Ventas, Inc. (VTR) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Ventas Inc. Earnings Conference Call. My name is Jess, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David Smith, Manager, Investor Relations and Capital Markets. And you have the floor, sir.

Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended September 30, 2011. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the company's reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2010, and the company's other reports filed periodically with the SEC, for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only, and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure, as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com. I'll now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thanks, David, and good morning to all of our shareholders and other participants, and welcome to the Ventas third quarter 2011 earnings call. We're so happy to be with you today, reporting on excellent results that for the first time include a full quarter of those on Atria and NHP acquisitions. Together, these acquisitions improved our private-pay NOI percentage, significantly diversified our business, increased our percentage of NOI from high-quality private-pay senior housing, and we're accretive to earnings. And importantly, all of these occurred with a very, very strong balance sheet. First, I want to thank more than 60 investors and analysts who attended our New York Atria property tour on October 20. The tour showcased 7 of our high-quality private-pay senior housing communities managed by Atria. Those who attended undoubtedly could see why we acquired the portfolio. These communities knock your socks off in terms of physical plant, location and wealthy sub-markets and high service levels. Atria, the fourth largest assisted living operator in the U.S., also highlighted its commitment to delivering a gold standard customer experience for its residents and its track record of delivering high returning, environmentally focused redevelopment projects. Today, I'll provide a brief overview of the quarter and discuss how we are executing on our larger, more diverse platform. Ray will review our portfolio performance, and Rick will end with a detailed review of our financial results. Following our presentation, we'll be happy to take your questions. In 2011, Ventas completed $11 billion of acquisitions and today, we're a $20-plus billion S&P 500 company, with multiple avenues for growth that generates 1.4 billion of diversified NOI from over 1,300 properties with the lion share derived from private-pay sources. We continue to focus on delivering consistent superior total return to our shareholders by growing cash flows and managing enterprise risk. Ventas' balance sheet, ratings and liquidity continued to be excellent, aided by our Atria and NHP acquisitions. Our current net debt to EBITDA is an outstanding 4.7x, and our current fixed charge coverage well exceeds 4x. These industry-leading credit statistics position us with significant dry powder as additional, attractive investment opportunities come our way. The rating agencies have recognized the benefits of our diversified platform, size, increased tenant-operator relationships and strong balance sheet. Both Fitch and Moody's upgraded Ventas' credit ratings during the third quarter to BBB+ and Baa2 respectively. We have also continued to reduce our borrowing costs and increase our liquidity. Not only did we issue $700 million in 10-year bonds in May at 4 3/4%. We also closed a new $2 billion unsecured revolving credit facility in October. This new facility added $1 billion of liquidity, extended the maturity from early 2012 to late 2016, and significantly improved our pricing. At LIBOR plus 125 basis points, we currently have the lowest healthcare reach spread in the revolver market. We will remain relentless in our focus to drive down our capital cost, as well as maintain financial strength and flexibility going forward. These dual attributes will allow us to be both opportunistic and safe. Our NHP integration efforts are proceeding well. Our teams are working effectively together and we are on track to realize the $15 million in G&A synergies we previously announced, a savings of 50% from the NHP run rate. We're also executing on the growth aspects of our powerful consolidated platform. In October, we closed over $150 million of investments, which included 2 MOBs under our Lillibridge platform, one seniors housing asset that will be added to our Atria portfolio, and another triple-net lease seniors housing asset with a new highly desirable operating partner. We had a great quarter as a result of our acquisitions and our teams' execution. Ventas reported normalized FFO per share of $0.88, a 20.5% increase over the third quarter of 2010. Our NOI is growing and diversifying. Our FFO and cash flow per share are increasing, and our balance sheet is industry-leading. Even if you choose to eliminate all of our net noncash income, Ventas' FFO would be $0.82 per share this quarter, representing 12.3% year-over-year growth, and extremely high-quality results. With the benefit of NHP, we now expect full year 2011 normalized FFO per share to range between $3.34 to $3.36 per share, an increase of $0.15 at the mid-point over our prior range. So in sum, we're very pleased with our position both financially and strategically, following our recent transactions, and we look forward to harvesting the benefits of our assets and our platform going forward for the benefit of our shareholders. Ray?

