Ventas, Inc. (VTR) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2015 Ventas’ Earnings Conference Call. My name is Katina and I'll be your coordinator for today. At this time, all participants are in a 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 your host for today's call. Mr. Ryan Shannon, Investor Relations. Please proceed.

Thanks, Katina. Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the quarter ended September 30, 2015. As we've start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the Federal Securities Laws. These projections, predictions and statements are based on management's current beliefs, as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the Company's expectations, whether expressed or implied. We refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year-ended December 31, 2014, 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 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 reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure, as well as the Company's supplemental disclosure schedule are available in the Investor Relations section of our website at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thank you, Ryan and well done. Good morning to all of our shareholders and other participants, and welcome to Ventas' third quarter earnings call. After our prepared remarks, our senior leaders including Bob PRobst and John will be pleased to answer your question. At the outset, I want to state that Ventas is now a better, stronger and faster growing company, well positioned to deliver sustained excellence. We now have an even higher quality portfolio operated by the nation's leaders in five major asset types. Our portfolio is diverse and resilient with multiple areas of growth. Our team is lean and energized and our results are strong. I know I speak for all my colleagues at Ventas when I say, how excited I am to share our strategy, progress and prospects with you at our upcoming Investor Day on November 10. Today, I'll hit the highlights of an incredibly productive quarter that personifies what sets Ventas apart and demonstrates our winning edge. It's amazing that the inner disciplinary Ventas team completed two highly structured value creating complex transactions on a tax efficient basis without a snag at the high end of our expectations and in record time during the quarter. And we did so while continuing to deliver solid results. Our third quarter normalize FFO of $1.09 per share represents 7% comparable per share growth versus the same period last year. On the heels of this strong quarter, we are delighted to increase our full-year guidance for both normalize FFO per share and full company same store cash flow growth. When we step back our high quality diverse portfolio operated by the 20 operators that lead each sector accounted for our strong performance. Within the portfolio our metrics are market leading. For example, our NOI contribution from private pay assets stands at 83% and our post-acute quality mix is 75%. We have also maintained our significant scale at $30 billion of enterprise value, our diversification, financial strength, our high-quality senior housing operating portfolio and our best in class MOB franchise. From an investment standpoint, we completed our Ardent Hospital investment on a positive note this quarter. Specifically, we now have $1.3 billion invested in high quality healthcare assets in three key markets where Ardent enjoy a significant market share. Our unlevered going in cash yield is attractive at 8% before cost and about 7.5% on a fully loaded basis. The Ardent ownership group is aligned to ensure Ardent maintained its strong financial profile with room to grow. Currently expect the EBITDA ratio is in the low two times. Most importantly, Ardent is an excellent operator and had a great third quarter. In the third quarter Ardent grew its top and bottom line by mid single digit compared to last year. Ardent also showed positive trend in its key performance indicators during the quarter. We are confident we can grow with Ardent, because of its scalable platform and ownership groups’ collective healthcare experience contacts in capital. We already have a few projects on the drawing board where we can help our Ardent expanded footprint in its existing market, including potential free scanning emergency department and new medical office building. Finally, as a result of our Ardent investment, we've received a notable increase in inbound enquiries from Quality Health System asking how Ventas can help them to grow, better serve patients and physicians and become more efficient. Turning to other asset classes, we continue to devote a meaningful amount of capital to redevelopment investments in our portfolio. These redevelopment investments provide excellent risk adjusted return and hence the quality of our portfolio drive superior growth and help our customers expand their market share. Examples of ongoing projects include an Atria redevelopment and our high end [indiscernible] Connecticut community and a major repositioning in our Edina, Minnesota Brookdale community. We also recently committed to fund two high-end senior housing developments in outstanding locations in San Francisco and Palm Beach County. In both cases, Ventas is the 20% to 25% managing partner in a joint venture with an institutional capital partner. Atria will manage both completed communities and the unlevered stabilized yields from the project should exceed 9%. Turning to another highlight of the quarter, we were delighted to affect our spinoff most of our Skilled Nursing Facilities operated by local and regional care providers at a valuation of $4.3 billion on a tax free basis. This innovative transaction improved our relative cost of capital, strategically repositioned our portfolio, enabled us to distribute to our shareholder CCP common equity value that $8.51 per Ventas share and provided us with $1.3 billion in cash. Post spin, Skilled Nursing Facilities or SNF represent just 4% of our net operating income and our retained SNFs are principally operated by our longstanding partner Kinder Healthcare. In addition to this spinoff, we've also executed year-to-date property dispositions and received loan repayments of $700 million, bringing our 2015 disposition total to nearly $5 billion. From a capital market standpoint, we've also been opportunistic and efficient this year, working around periods of volatility and excess supply. On the equity side for example, we've issued $2.7 billion of common equity at pre-spin pricing of $77 per share and raised $2.5 billion in bank and bond financing. Bob will address the particulars, but sufficed to say our liquidity is outstanding and our credit profile remains strong. On the investment side, we’re pleased with our completed acquisition volume totaling $5.2 billion year-to-date. With interest rates still low and the private bid for cash flowing assets still high, this quarter we saw some notable large transactions price at historically low cap rate. That said we’re beginning to see some sign of wider bid ask spread and longer marketing periods for certain of our asset types. With our emphasis on making value creating investment decisions and our relentless focus on cost of capital, we’re approaching the investment market with discipline. We’re picking the sports where we see accretion, solid risk adjusted return, great real estate, compelling strategic set or the opportunity to help a customer. So we’re executing a clear and decisive strategy at Ventas. As we've done so many times in the past, we believe we’re ahead of the market as we invest capital, select operating partners and make portfolio disposition decisions across a broad array of healthcare asset classes. We've great momentum at Ventas. We’re looking forward to demonstrating our strategy for sustained growth and excellence, shining a bright light on the terrific Ventas’ team and showing the sophistication and scale of our key operating partners at our upcoming Investor Day. We can't wait to see you there. Bob.

