Ventas, Inc. (VTR) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2015 Ventas’ Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] And we'll facilitate a question-and-answer session towards the end of today's presentation. I would now like to turn the call over to Ryan Shannon, Investor Relations.

Thanks, Warren. Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the yearend quarter ended December 31, 2015. As we've started, 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. Good morning to all of our shareholders and other participants, and welcome to Ventas yearend 2015 earnings call. I am delighted to be joined this morning by my Ventas colleagues to discuss our exciting and productive year, highlight the innovative and strategic transactions of 2015 and discuss our outlook for 2016. The Ventas advantage of superior properties, people and platforms has enabled us to consistently deliver outstanding results through multiple cycles for almost two decades. That is what distinguishes us. Over the years, we've demonstrated excellence through clear commitment to our shareholders, dedication to our customers and partners and engagement of our skilled interdisciplinary team. Ventas has a long track record of delivering superior FFO and dividend growth. We continued our outperformance in 2015 with 9% comparable normalized FFO per share growth and a 10% dividend increase inclusive of CCP. Our excellent and diversified portfolio generated industry-leading same-store growth during the year and we ended 2015 with a strong balance sheet and $2.2 billion of liquidity. During my 17 years at Ventas, we've seen a lot of changes in our markets and we've become the leading provider of capital to high quality healthcare and senior housing companies. We've navigated successfully through multiple economic capital markets and reimbursement cycles and have continued to grow with strength and integrity. We haven't gotten everything right to be sure, but we've been consistently early and opportunistic relative to the five asset classes where we do business. In 2015, we were once again at the forefront. Our experienced team really stepped up to complete several important and complex transactions that significantly improved Ventas and showed our continued ability to stay ahead of the curve in healthcare real estate, which we strongly believe is an attractive place to be for investors. Key accomplishments of the year included our strategic disposition of nearly $5 billion in assets, including over $4 billion of skilled nursing facilities through our innovative tax efficient spin-off of Care Capital Properties, and completion of over $5 billion in accretive acquisitions, including our successful beachhead investment in the large, attractive hospital space with Ardent, a top 10 provider of care. These successful transactions have reshaped our enterprise, provided additional channels for growth, improved the quality of our portfolio and enhanced the reliability of our cash flows. Beside specifics, our balanced and diversified portfolio generates industry-leading 83% of our NOI from private pay sources, principally medical office buildings and senior housing communities. Our partners are the best in the business. Post spin, over 80% of our NOI comes from top operators in each sector who have scale, a sound capital structure and operational excellence. We have a nice balance in our portfolio among operating businesses and triple net leases and none of our tenants represents more than 10% of our NOI. Importantly, Ventas now generates only 4% of our NOI from our 53-owned skilled nursing assets. Most of our post-acute facility rent comes from Kindred, our largest tenant. All of our post acute facilities produce excellent two-times property level cash flow to rent coverage and our rents are guaranteed. Kindred has become the nation's leader in post-acute care with a well-developed strategy, strong balance sheet and diversified business model. Our entry into the hospital space in 2015 was also a significant example of our ability to capitalize early on trends in healthcare and create high-quality platforms for future growth. We invested $1.3 billion in Ardent's extensive network of real estate sites in three key markets. As we demonstrated during our Investor Day, we think it’s smart business to align with leading hospital providers who have always been at the top of the food chain in healthcare services and are increasingly influential in the delivery of care and the distribution of dollars in a rapidly evolving healthcare system. Ardent provides both inpatient and outpatient care throughout its multiple access points in its market and it just completed a strong year where same-store revenues, adjusted admissions and ER visit showed solid growth. Our investment in Ardent was expertly executed and structured with outstanding property, EBITDARM to rent coverage and low leverage at the operating company. It was also very timely. We're seeing significant deal flow and actively working with our partners at EGI and Ardent to consolidate and grow. While the spin-off of CCP and our Ardent investment have rightly received a lot of attention I also want to highlight our senior housing portfolio and our commitment to that important sector. Atria had another outstanding year and we thank John Moore and his team for their significant contribution to Ventas's success. I'm really glad you had a chance to see Atria's excellence during our Investor Day. Senior Living is an incredible space whose potential is only beginning to be realized. Despite the ebbs and flows of supply cycles, we own an outstanding portfolio of SHOP communities and advantaged markets and high-quality triple net leased assets. We believe deeply in the value proposition of senior housing. As an industry, we have tremendous opportunity to advocate the benefits of communal living to our residents and their families. Growth in the senior population will provide undeniable tailwinds and increasing demand for our communities. And a mere one percentage point increase in the seniors who choose to live in senior housing community would create powerful new incremental demand, enough to fill all currently vacant senior housing units in the nation. We continue to invest in our properties during 2015 to fuel future growth through increased capital allocation to selective high-quality, ground-up developments and redevelopments. We committed over $200 million to ground-up development projects including a trophy medical office building in Downtown San Francisco connected to Sutter Health, newly constructed flagship $2 billion hospital, as well as two luxury senior housing communities in Palm Beach Country in San Francisco. On the redevelopment front, in 2015 we committed to approximately $150 million in SHOP and triple net redevelopment projects. These investments should provide attractive risk adjusted returns, improve the quality of our properties and help our customers maintain and expand their market share. We also allocated a portion of our strong cash flow to our shareholders through our cash dividend, which has always been and will continue to be an important component of the value proposition we offer our shareholders. Ventas has one of the best dividend growth records in the REIT industry and with a projected 70% FFO dividend payout ratio, we're well position to continue growing our dividends into the future. That's a good segue to our 2016 outlook. Our expectations for the macroeconomic environment are tempered. We believe the U.S. economy will remain in a low-growth, low-interest rate and low-inflation mode. Our segments should once again prove resilient because of the inelasticity of demand, the rapid aging of our population and the need-base nature of healthcare services. In that context, we are happy to provide 2016 normalized FFO guidance representing 3% to 5% growth per share on a comparable basis, which assumes the CCP spin-off occurred at 11 of '14. In 2016, we intend again to drive excellent consistent results by focusing on operational excellence and continued portfolio optimization in our senior housing operating and medical office building businesses, building on our advantage platforms including hospitals in Atria, recycling capital through value creating dispositions, making attractive accretive new investments including improving our properties through development and redevelopment, providing innovative capital solutions to leading healthcare and senior housing providers in a dynamic market and harnessing the potential empower of our outstanding and cohesive team at Ventas. That Ventas team has delivered superior consistent results for investors and customers for almost two decades. We have the properties, the people and the platforms to continue leading our sector. I want to thank our investors for having continued faith and trust in us. You are in safe and sure hands. Now, I'm happy to turn the call over to Bob Probst who is hosting his second yearend call as the CFO of Ventas. Bob?

