Ventas, Inc. (VTR) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Ventas Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Lori Wittman, Vice President Capital Markets. Please go ahead.

Thank you, Keith. Good morning, and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2012. 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 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, 2011, 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 to you 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 the quantitative reconciliation 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 will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thanks, Lori, and good morning to all of our shareholders and other participants, and welcome to Ventas' First Quarter 2012 Earnings Call. Today, I'll be pleased to share an overview of our outstanding first quarter results. Ray Lewis will discuss our portfolio and investment activities, and Rick Schweinhart will review our financial results in detail. After our remarks, we'll be happy to take your questions. Before we get into earnings, I thought we should reflect on Ventas' transformation. For over a decade, we have been clear about our goal to deliver consistent, superior total shareholder returns. We have also been consistent about how to create value for stakeholders, grow the company, increase earnings from internal and external sources, diversify our portfolio, our asset mix and our tenant operator base, focus on increasing the private pay portion of our business, pay a secure and growing dividend and maintain a strong balance sheet and financial flexibility. Our 10-year performance has validated this approach, with compound annual total shareholder return exceeding 22% during that period. And just a few data points demonstrate the incredible movement we have made on our objectives in the last year. A year ago, we hadn't yet acquired Atria or NHP. Our enterprise value slightly exceeded $11 billion, and we owned 602 assets. Now we own over 1,400 diversified assets and have an enterprise value of $24 billion. Then our largest tenant accounted for 36% of our NOI but now represents only 17%. A year ago, our private pay revenues represented 73% of our business, and now they have grown dramatically to 80%. Even more importantly, we have expanded our base of tenant operators by 4x to over 100 existing relationships, adding high-quality assets and operating partners, such as Atria Senior Living and West Coast MOB developer Pacific Medical, to our portfolio. As we have grown, we have also actively managed risk. First, our diversification by asset type, operator and business model positions us to perform in a variety of economic cycles, reimbursement regimes and capital markets environments and increases our reliability and stability regardless of any single event, tenant or trend. Second, our increased size and scale have allowed us to enhance our liquidity, balance sheet and our cost of capital. Since last year, our unsecured line has doubled in size and pricing has improved by over 170 basis points. Our recent bond issuances continue our trend of improving our cost to capital. Twice already this year, we took advantage of our positive credit momentum and strengthened the bond market to raise a total of $1.2 billion at an average interest rate just above 4% for 8.5 years. With our new Head of Capital Markets, Lori Wittman, leading our efforts, I'm confident we can accelerate progress on this front. With all the change Ventas has experienced, a few things have remained constant. Those include our commitment to stakeholders, to rigorous execution and to acting with integrity. We also continue to enjoy the benefits of demographic demand from the growing over-85 and baby boomer populations, as well as the opportunities embedded in a large fragmented $1 trillion health care real estate sector. And we have an incredible group of professionals at Ventas, both long tenured and new additions, who continue to work tirelessly as a team for our constituents. They go all out every day to keep performance on track, identify and solve problems quickly, integrate our acquisitions, maximize the value of our assets, optimize our balance sheet, build and capitalize on our acquisition pipeline and capture the full potential of our expanded platform. Our results show it. This quarter, our normalized FFO grew 21% per share over last year, to $0.91. Atria and Sunrise were big contributors, as were improved interest rates. This quarter, our dividend increased 8%, while at the same time, our payout ratio in 2012 improved considerably. Our debt-to-enterprise value of 28% at quarter end is industry leading. We intend to use this momentum to continue delivering excellent results. Ventas' normalized FFO guidance for the year, which included the Cogdell acquisition, represents almost 9% per share growth at the midpoint. The excellent acquisition of 72 high-quality MOBs from Cogdell Spencer in the second quarter should produce annualized accretion of between $0.03 and $0.05 a share or call it about $0.03 at the midpoint for the balance at 2012. This expected accretion was already included in our full year guidance. We welcome our new Cogdell Spencer employees to Ventas and thank them and our Ventas Lillibridge colleagues for their work in accelerating the integration of our companies. HR, IT, accounting and asset management have been exceptional in making the transition smooth. Finally, earlier this month we were pleased to announce the acquisition of 16 Sunrise communities. Given the strong results in our existing Sunrise portfolio and the confidence we have in Sunrise's operating team, we are looking forward to blending these communities into our portfolio. Now I'll turn the call over to Ray.

