Ventas, Inc. (VTR) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Ventas Earnings Conference Call. My name is Katina, and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today's call, Ms. Lori Wittman, SVP of Capital Markets and Investor Relations. Please proceed, ma'am

Thank you, Katina. Good morning, and welcome to the Ventas conference call to review the company's announcement today, regarding its results for the year and the quarter ended December 31, 2014. 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 events 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, 2013, 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 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 call over to Debra A. Cafaro, Chairman and CEO of the company.

Thank you, Lori. Good morning to all of our shareholders and other participants. Thank you for joining Ventas's year-end 2014 earnings call. As always we are delighted to share our outstanding 2014 results and accomplishments with you, and rollout our expectations for 2015. Following my remarks, Ray Lewis, will discuss our portfolio performance; and our new CFO, Bob Probst, will review our financial results and outlook in greater detail. We're very excited to have Bob, on the Ventas team. 2014 was a terrific year with notable highlights. We were also very consistent during the year in core respects, such as our strong FFO per share and dividend growth, the continued expansion and success of our business, and the strength and character of our team. Once again we achieved record financial results. This core consistency and repeatability of Ventas's performance truly distinguishes the company and continues to create shareholder wealth. Since 2000, our compound annual total return to shareholders is 29%. We've generated 10% compound annual FFO per share growth since 2004, and 9% compound annual dividend growth during the same period, boosted by 24% compound annual growth in our operating cash flow. In 2014 alone, we delivered normalized FFO per share growth of 8%, total return to shareholders of 31%, and dividend growth of 9%, while preserving our industry leading FFO payout ratio of 66%. Our normalized FFO of $4.48 per share represents record results for the company and is above the high-end of our 2014 guidance range. These results and our continued commitment to performance, and to our stakeholders, define Ventas and place us in the top tier of all companies. At Ventas, we focus our efforts around three pillars of sustained excellence. Raising capital efficiently, allocating capital wisely, and managing our assets productively. Here are a few highlights of 2014. On the capital raising front, we showed insight and agility in our activity. We tapped the bond market in early 2014 at just the right time, pivoted to the bank market to fund our deals in the third quarter, and then promptly hit the Canadian bond market with the largest REIT fixed income offering ever to provide long-term fixed rate financing, as well as hedging benefits for our Holiday Canada acquisition. Likewise, we chose to wait out volatility in the bond market in December to access the debt markets when they were more attractive in January, raising $1.1 billion in long-term fixed rate bonds at 3.7% for 15 years. Maintaining our focus on financial strength and flexibility, we used our at-the-market equity program, as well as the HCT transaction to efficiently fund our investments and delever in December and January. Turning to capital allocation. Our investment activity has continued to be robust as we've completed over $5 billion of investments in the U.S., UK, and Canada. Just since we spoke to you in October, we have closed over $1 billion in portfolio level investments. These investments are expected to yield over 7.5% and they include a significant senior secured loan in a large pool of diverse healthcare and senior housing assets; an expansion of our UK footprint with the acquisition of five private pay care homes in the UK under a triple-net lease to the existing operator; an investment in 12 newer post-acute facilities with an existing customer; an acquisition of eight higher-end senior living communities located in the Western U.S. operated by a new desirable customer under a long-term triple-net lease; an investment in seven assisted-living communities with an existing highly valued customer who used the proceeds to achieve full ownership of its operating company; and the $60 million construction loan to a thriving hospital in Colorado with the proceeds being used to build a new replacement hospital in its existing market. Of course, we also just closed our public-to-public acquisition of HCT. With that deal, we added 152 quality property, mostly medical office buildings and senior living assets, to our portfolio. These primarily private pay assets are consistent with our strategy, expand our customer base, and will improve some key metrics in our business. We are in the process of integrating those assets into our enterprise, leveraging our existing employees and infrastructure to manage them going forward. As you can see from the broad range of different asset types, structures, and geographies of our recent deals, the overall acquisition environment remains dynamic and deep, offering us abundant investment opportunities both domestically and abroad. We are highly confident that Ventas has the team, relationships, and track record to continue capturing a significant level of investment with new and existing customers. But as you know, capital allocation isn't just about investing. As we foreshadowed with you last quarter, we are taking the opportunity in this active market to recycle capital by executing a thoughtful disposition strategy. Our goals are to rationalize and improve the quality of our portfolio, take advantage of favorable valuations in the market, and increase our growth rate and/or the reliability of our future cash flow. This year, we expect to recycle about $600 million in capital. Examples of assets targeted for disposition include our sale of non-strategic MOBs, our sale of senior living communities to the existing tenant where our rent is significantly above the underlying cash flow, and a one-off disposition of a senior living community at a favorable valuation where we don't expect to do further business with the care provider. We believe these deals will make us a better company. Finally, of course our third pillar of excellence is using our skill, expertise, and relationship, to manage our diverse portfolio of assets productively. Notable accomplishments included our same-store cash NOI growth of 3.9% for the year. Atria, our largest operator, led the way with excellent growth in the 177 communities that manages on our behalf. During the year, our medical office building and triple-net teams delivered above trend performance through their hard work and focus. And we were particularly pleased to successfully re-lease or sell substantially all the 108 Kindred assets up for renewal in 2014, as well as reach a favorable deal with Kindred at year-end that further streamlined our portfolio and achieved significant economic value for our stakeholders, through receipt of a $37 million cash payment in January. As a result of our activities, I am pleased to introduce our normalized FFO guidance of between $4.63 per share and $4.71 per share for 2015. I would also note that we have guided to NAREIT FFO for the year at a 7% per share midpoint growth rate. Please note that we have embedded both the deleveraging impact of our recent equity issuances and the timing lag between dispositions and reinvestments in our guidance. Bob will discuss the key assumptions underpinning our initial expectations for the year in greater detail. Finally, I'd like to recognize and thank our Ventas employees for their dedication to our enterprise and to each other in 2014. They truly distinguish themselves during the year with their cohesiveness, character, and commitment. And on that note, I am happy to turn the call over to Ray.

