Ventas, Inc. (VTR) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2016 Ventas Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference, Mr. Ryan Shannon, Investor Relations. Sir, you may begin.

Thanks, Crystal. Good morning and welcome to the Ventas conference call to review the company’s announcement today regarding its results for the quarter ended June 30, 2016. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions, and statements are based on management’s current beliefs, as well as on a number of assumptions concerning future events. These 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, 2015, and the company’s other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only, and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Please note that quantitative reconciliations between each non-GAAP financial measure referenced on this conference call and its most directly comparable GAAP measure, as well as the company’s supplemental disclosures 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 good morning to all of our shareholders and other participants, and welcome to the Ventas second-quarter earnings call. We are delighted to be here with our colleagues to report on our strong results from our diverse, high quality portfolio, discuss our pending investment in life sciences and medical real estate, and provide color on macro trends. Following my remarks, our CFO, Bob Probst, will review our segment performance and financial results, and walk through our full-year guidance before we welcome your questions. We have great momentum at Ventas. Building off our superior properties, platforms, and people, we extended our long track record of excellence this quarter. If you invest in Ventas for reliable growth and income on a strong balance sheet, then this is a good quarter for you. Leading with results, we delivered $1.04 in normalized FFO per share, representing 7% year-over-year comparable growth, and we remain on track for 3% to 5% normalized FFO growth this year. We were opportunistic and access the debt and equity capital market, again demonstrating our commitment to financial strength and flexibility, as well as our expertise in capital markets activity. As you know, we love cash flow because it enables us to reinvest in our business and pay you a dividend. Our strong and secure dividend yield of nearly 4% is very attractive and has plenty of room to continue to grow. Our strong performance is fueled by our market position at the exciting intersection of healthcare and real estate, two large and dynamic industries with powerful fundamentals and growth prospects. Within this attractive space, our incredible team has made strategic decisions and executed our strategy with sustained excellence. As a result, we have differentiated our portfolio and our company, benefited our shareholders, and shaped Ventas for continued success. Recent examples of our disciplined capital allocation moves include our successful spinoff of most of our skilled nursing business and our entry into the large, growing hospital space with Ardent, both completed last year. The elevation and evolution of our business continued this year with our recent deal to announce to acquire $1.5 billion in high quality, life science and medical real estate operated by best-in-class developer, Wexford. We believe the Wexford deal is both financially and strategically attractive. With a going in cash yield on stabilized assets of 6.8%, it is a wonderful fit with our goal of delivering reliable growth and income through cycles. This investment represents an accretive institutional quality entry into the large and growing healthcare driven research and development space. It adds an adjacent business line that further diversifies our portfolio and cash flows and adds a large component of private pay NOI to our business mix. The powerful combination of attractive properties, superior platforms, and outstanding people creates the Ventas advantage. All three are on display with the Wexford deal. The 25 Wexford properties we will acquire are new, Class A assets that are environmentally advanced and architecturally appealing. I hope you will go to our website for a property tour to see this portfolio. The assets are also well leased to highly rated, top-tier universities, academic medical centers, and research companies, including Yale, UPenn Medicine, Washington University, Duke, and Wake Forest. Like other areas of our business, our prospective tenants are market leaders. The universities in our portfolio account for fully 10% of all university life sciences research and development spending in the U.S. That is an outstanding way to enter a new space. It was really fun to travel up and down the East Coast with Ryan recently, visiting these hotbeds of academic and commercial research, cutting-edge medical activity, innovation and education. The Wexford acquisition also creates another superior platform for Ventas growth. The Wexford team has a terrific reputation within the sophisticated tight-knit community of elite universities. Demand is increasing as universities face difficult decisions about capital allocation. In this environment, combining Ventas’s capital with a trusted developer who can deliver complex projects that benefit leading institutions should be a winning formula. We have an exclusive pipeline for growth with Wexford with two assets under development coming online in 2017 and nine development sites available to satisfy growing demand in research hubs anchored by leading universities. We already have identified one potential new development project adjacent to UPenn Medical, which could get greenlighted soon. We are hopeful we can grow the business like we have with Lillibridge and Atria. The Ventas people and culture will once again truly exceptional in the Wexford deal. We have always admired the Wexford business and have worked on it many times in the past. So when we were recently presented with the opportunity to acquire it, we were a knowledgeable buyer with an incredibly fast, sophisticated and interdisciplinary team. With our deep knowledge of the business and assets, substantial trust among the players, a good structure, and accommodative capital markets, we were able to execute with excellence. If less is what happens when preparation meets opportunity, then Ventas is lucky indeed. Hats off to the team and thanks to the many Ventas investors who participated in our Wexford equity funding in July. We sincerely appreciate your support. Next, I would like to comment briefly on the investment market. We are remaining highly selective as we consider investment opportunities in the current market. Our cost of capital has improved significantly, but we will only execute on deals we believe will generate reliable earnings growth at an appropriate risk-adjusted return. Thus, our focus continues to be on committing capital to high-quality hospitals, helping our customers grow and funding selective development and redevelopment projects. With the addition of Wexford, we expect our capital allocation to pre-lease university-based development projects to represent a larger percentage of our investment pie. We believe strongly in our ability to invest capital across cycles to create value for our investors and customers. This confidence flows from the combination of our advantage position within five and soon-to-be six asset classes, our relationships with market-leading customers and platforms, and our team’s hard-earned experience and skill. Before closing, it is worthwhile to spend a few minutes on the macro environment. In the healthcare arena, we see an acceleration of the transition to value-based payment models. Just this week, CMS announced that it will layer on additional mandatory bundling for cardiac care in 2017. This and other developments support our thesis that hospitals are beginning to exert even more influence and post-acute patient care and class, and that revenue streams for skilled nursing providers will likely remain under pressure in the near-term. In the longer term, diversified post-acute care providers like Kindred who can deliver quality care in a variety of settings, maintain a sound capital structure and adequate liquidity, and enjoy the benefits of scale should have a competitive advantage. From an economic and market standpoint, we are benefiting from multiple tailwinds that favor our business, including domestic GDP growth that continues to hover in the low single digits; a global thirst for yield; the creation of a new REIT global industry classification; and historically low long-term borrowing base. In this environment, U.S. real estate and Ventas should thrive. With our need-based, demographically driven business model, a superb track record of consistent reliable growth, external investment opportunities, a best-in-class per credit profile, a differentiated business mix that is 84% private pay, and a secure, nearly 4% dividend, Ventas should continue to be a magnet for investment dollars. Now, to talk about our positive quarter, I am happy to turn the call over to Bob.