Thanks Debby. Let me begin by reviewing the performance of our portfolio of high quality assets in the third quarter. I would note that unless otherwise indicated my discussion of our portfolio performance excludes the CCP assets that just spun out of Ventas in mid-August. Overall the third quarter delivered strong portfolio performance with same store cash NOI growing 4.3% year-over-year. Our triple net lease assets, which account for approximately 45% of total NOI delivered accelerated growth in the third quarter. Cash NOI for the 511 triple net properties in the same-store pool grew 5.7% in the third quarter of 2015 versus prior year. Same-store NOI growth in the quarter benefited from the $15 million positive annual rent increase for the 48 Kindered assets released with Ventas in October 2014. Even after adjusting for this releasing benefit, which will cycle out October 01, 2015 our triple net same-store NOI grew at 3.4% in the quarter demonstrating a faster growing portfolio following the CCP spin. Cash flow coverage in our same-store triple net lease portfolio for the second quarter of 2015, the latest available information was strong at 1.6 times. Overall, the property level cash flow performance for our triple net operators was solid growing 3.5% in the quarter. Our senior housing portfolio reported stable trailing 12 months coverage at 1.3 times, while our Skilled Nursing coverage improved from 1.8 times to two times as result of the CCP spin. Turning now to SHOP. NOI in the 239 properties in our same-store portfolio increased 3.2% in the third quarter of 2015 over 2014. In sum, it was a solid quarter but fell slightly short of our expectation. Our core markets continue to outperform well, driving strong rate in NOI growth in the quarter the total performance was modestly affected by discreet assets specific issues and limited supply impact. Our NOI performance was led by continued strong growth across many of our high barrier to entry into locations. Our largest MSA in New York grew NOI nearly 7% in the quarter, while other key markets such as Los Angeles, Boston and San Jose also demonstrated very strong growth in the quarter. In total, our core markets represent more than 60% of our portfolio and has consistently been the engine of growth in short. Further NOI growth in tertiary market such as Cape Cod continued to be favorable in the quarter and the yields of productive development and redevelopment activity. Turning to the challenges, specific asset level performance issues in Chicago, Atlanta and Jacksonville contributed 150 basis point drag overall NOI growth in the quarter. We are working alongside our operators to address these specific issues. Additionally, select markets were impacted by new buildings openings over the last year within our relevant trade area, for example, in markets such as Houston and Riley. That said less than 5% of our overall NOI experienced new supply pressure in the quarter. Looking ahead at new constructions, we continue to refine our methodology to assess supply impacts and now incorporates seven mile and three mile trade areas around our leased assets based on population density. On net basis, more than 17% of our portfolio does not face a supply surplus based on the third quarter NIC data. Against this backdrop, Ventas and our SHOP operators are working to drive operational excellence to continue to performance across all markets as we planned for 2016. In particular, I would like to call up the exceptional performance of our leading operator and partner Atria, accounting for roughly two-thirds of our SHOP NOI, Atria has consistently delivered excellent top and bottom line growth year-in and year-out, including in 2015. I'm fired up that our investor day on November 10th will be at the Atria headquarters. We believe this day will bring to life for our investors, the quality of the Atria team and the scale and sophistication of the operation that underlies this outperformance. Finally, let me turn to our market leading Lillibridge MOB business. For the third quarter 2015, NOI in the total portfolio of 358 properties was $95 million, an increase of 38% over the third quarter of 2014. Performance was driven by solid same-store growth as well as the addition of 83 properties in January. In the 274 properties in the same-store portfolio year-over-year cash flow growth was 3.1%. This was driven by an increase in rental rate of 2.6% and strong expense controls, offset by a marginal decrease in occupancy. Sequentially, occupancy in the same-store pool has trended up consistently since the first quarter, including 10 basis points sequential occupancy gain in Q3 to 92.5%. So the MOB portfolio continues to deliver stable and reliable performance and growth. I would like to now turn to the Company's financials. I'm pleased to report solid FFO performance in the third quarter and our third consecutive increase to our FFO guidance range for the full-year. We're also increasing our full-year company-wide same-store cash flow guidance. One note before diving in, I will discuss our financial performance on both the reported and comparable basis. Our reported numbers include the results of CCP properties for all periods up to August 17, 2015. Comparable results adjust all current and prior periods for the assess of the CCP spinoff as if the spin was completed on January 1, 2014. We think comparable comparison therefore provide a true apples-to-apples view of our underlying performance. Looking at the third quarter, we delivered reported normalized FFO of $365 million or $1.9 per fully diluted share. On a comparable basis, normalized FFO of $0.98 grew 7% versus the third quarter of 2014. The solid Q3 growth over 2014 is primarily due to the positive impact of accretive acquisitions and same-store portfolio NOI growth of 4.3%. These growth drivers were partially offset with a dilutive impact of $683 million in year-to-date asset dispositions, including an additional $90 million through their last earnings call. Early in the third quarter of 2015, Ventas issued and sold a total of 1 million shares of common stock for aggregate proceeds of approximately $67 million under our at-the-market equity offering program, of which approximately 580,000 shares was previously reported. Also as previously reported in July 2015, Ventas issued 500 million of [408] (Ph) senior notes due 2026. In August, in connection with the Ardent acquisition, the company also completed a $900 million five year term loan. Also in August, the company received a dividend from CCP of $1.3 billion. Ventas used these proceeds to repay $1 billion of debt at an effective rate of 3.3%. Debt repayment focused on near-term maturities and mortgages, resulting in an even more attractive maturity profile with a staggered weighted average debt maturity of 7.1 years. The company's net debt to EBITDA at September 30, 2015 is 6.1 times, only modestly above our five to six time targets. Current debt-to-enterprise value now stands at 36%. The company has strong liquidity with approximately $2 billion available under its revolving credit facility as well as $65 million of cash on hand. With that let me now turn to our updated guidance for the full year 2015. We're pleased to raise and narrow our guidance for reported normalized FFO per diluted share to now range between $4.43 and $4.46, representing 7% to 8% growth over prior year on a comparable basis. This new guidance represented $2.5 raise at the midpoint versus our previous outlook of $4.39 to $4.45. We now project full-year total company same-store cash NOI growth of between 3.5% and 4% in 2015, up from the previous 2.5% to 3.5% guidance range. We're updating our same-store SHOP NOI guidance to now range from 2% to 3%, in line with our year-to-date growth of 2.6%. Our triple net same-store growth guidance range is now increased to 5.5% to 6% as a result of the CCP spend and the positive Kindered releasing impact, while our MOB guidance is narrow to range from 2.5% to 3%. We have assumed no further material unannounced acquisitions, new equity or that issuance or asset dispositions in our guidance. Finally, to enhance our transparency and respond to shareholder request, we have expanded our investor disclosure in two areas this quarter. First, on pages 23 and 24 of our supplemental reporting, we provide a quarter analysis of our comparable numbers and related CCP impacts. Second on our full property listing on our webpage, we have now included at an asset level a breakdown of our assisted living, independent living and memory care residence splits for our SHOP portfolio. With that my colleagues and I will be happy to open the line for questions.