Thank you, Debbie. The fourth quarter completed another strong year of growth for the more than 1400 diversified senior housing, medical office, and post-acute properties we owned at year-end. Our same-store cash NOI for the total portfolio grew by 3.9% for both the year and the quarter, which was at the high-end of our 3.5% to 4% range. These strong results were evident in all three of our segments. Let me start with our seniors housing operating portfolio, the majority of which is operated by Atria and Sunrise. At year-end, this portfolio of high quality assets totaled 270 properties primarily located in high barrier-to-entry markets with excellent demographics across the U.S. and Canada. The total SHOP portfolio generated NOI after management fees of $138 million in the fourth quarter, growth of nearly 19% year-over-year, driven primarily by solid same-store cash NOI growth, and the addition of 33 new properties in 2014. Average occupancy in the total portfolio increased 80 basis points year-over-year to a very strong 92.1%. This exceeds the average primary market senior housing occupancy reported by NIC by 160 basis points. For the full-year, the total portfolio generated NOI after management fees of $516 million, an increase of 15% over 2013. Average occupancy over the year was stable at just over 91%. NOI in the 232 properties in our same-store portfolio increased 5.6% in the fourth quarter of 2014 over the fourth quarter of 2013. Performance was driven by an 80 basis point increase in occupancy, a 2.2% increase in RevPAR, and an 80 basis point increase in margin over the prior year. For the full-year 2014, NOI in the 217 properties in our same-store portfolio grew by 4.5% right in line with the 4% to 5% growth rate we provided in our guidance. Performance was driven by rate, which increased 2.7% and expense controls which increased margins by 60 basis points. Looking behind the number, same-store NOI performance for the year and the quarter was driven by outstanding results in our Atria portfolio, offset somewhat by lower growth in our Sunrise portfolio. During 2015, we are projecting continued modest growth from our Sunrise portfolio. Looking at the broader senior housing landscape, construction has remained fairly constant at 3.7% of inventory in the 99 markets reported by NIC. By contrast in the three-mile trade area around our buildings, construction was only 2.1% of inventory due to the high barrier-to-entry infill locations that are typical in our SHOP portfolio. And this is reflected in the performance of our portfolio, when compared to the net top 99 markets, our same-store stable occupancy at 92.8% was 220 basis points higher than the net average, and our RevPAR at $5,565 per month is 64% higher than the NIC senior housing data. Next I'll cover our triple-net lease portfolio which accounts for 52% of our NOI. This diversified and productive portfolio of 922 senior housing post-acute and hospital assets delivered another year of strong and stable performance. The 829 assets that we own for the full-year of 2014 and 2013 grew above historical trends at 3.7% year-over-year. As we mentioned in previous calls, triple-net performance benefited from escalation and higher fees and other payments from our tenants in 2014. Cash flow coverage in our same-store triple-net lease portfolio for the third quarter of 2014, the latest available information was strong and stable at 1.6 times. We will continue to actively manage our triple-net portfolio and work in collaboration with our tenant relationships, to drive performance and growth in the cash flows, increased asset value, and sustained portfolio quality. Finally, our Lillibridge MOB segment turned in another strong year. For the full-year 2014 NOI in the total consolidated portfolio was $293 million, an increase of 3.9% over 2013. Performance was driven substantially by strong same-store cash NOI growth of 3.8%. This exceptional growth was primarily driven by increasing rental rate and our continued focus on managing expenses and driving margins. With the addition of 83 properties that were acquired as part of the HCT transaction, our Lillibridge MOB segment platform now owns or manages over 23 million square feet of medical office building. Our fully integrated Lillibridge branded property management leasing and development platform capabilities are unique among the healthcare REITs and enable us to drive industry leading growth in our MOB portfolio. Already we have in-sourced property management on 23 of the HCT multi-tenant MOBs and expect to take on 12 more properties during the year, leveraging our scale and best-in-class MOB infrastructure for the benefit of our shareholders intent. So in summary, 2014 was another outstanding year for our balanced and diversified portfolio. We delivered strong performance in each of our lines of business for both the fourth quarter and the year. With that, it's my pleasure to turn the call over to our new CFO, Bob Probst, to discuss our financial results and outlook. Bob?