Thanks, Debbie. During the first quarter of 2012, our portfolio turned in another solid performance. Our same-store portfolio of 535 assets provided 3.5% cash flow growth over the first quarter of 2011 and over 5% if you normalize for the increase in the Sunrise management fee, which I will discuss in a moment. So today, I'd like to share with you how our strategic growth and diversification strategy continues to deliver results, whether it is the stable cash flows of our triple-net lease portfolio and MOBs or our higher growth private pay seniors housing operating assets. First, I'll briefly cover the performance of our triple-net lease portfolio, which accounts for over 60% of Ventas' annualized NOI and is diversified across nearly 900 seniors housing, skilled nursing and hospital assets. This is the bedrock of Ventas' portfolio and provides us with stable and growing cash flows through the annual rent escalations in our long-term master lease contracts, which feature credit and structural support. And the performance shows. Same-store cash NOI growth for the first quarter of 2012 compared to the first quarter of 2011 in our 384 same-store triple-net properties was 2.6%, consistent with our projections at the beginning of the year of greater than 2.5%. Cash flow coverage for the fourth quarter of 2011 in our same-store triple-net lease portfolio was a strong 1.7x and our Kindred coverages remained at 2.1x. Next, I'd like to discuss our seniors housing operating portfolio, which consists of 198 high-quality independent and assisted living communities managed by Sunrise and Atria, and accounts for 26% of our NOI. This portfolio had an outstanding first quarter, with positive sequential increases in occupancy, NOI and margin. These best-in-class properties are hitting on all cylinders and delivering above-average NOI growth. NOI before-management fees for the total portfolio increased 3.9% sequentially for the first quarter to $105.9 million compared to the fourth quarter of 2011. And NOI after-management fees was $90.4 million, up about 1% sequentially. As a reminder, our Sunrise management fee reverted to 6% of revenues for the first quarter of 2012, up from the 3.75% reduced rate that we had negotiated for 2011. Same-store stabilized unit occupancy continued its upward trend by increasing 20 basis points sequentially to 89.1%. This is particularly notable since seniors housing occupancy typically declines during the first quarter. Our Sunrise portfolio of 79 high-end, mansion-style seniors housing communities generated NOI of $38.8 million in the first quarter of 2012, an increase of 6.8% over the prior year and 14.2% pre-management fee. Resident occupancy increased 190 basis points year-over-year and 20 basis points sequentially and finished the first quarter at 91.6%, another record for the Sunrise portfolio. Operating performance in our Atria-managed portfolio of 119 private-pay seniors housing communities was similarly strong. Total NOI was $51.7 million for the first quarter, a sequential increase of 6.6% over the fourth quarter of 2011, driven primarily by annual rate increases which took effect in January, lower expenses and a full quarter of results from a property acquired in the fourth quarter. Ventas and Atria continue to execute on our redevelopment strategy, as 2 new projects were approved and will begin construction in the second quarter, and one recently opened property was acquired and added to the lease-up portfolio. Performance in the 8 properties in our same-store lease-up portfolio continues to be strong, as occupancy increased 180 basis points from the fourth quarter of last year. So the first quarter showed stronger occupancy than the fourth, the first time this has occurred, and we are pleased with the results during the first quarter. However, there are certain moderating factors that we are mindful of. For instance, there's typically a seasonal decline in occupancy during the second quarter. In addition, certain expenses were unusually low during the first quarter of this year, and we're expecting those to revert to more normal levels for the balance of the year. But make no mistake. Our seniors housing portfolio is performing strongly, and our company is significantly benefiting from these best-in-class assets in major markets with pricing power and excellent management teams who are driving performance. Before I turn to acquisitions, I'd like to discuss the Ventas MOB portfolio. The big news in the first quarter was the closing of the Cogdell Spencer acquisition. This $760 million purchase of 72 buildings, largely in the Carolinas, added over 4.2 million square feet of high-quality majority on-campus MOBs and another 2 million square feet of third-party property management. With the closing of Cogdell, we are now the largest operator of MOBs in the country with over 21 million square feet owned and managed, and medical office buildings now account for approximately 15% of our annualized NOI. Through the first quarter of 2012, the performance of the Cogdell portfolio is right in line with our expectations. And at the end of the first quarter, the stabilized consolidated Cogdell portfolio was over 92% occupied. Moreover, the merger integration is ahead of schedule and nearly complete. Shifting quickly to the Ventas portfolio, cash NOI in the 177 MOBs in our same-store portfolio increased 2.3% sequentially from the fourth quarter of 2011 to the first quarter of 2012, driven primarily by increases in rate and expense controls, offset by a slight decrease in occupancy. Total leasing activity started to accelerate in the first quarter of 2012, with a backlog at the end of the quarter of approximately 219,000 square feet of leasing activity versus 194,000 square feet at the end of the fourth quarter of 2011, an increase of 12%. So our medical office business continues to provide steady performance, and with the addition of Cogdell, a further diversification of our national platform and relationships with leading health care systems across the country that position us to continue to consolidate and grow in this attractive space. Finally, before I turn the call over to Rich Schweinhart, I'd like to spend a moment on the investment environment. Our total acquisition volume already exceeds $1.1 billion this year, including Cogdell and our recently announced acquisition of 16 private-pay purpose-built communities managed the Sunrise. Sunrise transaction is a perfect illustration of our investment strategy for seniors housing operating assets: the best assets in the best market with the best operator. We believe that this high-quality, newly constructed assisted living and Alzheimer's assets can provide us superior risk-adjusted return over time. The purchase price was just under a 7% cap rate on 2012 NOI. And if we can achieve a 5% annual growth rate in NOI, a reasonable assumption for assets of this quality with a good operator like Sunrise, we should be able to achieve an average annual cash flow yield on our investment after CapEx of 8% over 10 years. So this is a very attractive return for this quality of asset in today's investment environment. Looking at the external environment, the acquisitions pipeline remains strong, with significant activity in both the seniors housing and the MOB spaces, and we're seeing a consistent proprietary deal flow from our existing tenant relationships. We are off to a strong start on the acquisitions front and expect to be able to continue to find more attractive investment opportunities as the year progresses. With that, I'll turn the call over to Rick Schweinhart, who will discuss our financial results. Rick?