Thank you [Operator Instructions] Your first question comes from the line of Juan Sanabria representing Bank of America/Merrill Lynch. Please proceed.

Good morning. I was just hoping to start out, you could speak a little bit about the hospital business and opportunities you see there and if the recent volatility and weakness, some of the public operators has changed your thinking at all, or how you view cap rates potentially for asset opportunities. And if any of the cost pressures were seen in any of the public operators has filtered through to your exposure with Ardent?

Good morning, Juan and thanks for the question. Obviously, we've had a long-term secular thesis on the hospital business, which we're lucky enough to have begun to execute during the second quarter. We have always been focused on quality, quality real estate, quality at hospital operators and as a owner of the real estate, obviously are very focused on the EBITDA line. And I think it's very important to understand that we see Ardent having a very good third quarter and even HCA, I would tell you, announced earnings on the EBITDA line that were at the high end of its previously provided guidance range. And so there is a lot of stability on that big EBITDA line and that's we look at as we try to think about the hospital business, because we are at the top of the capital structure in what we do. And in addition, we look at this as having a very high coverage ratio in the case of Ardent in the high two to three EBITDA level. So, we believe this could create a good opportunity for us as we've outlined our strategy to help Ardent grow and really build a hospital business with high quality providers and that thesis remains on target. And we believe that some of the volatility in one particular case has to do with an acquisition and it's not really with the underline fundamentals as we've talked about on the EBITDA line. So that's how we think about it and we would be happy to take any follow-up questions that you have.

And just switching gears to the SHOP portfolio, you mentioned some one-off assets specific issues, I think in Chicago, Atlanta and Jacksonville. If maybe you could just elaborate on that just because a couple of those markets screen as high supply markets from NIC perspective and I think you also mentioned that looking at this three mile and seven mile radius that your portfolio doesn’t face supplier issues versus the NIC data. And I was just wondering how we should think about versus the NIC data, is that just you are not at a higher level than the NIC data or you are in line with it or what's your threshold for elevated supply I guess?

Yes Juan, this is Bob. Let me start with the change in methodology, because I think that frames the conversation. What we've done is, we've looked at population density to determine what the appropriate rings are and traditionally we looked at our trade area of three mile radius. We think in many markets a seven mile radius makes more sense, in the top highest density market three mile s continues to make sense for us, but we've fined it to reflect for less dense market that have a broader ring, which we think is appropriate. Against that backdrop, we've looked at what are the openings that we've seen in that context in the last 12 months in our markets, and on that basis there are select markets and I highlighted for example, Houston as an example where we have seen an impact and that is affecting our performance. However, today as we look at the quarter, the supply issue really doesn't expand more broadly than that. I think quoted roughly 5% of our business really has been affected as you look at those rings. As we look through the windshield we look forward based on start as that’s based on - opening is based on starts. We highlighted we do see obviously an impact and indeed we've updated our supplemental to reflect that as you look on page 13 you'll see how we've refined that. But against that as we look at the market and say based on construction, where do we think we’re, we see 70% of our portfolio 70 where we don't see an excess supply situation. Obviously that imply through our markets where there is a supply challenge and to the Atlanta point that would be one, but there are others. Nonetheless, we think 70% is insulated and that really plays to the high barrier to entry market that we participate in. So it is a market-by-market conversation and we think we've refined the analysis as we address it this quarter.

And is there any rough sum to what defines excess?

We've really looked at what is the underlying absorption rate in a market and taking into account not only obsolescence, but population growth and penetration and against that where do we think we have more than the normal absorption rate. And we've ball parked that around the 3% sort of range. So we look at that as a threshold against which more than that would really start to become an excess situation. So that’s how we viewed it.

Okay great and then just last question for me just quickly. If you are seeing any pressures on expenses or what should we be expecting for particular I guess wage growth across the businesses, I’ve been more focused on your idea given your exposure there?