Thanks, Debbie. With the Atria and NHP acquisitions, our balanced portfolio now includes over 1,300 properties in 47 states and 2 Canadian provinces, contains over 100 tenant-operator relationships, and is diversified by asset class and payer source, with the vast majority of our NOI coming from private-pay assets such as seniors housing and medical office buildings. Ventas' portfolio continues to provide consistent and reliable cash flow growth. For the third quarter, our same-store portfolio of 597 properties provided strong cash flow growth of 3.4% over the third quarter of 2010 after adjusting for a $2 million cash payment received from Sunrise, and equalizing the management fee in the 2010 comparison period. Moreover, our same-store cash flow growth statistic includes only those properties that we owned in both periods and, therefore, it does not get the benefit of the high-growth Atria-managed assets that we acquired in the second quarter of this year. First, I would like to discuss our triple-net-lease portfolio. This portfolio now includes all of the NHP properties, and accounts for 61% of Ventas' NOI. It contains over 900 properties, and is well diversified across the seniors housing, skilled nursing and hospital asset classes. Cash flow coverage in the entire triple-net portfolio was a solid 1.7x rent through the second quarter of 2011, the latest date available. Furthermore, same-store cash NOI growth was 2.7% over the prior year, driven primarily by contractual rent escalations. As a point of clarification, we report our triple-net-lease coverages 1 quarter in arrears. As such, this combined coverage information is only for the legacy Ventas portfolio, and excludes the NHP portfolio, which we did not own in the second quarter. In order to provide visibility into the consolidated triple-net-lease portfolio, including the NHP assets, we have provided 5 quarters of historical occupancy and coverage data by asset class in our supplemental. For all 3 asset classes, seniors housing, hospitals and skilled nursing, coverages were stable and occupancies were consistent with historical levels during the comparison periods. As many of you know, Ventas has strategically invested with a goal of diversifying its portfolio and increasing its private-pay revenues. As a result of the 11-plus billion dollars of acquisitions that we have completed, private-pay assets now provide nearly 70% of our NOI. In addition, our skilled nursing portfolio continues to perform well. Consolidated skilled nursing portfolio cash flow coverage, including our Kindred portfolio, was a healthy 2x in the second quarter. Assuming a 13% cut to Medicare revenues on average and a 25% mitigation on average by our operators, coverage would still be a healthy 1.7x, all other things being equal. So we continue to believe that our skilled nursing rents are well covered and should provide sustainable cash flow to Ventas. Now let's turn to our seniors housing operating portfolio. As previously mentioned, this is the first full quarter of operating results for the 117 communities managed by Atria that were acquired on May 12. Combined with our 79 highly productive assisted living communities managed by Sunrise, we now have a portfolio of 196 senior housing operating properties, which account for approximately 25% of our annualized NOI. This portfolio is located primarily in high barrier to entry coastal markets, with strong wealth demographics, and contains some of the very best assets markets and operators in the industry . Ventas' Sunrise's portfolio of 79 high-quality mansion-style communities continue to deliver solid performance, generating $40 million of NOI for the third quarter, which is a sequential increase of 1.2%, and represents the second highest quarterly NOI since we acquired the portfolio in 2007. Year-over-year NOI increased a strong 5.6% after making the previously mentioned adjustments for cash payments and management fee in the 2010 comparison period, and year-over-year average daily rate grew a solid 4.1%. Resident occupancy for this portfolio increased 120 basis points sequentially to 90.6% compared to the second quarter of 2011. And based on recent performance, we expect average occupancy for our Sunrise portfolio to be up slightly for the fourth quarter as well. So as you can see, our Sunrise portfolio continues to perform right in line with the assumptions we provided in February for rate and occupancy in 2011. Before I leave Sunrise, I just want to give a quick reminder that we negotiated a reduction in the management fee that we pay to Sunrise at the time we purchased Sunrise minority interest in our portfolio in December of 2010. Beginning in January 2012, the base management fee will return to 6% of revenues from the current 3.75% level. Now let's turn to Atria, which also delivered solid performance in the third quarter, and was in line with our expectations. NOI for the third quarter, our first full quarter of ownership, was $47.5 million. This reflects high single-digit growth over the prior year when Atria owned the portfolio, and is consistent with what we projected when we acquired the portfolio. And like our Sunrise assets, the Atria communities also experienced positive occupancy trends during the third quarter, with average unit occupancy up 60 basis points to 87.4% since June. During the quarter, we moved 2 assets from redevelopment into the stabilized pool, one high-end assisted and independent living community on 86th Street in New York, which achieved 95% occupancy during the third quarter and another asset in Sunnyvale, California, which was at 94% occupancy during the third quarter. We also commenced redevelopment on one asset during the quarter, and our redevelopment pool now consists of 6 properties, which contributed $1.2 million of NOI in the third quarter. Both lease-up and rate growth trends in this portfolio are very positive. For example, we opened one asset in Glen Cove on Long Island in September that is currently over 40% occupied, separately, another green-assisted living community in Westchester County that opened in April is now over 2/3 occupied with rates of approximately $7,000 per month, over 60% above the rates of the building generated prior to redevelopment. We continue to be impressed by Atria's unmatched redevelopment expertise. We are excited about the redevelopment opportunities in our portfolio, and look forward to announcing additional projects in the coming quarters. So both our Sunrise and Atris portfolios are performing well, tracking the guidance that we provided earlier this year. And as the largest owner of seniors housing in the U.S., Ventas should continue to benefit from the positive supply-demand fundamentals in the industry. Construction starts compared to overall inventory continued to be very modest, and totaled less than 1% of overall inventory for the third quarter. Moreover, demand is increasing as the 85-plus population, which is our target market, continues to grow at 3 times the rate of the overall population. These positive fundamentals should continue to drive performance in our seniors housing operating portfolio, where we are the direct beneficiary of the NOI at the communities. Now I'd like to briefly discuss Ventas' medical office building portfolio, which accounts for 11% of the company's NOI. Ventas' owned medical office portfolio now totals over 230 medical office buildings, and including our managed properties, spans across approximately 14 million square feet. The vast majority of these medical office buildings are on campuses of leading hospitals and health systems. As you know, Ventas' medical office portfolio has grown significantly over the past 5 quarters due to our Lillibridge acquisition in July of 2010, along with our recent NHP acquisition, which came with a strategic relationship with Pacific Medical buildings and exclusive rights to over 1 billion of future development for Class A medical offices. As a result, Ventas is now the largest, fully integrated owner, manager and developer of medical office buildings in the United States with a coast-to-coast presence. Our medical office portfolio delivered another quarter of consistent performance. Our total owned same-store medical office portfolio delivered another year of consistent performance with year-over-year cash flow growth of 2.6%. Year-over-year, our 57 consolidated same-store stable assets generated $12 million of NOI, consistent with the comparison period and an occupancy of 93.5%, which is comfortably above industry averages. Sequentially, our consolidated same-store stable portfolio contains 63 properties that delivered similarly strong and consistent performance in NOI, and grew occupancy by 30 basis points. With the addition of NHP, our stable-owned portfolio now contains 169 properties, an increase of 106 properties over the Ventas stable-owned portfolio in the second quarter of 2011. This portfolio is 91.6% occupied, and accounts for over $137 million of annualized NOI. Trends in our medical office business are very positive. During the third quarter, we experienced an increase in leasing activity, including new and expansion leasing. During the third quarter, our same-store weighted average tenant retention rate was 84%. We are also experiencing an uptick in requests for proposals on new development, with 8 projects totaling about $80 million for which we have been awarded exclusive rights to work on development. With over 14 million square feet owned and managed, our MOB portfolio provides the scale and financial performance to leverage the full-service capabilities of our Lillibridge platform. Coupled with our partnership with Pacific Medical, we now have the fully-scaled, multi-capability medical office platform that we set out to create just 4 years ago. Just a quick note on acquisitions before I turn it over to Rich Schweinhart. As you know, we closed our acquisition of NHP at the beginning of the third quarter, and we've been intensely focused on integrating and assimilating this transaction since we announced it in February. With respect to the external environment, conditions remain very fluid. During the third quarter, moderating expectations for domestic economic growth, volatility in the capital markets and the impacts of larger-than-expected CMS reimbursement reductions injected some caution into the markets and serve to reinforce the value of diversification, private-pay revenues and stable, growing cash flows, 3 important strategic themes in our acquisitions of NHP and Atria. However, as the capital markets began to stabilize and improve in September, we also saw an uptick in actionable senior housing in MOB investment opportunities, and our pipeline is pretty active heading into the fourth quarter. In fact, we have about 200 million of primarily MOB properties under contract and at various stages of diligence. In addition, subsequent to the quarter end, we closed 3 separate transactions, totaling $150 million at an average yield of 7 3/4%, and comprised of 2 seniors housing assets and 2 medical office buildings. With these transactions completed and under contract, our originations team will have acquired approximately $1 billion of asset-level deals in 2011. Looking forward, we are well-positioned to find and win transactions with our regional origination capabilities, our numerous strategic relationships with operators and health systems and our strong balance sheet and competitive cost of capital. However, while we should have sufficient opportunities to deploy capital, we intend to continue to invest with discipline, focus on delivering reliable and growing cash flow to our investors, and grow our portfolio in a strategic and thoughtful manner. Rick?