Thank you, Ray. The following significant events occurred in the first quarter. In February, we issued $600 million of 4.25% senior notes. The proceeds were used to pay down our revolver and, in effect, pre-fund our acquisition of Cogdell Spencer. In February, we sold 9 senior housing assets for approximately $120 million, producing a gain of $55 million, $15 million of which was deferred. In the quarter, we purchased a senior housing community and a medical office building for $56 million, assuming debt of $17 million. In February, we repaid over $75 million of secured debt with an interest rate of approximately LIBOR plus 250 due in 2012 and 2013 and borrowed $60 million of secured debt at L plus 150 with a 2016 maturity. In the quarter, we called our 6.5% senior notes due 2016, incurring a loss on early extinguishment of $29.7 million, which included a cash penalty of $6.5 million and a noncash discount write-off of the difference. Our revolver balance at quarter end was $73 million. After quarter end on April 2, we acquired Cogdell Spencer for about $760 million. This consisted of approximately $250 million for the equity, repaying preferred stock and debt of $330 million and assuming the remaining secured debt. In April, we issued $600 million of 4% senior notes. This effectively pre-funded the Sunrise acquisition, plus the repayment of our 6.75% senior notes due 2017, which will occur next month. Currently, we have cash of $25 million, $70 million outstanding on the revolver and over $1.9 billion of capacity available. Our total current debt outstanding after the Cogdell acquisition is approximately $7.2 billion, and our pro forma net debt to EBITDA is about 5.1x. Now let me focus on first quarter results. First quarter 2012 normalized FFO was $0.91 per diluted share, an increase of 21% compared to the first quarter of 2011 per share results of $0.75. Normalized FFO increased 118% to $263 million compared to last year's first quarter of $121 million. We have detailed the noncash items included in normalized FFO on Page 19 of the supplemental. Normalized FFO in the first quarter excludes the net expense totaling $9 million from the loss on extinguishment of debt, merger-related expenses and deal and integration costs, noncash income tax expense, mark-to-market adjustment for derivatives and amortization of other intangibles, partially offset by the gain on the sale of real estate assets. First quarter normalized FFO increased from last year's first quarter due to NOI increases in all 3 of our segments, triple-net, senior housing operating and medical office, as well as income from loans and investments. Triple-net lease revenues grew to $209.5 million from $116.6 million last year, primarily due to the acquisition of Nationwide Health Properties and also due to contractual escalations. Senior housing operating NOI increased $54 million, principally due to the Atria acquisition. First quarter medical office building NOI grew to $46.5 million from $18.4 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 $8 million this year from $6 million last year due to the NHP portfolio. On the expense side, consolidated interest expense increased to $71 million this quarter from $41.7 million last year, reflecting the assumed debt due to the Atria and NHP acquisitions, as well as all the debt activity in the last 4 quarters. Our average cash interest rate improved to 4.9% from 5.3% last year. Looking at sequential results, normalized FFO increased $4.5 million to this quarter's $269 million, primarily due to first quarter increases in all 3 of our segments, partially offset by a reduction in interest income on loans receivable due to fourth and first quarter payoffs. Interest expense increased $600,000 in the first quarter compared to the fourth quarter, principally due to the issuance of $600 million of 4.25% senior notes early in the quarter, offset by the repayment of $200 million of 6.5% senior notes late in the quarter. We continue to focus on maintaining a strong balance sheet and increasing cash flows from operations. Net debt provided by operating activities from the statement of cash flow increased 87% to $245 million for the first quarter from $131 million last year. At March 31, our credit stats were outstanding with net debt to pro forma EBITDA at 4.7x, our fixed charge coverage ratio in excess of 4x and debt-to-enterprise value of 28%. Our current debt ratings are S&P at BBB stable, Moody's at Baa2 stable and Fitch at BBB+ stable. We continue to operate the business in a way that should justify continued movement up the credit curve. Weighted average shares outstanding in the quarter were 291 million shares, flat compared to the fourth quarter of last year and up 80% compared to the first quarter of last year. We are confirming our 2012 normalized FFO per diluted share guidance at $3.63 to $3.69. Guidance does not include the impact of additional capital transactions or any acquisitions other than Cogdell.

Thanks, Rick. Before we go to Q&A, a couple of things. One is a clarification on one thing that Rick said. It was net cash provided by operating activities from the statement of cash flows increased 87% to $245 million in the first quarter from $131 million last year. And then the second thing is I do want to add a comment on our 2013 Kindred renewal, as I know many of you have some questions about that. So as expected, Kindred has now renewed officially 3 renewal groups of the 2013 renewal assets for a total of 25 assets and $46 million of the annual current rent. So we expect to re-lease the other 64 assets comprising $77 million of annual rent, or about 5% of our NOI. We have gotten over 100 unsolicited inbound calls from companies expressing interest in these properties. And we have developed a comprehensive plan for re-leasing, and we expect to launch that process in the second quarter. So just a reminder, these 64 licensed health care assets are profitable. We believe that current rent on them is about market. And we're very confident that the assets will be attractive to a wide variety of quality health care providers and look forward to executing on the leasing plan and bringing you all up to date in the coming month. So, operator, we'll be happy to open the floor to our investors' and analysts' questions.

[Operator Instructions] Our first question is from the line of Michael Bilerman with Citi.

It's Quentin here with Michael. Just sticking with the Kindred assets, firstly, once you've sort of moved to re-leasing those assets and given that your private pay portion of the portfolio is moving above 80%, I'm just wondering whether you'd sort of investigate selling out of that side of the business as you sort of focus more on seniors housing and medical office.

Quentin, we're very focused on maximizing the value of these assets. And while we would consider potentially selected sales, our real focus is on re-leasing the assets to qualified health care providers. And that's the path that we're going down.

Is there some point in the future once you sort of get them re-leased that you would investigate -- that you would think about selling them? Or are you comfortable having the nursing exposure? And are you comfortable with the reimbursement risk?

Well, what we believe is it's all about balance and diversification, and we think that skilled nursing assets have an important place in the health care delivery system. And so we believe in the asset class. I will tell you that now that we have over 1,400 assets, I think we will be more active capital recyclers and more rigorous in our kind of disposition, strategy and methodology. But overall, I think that it's all about balance in the portfolio. And skilled nursing assets are an important part of this health care delivery system to seniors, and so we're not contemplating sort of a wholesale exit from the business. And just to repeat, I mean, we do intend to go down the path of re-leasing these 64 assets.

Your next question is from the line of Jana Galan with Bank of America.