Thank you, Ray. Let me start by diving right into the numbers for the fourth quarter of 2014. In the fourth quarter, Ventas delivered normalized FFO of $342 million, an increase of 9.1% versus prior year. Q4 normalized FFO was $1.15 per fully diluted share versus $1.06 per share in 2013, an increase of 8.5%. The Q4 increase is primarily due to the positive impact of acquisitions, together with the strong performance of our same-store portfolio in the quarter. In terms of financing, we raised $246 million under our ATM program during the quarter, issuing 3.38 million shares at an average price of $72.74 before underwriters' discounts and fees. The dividend for the quarter was $235 million or $0.79 per share, an increase of 9%. Our strong payout ratio provides upside for future dividend growth. Turning to the full-year results for 2014, full-year 2014 normalized FFO totaled $4.48 per fully diluted share, an increase of 8.2% over 2013 normalized FFO of $4.14 per fully diluted share. This increase is driven by the full-year carryover impact of acquisitions completed in 2013, together with $2.4 billion of new investments in 2014. Full-year FFO further benefited from strong same-store NOI growth of 3.9% and an uptick in our net debt to EBITDA ratio during the year. Cash flow from operations also reached a record $1.25 billion in 2014. CapEx for the year totaled $194 million, inclusive of investments and development and redevelopment totaling $107 million. Cash flow after dividends and CapEx exceeded $285 million, even after our 9% dividend increase in December. We ended the year at a net debt to EBITDA ratio of 5.9 times and with a revolver balance of $919 million. Fixed charge coverage was exceptional at 4.7 times and we improved our percentage of secured debt to 9%, as we continue to refinance higher rate mortgages with unsecured debt. Before I turn to 2015, I'd like to take a few minutes to touch on FX. As a result of our recent international acquisitions, our exposure has increased to movements in the British pounds and the Canadian dollar relative to the U.S. dollar. On an FFO basis, the net earnings impact after hedges, including local currency borrowings, would equal $0.01 per share for any 10% moves in either currency. In order to neutralize the effects of currency movements, and better portray underlying performance, we now report our same-store performance in a standard multinational constant currency format in our supplemental reporting. We will also quantify the estimated full-year impact of FX in our guidance for the year. Turning now into 2015, I'd like to highlight some important accomplishments that have already occurred at this early stage in the year. In early January, we accessed the capital markets both in the U.S. and Canada. We raised $900 million in the U.S. markets, at a weighted average rate of 3.8%, for a weighted average maturity of 16.6 years. We also raised Canadian bonds of $250 million Canadian at a rate of 3.3% for seven years. In addition, we issued 3.8 million shares of equity under our ATM at a weighted average share price of $77.38 before underwriters' fees and discounts. On January 16, we closed on our acquisition of HCT properties. We issued a total of 28.4 million shares of common stock plus 1.1 million units redeemable into common stock. In addition, we assumed approximately $167 million of mortgage debt and paid cash of approximately $750 million net of cash on hand. After the HCT closing and the issuance under the ATM, we now have a total of 335 million of common shares outstanding, a 13% increase versus 2014. In addition to the HCT closing, we have already closed on acquisitions totaling approximately $320 million in 2015. The net effect of these transactions is a very strong credit profile and positioning for the year. Currently our debt to total capitalization is exceptional at 31%. At quarter-end we project an improvement in our net debt to EBITDA to 5.7 times, floating rate debt to 16% of total debt, weighted average debt maturity of nearly seven years, and a weighted average interest rate of 3.6%, a slight increase due to our longer-term fixed rate refinances completed in January to term out and fix over $1 billion in floating rate debt. Currently we have $1.5 billion available under our revolver thereby providing a strong liquidity position. I will close out my remarks with a summary of our outlook for 2015. Our expectation as we begin the year is to deliver normalized FFO per share in the range of $4.63 to $4.71. This range represents a growth rate of between 3% to 5% in normalized FFO per share. Our expected same-store growth rate, our assumptions around capital recycling via disposition, and our recent actions to delever are each worth about 1 point of growth in 2015 versus 2014. Let me cover each of these factors, as well as other key assumptions that shaped our 2015 guidance range. We project total company same-store 2015 cash NOI growth of between 2.5% to 3.5%. At a segment level, we project SHOP same-store cash NOI to grow 3% to 5%, MOBs to increase by 2.5% to 3.5%, and our triple-net portfolio to grow 2% to 3%. We have not included in our 2015 triple-net projections speculative fees rather payments nor have we included the $37 million payment we received from Kindred in January, relating to existing assets, which would effectively increase our 2015 same-store growth expectations to 4.5% to 5.5%. Looking further at our SHOP segment, we are expecting our 305 properties in our total portfolio to deliver NOI between $610 million and $622 million, including the 35 SHOP communities we acquired as part of the HCT acquisition. Within the SHOP portfolio, we expect Atria to continue to deliver outsized growth, driven by both rate and occupancy increases, and slower growth in Sunrise. We project that 2015 expense growth will trend up, mitigating the positive impact of rate and occupancy gains. Our guidance assumes 2015 capital recycling totaling approximately $600 million. This total includes the previously discussed MOB portfolio sale, together with approximately $450 million in other asset dispositions, and receipts from loan repayments. The average expected yield on these dispositions approximate 7% and they are expected to be completed early in the year. We have assumed that we reinvest the capital from dispositions in new investments at an expected yield in the mid-6s later in the year. No additional incremental acquisitions or dispositions have been assumed in guidance. Although, as Debbie mentioned, we are highly engaged in potential new deal activity. Our guidance incorporates the Canadian to U.S. dollar exchange rate assumption of 1.25 and U.S. dollar to British pound of 1.50. Net of hedging effects, this assumption has a $0.02 negative impact to 2015 relative to 2014 average actual FX rates. Our ending weighted average share count of 335 million shares is assumed to remain relatively constant over the course of the year. So in summary, we are pleased with our performance in 2014, and look to continue our long track record of earnings and dividend growth in 2015. With that, I will ask the operator to please open the call for questions.