Thank you, Debby. I'm pleased to report an outstanding year of growth for our portfolio of nearly 1300 diversified senior housing, medical office, post acute and general acute care hospital properties. Our overall same-store cash NOI for the portfolio grew an impressive 3.8% for the year, right in line with our 3.5% to 4% full company same-store guidance range. Our triple net business lead all segments by growing same-store 5.8% in 2015 with SHOP full year results in line with our 2% to 3% guidance and MOB is up 2% year-over-year. For 2016, we expect our same-store cash NOI to grow in the range of 1.5% to 3% for the overall portfolio. Let me detail our 2015 performance and our 2016 outlook at a segment level, starting with SHOP. Our same-store SHOP portfolio increased 2.3% for the full year 2015 over 2014. For the fourth quarter of '15, SHOP same-store cash NOI increased 1.1%. These results were in line with our expectations for the fourth quarter. As expected, same-store occupancy in Q4 trended mostly higher and strong rate growth held together driving 3% revenue growth. Adjusting for approximately $1.7 million of nonrecurring items in the fourth quarter of 2014, same-store NOI for the fourth quarter 2015 grew 2.4% versus prior year. As seen throughout 2015, our NOI performance in the fourth quarter was led by continued strong growth across many of our high barrier-to-entry infill locations. Key markets such as New York, Los Angeles and Boston grew organic NOI more than 6% in the quarter. Double digit NOI growth in tertiary markets also continued in the quarter as a result of productive development and redevelopment activity. SHOP performance in Canada in the fourth quarter, the first quarter in which the 29 assets acquired from holiday in 2014 are included in same-store showed an expected modest decline. During the year, Atria accelerated the transition of these assets to its operating model in order to position them for future growth. Q4 performance was affected by new supply coming online within our relevant trade area in a number of markets, notably Huston, Chicago and Sacramento saw NOI declines in the quarter driven principally by occupancy pressure. As a reminder, last quarter we introduced a more refined supply methodology, which identifies new buildings under construction within the relevant seven mile and three mile trade areas around our assets based on population density. On that basis and using the fourth quarter NIC data, more than 70% of our SHOP portfolio NOI comes from markets that are in supply equilibrium or better. The 30% of the SHOP portfolio NOI that is exposed to a potential new supply surplus represents less than 10% of Ventas total NOI. Remember that our methodology assumes 3% absorption and is arguably conservative as it is assume that all new supply within the relevant trade area is competitive regardless of care model, price point etcetera. Using this methodology, construction as a percentage of inventory across our SHOP portfolio stands at 4.5% in Q4, a 40 basis point increase from Q3, principally driven by market such as Atlanta, Sacramento and Denver. Against this backdrop, Ventas and our focus leading SHOP operators are working to drive operational excellence to gain share and grow even in the context of new supply. Our largest operator Atria continued to drive strong results in Q4 and for 2015 overall. These results are a testament to the operational excellence demonstrated at our Investor Day in November at Atria's Headquarters. Now let’s turn to our guidance and key assumptions for our SHOP business. In 2016 we project SHOP same-store NOI to grow in the range of 1% to 3%. This outlook assumes that our core engines of growth namely the 70% of our SHOP portfolio insulated from supply will continue to grow NOI at a mid single digit rate in 2016. This growth will be partially offset by assets in the markets where we anticipate increased supply challenges. As we begin the year, we're pleased with the mid single digit annual rental rate increases that took effect in January 1, 2016. These increases appear to be holding up well, thus demonstrating the value proposition of our communities and our operators. In fact our SHOP operators have some exciting plans in place in 2016 to compete and thrive in the market to retain their great teams and to deliver value to seniors and their families. Next I will cover our triple net lease portfolio, which accounts for 44% of our NOI. The 507 same-store properties within this portfolio comprised of senior housing and post-acute assets delivered accelerated growth increasing 5.8% in 2015 versus 2014. As we mentioned in previous calls, triple net's 2015 performance benefited from the $15 million rent increase for the Kindred assets where we increased rent to market levels in October 2014 as well as other income items. Even after adjusting for these items full year same-store NOI in the triple net portfolio grew 3.2% above historical trend in confirmation of the positive growth impact of CCP spend. In the fourth quarter triple net same-store cash NOI grew 2.9% reflecting customer rent escalations as well as recycling of the Kindred increase in Q4 of 2014. Trailing 12 month cash flow coverage in our same-store triple net lease portfolio for the third quarter of 2015 the latest available information was solid at 1.5 times. As Debby mentioned our post-acute coverage is a strong two times although we had a 10 basis point compression due to the combination of the aforementioned Kindred rent increase and lower third quarter performance. Coverage in our triple net senior housing portfolio remained solid at 1.3 times. Occupancy is up 50 basis points sequentially and operator EBITDARM and rates are higher year-over-year. For 2016, we expect our triple net portfolio to grow in the range of 2% to 3%. Consistent with our practice, we have not included in our 2016 triple net projections, speculative fees, which has the effect of lowering the growth rate in our '16 outlook. Let me close