I guess also following up on the Kindred leases, how does -- given kind of Kindred's change in strategy, how are you thinking about that next bundle of leases that you have expiring in 2014?

Actually, those go through 2015, just to be clear. And look, I think that we'll be happy to address that once we re-lease the 64, and happy to do that. I think right now, we're focused on having an excellent execution around our re-leasing projects. And these are good assets, and they're profitable. And we look forward to a good outcome.

And then maybe just as you're reviewing the deal pipeline out there, would the recent CMS proposals make you feel more comfortable about the public pay asset exposure, or if you kind of like where you are now with the 80% private pay?

Yes. Well, certainly the focus of our investment activities has been on the private pay side, and that's been, as Ray pointed out, really great for our company. I think you're discussing, really, the CMS preliminary rule that came out regarding long-term acute care hospitals earlier this week, and that was a rule that had an uptick in spending for 2013 of about 1.9%. And that proposed rule's subject to a 60-day comment period and was at the more positive end of our expectations for the 2013 Medicare reimbursement for LTACs. And we were particularly pleased that CMS really endorsed the LTAC model in its proposed rule. And the rule may stay as it is or even get a little bit better in its final form. But it, again, it certainly is a positive development for our LTACs in general and for the re-leasing project.

Your next question is from the line of Bryan Sekino with Barclays.

Just wanted to -- a quick question on the guidance. You said it doesn't include the Sunrise acquisition, is that right, but it includes the pre-funding for it?

Well, yes. Our guidance basically for the full year does not include the Sunrise 16.

Okay, okay. And then I think -- did you say that before management fees, the 79 Sunrise facilities were up 14.2% on NOI? Is that correct?

Yes, that's correct.

So if I think about the revenue being up 5%, really, where are you getting the leverage on the cost growth in the quarter?

Well, there's a couple of things there. We had significant occupancy gains and also rate gains, as you point out. And then with respect to the expenses, we did have some seasonally lower expenses in the portfolio, as I mentioned in my comments. In particular, utilities were about 12% less year-over-year given the moderate winter that we had. And then repairs and maintenance were similarly about 9% less year-over-year. And those 2 things, I don't expect to continue for the balance of the year, Bryan. But those were seasonably unusually low.

Got it. Okay. And then just a quick question on the 16 facilities in terms of -- maybe if you can provide us with any perspective. Do you expect to kind of, once they're under Ventas' banner, to kind of get more revenue growth? Or are there some cost initiatives that you can implement at these new facilities?

Bryan, you've got to come over to the private pay, high-end senior living nomenclature here. Those are communities.

Communities. I'm sorry.

Sorry, Ray. Go ahead.

Certainly, Sunrise has been performing very well in our portfolio. And these assets have some additional upside. A couple of them were more recently opened or are still undergoing their lease-ups. So there's some additional occupancy room to run in these portfolios. I think they compare very favorably on the benchmarking against our existing portfolio. So we do think there is some good growth embedded in these assets, but it's primarily by virtue of the fact that there's still a little headroom on the occupancy.

Your next question is from the line of James Milam with Sandler O'Neill.

I just wanted to dig in, Ray, a little bit more on the senior housing operating. Can you just quantify maybe in terms of margin what those seasonal expenses, what impact they had? It just looks like there needs to be a bigger -- a pretty big expense increase going forward for you guys to come in to your previous guidance range on NOI for that portfolio.

I mean, before management fee, yes, the margins were up about 260 basis points year-over-year in the Sunrise portfolio. So I mean, that gives you sort of the order of magnitude of some of the expense controls. Now there's obviously a little revenue in there, because you're getting some leverage off of your labor, some margin off of your labor. But it was a moderate quarter expense-wise.

But do you think on the overall portfolio, what you own now, is it kind of 31.5%, what you expect to see for the margin for the rest of the year? Or do you think that kind of gets squeezed a little bit?

I mean, I think it's probably in that 32% range, sort of where it's run historically. But we'll see.

And that includes the full management fee?

Well, the margin before the management fee, yes, is around the 32% range. It might run a little lower after management fee.

Okay. Perfect. And then my second question, or I guess, second topic of questioning, just the regional deal volume at about $56 million, that seems a little light. Is that just -- is there anything driving that? Or do you expect that to -- I would think you guys would sort of assume $150 million to $200 million a quarter. Obviously, deals are lumpy, but is that still what we should think about as kind of run rate for those regional teams?

Well, my Chief Investment Officer is reminding me that we did $1.1 billion of other stuff at the same time, Bryan? So, look, we're seeing a good deal flow from our regional originations network and from our existing relationships. The $56 million that we did in the first quarter is really just the way that the timing has come in. We're going to continue to work on a lot of stuff. The pipeline is active. As I said in my comments, I mean, I still think we can do some good business this year. So -- but it's a lumpy. And...

And unpredictable.

And unpredictable.

Yes. One, which is why we don't predict it. But one of the things that I'm really loving is that, and we talked about this as we were getting ready for this call, is we have sort of this great group of people now in the investments who are at Lillibridge, who are from NHP, who are from Ventas, and new and old. And that is giving us a lot of channels for growth. And we intend to take advantage of that appropriately. And I think, as Ray said, we're seeing some good opportunities from that. But that blending of those channels is something that I think is a real positive of where Ventas stands right now.

And your next question is from the line of Jeff Theiler with Green Street Advisors.

So just a quick question on development and your development appetite. You've got the redevelopments with Atria and the PMB developments in the MOB field. You started another development with this whole senior communities. Do you anticipate a pickup in senior housing development? Or how should we be thinking about your development going forward?