Thank you, Ray. There were 3 major events in the quarter and one following quarters' end. First and foremost was that on July 1, we purchased Nationwide Health Properties Inc. by issuing 100 million shares and assuming debt of $2 billion. NHP's result are included in our consolidated statements of income for the entire third quarter. Second, also in July, we borrowed funds on our revolver to repay $339 million in NHP's maturing senior notes, and $200 million in Ventas' 6.5% senior notes due 2016. Third, in August, we received our litigation award of $102.8 million from HCP, and used the proceeds to pay down the revolver. Now let me talk a little about third quarter results. Third quarter 2011 normalized FFO was $0.88 per share, per diluted share, an increase of 20.5% compared to the third quarter of 2010 per share results of $0.73. Normalized FFO increased 120% to $255 million compared to last year's third quarter of $115 million. Normalized FFO in the third quarter includes a full quarter of our second quarter Atria acquisition and a full quarter of our NHP acquisition. It excludes the net benefit totaling $9.2 million from net litigation proceeds and income tax benefit, partially offset by merger-related expenses and deal and integration costs, mark-to-market, adjustment for derivatives, loss on extinguishment of debt and amortization of other intangibles. Third quarter normalized FFO increased from last year's third quarter due to NOI increases in all 3 of our segments: triple net, seniors housing operating and medical office, as well as income from loans and investments. Triple-net lease revenues grew to $211 million from $118 million last year, primarily due to NHP and also due to contractual escalations. Seniors housing operating NOI increased $48 million, in part from improved Sunrise operating results and principally due to the Atria acquisition. The Sunrise-managed portfolio grew to $40 million this quarter from $39 million last year. Last year's results included a $2 million cash payment from Sunrise for expense overages. Third quarter medical office building NOI grew to $41.3 million from $18.3 million last year primarily due to NHP. Both periods include $1.3 million in unconsolidated joint venture earnings. Income from loans and investments increased to $10 million this year from $4 million last year due to NHP's portfolio. On the expense side, consolidated interest expense increased to $74 million this year from $45.5 million last year, reflecting the assumed debt in the Atria and NHP acquisitions, as well as all the debt activity in the last year. Looking at sequential results, normalized FFO increased $113.5 million to this quarter's $255 million. The principal reason for the increase is the NHP acquisition, effective July 1, and a full quarter's results for the Atria portfolio, which we acquired mid-second quarter. Interest expense increased by $20 million in the third quarter compared to the second quarter, primarily due to assumed debt of NHP and a full quarter of Atria. Even with that increase, our interest expense coverage is fantastic at over 4.5x. We continue to focus on maintaining a strong balance sheet and increasing cash flow from operations. At September 30, our cash balance was $57.5 million, and we have $474 million outstanding on our revolving credit facility and $250 million outstanding on our $800 million term loan. With our new revolver and assumed term loan, we currently have net liquidity of $1.8 billion. With our new revolver, our weighted average debt maturity is over 6 years. At September 30, our credit stats were net debt to adjusted pro forma EBITDA at 4.7x, our fixed charge coverage ratio in excess of 4x and debt-to-enterprise value, 31%. Let me recap our third quarter dividend, which was divided into 2 installments on account of our NHP acquisition. On July 12, we paid a dividend to stockholders of record to the -- prior to the NHP acquisition of $0.1264 per share. On September 30, we paid a dividend of $0.4486 per share. The combined amounts totaled $0.575 per share, which is the same dividend we paid for the first and second quarter. Our FFO payout ratio is an excellent 65%. Fully diluted weighted average shares outstanding in the quarter were 291 million shares, an increase of 84% over the third quarter of last year and 63% over the second quarter. Our fully diluted share count already covers all the shares we are likely to issue when our 3 7/8% convertible senior notes mature on November 15, 2011. We are increasing our 2011 normalized FFO per share guidance, and tightening the range of our guidance to $3.34 to $3.36 from $3.17 to $3.23. We expect our fourth quarter normalized FFO per share to range between $0.87 and $0.89. This increase in annual guidance is the result of better operating results and the inclusion of about $0.12 of net non-cash earnings in the second half, primarily due to purchase accounting adjustments. Many of the non-cash components will burn off over time, so we are going to try to call them out separately in the future, so you can see movement in the cash portion of results. Because of the increase in our FFO and large change in our weighted share count, it is possible that the full-year computation of FFO per diluted share could be as much as $0.04 higher than the sum of the 4 reported quarters, that's why we have provided separate fourth quarter FFO guidance. Operator, let's take our shareholders' questions.