Right, well if you look at the same-store P&L in the quarter, you'll see revenue and expenses largely growing in line with each other, margin as a consequence roughly in line. We do see wage pressure I mean we've talked about that before, the challenge and the opportunities continue to drive productivity against that and have been largely successful on doing that. So as a result, holding in line the rates and the expenses that will vary as you segment the markets and you look quarter-to-quarter there is always some lumpiness inherent in there, but generally speaking, we've nailed to hold that in line.

Thank you.

Thank you.

Your next question comes from the line of Smedes Rose representing Citigroup. Please proceed.

Hi, thanks. I wanted to ask you, you mentioned in your opening remarks some wider bid ask spread and longer marketing times for assets. Could you maybe just talk a little more specifically about what kinds or markets you are seeing wider bid asks and maybe by - across the asset types, and maybe a comment on the product of quality that’s coming to market and overall volume?

Yes. Good morning Smedes. I'm going to turn it over John Cobb. I would say in asset types where perhaps people are bringing lesser [B-ish] (Ph) assets that’s probably where we’re seeing it the most, but John can elaborate.

Right. You're seeing definitely a widening of the bid ask spreads on more B style assets both in the MOB sector also the senior housing sector. I think when we’re looking we definitely had a lot of more inbounds on the hospital sector where we’re seeing high quality operators come through and we’re right on mark on the spreads there.

And Bob your leverage came in at 6.1 times, I know it's just a little bit about the high-end of your target range. Could you talk about maybe the plan to bring that down a little bit?

Sure Smedes. We highlighted last quarter as you recall that we expected to be modestly above six times as a consequences of the spin, which was a leveraging event at 6.1 times where we we’re expected to be. At the time, we talked about just having multiple gloves in our bag and those continue to be available to us. We highlighted some additional disposals in the quarter that’s certainly something we will continue to evaluate. Obviously we have underlying cash flow that can delever naturally overtime and then equity obviously is an option. So, we are not in a rush, we are patient, the good news is we have great liquidity, I highlighted our maturity profile, the availability under the revolver, and so we want to make sure we're opportunistic and patient and do the right thing. So, pretty much right at where we thought we would be.

Okay. Thank you.

Thank you.

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

Well thanks, good morning.

Hi Nick.

The talk was that - it sounds like you are thinking supply has not been that much of an impact, yet if you look at your occupancy year-over-year was down 20 basis points in the stabilized pool, I mean that's basically exactly what the industry did for the NIC data. So, if it's not supply causing that occupancy pressure, what else is it?

Yes, thanks for the question. I highlighted two different drivers in the quarter that were driving some of the weakness and the primary one was more I call it asset specific factors and I highlighted Chicago, Atlanta, Jacksonville. One of the themes if you look within these markets at specific assets that can have a material impact is ED turnover, the executive director at the local level. I mean if they are strong they leave that can have an impact in the short run on occupancy and indeed we saw that in all three of those markets that I highlighted and that was a significant driver. I mentioned the overall same-store performance was affected by a 150 basis points by the performance in those three markets, so you can see that can have a material impact on the overall. Obviously we then talked about the fact, the job is to make sure that we are continuing to work to fill those slots with great people and address the other issues that are "non-supply related" and that's where the operational excellence of leading our operators like Atria can really come to shine. So we're working hand-in-hand with our operators to make sure we address those issues as they arise.

And we did see sequential increase in occupancy in the third compared to the second in the same-store portfolio.

Correct.

Right okay and then for those three markets I mean have you already - has the operator or you already made changes where we should assume that that occupancy issue or that NOI issue is already sort of fixed or this can also be sort of a problem for the fourth quarter?

Well look I think naturally in the portfolio of multiple assets, you are always going to have some issues right. And I also highlighted the fact that we have I call them the engine of growth in our core markets, 60% of business which has consistently performed very strongly, New York at 7% in the quarter would be the case study of that. For the specific asset issues, absolutely we're working to address those and in some cases we've already taken action. I wouldn't want to pretend that's all going to be fixed in a day or in a quarter, it takes time to address these issues, but as I think about them they are transitory, there are things we can address, there are things where you have leading operators to drive great performance, we are having great staffing, consistent systems, great recruitment and those are the ways that the winners can win in the industry. So, we are absolutely working on it, in these markets particularly we hope to see improvement, but I don't want to pretend it's going to be tomorrow.

And I guess just some follow-up on that is that you are talking about ED's leading, I mean presumably if they are leading maybe they are going to newly build communities right? So wouldn't that be a supply impact?

I don't think you can draw a straight line between those at all, I do think in general in the industry there is 50% or so ED turnover in general and so that is just a fact of life in the industry and so, these are just specific markets where I think we're working with the operators to just improve staffing at the building. So I think those are more typical what I would say industry issue that Bob is describing.

Okay, thanks. Just lastly any - can we get an update on where occupancy is trending so far in the fourth quarter for the year on SHOP portfolio? Thanks.

Yes, Thanks. Inherently in the outlook we gave for the full-year, we're assuming we're going to have some modest growth sequentially in occupancy third quarter to fourth quarter and against that to be able to hold our rate. The spot to your point, spot performances would just suggest that's a reasonable assumption. I think it's important to highlight that we will see some year-on-year challenges, we had some non-recurring benefits in the prior year that were going to be lapping. So that's inherent in that forecast as well, I think the underlying sort of revenue profile though will be solid and very consistent with what we saw this quarter.

Thank u.

Thanks Nick.

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

Hi, good morning.

Hey Dan.