Yes. Jeff, I think what we're seeing right now is that there is a modest amount of senior housing development going on. Construction starts are still generally less than 1% of existing stock. There are very limited construction financing options for people who want to develop right now. So we do get the opportunity from time to time to look at some pretty attractive development opportunities. I would put these Kelsh [ph] investments in that category. So we are doing a handful of these things, but I don't think it will become a significant part of our investment volume.

Right. I think it would probably be anywhere between $50 million to $100 million of capital.

At any one point in time.

Yes.

Okay. And so you're not seeing any signs, with these strong senior housing numbers that you put up, you're not seeing any signs that development is picking up across the industry at this point, is that fair to say?

No. I mean, I think, like I said, we're seeing a handful of things that come across the desk, some attractive opportunities. The data still indicates that development activity is very modest.

It's so hard to get financing.

It's hard to get financing. Many of the large companies disbanded their development departments, and so there's really not a lot of capacity for development right now. Now, we watch that very closely, and as the strong fundamentals of our sector continue to play out, perhaps there will be more folks that look to build new buildings to take advantage of that. But we're not seeing that right now.

Your next question is from the line of Ross Nussbaum with UBS.

Guys, Debbie, on the Kindred bundles, I think you had used, I hope I heard you correctly, that you believe the rents are "about at market"?

Right, yes.

How do you quantitatively define the word "about"?

Okay. Let's get metaphysical. Look, I think they're at market. I think we said in our original release on this that people should run sensitivities, but if you were up or down 10%, it's about $0.03 of earnings. That is not defining "about," but it's just a mathematical sort of quantification of the magnitude of an outcome. But we – the assets are profitable, and we think the rents are at market, and there's a lot of cash flow here that we have to work with to go re-lease the assets to operators who are in those markets.

What do you think the annual CapEx spend is on those 64 assets?

Well, the good news is that Kindred has spent -- kept these assets very much in good condition and has upgraded many of them. So they're very good assets. And in terms of different operators spend different amounts on CapEx, really, so a nursing home might be $500 a bed, an LTAC might be $1,000 to $2,500 a bed, something like that.

If we were using a number somewhere between $20 million and $25 million overall, is that anywhere near right?

No. It's not -- it's much lower.

Okay. Next topic. Life science, it's the one, I'll call it, big area that you're not necessarily in, in a major way. Where are you right now in terms of thinking about diversifying in that direction?

So, Ross, this is a question we get fairly regularly, and our answer remains the same, which is, we like this space, we think it belongs in the health care REIT portfolio. It's a specialized segment that requires specialized expertise. So it's not something we would dabble in. But if and when we found the right opportunity to either partner with or acquire an experienced operator to get into the space, that would be interesting to us. But when that might happen or how that might come about is hard to predict or pin down.

Okay. Final question for me is now that you've had some time to look back and watch Atria as a manager and Sunrise as a manager, how would you characterize the most notable differences behind how those 2 operators approach the business? And are you actually legally allowed to get them in a room and share best practices given that you are the technical owner of the properties?

So with respect to differences in operating models, the Sunrise is a very high-acuity, primarily assisted living and Alzheimer's model that's focused on the most need-driven population. And they really, really focus on providing that high quality of care and enabling the resident to basically live out the rest of their lives to the extent medically possible in their buildings. And that's sort of always been their business model, and that's really what they distinguish themselves and are best at in the markets that they serve. The Atria model is a little bit different. It's an independent and assisted-living model, some life guidance or Alzheimer's care, but it's a lower-acuity model. It's much more marketing driven. It's much more lifestyle driven. Bigger apartments. It's serving a bit of a different population. And I think they do an excellent job at serving their target market as well. So, in some respects, adjacent business models with some overlap but not purely overlapping.

So they're obviously both high-end major markets, great physical plan. And that's what they have in common, and that's why we have them in the -- under the management contracts, because they have higher growth potential. I think, again, one benefit of our expanded portfolio really is that we have a ton of data on the MOB business and on the senior living business across the country in various markets. And where we want to go is really the way the apartment guys have gone, which is to really use this data and -- for the benefit of our company and figure out, before other people do, where trends are going and things like that. And that's not really limited just to -- and that will help us in our acquisition efforts and our asset-management efforts. So I think that's something that really is a tremendous benefit to the platform that we've built.

Your next question is from the line of Daniel Bernstein with Stifel, Nicolaus.

The first question I had, not really directly related to Kindred but maybe on a broader-basis potential for the industry. Kindred gave their keys back in maybe unique situation. Do you think there's a potential for the industry, other operators in the industry to look at the tough reimbursement cycle and go, "We're going to go ahead and give up some of our leased assets, whether it's the LTACs or SNFs"? Do you think there are any broad implications for the industry itself going forward?

I mean, again, I think Kindred is -- Kindred has articulated that these are good assets. They just -- Kindred is really tacking off onto a slightly different strategy. But the fact that we've had 100 inbound, unsolicited inquiries about this portfolio says to me that operators out there are hungry to grow their EBITDAR and their cash flows, and we have good assets in EBITDAR and cash flows to transact with them. And so that's really the takeaway that I have, which is a very positive one.

And do you see consolidation as a greater likelihood in the skilled nursing space as well?

I mean, I do think and have said across all, really, health care and senior housing that we do expect to see continued consolidation over time. And we hope to have opportunities to participate in that as the capital provider, which is obviously right down the stairway of what we do.

And then also, I want to turn to the transaction side of the business. And there's nothing wrong with doing smaller transactions, but everybody seems to want the large cap REITs to do these big mega transactions.

We like making money. Even if it's -- we like good risk-adjusted returns, even if it's on a single building.