out the segment review with our leading MOB business, which represents 20% of Ventas’s overall NOI. Our Lillibridge business closed its full year NOI in the total consolidated portfolio of 364 properties of $381 million in 2015, an increase of 33% over 2014. Performance was driven by the addition of 83 properties from the HCT acquisition in January. Occupancy in the total portfolio in 2015 was up 40 basis points to 92.3% and margins increased by an exceptional 330 basis points reflecting the quality of the properties we acquired as well as the cost synergy arising from leveraging the Lillibridge platform. In the 268 properties in the same-store portfolio, full-year 2015 cash NOI grew a solid 2%. Occupancy declined modestly in 2015 versus 2014. Revenue grew slightly as a result of a roughly 2% increase in rental rate and NOI margins improved 40 basis points on the yields of cost productivity initiatives. In the fourth quarter, MOB same-store cash NOI was stable versus 2014. The rate growth in the quarter remained solid at 2% versus prior year while expense growth outpaced revenue growth due to unexpected R&M cost increases. We forecast our MOB same-store segment to continue to provide steady growth in the 1% to 2% range in 2016. This guidance assumes modest occupancy and rate growth and continued cost productivity. In 2016, our MOB team is actively working on driving occupancy gains, enhancing our portfolio of quality further to asset disposition and commencing on significant potential redevelopment opportunities stemming from our well located portfolio. Turning now to our financial results for Ventas. As a quick note, I will frequently refer to our results on a comparable basis, which adjust all current and prior periods for the effects of the spin-off as if the spin-off is completed in January 2014. This is best practice for spin situations and is intended to give investors a true like-for-like reflection of our performance. Please note that adjusting for the spin-off comparable normalized FFO per share was $3.95 in 2015 and $3.64 in 2014. Details of both our reported and comparable FFO per share are set forth on Page 25 of our Q4 supplemental. Turning to Ventas’s outstanding financial results overall for the full year 2015, full year 2015 normalized FFO on a reported basis totaled $4.47 per fully diluted share, topping our most recent full year FFO guidance range of $4.43 to $4.46 per share. On a comparable basis, full year 2015 normalized FFO per share of $3.95 represents 9% growth over 2014. This strong year-over-year growth was driven by outstanding same-store NOI growth of 3.8%, together with over $5 billion in new investments in the year, including our beachhead investment in the U.S. acute care space with Ardent. We also invested $232 million in CapEx during 2015, inclusive of high return redevelopment and development investments. To fund these investments, we recycled capital and enhanced our portfolio via over $700 million of asset sales and loan repayments ahead of our original guidance of $600 million. We also issued and sold $7.2 million of shares of common stock for approximately $500 million under the ATM. Nearly 80% of this ATM is -- issuance was pre-spin at a gross price of $72.94 while the remaining 20% was issued post-spin at an average gross price of $54.87. In 2015 we continued our track record of strong cash flow generation, delivering a record $1.4 billion in operating cash flow for the year. With our strong cash flow, we paid attractive cash dividends to shareholders totaling $3.04 per share, including a 10% increase when combined with CCP. The company's liquidity profile was solid at yearend including exceptional fixed charge coverage of 4.5 times, net debt to adjusted pro forma EBITDA of 6.1 times, a weighted average maturity approximating seven years and debt-to-total capitalization of 37%. In the fourth quarter, Ventas delivered normalized FFO of $346 million or $1.03 per fully diluted share. On a comparable basis, normalized FFO per share grew 7% in Q4 2015 over prior year. In the fourth quarter the company acquired $93 million in high quality MOBs. Ventas also committed to funding approximately $240 million in new development in redevelopment activity. The fund investments we raised $167 million under our ATM program during and after the fourth quarter issuing three million shares at an average price of $55.42 per share before underwriter discount. We also continue to recycle capital through asset dispositions in senior housing and MOB assets generating proceeds of $105 million in Q4 of '15 and $61 million thus was in Q1 '16. Before we take questions, I want to share a summary of our outlook for 2016. Our expectation as we begin the year is to deliver normalized FFO per share in the range of $4.07 to $4.15. This range represents a comparable normalized FFO per share growth rate of 3% to 5% over 2015. As highlighted earlier we project total company same-store 2016 cash NOI growth to range from 1.5% to 3%. During 2016, we intend to continue to improve the company through intelligent value creating dispositions and deliberate balance sheet strengthening. Our guidance assumes 2016 asset dispositions of approximately $500 million using a mid-year estimate of completion. We intend to use net proceeds to reinvest in about $350 million of new acquisitions, generating immediate cash returns and to fund our accelerating development redevelopment program, which will generate growth and returns in future years. We have assumed no additional material acquisitions, dispositions or capital activity in our guidance. Through application of operating cash flow and asset sale proceeds to both new investments and debt reduction, we project the reduction in leverage in 2016 to below six times net debt to EBITDA. So in summary, the entire Ventas team is proud of the excellent results we delivered in 2015 and we're excited to sustain that excellence in 2016. With that I will ask the operator to please open the line for questions.