Thank you. [Operator Instructions]. Your first question comes from the line of Smedes Rose representing Citi. Please proceed.

Thank you. I just wanted to make sure I understood something. In January you mentioned that you had $1 billion of acquisitions underway, so based on your comments, all of that has closed now at this point?

Yes. That's right.

Okay. So the only thing that's in your guidance for acquisitions would be just the recycling of the $600 million that you just touched on?

Correct.

Okay. I wanted to ask you just sort of bigger picture; as you look at acquisition opportunities coming across your desk now, and I'm sure you see pretty much everything, is there any kind of change in the quality of assets that you are seeing or the kinds of stuff that people are offering? Or any kind of change in cap rates, say, over the past several quarters to what you are seeing now? And are you more inclined to be looking in the UK and Canada versus the U.S., or any kind of changes around there for future acquisition activity?

Great question. I think the most overriding theme on the investment front is that we continue to see a very high volume and pace and variety of investment opportunities. And that's evidenced by the range of investments we have described to you on the call. And we -- the principle of Ventas business continues to be in the U.S., where I would say we have great opportunities because of the fragmented market here and the fact that we still are in early innings in terms of the privately held assets migrating into public hands. We are still early in that versus some of the other re-sectors and that's a huge opportunity domestically. And then, we do have -- we have seen an increase in activity and opportunities outside the U.S. And we are selectively targeting certain jurisdictions and working on those types of transactions as well.

Your next question comes from the line of Juan Sanabria representing Bank of America. Please proceed.

Good morning. I was just hoping you could give us a little bit more color on the cap rates for the assets, that $1 billion you have closed in the fourth quarter and the first quarter, sort of by asset type. We've seen some stories in the press about more senior housing assets at 5.5% cap rate range, so just looking for a little bit of color there on kind of where the market is at for the different product types.

Okay. So if you look at that let's call it $1 billion, $1.1 billion of acquisitions, I would say that you could categorize them in a couple of ways. You would see kind of debt development and redevelopment on a cash basis being in and slightly above may be the 8-ish range plus or minus on a cash basis, a little bit higher on GAAP. And then on triple-net senior housing, I think you're going to see closer to 6 with the GAAP deals a little bit higher. So what I would tell you is that we are seeing a very, very low cap rates on senior housing in general. And as you can see from our investment activities while we are very bullish on senior housing in general, we have weighted our investment activity to other types of opportunities that we are seeing that provide really good risk adjusted return in our opinion.

And with the post-acute assets you acquired, are those -- the traditional long-term care or more the short-term stay model? And where do you see pricing for those assets?

Good question. Yes, we did do a follow-on deal with an existing customer in the post-acute business. These are newer, skilled nursing assets; I would say all skilled nursing assets have a quality mix, if you will. In this case these particular assets have a nice quality mix of 55% they're newer assets. And so in general it's toward more of the shorter stay Medicaid type asset, but in the middle, very high quality, very nice good coverage et cetera, good quality.

And the pricing that you are kind of seeing for those assets? Sorry.

I would say that the lease rate for quality post-acute are in the, call it 7.5% to 8.25% lease rate.

Great, thanks. And just a last question. I think may be Ray touched on this on some pressures on the expense side. If you could just articulate kind of where those are coming from. Is it pressure on labor costs? Obviously the job market has improved and there is new supply so may be competition for talent, or what that is and what we should be thinking about for year-over-year growth.

Sure, Juan. I think really there are three major categories that are driving the expense growth year-over-year, and they account for about 70% of total expense spend in our properties, and they are salaries, wages, and benefits, utilities, and property taxes. The salaries, wages, and benefits, I think the biggest impact we're hearing there from our operators is minimum wage impacts in California and New York, which are our two larger SHOP states and those went into effect sort of late last year and have the effect of sort of raising all the wages in sympathy. I think in the utilities we're -- we've got a concentration of assets in the Northeast where there are a lot of coal fire plants coming offline and so we're projecting some pretty strong utility growth in that area. And then, with respect to property taxes, we just don't really budget appeals and so there may be some opportunity there in next year.

Your next question comes from the line of Josh Raskin representing Barclays. Please proceed.

Hi, thank you. First question is on healthcare.

Good morning.

Good morning, Debbie. The healthcare trust assets, I was wondering if you had an update on the occupancy levels for the MOBs as well as the SHOP portfolio there.

Yes, we expect the HCT, MOBs to be about 91% occupied, did I say 97%?