Hi. So, not that everybody [indiscernible] a couple of questions on that also. If we look at your portfolio today where the construction is, it doesn't look too concerning, but the general start cadence has been moving up, and up, and up for the last four or five quarters. What's your general view and concerns about, if we've look out 12 months 24 months - further down the line or how concerned are you about to supply getting I would say out of hand or just significantly higher than where we are today.

Well, I would start with the couple with the factors. We highlighted 70% of our portfolio today. We think is insulted based on the methodology that I described and we do have a great portfolio in that regard. That said, 30%, certainly does have exposure and we've seen that trend up as NIC has highlighted, no question about it. So what are we doing against that? I mentioned operational excellence is one way to really partner with the legs of the Atria to drive outperformance, so this is also about share gain. I think there is an opportunity to drive penetration. We've talked a lot about the value proposition of senior housing and how we need to make sure that's well understood. At 10% penetration it doesn't take more than one point of penetration growth to fill all the building in the United States. So that's clearly an opportunity. I mean at the same time, we have to think about portfolio strategy and how we think about our markets and our assets in that context and all of those things as we play our portfolio that as we look forward we think are going to be necessary and important. That said, we like senior housing, we like the SHOP business, we like our operators, we like our position and we are bullish on continuing to drive growth in that business.

Have you seen any current new developments start to struggle and discount against your properties at this point, I mean the other I guess related to question to that would be, if we can get really granular on the construction that's out there, what kind of price point are those assets that relative to your assets in those markets. I mean I think that's not just a level of construction, but what's being built out there as well that I would like to hear about relative to your portfolio

I mean, I think in general, we've taken a conservative or broad approach in terms of what's competitive with our asset across different price point. So that's actually a more conservative slice at looking at developments and I think from time and memorial in real estate you see that when new assets are filling, generally their owners will try to do that on an accelerated basis and that's typically where you see the impact and then that impact tends to evaporate as the new building sells. So, there is nothing different in what we're seeing than what you would normally see in this part of the cycle.

Okay. And then switching gears a little bit to the investment side of the external growth in portfolio, you are starting to see bid ask spreads widen out, but I would say they are probably pretty thin relative to historical levels. At the same time, we see high yield bond spreads really have widened out, but do you see any opportunities to - again maybe this isn’t a long-term strategy but a short-term strategy to go ahead and invest a little bit more on the CMBS side or somewhere in a debt stack within the healthcare real estate?

Good question. I think there has been a good level of stickiness on cap rates, because the assets continue to be attractive to institutional capital and international capital, et cetera and that really speaks to the resiliency and the quality and the strong cash flow from assets like we own which is good. We have seen the debt market widen out in terms of spread and we've done a good job over the years of taking advantage of different spots in the capital stack, because we are expert capital providers and that's part of I think to excellence that we bringing and so we are constantly evaluating in our investments decisions across the board, public-to-public, private-to-public, we're in the capital stack mez, bonds, et cetera within the healthcare universe. We believe there are good risk adjusted returns and opportunities and still maintain a diversified portfolio, still have a margin at safety and still the strong balance sheet and so I think there could be a opportunities in that vein and we're constantly as part of our investment team is evaluating those opportunities.

Okay. I appreciate that. Not a question, but just a general comment. Thank you for expanded information on the senior housing portfolio and the supplement on website is very helpful. Thank you.

Well we appreciate your saying so. So we work - there is a lot of people here who worked very, very hard to make Ventas excellent and also be responsive and transparent to the investment community and so we appreciate your saying so.

I'm happy to do so. I'll hop off and let others ask questions. Thanks.

All right, let’s roll. Next up.

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

Good morning everyone. Just a two specific short questions and one kind of longer one if you can indulge me. First of all, I just want to make sure I got this right for 2015 guidance same-store NOI growth guidance is 3.5% to 4%, but yet as a 3Q year-to-date you are at 4.4%, is that something you would need to happening in the fourth quarter that I'm missing?

Yes.

Yes, I highlighted the - short answer yes. I highlighted the Kindred releasing benefit that is coming to an end October 1, so you will cycles out of that in the fourth quarter. Even without that you are above 3% and that’s above where were previous CCP spin. So it demonstrates accelerated growth there.

Yes, totally got it thank you now. MOB portfolio 3Q pretty strong same-store NOI growth of 3.6%, but a lot of it seemed expense driven rather than top line driven. Just curious further outlook to kind of maintain operating expenses at current levels or if would expect to see a slowdown in same-store NOI growth going forward if the top line doesn’t move much?

Tayo this is Todd. We continue to control given our platform, our expense line. I think we've done that you year-over-year consistently around our controllable. I think you are seeing that here in the third quarter which again we continue to see and we’ll see that really throughout the balance of this year.

Got it, okay.

Yes, and occupancy trended up in the quarter sequentially.

Okay that’s helpful and then lastly Debby this one is more for you. It's just I mean we've brought up a lot of concerns that the investors have had about the hospital space over the past month or so and given the results that some other public guys have had. Brookdale has had its own unique issues that’s creating concerns about the outlook for senior housing. You are seeing a couple of the Skilled Nursing guys who are talking about pressure on volumes and also kind of talking about all this DOJ OIG investigations into overbilling on the therapy side. I mean there just seems to be a lot of headline risk across several of the healthcare property types. Sort of against that backdrop I mean what can Ventas really do to kind of just prevent people getting overly concerned about these issues and the potential impact on the company whether will or not?