I agree. I agree. But with some of the lack of construction that we're seeing in the MOBs and seniors housing, do you think there is -- is that going to impede the REIT's ability to make some larger acquisitions in the next couple of years and maybe look more towards the assets that are already at the public REIT -- other public REITs or public operators? Because a lot of the stock out there is from the '90s and built in '05, '08, even some of the stuff like you just bought with Sunrise. That's all I'm alluding to.

Well, yes. I mean, a couple of things in that question. I mean, one is, there's -- it's a trillion-dollar industry, health care real estate is, of which the REITs own maybe 8% or so. So I mean, it's still a highly fragmented industry. There's still plenty of opportunities to acquire things. There are still plenty of good assets out there to be acquired. And so that is pretty interesting and pretty attractive to us. I think one of the opportunities that's embedded in the question as well, Dan, is the opportunity to provide dollars like we have in our Atria portfolio to redevelop high-quality assets in high-quality locations to either add additional programming or upgrade common areas to drive rates, those sorts of things. And we're seeing that in our Atria portfolio. I know a number of other operators are doing that right now, expanding existing buildings to add incremental units. Those are very safe investments that can drive pretty attractive returns. And that's something that we think, with 1,400 properties in our portfolio, is a huge, huge opportunity for us that we're working on.

And I saw one of your triple-net leased operators you're redeveloping. Are you seeing more of your triple-net lease operators coming back to you, whether it's the SNF side or the senior housing side coming back, looking for additional capital to make those redevelopments?

Absolutely. And likewise, we're poring through our portfolio and saying who should we be calling to say, "Are you interested in redeveloping?" So the communications are going both ways.

And I just wanted to go back to, Debbie, your comment right at the beginning of the call, where you're going to go ahead and continue to make progress, I guess, on the balance sheet. Can you define what that progress would be? I mean, you already have a fairly good balance sheet.

Yes. We're going to -- yes. We have a great balance sheet and what I mean by that is we're going to continue to drive down cost of debt. We're going to continue to try to obviously enhance liquidity, stagger debt maturities, push out average weighted maturity levels and cap different markets opportunistically. And that will help us continue to grow and make money for shareholders. But the other thing, I think, is that given our credit statistics and our performance and the performance of our assets, I think we should continue to move up the credit curve, and we'll continue working on that as well.

Have you talked to the credit agencies about specific criteria to move that [indiscernible]?

I think the restraining order is still valid. Yes, we talk to them all the time. And the progress that we've made on the integrations is obviously important to them. And the -- our reported results, obviously, and our credit stats and our diversification are all tremendous positive.

Your next question is from the line of Tayo Okusanya with Jefferies.

A couple of quick questions. Senior housing on the operating side, could you talk a little bit about what you're seeing early April trends?

Yes. I mean, I think the occupancies are fairly flat. They're holding in there. So that's encouraging.

And what about rents?

Well, the annual increases take effect typically in January. So in a month, you're not going to see a big move in rents other than January. So again, I would say flat.

Okay. So kind of going back to James' question a few minutes back, it just seems like when I kind of put all my -- all those numbers into my senior housing gumbo, that you guys would be in the pot ahead of your estimated NOI from your senior housing operating platform.

And the way that I look at it, Tayo, is we're a quarter into this thing. Things ebb and flow in this business, and we hope that we continue to be doing very well in this portfolio, but we're a quarter into it.

Okay. That's helpful. And then just a quick follow-up question -- just another question. From a regulatory perspective, if the Supreme Court really does end up overturning the Health Care Reform Act, every single facet of it just kind of gets thrown out. What ultimately do you think happens to operators? Which kind of property type do you think has -- gets impacted the most by that? And what kind of response do you think the health care industry would have to that?

Okay. So, look, it depends, first of all, obviously, what the Supreme Court does and then, of course, what legislative reaction there is to what the Supreme Court does. The impacts of Health Care Reform really have the most to do, I would say, with managed-care and hospitals, because the principal aspects having to do with the individual mandates so that there is a bigger pool of people within the health care insurance sector and then the requirement that the insurers actually ensure pre-existing conditions, for example. Those obviously have a big impact on managed care. And on the hospital side, obviously the hospitals gave up some market basket increases over 10 years to pay for the fact that there's going to be greater volume and less bad debt because everyone will be covered. And so those sectors really have the most -- the Health Care Reform Bill, up or down, has the most impact on those 2 sectors. SNF paid for some of the reforms that really aren't getting as many of the benefits as hospitals are because they don't have an emergency room. So they might be net winners. But the real answer is it's highly speculative. It depends what the Supreme Court does. I would guess that if the bill is struck down in whole or in part, there will be a legislative reaction, which I cannot predict. And so it's hard to speculate, really, on the ultimate outcome or impact.

But all these hits that the SNFs and the hospitals have taken near term to pay for this stuff, do you think CMS gives it all back if it all gets struck down?

Well, some of the -- again, some of the pay-fors are very related to the bill, but I don't know the answer to that question.

All right. Okay. That's helpful. And then just one quick administrative question. The 6.75% notes that were tendered, do you have a sense of when that's going to close?

It'll close in the second quarter.

Second quarter. Earlier, later, middle?

Middle to later.

Your next question is from the line Todd Stender with Wells Fargo.

Because -- and you just indicated this, Debbie, because it's only speculation at this point with the Health Care Reform outcome, is it still kind of a wet blanket over transaction activity? And I guess I'm being specific with medical office buildings. Are you seeing anything which actually slowed down transactions and maybe impacted the cap rates?

No, Todd. We really haven't. I think our pipeline is fairly brisk in the medical office building space. I think the – and, in fact, leasing activity is picking up a little bit. I think people are sort of adjusting to the new normal of having a little bit more uncertainty in the world and trying to proceed with their businesses. So I think perhaps maybe a year ago it was more of a wet blanket than it is now.