[Operator Instructions] First up, we have Mr. Michael Bilerman with Citigroup.

Question on the development, which you include now in the supplemental on Page 17, you have about 131 million of spend that's listed, the majority of which is the one asset for PMB and then Brookdale. And then Ray, I think, you talked about $200 million or $80 million of potential new MOB development that you're targeting, how should we think about development sort of spend and that portion on your business in terms of driving growth?

Michael, I think we'll always do a modest level of development relative to our total portfolio size. And as you see on the schedule on Page 6 on our supplemental, it's a reasonable pipeline of development. We look at development as an opportunity for us to add new properties to our portfolio, enhance existing relationships and drive higher yields than the acquisition side, so put a little extra also in the portfolio. And this pipeline of opportunity should do that.

And you expect it to grow, I guess, adding that $80 million that this probably could be a $250 million to $400 million pipeline over time?

Yes, I would say at the upper end, yes.

And that's again, it's about less than 2% of our total balance sheet, even at $400 million.

Thinking about just from a tenant and asset management perspective, one of the benefits of doing a lot of these transactions was diversifying your tenants and your top 5 tenants have gone from 86% of NOI down to 62% of NOI. But those under 1% jumped dramatically from under 4% of NOI to over 26%, so just a lot of smaller individual tenants that came out of the NHP portfolio. I guess, as you've taken those over, what are you sort of -- before, you used to have -- you had 5 people you called, and you got a pretty good sense of your portfolio and how the tenants were doing. Now, they have much bigger exercise, and I'm just curious from a management perspective, how you're dealing with that and then sort of what the health is of a lot of those smaller tenants that you have?

Yes, that's a great question, and we're very happy that we further diversified our portfolio and have increased our tenant relationship 6x. I mean, that was one of the positives of the NHP transaction. As you correctly point out, there would be a different asset management style and perhaps, tenant [ph] control when you have multiple smaller relationships. And Ray and our Head of Asset Management, Tim Doman, who are here with us today, have been spending a lot of time basically dealing with organizational structure going forward. We've obviously retained the NHP asset management group, and that has the historical knowledge of the portfolio. And we would expect to have a larger asset management group as we go forward to manage that portfolio. But it's a real positive again that we have multiple tenant relationships. Those are areas for future growth, and they also minimize risk in the portfolio.

I would just add one point to that, Michael and that is that before we acquired NHP, we had a highly scalable asset management system. And we've been able to get the NHP data uploaded into the Ventas asset management system, and that's enabled us to continue to have visibility and to all of our tenant operator relationships. So a lot of focus on that during the integration phase.

And this is my last question just in regards to the HCP Ventas lawsuit, Jay Flaherty has said both in August and on his recent call that the litigation has been expensive and distracting, and that they would prefer to settle the matter if reasonably possible. And I'm just curious, are you in settlement negotiations? Or has a settlement amount been proposed to you to resolve the matter? Or are you just progressing forth to the court case in February of next year?

Well, couple things. We did receive the $102.8 million compensatory award, as Rick pointed out in the third quarter. We -- the punitive damage trial has been set for the 21st of February, 2012 in the Louisville Federal Court. HCP has filed a petition for the Supreme Court to hear its case, and they filed that on October 25 of this year and we've obviously, opposed that petition. And finally, beyond that, I think, I just wouldn't comment other than to say that we have never been offered any amount to be paid for the HCP litigation from HCP.

Our next question comes from the line of Jerry Doctrow with Stifel, Nicolaus. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: Just to start maybe, I guess, it's a Rick question, a little more color on sort of the noncash items, and you talked about them burning off, but any sense of what that tail looks like because it does move the numbers a lot?