Okay, well that’s a big question, I'll try to answer it briefly. It is fun to be in healthcare right now. I have talked about it as a dynamic sector. 20% of the GDP and like real estate 20% of GDP and we feel lucky to be at the intersection of those. We have a long-term secular thesis in the hospital business, which as I mentioned, we continue to espouse and believe there will be opportunities in this $1 trillion revenue business in the U.S. that is the nerve centre of healthcare, top of the food chain whatever label you would like to put on it and I think there is lots of opportunities there as healthcare continues to evolve those, hospital providers are going to be in the centre of it all with more and more influencing and control over where patients are treated and physicians and so on. So we remain excited about that and I think again, we have a great history in healthcare, we have managed Ventas for the benefit of shareholders through every imaginable reimbursement, capital markets and economic cycles and we have continued to deliver and perform. And so the way we address all of that excitement if you will cross sectors and healthcare is a due we've always done which is to find the operators, invest in the best real estate, have a margin at safety, stay financially strong and flexible and be really, really smart about how we work on diversification, portfolio mix and so on. And I think our hospital investment is evidence of that. Our spin is evidence of that. Our building, the MOB business with Todd is evidence of that. And so everybody has their ups and downs, everybody has their cycles. I think business teaches you to be humble, but at the same time we have demonstrated over and over again that we are good at managing this company for the benefit of shareholders and delivering results.

All right Debby Cafaro for NIC president 2016, I like that.

Well thank you very much. So let’s move on to our next questioner.

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

Thank you. Good morning. It's a quick yes or no question. Maybe if I could paraphrase your hospital kind of thesis given the uncertainty out there. You view that as an opportunity from the standpoint of consolidation perspective, is that the right way to kind of paraphrase your view on hospitals right now?

That’s one part of it, yes.

Okay, I said yes or no. So I guess I'll stop there. The triple net growth of 5.5% to 6% what does that compare to previously? How much of that go up with the spin of CCP?

Rich it's Bob. It's a little bit tough to kind of what you way through that because there is Kindred impact I described which cycled out October 1. If you take that out and you look to other performance in the quarter we are in aggregate well above 3% and in triple net above 4%.

which it was 2% to 3%.

And it was 2% to 3%. I think as we step back and think about when you look sort of like-for-like overtime what’s the differential in growth rates in triple net as a consequence of the spin, we could see something in the sort of neighbourhood of 40 basis points as a good proxy. So, when you kind of cut through it all that's how we think about it.

And then last question, Debby you could probably give an unvarnished view on skilled nursing now at 4% excuse me of your portfolio. A lot of talk about CMS and bundling and all sorts of pilot programs to move people out of post-acute into home health. I'm curious to what degree you think that that would be a concern in the space and also to what degree it cause you to spin off CCP, how much the dog wag the tail or the tail wag the dog from your perspective on that specific issue?

Yes, I mean look we've always said that we believed that Skilled Nursing Facility and other post-acute have a critical role to play in the delivery of care to seniors in the U.S. and we continue to believe that. I would say that as we go toward bundled payments and things like that I do believe we're going to see the hospital providers controlling a lot more at the dollars, which again plays into our hospital as the nerve centre thesis. And there will be a role clearly for a low cost setting, outpatient care, like we own with the Lillibridge business and that's an important part of the evolution that healthcare, but we do believe that the hospital business is going to continue to influence more and more of where patients go in post-acute settings. And to that point we specifically kept for example Kindred that is a leading post-acute provider in the U.S. and as we see them execute an excellent [indiscernible] around integrated care markets, I think they with the data that they have and the expertise and skill they have will likely be a winner as healthcare continues to evolve. So, long answer, but we believe in the post-acute space, we're happy with the portfolio that we've retained and we do think the hospitals will continue to play a larger role frankly in post-acute care with bundling going forward.

Are you hanging more of your hat on Kindred's home health business now, you think?

Yes. I think what's interesting is that we're hanging our hat more on Kindred as the leading post-acute provider with this very evolved, integrated care strategy in their market where they can be a one-stop shop for post-acute patients in any setting as they are discharged from the hospital. And so that's what we like about the Kindred story.

Understood. Thank you very much.

Thank you Rich.

Your next question comes from the line of John Kim representing BMO Capital Markets. Please proceed.

Thank u. On your 2015 guidance, your merger related and audit expenses went up significantly to $154 million for the year from $85 million last quarter. Can you just discuss why there was such a large increase in just the past three months?

Yes.

Sure, yes, there is really a couple of key factors there, one is obviously we closed Ardent in the quarter and so we had the deal cost associated with that. And then secondly we had obviously the spin separation related cost on that, both of those we kind of consider our transactional expenses.

And the spin was not in the previous, because we had not guided to that.

Right, exactly we had not included the spin costs as you recall in the last call, but plans to do so once we have spun it out. So those two really are what is driving that difference, it’s obviously focused in the third quarter where all the action happened.

So, your prior guidance even though the full-year guidance did not include the expected costs from CCP?

Correct, we were explicitly excluding the impact of CCP. We gave you the dimensions of it in terms of $0.20 to $0.22 that quarter, but we didn't give the specifics particularly around things like transaction separation costs.

Okay. Well, this year it's over 10% of your FFO and transactions do occur every year. So, can you just maybe discuss why it's added to normalized FFO?

Yes, it's an apples-to-apples comparison. We have always had normalized FFO, net of transaction cost, because obviously we exclude forward transactions from our guidance and if we simply stop doing transactions that cost would go away. So, we are trying to give investors the clearest indication of the underlined performance of the company. So that's why we started doing it year ago and why we had continued to do it on a consistent basis.

Debby based on your discussion of the wide bid ask spreads in the market, is the logical progression that until cap rates move up that acquisitions and disposition volume will probably slowdown or continue to slowdown?