Thank you, Debbie. I am pleased to report solid earnings growth on an even stronger balance sheet in the second quarter. Let me jump right into the performance of our high-quality healthcare and senior housing properties, which together delivered same-store cash NOI growth of 3.5% for the nearly 1,200 assets in the company’s quarterly same-store total portfolio. Performance in the quarter was led by our triple net leased business, which accounts for 43% of our NOI. Triple net reported same-store cash NOI growth was 6.2% in Q2 versus the prior year. Growth in the quarter benefited from a $3.5 million cash fee associated with the previously announced collaborative agreements between Ventas and Kindred. Excluding the Kindred fee, triple net same-store cash NOI grew 4.1% in the quarter, principally reflecting strong in place lease escalations. Cash flow coverage and our overall stabilized triple net lease portfolio for the first quarter of 2016, the latest available quarterly information, improved 10 basis points sequentially to 1.7 times. This strong coverage level reflects the quality of our triple net leased properties and of our operators. Coverage in our triple net same-store senior housing portfolio remains stable at 1.3 times. Coverage trends were supported by low single digit EBITDARM growth at the asset level for the trailing 12 months. Our decision to spin off the majority of our postacute portfolio in 2015 continues to be validated. Our remaining postacute portfolio where SNFs now represent only 4% of our NOI demonstrated market leading same-store cash flow coverage at 2 times in Q1 of 2016. Finally, Ardent triple net coverage held steady at 3 times and continues to perform well at the assets. Ardent showed positive momentum in top and bottom line key performance indicators in both the first and second quarters. With the strong first half of the year and the majority of lease escalations now in place for 2016, we are pleased to update our forecast for the triple net segment to grow reported full-year same-store NOI in the range of 3.5% to 4%, an increase of 75 basis points at the midpoint. We are happy to report another solid quarter in our SHOP portfolio, generating Q2 same-store cash NOI growth of 2.1% versus the prior year. This result is right in line with our expectations and reflects our most challenging year-over-year comparison period in 2015. The framework by which we established our SHOP guidance range for the year is holding up very well in both the second quarter and the first half of the year. And with the first half now under our belt, we have performed at the higher end of our guidance range with H1 growth of 2.5% versus the prior year on a reported basis. In the second quarter, as expected, our rate-driven strategy continued to fuel our earnings with RevPOR growth of nearly 4%. Our high barrier to entry infill coastal markets continued to be the engine room of our overall SHOP portfolio growth in the second quarter. These communities, which represent approximately 70% of our SHOP NOI, grew Q2 same-store NOI mid-single digits on continued strong rate growth. Major coastal markets, including New York, LA, and Boston, continue to drive consistently outstanding growth in both rates and NOI in the quarter and the first half. In select markets, we observed the impact of new construction coming online within our relevant trade areas. In these communities, same-store NOI posted low single digit declines in aggregate, driven by occupancy and wage pressures. Again, this performance is consistent with our framework for the approximately 30% of our SHOP portfolio located in markets with a new construction surplus. Construction as a percentage of inventory in our trade areas as reported by NIC increased in the quarter by 40 basis points to 4.8%. Importantly, however, the amount of our SHOP NOI that is affected by new supply remains at roughly 30%. We have observed that a significant number of projected openings as reported by NIC have been delayed into 2017, and that anecdotally financing and completing new developments may be getting more challenging. Overall, we are pleased with our SHOP performance through the first half of the year. We are, therefore, raising our full-year guidance for SHOP reported cash NOI in the full-year same-store asset pool to grow in the range of 1.5% to 3%, up from our 1% to 3% range previously communicated. Strong rate growth on lower year-over-year occupancy led by our high barrier to entry markets is expected to fuel this NOI performance. Let me close out the segment review with our MOB business, which represents 20% of Ventas’s overall NOI. MOB cash