Yes, 97.1%.

Yes, 97%.

Okay, 97.1%, all right. So that's relatively back to where they were. And on the SHOP side?

Exactly, yes. On the short stuff we're going to put it in the kind of 90% to 94% range.

Okay. So wide range but -- a wide range but relatively stable as well.

Yes, definitely.

Got you. And then I guess a second question just around the SNFs. It sounds like that those 12 post-acute assets were some of those newer SNFs and I'm just curious to get your perspective on the market there. It sounded like cap rates are anywhere between I think you said 7.5% to 8.25%. I'm assuming you are talking about SNFs specifically there. May be just general thoughts on where you think the SNF market is from an investment perspective.

Well again, you're right about the lease yields that I provided which would be in that sort of 7.5% to 8.25% in the quarter range. I would say that the skilled market, skilled nursing market or post-acute continues to be an important part of the healthcare continuum. I think that you've seen a tremendous revaluation of that asset class, which is something we talked about for a long time. And I think we're seeing that come to fruition, as you've seen some other deals at even seven lease yields and things like that on skilled nursing assets. So we're being selective here and think we found a nice portfolio in a way it was able to really helping existing customer and so that met our investment criteria and so we move forward.

I guess I was just -- may be a little more specific on the operations. They got a rate increase in October. I know Ray mentioned some of the earnings -- some of the expense pressures. I'm sure that is similar; some of that spills over. So I'm just curious if you are seeing any improvement in 4Q. It looked like comp? Fine.

I think, we have seen in the skilled nursing market several consecutive years of those Medicare and Medicaid increase and so that is a favorable. And we continue to believe that there is a good way to make a good risk adjusted investment in skilled nursing, if you do it with a quality provider, and you have a margin of safety in terms of lease coverage at the property level, and that's how we invest in skilled nursing.

Your next question comes from the line of Derek Bower representing Evercore ISI. Please proceed.

Thanks. You guys mentioned your rents are over 60% above the NIC average and your occupancy is 200 basis points better as well, but the rent growth spread between your portfolio and NIC's has somewhat narrowed and I think in the fourth quarter actually was below NIC. So have you guys thought much about why this trend has occurred? Do you think higher occupancy could lead to better pricing power going forward?

Good morning, Derek.

Hi, Derek. I think our rates remain pretty strong and we have experienced good occupancy growth even in the fourth quarter, which is typically a quarter when we see occupancy flat to declining as people don't move in around the holidays. So the occupancy trend in our portfolio remains pretty strong. As you point out our rates are well above NIC which I think reflects the quality of our portfolio. As we look at next year, I think we're seeing Atria doing a good job of continuing to push rates. I think Sunrise has not pushed rates as much as Atria and that's going to lead to some margin compression due to the expense increases that I talked about earlier.

And you mentioned Sunrise would only do modest growth this year. Could you kind of frame out may be what the spread would be in NOI growth this year? Could it be 200 basis points, 300 basis points; is that sort of how to think about it?

I think the way to think about it is that they're not really pushing the rates to offset the unusually higher increases in expenses this year as I said. And I think the growth rates next year are going to be sort of consistent and perhaps a little bit less than what they delivered this year.

Okay, thanks, that's helpful. Can you just lastly talk about the loan investment strategy going forward? You guys mentioned earlier you might have done a mezz deal. Can you talk about what the size of that investment was, may be what's attracted you to it and what assets are actually secured as part of that?

Great. So yes, as a capital provider to senior living and healthcare assets, part of our business is originating loans it's -- and so we've seen some good opportunity on the secured mezz loans, which is on a very diverse large pool of healthcare and senior housing assets. And what attracted us to it really is we think it's an excellent risk adjusted return, it's a very secured in terms of the spot in the capital structure and that's in kind of 60% to 75% loan to cost tranche and the returns are about 8% current and the coverage is quite good. So all in all, when you have a significant equity investment that supports a loan and you can get that tranche at a very nice 8% on a secured loan. On quality assets, that looks like a good opportunity to us and we took advantage of it.

And are these mostly senior housing or MOB assets that are secured?

Yes, it's a mix portfolio which is one of things that we really like about the investment is that provides you greater certainty on the cash flows because there is mostly private pay, MOBs, and senior housing, again diverse operators, diverse pool, diverse geography. And so that gives you good downside protection as well as the equity cushion that's there and the cash flow coverage.

That's helpful. Thanks Debby.

Thank you.

Your next question comes from the line of Rich Anderson representing Mizuho Securities. Please proceed.

Okay. Good morning. So the $600 million of dispositions in the early part of this year, I know that's all you have in guidance, but to what extent are you on the lookout for more in terms of pruning the portfolio? And specifically may be -- you mentioned 23 million square feet of MOBs now. How much of that do you consider in the kind of non-core long-term category?

Great question. I'm really happy that we were able to kind of follow through on what we talked about last quarter and really start to execute some focused disposition activities that we do think will make us a better company. Once we get through this effort which we hope to do in the first and maybe a little bit into the second quarter. I think, there is always an opportunity to look at your portfolio and continue to focus and improve the quality, and we will continue to look for those kinds of opportunities balancing of course our desire to continue to drive cash flows and dividends. So those are -- that’s how we are thinking about it.