[Operator Instructions] Our first question comes from Juan Sanabria from Bank of America.

Hi good morning. Thanks for the time.

Good morning.

Good morning. On the post-acute business, can you give us a sense of the facility level EBITDAR between your Kindred, SNFs, and LTAC/IRF businesses, those two separate? And if you have any sense of how those are trending in the fourth quarter?

Good. Juan we have about equivalent strong coverage of two times EBITDAR at the SNFs, and LTACs and obviously combined in the whole post-acute portfolio.

And any sense of how that's trending in the fourth quarter, given some of the news that has come out?

Well I would tell you this, most of that post-acute rent is from Kindred as I mentioned and Kindred’s guidance is for a better fourth quarter than its third and so we believe the really good operators are good in part because they provide quality care and also because they manage through constant changes in reimbursement. And so as we showed during our Investor Day, we felt very good about that. So we think Kindred will be managing through the reimbursement changes in the fourth and throughout 2016 relatively well.

Okay. What do you guys assume for management fees again?

And this is what typically the industry standard is, is either 4% to 5% on skilled and 2% to 3% of revenue on hospital assets.

Okay. Great.

Yeah so that would be about in total on our Kindred portfolio about 30 basis points to get from EBITDARM which is two times to EBITDAR.

Okay, great. Thank you. And then on the RIDEA, I think Bob mentioned a one-time expense in 2014 that kind of maybe messed up the year-over-year comps on the expense side I believe. Correct me if I'm wrong. But if you could give us a sense of what that would have been on a normalized basis, and as a whole, what you guys are expecting for occupancy rate and expense growth for '16. And if you have any sense of how the first quarter is trending to date

Sure, Juan, so I think there are a few questions in there, let me start with the fourth quarter and characterize the non-recurring expenses where they hit. So about $1.7 million so that takes, when you adjust for those, the NOI growth from 1.1% to about 2.4% same-store for the quarter. So pretty much in line quarter and year if you look at it that way. And these non-recurring tend to normalize over the course of the year. So I think that’s a reasonable way to view the year overall. The margin and expense versus revenue profile in the fourth quarter to note reflects that one-time type benefit in 2014. So when you align for those in margins are really in line, expense grew in line with revenue, so that’s the fourth quarter. As we think about ’16 and how we model ’16, overall on a blended side I highlighted a 1% to 3% outlook for SHOP overall, really has two building blocks to that and really important to highlight those. The first is we call it the 70% engine room of growth, the markets like New York, Los Angeles, the coastal markets in which we have a strong hold. We think those markets are going to grow mid-single digits. So that’s a continuation of the momentum we’ve seen in those markets in 2015. That will be partially offset by call it the 30%. That is the list of markets, which may be affected by supply challenges and really to think about what those challenges might be, it’s hard to model exactly because it could be a function of occupancy, it could be a function of rates, even a potential expense impact, but overall we think that on a blended basis, that performance for that 30% will bring down the overall average. So it will partially offset the strength and momentum we see in the 70%. Therefore overall coming back to your 1% to 3% growth overall showing the benefit of a great portfolio which we think we have. So within that I can give more assumptions, but that’s the overall flavor for ’16.

So that 30% is going to have a mid-single-digit negative type number to offset that 70%, most of the growth in that 70%? Is that a fair characterization?

We think it will be a range and indeed we went back to try to truly understand this and modeled where we have assets where there has been new supply coming online what happens and we've had pretty good experience of call it 40 properties where we’ve seen that. And there tends to be a wide dispersion of outcomes there as there will be in any portfolio. But overall our guidance range reflects what we think the essential median is of that, so you can do the math as you did to reflect the overall for that, but again that’s partial offset to the 70%.

And just lastly, any sense on how the first quarter is trending with a mild flu season to date? How are you guys feeling?

Sure thank you I should have mentioned that. So I highlighted first of all strong rent into - rental increases effective January 1 mid single-digit, which is really great news. We’re really pleased to see that. We’re really pursuing a rate driven strategy. We think that’s a wonderful way to drive profitability and seeing those rate letters go out in that performance thus far holding is very encouraging, that together with the fact as you know that we have the flu season challenge in the prior year that we're lapping would suggest just from a phasing point of view the first quarter would be a better comparable for us overall for the year. So we're pleased with the start. Obviously the occupancy that we begin the year with is below last year but again that's reflective of that rate strategy I highlighted. So very intentional as we think about our first quarter performance.

So we feel good about the way the year is starting in SHOP and Juan we're going to move on to our next questionnaire. Thank you.

Thanks for the time guys.

Thank you.

Next question comes from Smedes Rose with Citigroup.

Hi, thank you.

Hi Smedes.

Just on -- I wanted to ask you too, now that you've had a little more time to see some of the new supply coming into your markets for the -- on the SHOP side of the business, are you seeing, I think as you've indicated before, that maybe the competitors are a little more aggressive in pricing? And is that still how it's playing out as they come along? Are they typically targeting the same price point customer that you guys are or is it something below? Maybe just some color around how the competitors are behaving.

Sure. I think it's important to highlight the point you make, which is we've assumed in our methodology that all new supply will compete. We think that's a conservative point of view because as you say price point model AL versus IL, location, operator, all matter. We've taken a very conservative position we think to assume that there will be some level of competition irrespective of those items. So that's a conservative point of view. Indeed what we do see though is different ways that folks compete within the market. As I said it could be occupancy, it could be rate. The key for us is really to drive the operational excellence. I'll come back to that that theme to really win and grow in those markets. So when you have a great team, you have great processes, you can differentiate through yourself, you have a great track record to compete against the shiny new penny as I describe it and win. And that's what we were really focused.