Yes, it does. And this -- I think this is a really important aspect of our earnings, and we're really endeavoring to be excessively transparent, if you will, in the way that we have reported this quarter's earnings. And I do think that's a value that we have and something that we consider to be important. The -- let me give you some -- so again, just to repeat, our earnings, our normalized FFO earnings are $0.88 a share. That's fantastic, 20-plus percent year-over-year growth. What we've done is tried to call out that there's about $0.06 in there that is kind of non-cash GAAP required earnings. And then even if you took all of that out, which by the way, most companies have some non-cash earnings in their normalized FFO. So that's why, I mean, we're being, I think, excessively conservative and transparent in the way that we reported it. But the kinds of things those are will burn off at various times to the extent they relate to a lease theory. They'll extend over the whole lease term. The best example I can give you is really on the interest side, if we took over an NHP senior note, say, and say that senior note was a 10-year note at 7.5%, but it matures say, next year. We would have to book the interest expense at the 1 year rate of Ventas' borrowing rate. So that's a pickup in earnings. Now when we go to refinance that and we do a great job and say we get 4.5 or whatever, our cash results will be better, but the way GAAP books it, our GAAP results will be a little bit worse on that particular component. So it gets a little complicated. It depends on the various lines. But what we expect to see and the reason in part we're calling this out is that we would expect to see the cash portion going up and the noncash portion over -- tailing off over time, depending on what the various noncash items are. So hopefully, in an effort to be transparent, we haven't really confused you but... Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: Well you probably have, but it may just be me.

Okay. GAAP is very confusing, I would say. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: And it's not like one nice, neat item. It's basically spread in a bunch of different places.

It is. Yes, it is. And it's really a function of doing a lot of acquisitions and what the purchase accounting rules are. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: And just sort of optically, I don't know if you have this or maybe you can do it when you do a fourth quarter guidance for next year. So optically, if we think about that $0.06 a quarter, obviously, it continues into 4Q.

Yes. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: Burn-off, if we think about it just through 2012, is there any material burn-offs through 2012? Or I should think that $0.06 just stays with me..

Yes, we'll get -- that's a good suggestion to -- that we can provide more on when we report the fourth quarter. But for now, it's probably as good as anything else to carry that on. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: Okay. All right. And then just a couple of other things, if I could. Just view on the dividend, I mean, obviously, you've got this great earnings growth. I think you calculated with the noncash of 65% payout ratio, which is wonderful. Just -- I mean, how are you thinking about dividend, maybe as a ratio to FAD or FFO? Or should we be thinking of more growth on the dividend side?

Well, we -- a couple of principles that we'll state and some past practice. We believe that dividend growth is an important part of delivering total shareholder return which, obviously, is the holy grail for us. We have about an 8% dividend CAGR on the Ventas dividend for the last 4, 5 years. We typically do look at the dividend in the first quarter of the year. And we will look at those FFO payout ratio and again, right now, that's about 65%, very, very strong, a well-covered dividend. And we'll look at it in relation to cash flow as well, but I think Ventas is -- again, this is a very important investment attribute of Ventas, which is the prospect of dividend growth -- history of in the prospect of future dividend growth. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And so based on what you're saying, I'm assuming that in first quarter, we'll get a dividend increase and we may need to think about it more on a cash basis than with this noncash stuff?

It's both. I mean, I think you look at FFO coverage and you look at the cash as well and you triangulate to a good outcome that in the past has been very positive for shareholders. So hopefully, we'll be able to continue that in the future. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: All right. Last thing for me. Obviously, all the Medicare stuff, I don't necessarily want to hold rehash of lease coverage. But are there any items in your portfolio, property income portfolio either with the Kindred or with some of the smaller operators where you expect either lease terminations on maturity or renegotiations? Is there going to be any noise as we get into kind of fourth quarter, first quarter because of the Medicare rate stuff?

So Jerry, as I said in my remarks, I mean, even with a 13% cut in Medicare reimbursement and the 25% mitigation, we'd be at 1.7x across the portfolio. That's consistent between our Kindred and NHP assets generally. So we've got a large diversified portfolio with a number of operators in it. There is nothing material that we would anticipate in the fourth or the first quarter that would arise as a result of the announced cuts in reimbursement.

Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

As you're evaluating your acquisition pipeline, I was curious how you think about balancing the triple-net exposure versus MOBs and then the senior housing operating?

When we look at our portfolio, right now, we -- the combination of the NHP and Atria transactions did a number of things for us. It decreased our triple-net-lease exposure to currently 61% on an NOI basis. And it increased our seniors housing operating assets to about 25% of the total portfolio. And I think because we're in a very good part of the cycle on seniors housing with low construction and growing demand, I would guess that, that part of our portfolio is generally going to be in the 25% to 33% range over time. I would again emphasize though that it's not so much the percentage that we care about, it's the kind of assets operators and markets that we're having in that operating portfolio because we really have with Atria and Sunrise, as you know, the best market, best physical plans and the best operators in that operating portfolio. And as a result, and you can see this from some of the trends, that we believe that has more upside and a more protected downside. And so when you have operating assets, that's really how we think about it. But again, we would expect that to be between sort of 25 and 1/3. And then on the triple-net lease side, again, with the NHP and Atria transaction, that part of our business is 61% now, down from 68% previously. The triple-net leases gives us a good year-over-year kind of growth rate in good times and in bad, and we would expect that to continue to be a significant portion of our portfolio. Maybe it will shrink a little bit over time, but it is an important part of our business, and will continue to be so going forward.