Do you have a sense of what percentage of the portfolio like particularly MOBs is kind of stuff you would have at least to look at in terms of selling?

There is always going to be -- we have a $37 billion portfolio, which we are quite happy about, we think its high quality. There is always going to be things at the bottom that you can think about recycling capital, and there’s always actually think that are at the top where you have we’ve talked about really, really fantastic cap rates on senior housing; maybe there’s some markets where we would want to create value by lightning up in a market or, as I said, where we’re not going to do business with the operator going further and then we can use those to recycle into early stage more value creating investment. So we’re looking at in multiple dimension, multiple asset type and, given the size of our portfolio, I would expect that we will have other opportunities in the future.

Okay. And the second question and only last question for me is you mentioned the Sunrise way relative to Atria IV in terms of internal growth prospects. To what degree are you willing to put up with that and is there any way that you would have the ability to replace them if they are just not meeting some set standards that are -- that you are expecting?

So look, first, it's important to know that Sunrise provide excellent care to high acuity population in our building. So that is a very positive about Sunrise. And while they've got day-to-day operating responsibility we are constantly in dialog with them about ways that we can drive the financial performance in our portfolio. In particular, this year we’re going to focus on trying to push rates in markets where we have higher occupancy and managing those expenses to hopefully do better than the budget. But our goal is to have Sunrise return to their prior levels of performance in that portfolio. We do have good contracts that have incentives and protective rights and we use those to drive behavior in the portfolio. So that’s where we are and I think that where we’re going to continue to focus over the balance of this year.

Okay, sounds good. Thank you.

Thank you, Rich.

Your next question comes from the line of Michael Knott representing Green Street Advisors. Please proceed.

Hey, good morning, everyone. Just a question touch on that Griffin mezz loan. When you guys think about that are you allocating capital just for a risk-adjusted return or is there a broader strategic element at play?

Great question. And I don’t remember saying the word Griffin. So I’ll just let you get by with that. I would say the following: in our loan activities which we have as an ongoing part of our business, as I said, we generally originate loans to get a good risk-adjusted return and to get repaid. There maybe when we look at the variety of outcomes, we always want to be comfortable that at the end of the day if it turned into an ownership position that we would be happy with that and we would be in good asset at a good basis basically. And so we feel very much that way about Griffin, but our intent certainly is to make the good loan and get repaid on that loan.

Okay, thanks. And then can you give any more update specifically on the MOB portfolio that you wanted to sell? I think previously you had said $200 million, maybe 6 cap plus or minus?

We can. We have a little bit better visibility on that and I think that you will see us close a little bit more than 30 of those assets here later in the first and into the second quarter with the cap rate and kind of 6.25-ish range.

Okay, thanks. And last one for me, just curious how aggressive you guys think you might be investing in the UK this year, and what is attracting you to continue to grow over there?

Well it all -- good question. We have expanded out footprint in the UK this year. We started with Spire; great hospital operator, successful IPO with over a ₤1 billion equity market cap. We’ve expanded now with a good operator in senior housing. We like the market for all the reasons that we talked about which is it’s a very deep market; it has all three asset types in it, there is broad acceptance of PropCo/OpCo in all sectors there. I mean, in fact, the hospital sector there is more advanced than it is in the U.S. in terms of PropCo/OpCo separation. There is a great demographic and policy support for healthcare there, and really great capital markets where you can match fund. So it certainly meets all of our criteria for investing abroad and so we will continue to explore both follow-on opportunities there, as well as new opportunities, and it will all depend -- the outcome will all depend on whether we see great risk-adjusted opportunities there, and hopefully we will.

Your next question comes from the line of Nick Yulico representing UBS. Please proceed.

Okay, thanks. Going back to the senior housing, the SHOP guidance this year, I think you said 3% to 5% on NOI same-store. How much of that is being driven -- that range being driven by variability and expenses? And can you give us what you are thinking about on expenses because it seems like that it's sort of a driver of whether you guys are going to be bottom, mid or top of that range?

Yes. Nick, thanks for the questions. It's Bob here. The range really -- on the downside at a lower end of the range is more function of occupancy. We've got really aggressive occupancy growth in the budget, and particularly within Sunrise. And so delivering on that is clearly critical. To your point on the upside of the range, it's really about the labor cost productivity to help mitigate those inflationary costs, which are above inflation level sort of unusual in some cases, for example, with the minimum wage levels we have seen. So being able to drive productivity in the assets, maintain that margin is really what drives the higher end of the scenario.

Okay. So what is the range you think about on the same-store expense growth of that portfolio?

I think it's fair to say mid-single digits.

I think well the single-digit is a pretty wide range --

Mid -- mid --

Is that 0% to 9%?

That's not. I don't define it that way. In the 5% range, so above inflation would be --

So about 5% we should think about on same-store expense growth this year?

Yes.

[Indiscernible] stock portfolio?

Correct.

Okay. Great. And then, what about you said -- I mean, occupancy, you said it sounds like the upside -- coming upside could be from occupancy. Well, what do you -- I mean, what's the range you think about on occupancy growth for that portfolio this year?