Okay, thanks. I wanted to ask you just sort of bigger picture I guess, too, the overall acquisition activity has slowed in the second half of 2015 in general across REITs. What changes are you seeing, if any, on pricing? Is there a re-pricing underway so sellers can start moving product more quickly, or are they holding fast or what are you seeing in general?

Smedes, this is Debbie, I would say that as we've talked about the last couple of quarters we've been very selective in terms of our investment activity, very focused in terms of our capital allocation and there definitely has been a period of price discovery ongoing and volatility certainly creates a wider bid/ask spread and so until we get through that time period I think you will see again very selective investment activity on our part. But we are mid ways through that process I would say. And there are deals that we want to do and that we can do and those again will be development, redevelopment, it will be hospital, it will be supporting our customers with the right kind of assets to help them build market share and we still think there are opportunities for us to play but very selectively.

All right. Thank you very much.

Thank you.

Next question comes from Andrew Rosivach from Goldman Sachs.

Good morning, everybody. Debbie, it sounds like you're fighting a cold.

Little bit. Yes I am.

I'm sorry to hear that. I did want to just hit the SHOP guidance. As you probably know, last year you started at 3 to 5 and you ended up at 2, 3. If you look at the 1 to 3 now, what's the narrative? Is it we know what happened last year and we've gotten better at this; we know it won't happen again? I'm a real estate guy; retail they will throw in a cushion for bankruptcy. Or do you think it's fear or is this like, look, SHOP is short duration; it's low margin; it's just difficult to forecast?

Well, this is Bob's second year. So I'm going to let him answer that question.

I just we learned something last year no doubt as the year progressed there was a lot we talked about whether it's flu season or challenging year-on-year within any one quarter, but certainly the reality of increasing supply as the year unfolded presented itself and we saw that impact particularly in the fourth quarter as I highlighted. So as we think about '16, we think we played it down the middle Andrew. We've looked at the momentum in the current markets and as I say we expect that to continue. It's really a question then of modeling what is the supply in fact going to be. And only time will tell, but we try to be as factual as we could be as I said looking at experience and therefore we think we've played it right down the middle but we'll see.

And just to make sure, off of Juan's question, there's no backend hockey stick here? If anything, you think in the first quarter you can be ahead of where you are for the full-year guidance?

Yeah there is no hockey stick a good start to the year first quarter would be the easier comp from a flu season perspective, but we shouldn't expect wild fluctuations quarter-to-quarter.

Great. Thanks a lot team.

Next question comes from Kevin Tyler from Green Street Advisors.

Good morning guys thanks.

Hi Kevin.

Can you talk a bit about Ardent? And I think you talked about the managing shift or managing the shift to Medicare Advantage, the new Medicare payment regime. But specifically, when you talk about the revenue mix, I noticed you put in numbers for the supplement, thanks for that on revenue mix, saying 100% was from Medicare or Medicare and private sources. I was just curious about that, that there was no Medicaid at all in Ardent. Maybe you can explain.

Hang on I will. Okay let me answer that for you. Okay. And I have to look at the supplemental to what you refer. There is certainly some Medicaid in the Ardent portfolio. So Ardent is a very high quality operator. It had a great year. I would tell you that we like both the shift in our overall portfolio to 83% private pay NOI as well as the new channel for growth that we have in Ardent. And as you saw in our Investor Day, we have really focused our portfolio on working with healthcare providers who are excellent and experienced at managing through changes in the healthcare services environment. And we certainly are in dynamic policy environment now and we think Ardent has the right characteristics to be able to manage through that.

Okay. Thanks.

Yeah okay. And by the way I was very pleased to see that you have embraced our framework on post-acute services in your recent report and we agreed with everything until you got to the stock recommendation.

Well I appreciate that and thanks for the color on Ardent. I do think -- so just to make sure I heard you correctly, there is some Medicaid in that portfolio, correct?

Yeah so all healthcare services have as a quality mix and we particularly like State for there is Medicaid expansion and Ardent certainly has a good quality mix that includes some Medicaid patients.

Okay, got it. And then last thing for me, following up on Smedes's question earlier regarding transaction activity. Not Ventas-specific, but in the markets as you are working with players looking to sell, what are you seeing specifically on the cap rate side? Have you seen a move up in cap rates in senior housing, and MOBs specifically?

MOB is a hot asset class.

Yeah this John. We're seeing -- we're still seeing both Class A and Class B medical office trade in the 6 to 6.5 sometimes below 6. On the senior housing side, we haven't really seen any a lot of Class A senior housing properties come to market, but we've also seen a fair amount of Class Bs move up 50 basis points in spreads.

One interesting data point that we have is Bob mentioned that we did sell some assets in the first quarter and we sold a senior housing asset in Salt Lake City for fixed cap and generated a very significant gain on that. And so that's one data point that would suggest that cap rates for senior -- quality senior housing remained pretty strong certainly for good quality assets like we owned.

Okay. Thank you.

Thank you.

Next question comes from Chad Vanacore from Stifel.

Hey, good morning all.

Hi, Chad.

So, Bob in your prepared remarks you mentioned that MOB cost frapped up in the fourth quarter and can you unpack that a little bit and tell us what was driving that?

Sure, again I think quarter-to-quarter volatility is a fact of life not only in SHOP but in MOB and particularly in the cases of fourth quarter, we had some unexpected R&M cost increases. There tends to be some variability and volatility in those and we got hit particularly in the fourth quarter and late in the fourth quarter for that matter. So, I’d really come back to the full year performance of 2% that’s very much in line with the expectation for '16 steady and stable as she goes should be the way I would highlight that. So kind of a unique quarter just in the fourth.