NOI in the 353-property, quarterly same-store pool grew nearly 1% in the second quarter and increase 2.3% in the first half. Both the second quarter and the first half benefited from in place rent escalations and continued cost productivity from the Lillibridge platform, partially offset by lower occupancy. For the balance of the year, we are actively filling the leasing pipeline to backfill budgeted moveouts and to cover increased repair and maintenance costs expected in the back half of the year. For the full-year 2016, we continue to forecast the MOB segment will grow same-store cash NOI for the full-year asset pool in the range of 1% to 2%. Turning now to our overall financial results. This was a very busy and productive quarter for Ventas. In the second quarter, we generated strong FFO growth, reduced refinancing risk while capitalizing on favorable market conditions, and further strengthened our credit profile. First, our earnings growth. Second-quarter 2016 normalized FFO totaled $1.04 per fully diluted share, representing 7% growth on a comparable basis over the second quarter of 2015. This strong year-over-year growth was driven by the carryover impact of 2015 investments, including Ardent, together with new year-to-date investments in 2016 and second-quarter same-store NOI growth. Ventas made $65 million in new investments in the second quarter of 2016, including $30 million of acquisitions, and $35 million of development and redevelopment spending during the quarter. We strengthened our balance sheet in Q2 through the issuance of a total of 3.5 million shares of common stock under our ATM for gross proceeds of approximately $232 million. We also capitalized on the strong debt capital markets and took refinancing risk off the table in the quarter. In June, we tendered and ultimately retired in full the $550 million 1.55% senior notes maturing in September 2016. The September note was retired principally through the issuance of a $400 million, 3/8 seven-year unsecured note. Demand for Ventas’s debt offering was very high with the order book 7.5 times oversubscribed. As a result of this cumulative capital activity during the quarter, we have an even healthier balance sheet and excellent liquidity. The Company’s net debt to EBITDA ratio improved from 6.1 times at year end 2015 to 5.8 times at the end of the second quarter. Ahead of our expectations. We have lowered gross debt by nearly $300 million since the beginning of the year. Our fixed charge coverage is exceptionally strong at 4.6 times, and our debt to total capitalization is outstanding at 30%. And we did not stop there. Following the quarter end, we elected to lock in our attractive return and accretion on the Wexford acquisition through a block equity issuance. Concurrent with deal announcement in early July, Ventas sold 10.3 million shares of common stock for total proceeds of $736 million at an issuance price of approximately $72 per share. We plan to hold the proceeds in cash until the Wexford closing. The temporary FFO cost of this strategy is $0.01 a month, notably dampening our Q3 FFO per share assuming a Q4 Wexford closing. We believe the short run dilution of pre-funding is more than offset by the longer-term value creation of this strategy. And that is a good segue to our full-year guidance for the Company. We are updating our normalized FFO per share guidance for 2016 to a range of $4.05 to $4.13, representing 3% to 5% growth over 2015 on a comparable basis. Put simply, the modest $0.02 revision from previous guidance reflects paying $4.00 for the certainty that comes with the Wexford equity pre-funding, as well as Q2 deleveraging, partially offset by the accretive impact of Wexford post-close. Our second FFO per share guidance is expected to be lower than our first-half results, driven by these same factors. Setting aside capital activity, our underlying same-store portfolio performance is solid. On the heels of a healthy first half, we are raising the bottom end of our total 2016 same-store NOI guidance range by 50 basis points. 2016 same-store NOI is now estimated to grow in the range of 2% to 3%, up from the Company’s previous range of 1.5% to 3%. Our guidance continues to assume 2016 asset dispositions of approximately $500 million, inclusive of $75 million in dispositions closed year-to-date. No further material acquisitions, dispositions or capital activity are assumed in guidance. In summary, the entire Ventas team is proud of our productive and strong first half of the year and is committed to sustaining our track record of excellence. With that, I will ask the operator to please open the call for questions.