And then are you comfortable underwriting skilled nursing acquisitions at this time? Or is that an asset class you'll probably stay away from in the near term?

Well, I mean, we -- having been here for 12 years, I think we really understand the skilled nursing business. I would say that it -- there are some positives about the skilled nursing business. It's a low-cost provider, which is an important part of the long-term sort of healthcare delivery systems to seniors. And we think in the right time in the cycle at the right price and the right structure that it's a valid part of someone's portfolio. I think I'll defer to Ray in terms of what you could expect from us going forward.

Yes, I would just echo what Debbie's saying. We think it's an important part of the healthcare continuum. It is a low-cost provider. It is going to be, going forward, an important part of the healthcare system. So we will continue to have an interest in owning skilled nursing buildings. That all having been said, there's not a lot of activity in the marketplace right now. I think people are very internally focused on making sure that they mitigate the -- that they focus their efforts on mitigating the cuts, that they are working on their operations rather than thinking about monetizing their portfolio in a relatively less certain environment. So I do think we're going to see a lot near term. That being said, as this plays out, there may actually be some good buying opportunities, and we're going to keep our eyes peeled for that.

Our next question comes from the line of Rich Anderson with BMO Capital Markets.

Could we talk about the rent reset from Kindred and when -- I think it's 2013 that things start to expire, is that correct, re-expire?

Well, you're right. There's a portion of the Kindred portfolio that's up for renewal in May of 2013, and some of that has a reset rate in it in Ventas' favor.

Okay. So where would you say -- you said in Ventas' favor, where would you say rents are in light of CMS and everything else where rents are relative to market today?

Yes, so the assets that are up for renewal with Kindred in 2013, it's about 9% of our total NOI and it's currently covering EBITDARM about 2.1x, so very, very strong coverage. So with sort of you can call it a 15% reduction on the Medicare side and maybe 1/3 of mitigation or something like that gets you back to about a 10% impact. It's still covering quite well. There's about 40% hospitals in there, which have received an increase in Medicare reimbursement recently, and about 60% skilled nursing. So net-net, I'd say about market rents for that portfolio, it's a profitable group of assets even after changes -- known changes in reimbursement.

Okay. Just getting back to the non-cash element to your FFO, was there any thought to not having that normalized FFO, so that we weren't having this conversation or a portion of it?

Well, the answer is no. I mean, the answer is no because this is really -- I mean, it is really normal FFO. And as I said, most companies have a significant amount of kind of non-cash items. If you look at their cash flow statements in their regular FFO and we do too. It just happens that because of the volume of the acquisition activity, we happen to have a bunch. And so we tried to call it out for you. Again, I know the REIT analysts are always trying to make a better FFO or make a better FAD or what have you, but I really like the income -- or the cash flow statement because that's a GAAP statement, and you can look at it. It's apples-to-apples pretty much for everyone, and so it is normal FFO. It's just we're trying to make it, again, conservative and very transparent for you.

When you underwent that purchase accounting change as you described it, did this noncash income, I know there's several kind of parts of it, but did it come from someplace else? In other words, it was maybe viewed as cash, and now it's non-cash or something like that?

No. And in fact, that's why our guidance is going up and it's going up more than the noncash items because the -- we typically underwrite on a cash basis, obviously, because that's what we care about. And so that comes -- the cash part is coming in, better than we expected, and then the non-cash part is an add-on on top of that, if you will, so we...

Okay. That's fine. And then last question is the element of your increase that was kind of the outperformance as I think, Rick described it. You had in line, Sunrise in line, Atria, where did it come from? Was it from the NHP portfolio? Or is it kind of all over the place?

It's all over the place, a little bit from NHP, a little bit from better cash interest expense, et cetera, better capital cost, lower deal cost, that sort of thing.

Our next question comes from the line of Karin Ford of KeyBanc Capital Markets.

Sorry to beat a dead horse on the non-cash, but when –- you said you underwrite to -- on a cash basis. When you quoted your pricing on NHP back at the time of the acquisition, I think it was like an 18 times FFO multiple, that does not include – that was a cash basis, right? That does not include this noncash income?

Essentially, yes.

Okay. And is there a breakout of how much of the $0.06 is specifically, NHP purchase accounting related, or is that all of it?

It's everything, it's -- yes.

Okay. Just a question on the senior, the operating senior housing on Page 13, it looks like the Sunrise portfolio saw same-store expenses grow on a year-over-year basis, and sequentially such that margins came down despite the occupancy increase. Can you just talk about what types of expense pressures you're seeing in the portfolio?

Right, so I think year-over-year, if you adjust for the $2 million cash payment and equalize the management fees, the margins were actually spot on at 33.8%. Sequentially, they were down 40 basis points, and that relates mostly to utilities and a little bit of hurricane expense in there.

Got it, okay. And then final question, I guess there was a recent 20% cut in Medicaid payments in the State of California. I know you guys don't have a -- you have some properties there, some [indiscernible], some hospitals, do you expect it to have a significant impact on your portfolio on your coverage in anyway?

We've got 9 nursing homes in California, and there really wasn't a Medicaid cut. Let me just clarify what happened, and that is there was a 10% deferral of Medical payments. So it's a deferral. It's not a reduction in the rate and it's 10%, so we feel fine about it. We have 9 nursing homes there, and the hospitals really aren't Medical. It's not a material portion of the hospital business.