All right and then just thinking about your overall assumptions on your same store NOI for SHOP portfolio in that 1% to 3% range, can you guys give us a little bit more detail on how you're thinking about rate versus occupancy in that number?

Sure, on a blended basis, so for the total portfolio I would say, flattish on occupancy. Again I come back to we're very much pursuing a rate driven strategy. When you look at NOI sensitivities, rate very much trumps occupancy and therefore we think a good profit approach and therefore as we look at it, the NOI is driven by rate and again very much encouraged by the start to the year those rate letters are important. So that mid single digit rate increased starting Jan 1 really is central to that full year performance.

Okay. And on that Jan 1 rate increases, what percent of your portfolio get those bumps on Jan 1?

The majority, there is some staggered timing on it. Not everybody starts on the 1st of Jan. So different time periods, but the majority.

All right and then just thinking about your markets and the 70% of the markets that are not facing pressure, would you say most of those are high barrier markets in terms of rent or any other local functions?

They are absolutely the high barrier markets and at the Investor Day, we talked about the fact 50% of our SHOP portfolio was in Coastal markets and when you look at those that is where we really see the strength. We see high rate, high RevPAR, we see high margin and we see very limited supply in New York, our largest market is the case study of that. I've highlighted the last two quarters of strong performance in NOI. That strong momentum really reflects that great position, great market scale this idea of cluster markets and very limited supply. And so those together drive that engine of growth I’d call it that we’ve seen in '15 and expect in '16.

All right, thanks. I’ll hop back in the queue.

All right, thank you.

Next question comes from Ross Nussbaum from UBS.

Good morning, everybody.

Hi, Ross.

Hi.

Debbie, can you talk about underlying your commentary that 70% plus of your markets are at equilibrium or better status on the senior housing side, you had said that assumes 3% absorption, why do you believe that in 2016, 3% absorption is the right number or is that longer term aging of the baby-boomer long-term trend assumption.

Ross, this is Bob, we’ve modeled it every which way. I would tell you that 3% assumption really looks at a 75 plus population and its growth rate in '16 and the CAGR of the next five years. If you looked at 80-plus within our trade rings you come back to the same number, that central tendency I would say of 30% of the portfolio being exposed really comes back no matter, which methodology. The 3% therefore is the combination of population growth and then some level of obsolescence which is relatively small. Overall averaging assumption, it will differ by market, but we think as we've pressure tested it, we think it holds up very well.

Couldn’t have said it better myself Ross.

Okay. That’s helpful. The second question I’m looking at page 20 of your supplemental, in October of last year you guys had a disposition of some triple net senior housing assets for $78.448 million and then you also had a debt investment of $78.448 million, did you swap in equity stake for a debt investment or were those the same assets?

They are the same assets and if you look at Brookdale's disclosure, you’ll see something similar. Brookdale had some purchase options on NHP assets and basically we have helped Brookdale exercise those purchase options as they have basically purchased the assets and we've provided purchase money financing that is secured and guaranteed with those assets over a five-year time period.

It looks like the same yield is what you had when you actually owned the property?

Exactly, exactly. So it’s a good collaborative deal for both companies.

Appreciate it. Thank you.

You’re welcome.

Next question comes from Rich Anderson from Mizuho Securities.

Thank you. So when you look at Ardent, excuse me and you think of the same-store growth profile of that organization within your -- under your flag now, I understand you don’t have a same-store outlook as you don’t have the right amount of time with it, but what do you think about that as an internal growth engine? Is it in the low single digits like everything else or is it something different?

Yes I think in general the healthcare services business over long periods of time will generate low single digit same-store EBITDARM growth. We have always structured our leases and our investments in those businesses with a margin of safety through property cash flows, coverages, credit in structure. And so you’ll see ebbs and flows that are predictable and contemplated in those cash flows, but over time they’re as you say in the low single digits and if properly structured will provide good risk adjusted, reliable rents and rent growth.

Okay. And the reason why I slipped and said Forest Park is because I was wondering if Ardent would have any interest in some of those assets in Texas that are under review right now for sale?

As I mentioned without commenting at all expressly or impliedly on any particular assets, I would tell you that we’re actively working with Ardent and EGI on acquisition and investment activity. If you go back to our Investor Day what you would see is what our criteria for investments in the hospital space are and it’s very high quality market share and numerous other characteristics that we laid out there. So that you should focus on as you’re looking at where we would be likely to invest with Ardent.

Fair enough and then last question, Debbie you mentioned a 30 basis point impact from EBITDARM to EBITDAR on the two times skilled nursing coverage, what is the -- and are you talking about that goes from 2 to 1.7 or you talking about 30 basis points reduction to 2, I want to make I understand that?

Yes that's on our post-acute business, which is on the South Kindred. So you would re-quote EBITDARM…

Right.

Because again there are different management fees that different people apply. And so it would be about 30 basis points to get to EBITDAR coverage, which is very good, very strong and we still believe in our portfolio…

17.

Yes sir.

Premium 17 right?

Yes at the asset which again is further enhanced by corporate and other guarantees and structures that just pulled multi-facility master leases.

Fully understood.

Yes, we I think have really distilled our portfolio into just a great one.

Okay. And then is the same 30 basis point applied at 1.3 times EBITDARM coverage on the senior housing triple net coverage?

No, no, no. The senior housing is really call it 15 basis points. The margins are different. That's why it's different because it's a percent of revenue and so our senior housing has been at about 1.3 times EBITDARM for good while, very stable again.

Okay. Perfect. Thank you.

Thank you, Rich.

Next question comes from John Kim from BMO Capital Market.