Well again as I mentioned, we are disciplined investors and I think we have the opportunity to move around the wheel in terms of our diverse asset type that we have and so that's a real benefit to us, but we've really identified the kinds of activity that we think will be value creating and we're at the strategic, great real-estate, we are helping the customer and so on and so acquisition volume is always difficult to predict which is why we don't it, but we have acquired probably I don't know $3 billion plus a year over the past consistently over the past years and we will know what our volume is as we evaluate opportunities and see which one of them we think create good value for our shareholders.

But that would be on the disposition side of block and does that slowdown in third quarter?

We had originally I think talked in the beginning at the year about half a billion potentially for 2015. So we've well exceeded that with the $700 million year-to-date, so we feel good about that and we will continue to try to be thoughtful and good capital allocation includes, reviewing assets for sale and we'll continue to try to do a good job there as we look into 2016 as well.

Okay. And then finally on Brookdale, can you just discuss if you have seen any deterioration in operations and in any of your assets with them?

I mean, I think our experience with Brookdale is very consistent with their publically reported information.

So that would be a yes?

I think, they have - again it's pretty consistent with their overall public performance.

Okay. Thank you.

Okay. Thank you.

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

Hey, good morning. Few questions…

Hey Michael.

Hi. On the revised 2015 SHOP guidance range, why that so large for one quarter lastly, it sort of implies of four point possible range for 4Q?

Good question. I think we feel on the base case pretty solid. I think we mentioned we're continuing to do something to try to drive growth and that's going to result in some over under. So it might be overly wide to your point, but I think we want to leave ourselves a little bit of flexibility. So, I think run rate as I kind of go back to - if you look at the underlying run rate, we feel pretty confident in the fourth quarter revenue line and kind of we're that's going to come out.

Okay and then I'm going to use the modified version of Richard Anderson's yes or no, if you had to make a bet on where you will set 2016 SHOP guidance will be better or worse than the 2% to 3% for 2015?

I can’t wait to talk to you about that.

Okay. So you are not going to opine on that one?

That's a very consistent process we follow to rollout guidance and there is lot of work involved to do so and we will be happy to share that with you when it's ready.

We're working on that process with our operators right now.

Okay. I thought Rich’s approach might help me on that one. If you theoretically broke out your NOI growth, just conceptually for next year for SHOP, just staying on that same topic if you thought about it split between the 70% that you say is supply protected and the other 30%, how wide is that gap between those two buckets?

Isn't that a variation on the first?

Or just with your 2% to 3% for 2015 maybe you can think about it that way. Is it that materially different or not?

Yes, look I think where there is new supply that comes online, there will be an impact. There is no question about it and that will look different than the New York City and where you have and continue to see consistent growth, what's that spread it’s not something I would want to call today, but I assume it will be a differential. I think the thing we keep coming back to is to say the core engine is performing well, we like that. Our job is to make sure we continue to look at that other pieces there and how we can address that and to quantify that at this stage would be tough.

Okay last one for me if I can. Just on the triple net portfolio within senior housing, it looks like the occupancy has continued to decline, so I'm just curious A, on the supply concern there and then B, is that coverage at risk of kicking down in other word you have two decimals.

Can I just return to the prior thing, I mean obviously we have a lot of our triple net senior housing portfolio with Brookdale and this is second quarter data. So again, I think it's pretty much consistently following the publically announced comments from Brookdale that has an outside impact and again we believe they are going to get that back on track and so we feel good about that portfolio.

Okay, but it's not at risk of rounding down to the next coverage level?

At some point theoretically, but again it's a trailing 12 months number through the second quarter and it’s been pretty consistent there at 1.3.

Okay. Fair enough thank you.

Thank you.

Your next question comes from the line of Jordan Sadler representing KeyBank Capital Markets. Please proceed.

Good morning. Thank you.

Hi Jordan.

Good morning. So, I'm looking at the disclosure for the senior housing operating portfolio the trade area construction, the 4.1% supply number. Is that consistent with disclosure from last quarter or could you give us what that number was last quarter?

Yes. So it has changed, you are absolutely correct. The 4.1% is on the methodology as I described earlier with seven mile and three mile range, the old methodology was three only. On the three only basis we would have been at 3.2%.

Okay and what was the last quarter of seven mile basis, do you have that?

We have it on the three mile basis.

Yes on a three mile basis, so like-for-like 3.2% last quarter 3.2% this quarter. So trend wise under the old methodology no change.

And under the new methodology trend wise, do we know?

We haven’t got that…

Okay, I get it. And then I guess along the same lines, but really taking it from the other side, the demand side. We see the population growth estimates and we know them, but you sort of I think probably touched on the potential for increased penetration that could fill up the entire portfolio globally, nationwide. Can you talk about what you are seeing from a penetration standpoint sort of efforts to increase the level of penetration and if you think they are effective.

Yes. I think it's interesting, Bob comes from a marketing type companies and consumer products. And I think it's fair to say that we’re still somewhat neanderthal in our industry from his standpoint about how the market and improved market share, and I think his experience is going to help us and our operators to get better at that. But it's really interesting. I think the industry has incredible opportunities to sell the value proposition of what we are offering in senior housing. The wellness benefits to a senior of not being isolated, which has been deemed to be more dangerous than smoking. And also to sell - in selling the value proposition to charge for the kind of tier that’s being delivered to. In many cases high acuity residents. So that’s the big opportunity. I think you see also the opportunity for sales and marketing efforts which are really all kidding aside that’s very rudimentary levels Brookdale is now of course rolling out its new marketing campaign which is I don’t know if you have seen it, but it's quite good. And I think we have opportunities again on selling that value proposition and more sophisticated local and national marketing to really making impact on penetration.