Our next question comes from the line of James Milam with Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Sorry to do this as well. The $0.06, none of that...

Let's talk about the -- $0.82 to $88. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Hopefully, this is quick, but that doesn't include any straight-line rent?

Yes, it does. It's the -- it's basically the non-cash earnings. It's the sum of all of them. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay, so sum of that is in there. Okay, great. The next one just on the same-store MOBs, I know that, that portfolio is going to shift the mix over time, but just looking at the same-store NOI, it's been declining for a few quarters now. Can you just talk about the leasing environment and what the rental rates are in that? And when you expect that to move the other direction?

Actually, James, the cash NOI and the same-store MOBs was up slightly year-over-year, and as I mentioned in my remarks. And I think when you look at the trends, the leasing activity is actually pretty good. I mean, our portfolio at 93.5% occupied is certainly above industry averages. We're seeing a great retention rate at 84%, and we're starting to see leasing activity pickup, I think, in our portfolio. So, we think the portfolio is performing pretty well. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay. I'm just looking, it looks like it's 12 and 12.3 year-over-year of NOI, but...

Again, same-store NOI cash is up 2.6% kind of year-over-year, and that's what...

On the total portfolio, including our consolidated and unconsolidated, so you're looking at just the consolidated there, and that also is a different pool of non-stabilized assets in one period to the next. So it's not easy to divine from that -- the growth. James Milam - Sandler O'Neill + Partners, L.P., Research Division: I'm glad you said that, because that's obviously why I'm asking the question, so that makes me feel better. Can you guys just – on the line of credit, it sounds like there's about $450 million outstanding now, is that right?

Well, we have about $750 million outstanding -- we have $1.8 billion of available liquidity. We have about $750 million outstanding on the line, and we have the term loan as well that has $550 million of availability. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then the debt, the interest rate on the acquisitions, the debt that you assumed, was that around 6% or so or...

The $37.7 million on the $150 million of acquisition? James Milam - Sandler O'Neill + Partners, L.P., Research Division: Yes.

It's in the 6%. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay, great. And then just the last one on the integration cost and expense G&A savings, of the $15 million that you expect to receive or to earn, how much of that have you guys already cut out of the G&A line?

I mean, we're -- a lot of it, but we'll continue to try to make efforts to bring the benefits out of the NHP transaction.

Our next question comes from the line of Bryan Sekino with Barclays Capital.

Just a follow-up on the development opportunities for the MOBs. With the Lillibridge under your belt for a year, and the $1 billion of the PMB development pipeline, can you kind of tell us, what the hurdles are to ramping that up, given the extra yield that you do get from development?

There really aren't any hurdles internally to ramping that up. It's really the market activity, which has been accelerating, as I mentioned in my opening remarks. I mean, Lillibridge has its development capabilities and PMB has internal development capabilities, which are scalable from their current level. So we feel pretty good that we're going to be well-positioned to field the opportunities as they accelerate.

Okay. So just a function of more of a pull business and seeing the opportunities in the market accelerate is what you'll see -- is what will get you to up your development?

Yes, and we've been seeing an increase in the number of RFPs that are coming across our desk, I mean, request for proposals, that have been coming across our desk. And so if that trend continues, hopefully, we'll see continued growth in our development pipeline.

Our next question comes from the line of Jeff Theiler with Green Street Advisors.

You've talked about the 25% mitigation number for Medicare reimbursements a couple of times now. And I was just curious about how you came up with that number. What kind of confidence you have in that estimate, and whether you think that would be different for the Kindred portfolio versus some of the legacy NHP assets?

Well, it's a very high-level analysis. I think that you can see from the public operators what their comments are. I think many of them have stated they expect 50, 5-0 percent, mitigation. But we're taking, I think, a measured approach in terms of what we think the operators can do in overhead costs and technology improvements, for example. What I think about the difference between the public operators – and I won't speak for anyone of them, they speak for themselves, versus though the smaller local and regional operators is that the negative impacts on the larger national operators of the cuts will be on the higher end because they have therapy businesses. They were really getting the benefit of the full RUG-IV improvement, and so the impact on them will be greater, and they'll have a greater mitigation sort of necessity, if you will. On the local and regional operators, it's a bit of a different story. They did not get as much of a benefit from the Medicare RUG-IV. They don't, by and large, have the therapy businesses. So the reduction in rate to them will be at the lower end, and they'll have less mitigation effectively to do. So it's a little bit of a different story for both of those kinds of portfolios. It's again, depending on your business model, your quality mix, et cetera.

Our next question comes from the line of Jerry Fuller with UBS.

Its Ross Nussbaum here with Derek. First question, do you have any acquisitions in your fourth quarter guidance?

No, no.

Okay. Second question and I'm going to continue to beat the dead horse, could I make a huge suggestion? Could you guys post a schedule to your website that breaks out that non-cash $0.06 adjustment in terms of what was -- what's in there from a gross basis on a gross-dollar basis as well as a per-share basis? Because I think...

Yes, I mean, it's in the cash flow statement, and that's already posted. There's only one wrinkle, so I mean, I can just tell you right now, it's 4 lines and then 900,000 on another line, but we'll -- yes, we'll be happy to point you there or post some things...

Okay, that's where I wanted to go because I've spent a lot of the time on the call sort of trying to go through those numbers, and I'm coming up with $5.5 million of straight line rent, $10 million of FAS 141, $9.5 million of debt amo. So I think that's part of the issue is everybody is sort of struggling to get those numbers from the cash flow statement to understand exactly what they are?