Thanks, good morning. In your analysis of new supply pressures on senior housing, what is the rationale of using of three and seven mile radius as a metric?

Another good question. There has been a lot of debate around that. And it really comes back to looking at where the source of business is and how far folks are typically willing to travel, which for each of the properties our operators understand that as they do their marketing. It's intuitively make sense for the highest density areas you're not going to go very far, you're going to walk, you're going to drive a short distance whereas the more rural or suburban areas you're going to drive and so it's really a function of that. John, you can look at it and cut it different ways. Your denominator changes depending on how broad the ring you draw there. So it doesn't necessarily change the numbers overall, but we think it ties back to where the business is coming from.

And we all know in New York, three miles is far and in some other areas seven miles would be the equivalent. So that's really how to think about it.

Do you have data as far as the catch of a typical senior housing facility? I'm just wondering…

Betrayed areas?

Yes, betrayed area.

By asset our operators will have that information. As I say, it's really for marketing purposes. To understand, where is your source of business? Where is it coming from?

Yes.

And again, the three miles for us is the top 10 most dense markets. So it would be the Manhattan of the world that you would expect to see. And that's what we've done.

So they have empirical data that -- for their tenants, X percent comes from a seven mile radius or three mile radius there they have specific data on that kind of information?

There is data to support that. Yes.

Okay. And then also moving on to medical office buildings, you expect a lower growth maybe in 2016, but higher occupancy and rate growth. So I'm just trying to tie those two statements together.

So yes, we have some modest occupancy growth and some modest rate growth. I would highlight that rate growth is not as significant as we saw in 2015 and to some degree CPI linked. So lower inflation, lower increases, so that's really a revenue and therefore profit mix isn’t as rich and that's really kind of the most fundamental driver of that.

The lower CPI I imagine impacts all of your triple net leases?

Yes. So triple net lease is right, but it will later add back to the fact very stable and integrated business.

Yes. So on triple net, some are CPI based and others are contractual base and in MOB there is a significant CPI component.

Got it. And then finally on Kindred, now that it's settled with the Department of Justice, can you maybe describe what its relationship is with Medicare?

Okay. Yes. I would say the following. Kindred is the leader in post acute care in the United States. As was announced, Kindred settled in a very proactive way with the Department of Justice relative to acclaim the Department of Justice made for a company that Kindred acquired for activities that occurred before the acquisition. Kindred had a reserve of about $125 million for that and has settled that for approximately the amount of the reserve and is in good standing with all programs and has an excellent compliance functional, which is one of the many reasons that we like to do business with them and our other providers.

Actually you touched on another question that I had, because Kindred's press release seem to suggest that the claims were mostly regarding rehab care prior to the acquisition, but since acquisition Kindred has been charging the ultra highway at very -- rising at high rate compared to its history? So are they fully settled now with Department of Justice or Kindred's be an ongoing issue with them?

They are fully settled with the Department of Justice. Again, the claims or pre-acquisition of a company called Rehab Care and Kindred has a very appropriate mix and a high-quality mix between the specialty hospitals and the skilled nursing. And we believe consistently has good compliance and codes appropriately. So I think you may be misunderstanding some data, I'm not…

Okay. I'll follow up separately. Thank you.

Okay. Thanks.

Next question comes from Steve Sakwa from Evercore.

Thanks. Good morning.

Hi, Steve.

I guess first question is for Bob. You've got about $550 million of debt maturing this period at 1.6%. What are the plans and what's incorporated into guidance? And any thoughts also taking look at the '17 debt maturities.

Thanks Steve. We indeed have $500 million of dispositions factored into the guidance as I highlighted and $350 million of new acquisition. So that together with cash flow is driving debt reduction. As part of that we have rolled over as you've highlighted some very low cost debt end of the year, clearly as we look at interest rates here at record lows. We're actively considered different ways to optimize but ultimately, the key being that we we're looking to de-lever and have highlighted that this guidance brings us full out six times by yearend.

So I guess I'm not really clear what, are going to a bond offering or it's up in the air at this point?

Well, we'll see how things go, but we would do a bond to refinance it at the fourth quarter of the year. But if interest rates make it attractive, we may think about doing that earlier. We'll see.

Got it. Okay. I guess Debby, you talked a little bit about the developments and the developments and would seem like a better use of capital than may be straight up acquisitions, but I'm just curious how you are maybe re-totaling or re-underwriting developments today and just light of where the economy is and maybe what changes are you making internally as you set this projects.

I would say thank you for raising that. We do think that some acquisitions as we said and some redevelopments and developments are good capital allocations. On the ground up development, we are exceedingly selective and I would point you to the fact that the one medical office building ground up development that we're doing is expected to be 75% pre lease with the AA rated hospital system Downtown San Francisco connected to brand new hospital. That meets my hurdle for ground-up development. In terms of senior housing developments ground-up, we've got only two projects underway. Very good market areas in Palm Beach County and San Francisco and there where you are looking at different cycles and economies and so on, we are a partial owner and have brought in third party, pension fund capital as a partner to spread the risk and narrow that. We think those projects will be very successful. Atria is going to manage them. They have good developers. But again, the typical Ventas go with opportunities, but also make sure you're managing risk. So those are our three ground-up developments and I think you'll see us continue to be highly selective in those. On redevelopment, we think there are good opportunities. We have been allocating more capital and those as we've said provide good risk adjusted return.

Okay. And then last question. I know the skilled nursing is only about 4%. Can you just remind me why that was retained by Ventas when you did this and are there any plans, longer term to take that portfolio to zero as a percentage of your overall?