How about length of stay? Are the doctors willing to go out a little bit longer on lease maturities? Or are they tightening it in more of a 2-to-3-year range versus the old 5-to-7?

I think the trend generally has been the shorter leases, probably more 5 years than 7 or 10 years.

Okay. And just on your occupancy, just on the stabilized piece, it's down in the 92% range. What should we think about for more of a stabilized number going forward? And is this really a function of you guys maintaining and pushing rental rates?

And you're referring to the MOBs, correct?

Yes.

Yes. I mean, I think the stabilized rate is probably in that 90% to 91% range. That's really what we're sort of looking at. We have had some good success with rental rates, as you point out. We did have some scheduled move-outs in the first quarter that brought our occupancy down slightly. And so we expect to recover some of that as the year plays out.

Okay. And just finally, how does the Cogdell Spencer portfolio, how does that compare to your existing portfolio, particularly with the rental rate per square foot?

Todd, Todd Lillibridge. It's very consistent, first and foremost. As Ray pointed out, we've got a good group of 72 on-campus, for the most part, assets, rental rates in line, well occupied in the 92% level. And for us, it's a good strategic fit in terms of the Carolinas. And so it brings our portfolio that is in the MOBs into kind of a well-diversified balance across the country. But the rental rates are very consistent with the balance of the portfolio.

Your next question is from the line of Karin Ford with KeyBanc Capital Markets.

Just quickly, where do you think skilled nursing cap rates are today? Or have cap rates changed in your view in any of the asset classes that you guys are looking at?

Well, I would say that cap rates for skilled nursing probably hit their -- I don't if you want to call it the peak or nadir, but the lowest cap rate and the highest valuation maybe last year before the 11% reimbursement changes. And so they're probably, depending on quality and operator structure and so on, they're probably gapped out from that point. But it really all depends on some qualitative factors.

And do you have just an order of magnitude on how much you think they gapped during that time?

Again, it depends on qualitative factors. So it's kind of hard to peg a specific number.

Okay. And during that short period of time where the 10-year -- the yield on the 10-year ran up, did you see any change in pricing? And what's sort of bringing sellers to the table these days?

Yes. One thing that's interesting is that, and I've done a lot of work on this, is that as -- the capital markets, as you know, are 12 to 24 months ahead of actual property level kinds of response in many cases. And so what we've seen in the past with pricing is that even as interest rates go up, sometimes you have this lagging effect where cap rates continue to fall and even invert for a period of time. So I can tell you, as rates were rising up there for a while and now they've fallen back again, we did not see really any immediate change in property level pricing.

Helpful. And then just last question. I noticed there wasn't a mention of lease termination fees in the press release. Were there any lease termination income in the income statement this quarter?

Yes. And this is very consistent with the past. In transactions like the ones we've done with Kindred and Brookdale, there is commonly a lease termination fee in connection with a termination of the lease. And so that's in the first quarter.

And how much was it? And which line is it in?

Yes. It's in discontinued operations, and it's $1 million and change.

Your next question is from the line of Michael Bilerman with Citi.

Yes. Debbie, I just wanted to follow up a little bit on the bond activity that you did and just I guess how you're thinking about things. And I know you try to be balanced in everything you do, but it just strikes me in terms of issuing the debt, which you got very favorable rates down in the 4s and then tendering for the '16 and '17 maturities using about $460 million of proceeds, which includes your $40 million of make-whole. You're saving about, let's call it, $10 million a year, right, by doing that, but you pay $40 million, right? So you're effectively just bringing all the...

No, no, no. That's the gain.

No, no. The $40 million is the gain on the sale.

So how much was your make-whole on the redemptions?

You're lumping together the $29.7 million and the $10 million?

Yes.

There's a noncash portion. So the penalty on the 6.5% was only 6-point-something. So the rest was just a write off of the discount.

They're both NPV positive, and they extend maturities.

Yes.

And so how much -- so your total make-whole on both of them was like $10 million, like one year of savings?

Yes.

Yes. The total, yes, was under $10 million.

Okay. So it's a lot less.

Yes.

A lot more attractive than a one-for-one.

Yes. That's a good question, but yes, it's...

And are you thinking about it just solely from that point? You're extending duration at a lower rate and effectively in your mindset also, your view is that the rates are going to be a lot higher in '16, '17, so you'd rather refinance those maturities today?

We -- look, I've given up prognosticating about interest rates, and some of the -- and we've talked about this. Some of the smartest people I know said 5 years ago rates could never go lower, and they've progressively gone lower and lower. So again, we're just trying to stagger maturity schedule, make sure we're pre-funding ourselves so that we don't get caught in a market disruption if Europe or anything else happens, intelligently redeploying the proceeds, hopefully intelligently, and continuing to lengthen, on average, our maturity schedule. But don't go whole hog one way or another. Just continue to average in, hopefully at progressively lower rates if we can and so that any 1 year doesn't cause a material change one way or another in our income statement or cash flows.

And is there anything that, as you look at the maturity schedule today, that we should be mindful of trying to pull forward even further? I mean, the bottom -- what you're doing is obviously accretive on an FFO basis by $0.03 or $0.04 a year just by doing what you did.

I mean, we're happy to report that in May we will have our last high-yield bond gone away. So that's really good. And then we have mortgage debt that is coming due going forward. And, hopefully, we'll refinance that, both on an unsecured basis, at least in part, and at lower rates.

Is there anything that you can pre-pay it today? I mean, as you think about your '13 maturities, you got 500 of...

Probably later in the year. So it wouldn't have a big impact, presumably, on 2012 earnings.

Right. But as you think -- as you think towards 2013 where you've got $1 billion debt coming due in the 5.5% blended split between unsecured and secured, the likelihood is that's going to have a materially lower rate than 5.5%, if you think about it.