Yes. We have assumed -- and Ray mentioned about 80 basis points improvement year-over-year something in line with that, reasonable trend line in line with that I think is a fair assumption for the base case. And we started the year happily. As we look at the January numbers, it appears we're in line with that in the start of the year, and obviously we need to see that continue throughout the year. I think you'll see from a phasing point of view therefore year-on-year we have a strong first half on some of the auctions we sold off. So on a year-over-year basis you'll see strength in the back half of the year as we see it.

Okay. And then rate growth, do you think -- is it going to be similar to last year?

If not, a bit better. As Ray, mentioned, in particularly in the case of Atria they pushed the rate a bit harder. So in effort to neutralize that cost inflation we're hoping to see a bit more rates than we did in 2014.

Okay, thanks for that. And then just one other one on the loan that you did. What is the duration of that loan?

Hey, Nick, this is Debbie. So you're talking about the net flow, the secured net flow?

Yes.

Okay. So its five years with a little complexity underneath that but think about it as five years.

Five years, okay. And can I just -- this is maybe more of a comment, but I mean when you guys do $1 billion of acquisitions, pretty helpful to have the actual details of some of these acquisitions in the press release or the supplemental. A lot of your competitors do that; I think it's pretty useful so we can understand exactly what you guys are buying and so it looks less like a black box thing?

Thanks, good recommendation.

Your next question comes from the line of Karin Ford representing KeyBanc Capital Markets. Please proceed.

Good morning, thank you. Can you just tell us how the Holiday portfolio has been performing relative to your underwriting and do you see any additional follow-on opportunities to invest with that operator in 2015?

Hi, Karin. It's performing exactly as we expected. And as I think everyone knows that Holiday is a very large senior living provider and there have been multiple transactions, two of which we have done. And well I can't predict what the owners of Holiday would do. I think it's fair to say that they continue, they will continue to look for ways to create value there and that could include additional follow-on transaction.

Thanks, that's helpful. And then just lastly, Ray, what do you think is the primary reason why Sunrise is having lack of ability to push rents? It sounds like the portfolio is still under occupied in your view. Is that fair to say? And what do you think is the primary reason?

I mean I would say Karin, that it's really that they, when they put their rate letters out they didn't push as hard I think as others did. And I think they missed an opportunity and so for the balance of the year we're going to be working on pushing the street rates and the move-ins to try to make up for that. But I think really that is the, that is really what it is.

Okay, that's helpful. Thank you.

Thank you, Karin.

Your next question comes from the line of Tayo Okusanya representing Jefferies. Please proceed.

Hi, good morning, everyone. First of all --

Thanks, Tayo.

How are you?

Good.

Bob, good job this morning. You sound like an old pro there already.

I appreciate that. Appreciate Tayo you put that now.

Yes.

Two quick ones from us. I think with the Sunrise thing we kind of get what's going on. Debbie, you made this interesting comment again about your investment outlook and just looking outside senior housing for things that made more sense on a risk/reward basis, given how expensive senior housing was becoming. Wondering if you could just talk a little bit about how you think about medical office buildings in this context, given cap rates in that space also continue to compress and you only see about kind of 2%, 3% same-store NOI growth coming out of that portfolio for most of your peers.

Okay, great question. I think that when we look at investments again, we are looking for an asset that's going to grow cash flows and/or experience increasing multiples or inversely decreasing cap rates. And if either of those things happen we're going to create value for our investors, if both of them happen, obviously that’s the greatest outcome and we've done a lot of those where both things have happened. I'd say coming out of 2009 into 2010 and 2011, we did have the environment where you could make a macro trade on MOBs and senior housing, and you could be pretty sure that you were going to make a lot of money for your investors, because you had higher cap rates and you had a good part of the cycle in terms of cash flow growth and that's exactly what we've done. I think as we got into 2014 and the current environment I think you do have to be a lot more selective in terms of what you're doing in those sectors and you have to focus your efforts. And I think do think we have a critical competitive advantage in the MOBs with Todd's business which has been serving hospitals and healthcare systems for 25 years or 30 years. And where we are showing very strong same-store growth this year at 3.8% I think and then with an expectation of I think 2.5% to 3.5% in 2015. So we have the ability to leverage our infrastructure, our skill, our experience to really do a good job in driving same-store growth. And that all said we will continue to be selective in the asset type because it has appreciated greatly, and as an owner, and an early investor, and an early adaptor, in the segment I think our shareholders have really benefited from that.

Okay, that's helpful. The second thing I wanted us to discuss -- I'm going to take us back about 15 years actually. This has to do with -- on the HCP call a lot of questions around managed care, all this kind of disclosure around the U.S. Department investigation and things of that nature. Everyone trying to assess what's kind of going on within skilled nursing and if we go through another round of these things. We did go through it in 1999. Vencor was right in the middle of all this stuff when it was going on. And I'm just kind of curious again what are you seeing at this juncture just from a regulatory perspective on how regulars are looking at skilled nursing and if there's any kind of risk of increased regulatory risk in the space over the next 12 to 18 months.