[Operator Instructions] And our first question comes from Juan Sanabria from Bank of America. Your line is now open.

Hi, good morning.

Good morning.

Good morning.

Debbie and Bob, maybe you could speak a little bit about EBITDA growth expectations. Your guidance at the midpoint does seem to imply a bit of a deceleration, and maybe if you could just talk about the confidence level within the new range and how you are seeing your rate strategy playing out? It appears to be working in the primary markets, but any change to how that is working out in the other 30% of the secondary and the tertiary markets.

Yes. We will be happy to address our senior housing operating expectations for you.

Sure. Well, first of all, we are very pleased, Juan, with the first half. As I mentioned, we expected to have a strong first half and we did, and it really has been fueled by the interim I keep referring to, because of the key coastal markets like New York, like LA, like Boston, which have continued to grow mid-single digits. On the back of that, as you referenced, the rate-driven strategy you see the strongest rates and NOI growth in those markets, and that is very much as expected. So we are really pleased with that. At the same time, the construction impact, again, very much in line with the initial guidance we gave in February and the framework we put around that. Indeed, the impact of the new units coming online is on the better end of the guidance that we gave in February. And as a consequence, net, net, net when you step back and look at the portfolio in the first half, 2.5% growth above the midpoint of the guidance towards a higher end. So we feel very good about the first half, and that is the core reason why we are raising the guidance for the back half of the year. The reason for the range continues to be very consistent with that framework of engine room performance continuing to drive forward a potential variability depending on the impact of new construction. And that is the reason for the range in the back half. But, fundamentally, the confidence in the guidance is solid.

And do you expect the growth to accelerate or decelerate looking at the third and into the fourth quarter?

Well, look, I think you can see a scenario of, if you stick to what we had in the first half, to get the higher end, again, as we were in the first half. So the lower end of that will be dictated by supply, and the big question is, when are those new units coming online? What does that look like? One of the things we have seen and others have commented on is deferring new units coming online into 2017. That would obviously be good. That gives more time for absorption of existing inventory. And if that were to happen, we expect to be at the higher end. But it really would be a function of when that inventory comes online and what the impact is.

Okay. Thanks for that. And then, just a second question on dispositions, you still have a share on that left to do relative to the guidance. If you can give us any color on what tax for that, that’s you are looking to sell and maybe why the death of the buyer pools and cap rate expectations? And are you looking to monetize any of those assets in the weaker secondary or tertiary markets?

Sure. So we have $500 million in the guidance for the year, as you readily pointed out, $75 million year-to-date. We feel very confident in that guidance for the year. The markets are good. We have said before and it continues to be true the focus areas include MOBs, some senior housing, and potential loan repayments, and we have line of sight very much for the guidance number of $500 million. Obviously, back-end weighted, so it has an impact in the back end. But feeling good about that guidance number.

Okay. Thanks, guys.

Thank you.

Next one.

Thank you. Our next question comes from Smitty Ross from Citi. Your line is now open.

It is actually Michael Bilerman here. Debbie, I was wondering if we can talk about Wexford, and you commented having worked on it sometimes and having a lot of knowledge. And so when you are presented with it, you were able to act fast, and you called out three variables that ultimately led you to win: the trust that you had with the other parties, the structure that you presented, and then commented as capital markets. And I recognize stars have to align for any deal to occur and you have said that before. How would you rank those three variables as we think about other transactions that could happen? So how important is the capital market side versus the trust that the seller has and the structure that you are creating? How would you weight those and rank them?