It will -- remember, yes, I mean, it will on a cash basis. Again, it may not to the extent that it was assumed debt that was -- that – where the income statement books interest expense potentially at a below cash level. So it would be cash positive, and depending on what we were pre-paying, it could be income statements the other way. So we'll talk -- we can talk about the details of that with you.

Your next question is from the line of Conor Fennerty with Goldman Sachs.

Debbie, just coming back to Sunrise and the 2 key investments, obviously not a tenant, but do you guys track or cap your exposure to them as an operator?

Who?

For Sunrise. Do you view it like a tenant in that they have x percent of NOI?

Let's talk about that, because that's a great question. We want to have a balanced, diversified portfolio. That's what we've been working towards for a dozen or more years. We want to have a balanced and diversified by tenant operator, by asset type, by business model so that again, we have this 26% of higher-growth senior housing operating and that's broken down further by Sunrise and Kindred -- Sunrise and Atria as operators. So it is relevant that Sunrise is half of that, let's call it, 26%, and Atria is the other half. And we do look at that. But I would say again to everyone, those -- that portion of our portfolio is really like senior apartments. It is really -- we are renting to the grandmothers and grandfathers who are in those units, and we are directly getting the cash flows from those assets just like multifamily, and then we are paying the manager a management fee. And so there is no – and what's different about that from the triple-net portfolio is there is really no credit aspect to the relationship. It is a diversified, very granular, very reliable like multifamily set of cash flows because Mrs. McGillicutty is going down and paying her rent every month. And there is virtually no bad debt in that portfolio. And so we think about it. It is relevant, how -- what that slice of the pie is with Sunrise. But it is very different. We view it as very different and much more like multifamily. And in that way, lower, more reliable, if you will, because there's no credit exposure. So hopefully, that's a -- it's a complicated answer, but hopefully it answers your question.

It helps. I was asking more on the line of how much more you thought you would be comfortable with or how much more you could do with Sunrise on a go-forward basis. But that's helpful. And then just switching to the medical office side, you hear more and more about kind of the non-health care REITs getting into the space. Can you talk about the level of competition you guys are seeing today for build-to-suits for development? And where do you think that pushes yields and potentially cap rates, call it, over the next 12 months?

Well, again, one of the interesting things about health care and senior housing is that, that's where there is demand. That is demographically under -- you have demographic underpinnings or tailwinds. And so people want to go where the demand as, and it's much more so than in many other segments of real estate. So we have some great MOB developments under way. One is with AA rated, totally pre-leased with Sutter Health and Northern California at about an 8% unlevered return. And I'll let Todd or Ray talk further about the competitive environment.

Yes. Conor, I think it's really important to note that the request for proposal process and the decision-making process of the hospitals in the MOB space is a little bit different. And they are very concerned because this is their campus. This is their franchise. But they're doing business with people who are experienced, reputable and that they can trust, and so -- and who've done it before. And so our Lillibridge business has among if not the best reputation in this space for being a good partner for the health systems. And that's a real advantage for us when we go in and sit down with hospitals and talk about building them a new building. So it's not something -- there are high barriers to entry from a relationship standpoint in this marketplace, and that's something that people can just sort of jump into as an opportunity set. And that's, quite frankly, one of the reasons why it took us as long as it did to get into the medical office building space, was because you do have to have that credibility. You do have to have that reputation if you wanted to do business with the best hospitals like we do.

Your final question is from the line Philip Martin with MorningStar.

Just kind of dovetailing on this last question and response, it certainly sounds as if there's a robust deal pipeline. Can you characterize even a bit more the sellers in this market? How are the sellers weighting waiting their sales decision in terms of the importance of cost of capital, price and ongoing relationships? I think in commercial real estate everybody is so focused on there's a lot of competition out there, price is always one of the key or more important determining factors. But in health care, health care is a bit different. And you touched on that on your last answer, but I'd be interested in a little more follow-through on that.

Sure. I mean, Philip, price wins, okay? I mean, let's just be -- this is -- at the end of the day, you have to have the best price. But if the margin, your reputation, your ability to be a good partner, particularly when you're talking about some of the seniors housing sale leaseback or operating asset transactions, that can help you win a deal when you've got a strong price on the table. And that's what we focus on. We have people that come to us and say we want to do business with you because of your reputation, your capabilities. You can be a great partner for us going forward. But we still have to match the price.

Okay. And shifting gears a little bit, is Ventas seeing the role of the skilled nursing facility change within the integrated delivery system?

Well, it has been evolving over time, as you know, from more of a long-term custodial model to a higher-acuity, rehab, shorter of length-of-stay kind of business. And a lot of the nursing homes that we have, obviously, are in that niche, and that may continue as there's post-acute bundling and so on and integration of post-acute care. So, yes, I would say that, that's a trend that is continuing. And one thing about health care is it's always changing. And the services -- the good operators are able to change their health care delivery as the environment is changing. So that is true, and I think that will continue.

And would you believe that that's an underlying catalyst to better valuations for those assets over time in the hands of the right owner-operator, et cetera?

Well, I mean, obviously, if the health care delivery system is asking to have patients go and be treated in the lowest cost, most clinically appropriate setting, it certainly could be positive for the skilled nursing business. And this is all long-term secular trends that will continue to evolve. So everyone, thank you so much for joining our call, for your interest in Ventas. We very much appreciate it, and we look forward to seeing our investors here in Chicago at the Green Street Conference and then again at NAREIT in June. So thanks to everyone.

All right, ladies and gentlemen, that will conclude today's conference. Thank you very much for participating. You may now disconnect, and everyone, have a great weekend.