Okay. So just everyone, just so you don't struggle, it's amortization of deferred revenue and lease intangibles, other noncash amortization, stock-based comp, straight lining of rental income net, and then 900,000 of below-market ground lease, which is in the other line, so -- and that line is 1315. So, again, it's intended to be transparent. It's right there on the GAAP statement other than the ground rent and…

And the change in value of financial instruments? Is that one of the adjustments?

It's not because that's not in normalized FFO.

Okay because I think the other struggle that some of us are having here is your definition of normalized FFO is perhaps gone one step beyond what other REITs typically do with the exclusion of some of these items. So I think that's part of a struggle as well. I'm trying to understand how you're defining it versus how we typically define it.

Yes, I think, for example, we've excluded some normalized FFO, the proceeds of the litigation award et cetera, again, because we've had $11 billion in transactions, we've excluded deal costs, et cetera. So I can understand that we need to spend some more time walking everyone through it. But again, the purpose of just putting everything in a bucket there for you was to make it easier and I can see that we need to do -- we need to spend some more time with people just to further clarify. I think the bottom line again is $0.88 versus $0.73 is fantastic. Many companies would have all of that in their normalized FFO. Take it all out, if you like, it's $0.82. It's over 12% growth, and we're extremely happy with our performance.

Our next question comes from the line of Tayo Okusanya with Jefferies. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Couple of quick questions. The same-store numbers for the Atria and Sunrise portfolio, Page 13 of the supplemental, I'm just trying to figure out same-store NOI growth, that actually occurred in each of these portfolios on a year-over-year basis, if you could help me with that?

Right, well, since we didn't own the Atria portfolio last year, obviously, we don't include it in our same-store. And so that's why you can't see it on Page 11, but or on 13. I would say that Ray talked about Atria, as we have from the beginning, being in high single digits year-over-year NOI growth and right in line with our expectations, and then you have Sunrise there. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: If I just look at the Sunrise piece, I'd back out the 2 million from 3Q '10. Am I really looking at the 7.5% type growth?

Well, there's a -- you have to normalize the management fee, which will go in the other direction and it's really more like 5.6%.

Is that helpful? Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Yes. That's helpful. And then, second question, the Page 5 of the disclosures and the lease rollovers, I understand the situation. Just kind of looking at 2013, where you have a decent amount of rollover, we've talked a little bit about the Kindred piece, could you talk a little bit about the hospital piece and what's going on there?

Yes, that's what I referred to when we talked about the 2013 Kindred rents, which in total, is about 9% of our NOI. And of that, about 40% is the hospitals and 60% is the nursing homes, so that's -- okay? Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay, helpful. And then going -- I'm not going to go into the whole normalized FFO. That's definitely an offline conversation. But on the MOB side, just going back to Mr. Milam's question of what is trends there in regards to just mark-to-market? Could you talk a little bit about what you're seeing in regards -- it sounds like many of your other peers, they're starting to see mark-to-market trends slowdown somewhat, and I'm just kind of curious what you're seeing, and if you're kind of seeing anything in any particular regions and kind of across the portfolio as a general trend in regards to lease rates.

Yes, this is Todd. I think, overall, it varies, as you said, market by market. We're seeing in our secondary and tertiary markets, we're able to push rents. Those are markets that anywhere from St. Louis to Indianapolis, Austin, Columbus, Ohio. In the primary markets such as Chicago, Atlanta, we have difficulty in terms of pushing rents. The rest of the market, we find stability. As Ray had mentioned, we are seeing some very strong leasing activity again being driven by, not only the industry consolidation, but the employment of physicians. And we're the recipient, obviously, of the continued trend towards out-patient. So from that standpoint, leasing activity continues to build the momentum up. Keep in mind, the employment rage, we're just starting to see that as a result of a lot of activity in 2010. So we're optimistic about the activity, and we think that, again, translates into increased occupancy, but it is market to market, and I think we're going to continue to see that over time as with varied supply.

Our next question is a follow-up, and it comes from the line of Jerry Doctrow with Stifel, Nicolaus. Jerry L. Doctrow - Stifel, Nicolaus & Co., Inc., Research Division: So the one thing I want to do is to ask as a follow-up was on the Atria properties, you had these ones that were owned by NHP that I think you're going to move into the RIDEA structure, if I remember. And I was just curious about sort of that process and timing, because it may move the numbers a little bit.

Yes, I mean this is another fun one for you, so buckle your seatbelt. So essentially, the way this worked is those assets went on our balance sheet and were owned and were managed and owned by us on our balance sheet and managed by Atria when we acquired Atria. When we merged with NHP, we eliminated a liability of a couple of hundred million dollars. So it was already on our balance sheet as an owned item. Atria was managing it, and everything sort of got collapsed when we then closed NHP. So it's very straightforward now, but there were various steps along the way.

All right, ladies and gentlemen, that will conclude the question-and-answer portion for today's event. I'd now like to turn it back over to Ms. Debra Cafaro for closing remarks.

Okay. Well, I want to -- on behalf of all of my colleagues, I want to thank you again for joining us today. We really appreciate your interest in the company and your support of the company. We'll be happy to spend some more time with you on any of the detailed results, but we're again very pleased with where we are, and we look forward to seeing everyone at NAREIT and take care. Thank you. Have a good weekend.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a wonderful day.