuity—how do you think about additional CapEx?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

Senior housing is supposed to be a social environment, which is a key difference from home health. I'll ask Justin to add color on the continuum of care and CapEx.

Justin Hutchens, President & Chief Operating Officer (COO)

Home health tends to be supportive of independent living, which is about half of our senior housing portfolio, allowing residents to receive medical attention at home within their independent living apartments. Assisted living is well positioned to care for residents with higher acuity needs and memory care needs. We would expect that need to continue. On CapEx, the asset class benefits from ongoing investment. Our portfolio has been well invested over time and will need continued CapEx to remain relevant and competitive. I expect certain markets will benefit from redevelopment or broader refresh programs; we have a list of projects under review for when we exit the pandemic. Overall, the asset class benefits from CapEx and should continue to attract investment.

Operator, Operator

Your next question comes from Lukas Hartwich with Green Street.

Lukas Hartwich, Analyst, Green Street

Now that Ventas has a JV for new development and acquisition in life sciences, how will the company evaluate new opportunities going forward? Will they all go into a JV? If not, what determines whether they go in a JV or not?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

That's a clear answer: the GIC joint venture is for basically these four projects underway, including the UCity development that we started construction on, and the JV will accelerate our ability to drive the business forward. There are a handful of identified projects in our pipeline that could go in that JV. The open-end fund we launched in March is designed to capture low cap-rate, high-quality core assets that would be difficult for Ventas to buy on-balance-sheet. The segmentation gives us lots of options, particularly when public markets may be disrupted, and creates significant value for our shareholders.

Operator, Operator

Your next question comes from Steven Valiquette with Barclays.

Steven Valiquette, Analyst, Barclays

On the senior housing operating portfolio you mentioned revenue decline in Q3 was offset by lower COVID-related operating expenses—about 4% to 5% lower. For Q4 you expect operating expenses to remain flat at current elevated levels. Was there any disclosure in the slides on the total dollar amount of COVID-related expenses Ventas and your partners have absorbed in the senior housing operating portfolio? If not, could you give some data points—either as a percent of revenue or a dollar amount of COVID expenses in Q3 or prior quarters?

Justin Hutchens, President & Chief Operating Officer (COO)

Q2 to Q3 COVID expenses went down by about half. But we're still carrying around $15 million of COVID-related expense. So we're still running at an elevated level, but it did decline sequentially and we expect expenses to be relatively flat at the current elevated level in Q4.

Steven Valiquette, Analyst, Barclays

One quick follow up on slide 15 in the slide deck—the U.S. map slide—what's the takeaway you wanted investors to have from that slide?

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

That map shows the geographic distribution of our NOI and overlays it with the prevalence of COVID cases by region. It helps illustrate where we have more or less NOI and where moves-in are tracking as a percent of prior year. For example, in the New York area, case counts are lower and moves-in are above 75% of prior year levels. We liked the map—Justin developed it—and it provides useful context about geographic virus dynamics and operating performance across our senior housing markets.

Operator, Operator

Your last question comes from Sarah Tan with JPMorgan.

Sarah Tan, Analyst, JPMorgan

Once we're past COVID and occupancy recovers, do you think the operating margin of the senior housing business will be materially different from pre-pandemic levels, given the moving parts around COVID-related expenses and potential continued security measures?

Justin Hutchens, President & Chief Operating Officer (COO)

In a post-pandemic situation, I would expect expenses to normalize. There may be a small amount of ongoing PPE cost, but it is unlikely to be material. The biggest improvement to margin will come from revenue growth as occupancy comes back. This is a high fixed-cost business, so getting occupancies back up into historical levels—high 80s to 90s in some markets—would significantly expand margins. There will be a recovery period, but margins should be somewhat similar to previous levels once we get there, supported by operating leverage.

Debra A. Cafaro, Chairman and Chief Executive Officer (CEO)

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 when we get to the post-pandemic recovery of senior housing and the demographic demand. That concludes our call today. I want to sincerely thank everyone for joining us. As always, thank you 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.

Operator, Operator

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