That is a long question. And you remind me that I'm coming up on my 16th anniversary as the CEO of Ventas and I have all the great years to prove it. But I would say that look; we are expert in investing in the government reimbursed sector. I would say we have good operators who have good compliance programs, good quality of care, and we're really pleased with our government reimbursed portfolio. Over time from time-to-time you do see regulatory scrutiny on the businesses. But in general I would say that we feel very good about our business and our operators in that regard.

But are you seeing anything from a regulatory perspective where they just seem to be a little bit more aggressive now, and if they are looking for anything in particular?

I mean look, I would say that it's kind of ebbs and flows that you suggest and sometimes there are broad based enquiries or market enquiries and I don't see any material changes from the 15 years that we have experienced in healthcare.

Your next question comes from the line of Michael Carroll representing RBC Capital Markets. Please proceed.

Yes, thanks. Can you give us an update on the 12 Canadian assets that were leased to Sunrise? It looks like performance drops during the quarter after it had a pretty good pickup during the third quarter.

Yes, Michael. So the 12 Canadian assets that Sunrise operates under our management contract with us. I think when you look at the quarter-over-quarter trends, occupancy was up strong, rates were pretty flat, but expenses increased and its driven by a couple of things. One is there is always higher expenses in the fourth quarter in the seniors housing operating portfolio generally as people spend out their budgets for the balance of the year on things like repairs and maintenance and supplies and all that kind of stuff. So that's sort of a normal trend. And then we also had sort of a one-time impact from a collective bargaining agreement in Canada that also added on half of that sort of hit the expenses. I think we're pleased to see occupancy continuing to increase and that's driving the revenues. We want to continue to see expense control and expense management out of that portfolio as we look to have these assets continue their recovery to their previous exceptional performance.

So would the run rate be ongoing into 2015? Would the, what, the $7 million EBITDAR that was in the third quarter, is that a better run rate than what will happen in the fourth quarter?

Yes, I mean I think it's going to ebb and flow from quarter-to-quarter. But I would say that the margins in the fourth quarter were lower as a result of the expense items that I described.

Okay, great. Thanks guys.

Thanks, Michael.

I think it's fair to say, just building on that in 2015 we expect to see growth NOI growth in Canada that's attractive. So the occupancy year-over-year that we've seen those improvements over the last quarter or two will really help as we think year-over-year in 2015.

Your next question comes from the line of Daniel Bernstein representing Stifel. Please proceed.

Yes, these calls are getting longer and longer, so I can't --

I think this is getting bigger and bigger.

But compared to 15 years ago you have a lot more coverage, right?

I would say so and we welcome that.

I guess on Sunrise I just wanted go back to the rate. Has there been a philosophical change at Sunrise about rate growth versus occupancy? I think historically they have been -- they have always pushed rate very strongly, so was it just a mistake or has there been a philosophical change in how they want to operate those properties?

I mean I don't think it's a philosophical change. Again I'll just go back to I think, we would have liked to see them put more into the annual increases this year.

Okay.

And look it's a philosophical judgment; it's more of a judgment issue in terms of what the right way to optimize and maximize NOI is. And Sunrise has made a judgment in terms of rate for 2015. And again, I mean we are looking for continued growth from Sunrise. I think if, as Ray said, if there is an ability to continue moving rate a little bit through 2015 and if there is an emphasis on expense control, we think Sunrise can have a reasonably good year and we're working with them to deliver that.

Okay. I was just trying to make sure it's philosophical versus just maybe a judgment.

You call it a judgment.

Okay. And on the development side you have a lot of seniors housing, but not a lot of MOB development, particularly given in light of a cap rate compression. Are you looking at more MOB development or is there a little bit like a shadow pipeline still there with Pacific Medical that you don't have to do a lot on balance sheet development on the MOB side?

We are looking at a couple of potential MOB developments that would be actually quite interesting and exciting if they are to come through. And what we like about MOB development obviously is that you get a significant amount of pre-leasing. You often will get very high credit type tenants and I do think that with our lower bridge development business and the really tremendous expertise that we have with our partnership with PMB that we're very well positioned to do that. But again we're very selective in that regard and if we do, do anything they're going to be marquee projects.

Okay, okay. And then Brookdale is a 10% tenant. They have an activist looking at maybe trying to split them to a REIT and an opco. Could you refresh my memory on what rights you have under your leases to --? Can you prevent that kind of strategic split or sell the company? Just trying to refresh my memory on what rights you have as landlord.

What I would say is that, we are really happy with our relationship with Brookdale. We're very supportive of Brookdale. They are a 10% tenant and we're happy about that. I would say that again over time you may see assets all across the healthcare spectrum moving into the most efficient hands that may be REITs in the case of any type of assets. But I would say that these types of PropCo/OpCos which we are quite expert in. They're much more complex than I think any of the activists or any of the analysts really can be able to evaluate. And so we're just going to be happy that we have Brookdale as a tenant, continue to have a good relationship with them, and support them in whatever undertaking say they decide to peruse.

Okay. Again, long call; I will hop off. Thank you for all the color.

It's a pleasure. We appreciate that. And with Dan's, question I think we're done for the day. And I want to really thank everyone for their attention to the company and for your interest and support of the company. We really appreciate it and we look forward to seeing everyone in Florida in March.