I'd love to ask you to repeat the question. So let’s hear it again. Ventas NOI is 4% skilled nursing and why did we keep -- why did we keep that okay. So our strategy is really to A, maintain a balanced and diversified portfolio that has always been our strategy. And we also believe that post-acute care is an important component of healthcare delivery in the U.S. We also believe that you're seeing increasing interconnectivity amongst the different segments within healthcare. And so we’re seeing as we showed in our Investor Day, hospitals working with post-acute, post-acute like Kindred and their home healthcare divisions providing solutions to our senior housing operators, etcetera. These are powerful trends that are underway. We have distilled the portfolio in each of those segments particularly post-acute and with our addition of hospitals to be doing business with the leading providers of care in each of those segments. So that we will win the winners and that is our strategy and that is how we've reshaped the portfolio through the spin and the Ardent acquisition and we have a great company and our integrate spot, could you ask that question again?

That’s it for me. Thanks, Debby.

Okay. Thank you.

Next question comes from Vincent Chao from Deutsche Bank.

Hey, good morning everyone. Most of my questions have been answered.

Good morning.

Hi, most of my questions have been answered, hi, most have been answered here already, but just going back to the debt conversation here, leverage coming down below 6, I was just curious how much of that's just a function of the math? You looked at the acquisition opportunities and the disposition opportunities and the math just works out that way, versus a more targeted approach to say hey, let’s look to take our leverage down here, things maybe worse, just curious how that played out, macro wise when I say worse.

Yeah, absolutely I highlighted a word in the prepared remarks saying that we are deliberately reducing leverage and have said that for the last couple of quarters, we have the benefit of being able to be patient and have been patient. We issued some ATM over the last quarter or so. We're continuing to dispose off assets, $700 million last year and now projecting 500 in '16 and we've record cash flow and those things are going to get us under that six times target and so it’s not math, it’s very deliberate and strategic.

Okay. And I guess…

As I mentioned we have and have always had a very strong balance sheet, got $2.2 billion of liquidity. So we're in a great spot, needs are all self imposed decisions on us to be consistent with our strategy and our principle.

Okay. Thanks for that. I think I was just trying to get at timing wise if there was any change because of some of the things are headlines are out there that are making a little bit more concern nearer term but…

We're very consistent.

Okay. Appreciate that and then just maybe a cleanup question here just, you talked a lot about the SHOP outlook on the revenue side. I was just curious it sounds like you think inflation is going to be pretty low here this year, but just wondering how you're thinking about the expense growth in SHOPs.

Sure, we have incorporated in the guidance some assumption around some wage pressure. Again there has been a lot of talk around that. There are really two forms of that, that can be supply driven or can be tied to minimum wage. Its inherent in our assumptions and I come back to the rate driven strategy, you need to maintaining and cover your margins and you see to drive labor cost productivity and you need to be efficient and the outlook we've given supports that.

Okay. Can you share what the expense growth assumption is?

I call it 3% to 4%

3% to 4%, okay, thank you.

Thank you.

Next question comes from Tayo Okusanya from Jefferies.

Hi, yes good morning everyone. Debby I hope you feel better soon.

Hi, Tayo. I feel fine.

Okay, good to hear. I just wanted to dig in on acquisitions and dispositions a little bit more, specifically on the disposition side on the $500 million backend guidance, could you talk a little bit about areas you’re looking at and specifically if part of these senior housing operating platform especially that 30% may generate negative same-store NOI growth, whether some of that is up for potential sales?

Yes I think our portfolio optimization efforts have began last year. Will continue this year as we look to dispose off non-strategic assets maybe certain markets. We have a lot of very attractive assets that we think would be desirable in the marketplace as we continue to refine and distill our portfolio.

Okay. But then specifically could you just see some sales of some other SHOP’s stuff?

I think you saw in the first quarter that we did sell the Salt Lake City asset that was high quality SHOP assets and again fixed cap rate, $20 million gain on sales that sort of thing, certainly within the sandbox of possibilities.

Got it, okay. That’s helpful. Then the $350 million of net new investments in 2016 given that the development under redevelopment pipeline, you still have about $220 million of spend to go there, is that firmly built to that $350 and in the balance of acquisitions?

To be clear, Tayo it's Bob, the $350 is acquisitions.

It’s purely acquisitions?

It is acquisitions yes.

Yes.

Okay. And then whatever you need to spend on a development side is a totally different number?

Correct.

Yes.

Okay, that’s helpful.

Thank you.

Good, thanks for the clarification Tayo.

Next question comes from Michael Carroll from RBC Capital Markets.

Thanks. Can you guys give us some color on the senior housing triple net portfolio, have you done a similar analysis on the SHOP tracking, how this portfolio be impacted by senior housing supply?

Mike I think you’ve gotten clean up today. So we have a good triple net senior housing portfolio, it is characterized by good coverage, good operators. Brookdale is about 40% of it and it has been growing year-over-year. We look at that portfolio differently from SHOP in general because of the significant pooling credit support etcetera and coverage that we have and so we do not believe that it is -- we believe that it has acceptable levels of new supply, but we have reliable cash flows there principally because of the cash flow coverage and the triple net leases that we have that are in pooled bundles that are diversified. So we focus mostly on our high quality SHOP portfolio as we look at construction and development trends.

Okay. And then within the SHOP I guess there is four leases that have represented 4.5% of ABR with coverage between 1 and 1.09 that's I guess in the senior housing triple net portfolio. How have those coverages trended and is that something that we should continue to watch for?

Yes, those coverages I think are trending little bit of our NOI frankly. I think they don’t even and in general we feel comfortable with those, they’re small, they’re small leases and kind of move up and down over time.

Okay. Great. Thank you.

Thank you.