And I would only add in more segmented offerings, so you don't have just sort of one size fits all, but you have different types of offers whether it would be by type as we've talked a lot about AL, et cetera, but also by price point amenities sort of environment and bringing some of those learning from other industry leaving even within REITs that have done that well. So I think those are all opportunities.

Okay.

Yes, well that helpful. Lastly on that penetration. Is there anything that you have historically that talks about your changes in the net penetration rate maybe over last 10 years?

It's been relative constant and again as Bob pointed out 1% of penetration sells up all the open units in the whole country. So it is a real opportunity and hopefully the industry will be successful in moving that as we look to this next five year period. So we've to move on Jordan sorry.

Okay. Thanks.

Okay. Thank you.

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

Thanks. I appreciate you guys taking the question. I just wanted to flash out you talked a couple of times about the long-term hospital strategy being able to start affecting that strategy with the Ardent acquisition. So it sounds like you guys are under the belief that more and more dollars will go through the hospitals through bundling. And I just want to see what are your thoughts on the long-term payor mix and volumes and the value of inpatient hospital. And then should we understand this as Ardent being the management company that you will use to acquire or are you listening to incoming calls in the sense that you would be willing to look at investments with other operator?

Let's just take that last one first, which is I do think because of the quality and experience Ardent's management team, it's scalable platform. We do have an opportunity to grow and consolidate with Ardent just as we did the Lillibridge MOB business, just as we've done with the Atria. But I also believe that we are going to build as we have in these other businesses a business and the inbound calls really are where we could work with the quality hospital system to really do some of sort of sale lease back transaction with them, and that would be a separate way for us to grow that business. As then in terms of the hospital again being the nerve centre of healthcare delivery, we do believe that the hospitals will play an increasingly large role as these different segments or sites of care start to convert in a post HCA world, and the hospital will be more influential and where the patient goes where comes from, where it goes, et cetera and that's part of why we want to align with that giant, very influential industry as you well know as we continue to invest in healthcare, we think that's a very important piece of the overall holistic delivery of healthcare and that they are at the top of the food chain. So, that's one thing and then in terms of - we look at this as really owning a market if you will of real-estate and not only the core hospitals but also the feeder and out-patient facilities that the hospitals may own, because healthcare has provided has holistically. And so, we would imagine that in that overall system because of demographics, because of improving economy, because of more insured patients, we're going to capture bigger volumes overtime.

And then do you have a target in terms of how big you want the hospitals to be as the percentage of the total NOI?

Our focus is really on the quality of the operator and the real-estate and their position in the market just like we've sort of done our MOB business where we've really done business with the best and 89% of our NOI comes from investment grades, hospitals, affiliations and HCA. So, it's really more of the quality of the opportunities that we get presented that will drive how big that piece of pie can get and the timing of our growth in that business.

Okay, and then last one just I think you said Ardent specific in the third quarter, talked about growing both top line and bottom line, any commentary specifically around payor mix and what they are seeing for commercial volumes?

Yes, I mean mix stayed relatively constant and so I think they had a good quarter across the board.

Okay, thanks.

Thank you. Okay lets go guys.

Your next question comes from the line of Todd Stender representing Wells Fargo. Please proceed.

You mentioned earlier that the CCP spin improved your cost of capital. Can you just discuss what factors you look at to make that statement?

An improved relative cost of capital and what I mean by that is simply when you strip out market tinges say in the REIT market that multiple improved and so it's just as simple as that.

And the ratings agencies, do they make any comments on now you don't have SNF exposure?

I would say that the rating agencies have acknowledged in our conversations with them that we have a higher quality, more private paid portfolio that is very attractive and so I think we agree on that.

I think they would say it's a credit positive?

Okay thanks and just a quick one for Todd, can we hear your expectations for what the MOB portfolio, same-store is going to look like, maybe just your revenue expense in NOI growth?

Well as Bob alluded we are modified our guidance. So, we see ourselves in that 2.5% to 3% range, I think we will be at the upper end of that range by year end and we see that range going into 2016 as well.

And any changes to your CapEx assumptions?

No, not as we it now, except for the fact I think we're going to see some significant redevelopment opportunities in our portfolio next year.

Great. Thank you.

Thank you. Okay, we have a couple more or one more? Okay finish that and clean out.

Your final question will come from the line of Michael Carroll representing RBC Capital Markets. Please proceed.

Can you guys give us some color on the hospital inbound calls that you received are these from for profit operators and what did they need to be capital for?

Again, the hospital sector is very gigantic and Todd has about 400 clients, so I won't go down his call list, but it's both type I would say as we've mentioned before there is not for profit, there is for profit, there is publicly traded for profit, there is private equity backed for profit. So this is all across the board and so I think what the opportunity we have is really to show how we can really provide capital to high quality operators that will help them run their business better, we'll help them grow, we'll help them consolidate market share and then they would use those proceeds for sort of income producing, consolidation, adding debt covers, that type of thing, I see all the kinds of high returning activities that a hospital can do.

Then last question does the dislocation in the public hospitals stock prices over the past month or so, does that provide then causes more opportunities to deploy capital in a space or is it just too early to tell?

I think it's too early to tell but I do believe in this long-term secular thesis and I do believe in the recent activities and excitement in our space will give us greater opportunities and we'll be patient, we will look for quality and we'll look to win with the winners as we have every other segment so thank you.

Great. Thanks.

Any other questions, Mike?

No, I'm good.

Okay. Great, well thanks for bearing with us guys. We really appreciate as always your time and attention. It was an incredibly productive quarter and we can’t wait to see and move on the 9th and the 10th. Thank you so much.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.