Well, one of the biggest factors, as I mentioned in my remarks, Michael, is that, do we believe that we are entering at a good risk-adjusted return and that the assets are going to produce reliable growth and income? So that is the number one factor in all deals, definitely. And obviously, our funding costs are critical because we are here to add value for shareholders. And so appropriate capital markets is extremely important, and I would say, having a good relationship with Blackstone and the Wexford management team is a helpful facilitative factor in the transaction as well. And the structure is always I would say a helpful factor, but normally it is not this positive. It is really those cash flows. And here, when we look at Wexford and these are new assets or Class A assets and about three-quarters of the NOI is from tenants who have investment-grade ratings, have billion-plus market cap, have AA rated or universities. That, to us, is a really good risk-adjusted return when you are looking at 10-plus a year length of lease maturities. And so everything came together, I think, in a really positive way. The fact that we have looked at the deal before, I think, really shows our discipline and patience, and that is really how we operate here. And so we are very excited about it, and I hope that answers your question.

Yes, no, it does. And I was wondering, how would you debate – there has been some that have sort of compared this to some of the core life science markets where cap rates are in the 4s% to 5s%, and then taking it one step further, if Wexford came in at high 6s%, it has to be lower quality or there has to have much higher risk involved in that portfolio because it is commanding a cap rate that is significantly in excess of where stuff in Cambridge or South San Francisco would trade. How do you defend some of that criticism?

Well, I would say the following. The Wexford business is a very institutional business. It matches incredibly well with the Ventas business model. And I do think that there is a natural segmentation, frankly, between this part of the business and the Cambridge, et cetera, cluster market strategy. I would say to you that the reliability of these cash flows is extremely high, and they will produce this reliable growth at income that Ventas prizes and that our investors prize. But it is a different game in Cambridge, really, and there’s excellent players like Alexandria and Blackstone who will invest in those 4% or 5% cap rate markets and deal with the turnover and all of that. But Wexford fits with the Ventas business model. And that is really the key thing, and it is a very reliable, consistent growth in income with institutional tenants and even cross-selling opportunities with medical assets as well. So that, I think, if anything, the deal is just a good one for our shareholders, plain and simple.

Great. And just last one for me. Can you talk a little bit about the Ardent pipeline and where you stand now that the managers are under AIG and where do they stand in terms of growing the platform with you as a capital source? When we should expect additional acquisitions there?

Yes. Well, as you know, we are big believers in the growth opportunity in our hospital business. We are really happy with the Ardent investment and the Ardent management team. It is performing very well. We have said all along that this is a big, long-term secular opportunity, and we want to build a great business here. We have also said we are going to be very selective and we are. We want high quality with all the characteristics that we’ve talked about over and over again, and we think we can scale this Ardent business. But it is a business where we will stay selective and, therefore, difficult to predict when transactions will meet the hurdle and we will have something to announce. But, really, we feel optimistic about the opportunities and feel really good about the Ardent investment and, hopefully, more to follow at the appropriate time.

Thank you.

Thank you.

Thank you. Our next question comes from Nick Yulico from UBS. Your line is now open.

Good morning. I had a few questions on your senior housing operating segment. If I look, your portfolio has been kind of steadily losing occupancy quarter by quarter over the last year, which suggests you probably can hold rate growth high forever. So you also cited supply being an issue for 30% of your portfolio. So I guess I am wondering, big picture here, how does senior housing growth get better in coming years? It seems like it should be getting worse.

Well, Nick, if I step back, big picture, I will emphasize again the value proposition of senior housing. We are bullish on senior housing. Short, medium, long-term, because when you look at the services that seniors get in senior housing communities, economically to replicate that at home is twice as expensive. Not to mention the social benefits of being part of a community, which are proven to be enhancing and extending life. And, therefore, there is a great product offering here where affordability – importantly, we have affordability, if you look at net worth among seniors, affordability of senior housing is not negating issue. They can afford comfortably on average to enter senior housing. So that, together with, of course, the aging population, the megatrend of longevity, has a huge tailwind to this business, give me and us confidence in that business. Now, within that, as you rightly point out, we have been driving a rate strategy in light of that value proposition. We think that is a smart move that really is very much predicated on the annual rent letter. And that increase we saw this year, which was among the highest we have had, has held nicely and is proving out to be a good strategy. At the same time, we are being sensitive to the occupancy impacts, and this is proving out to be a good formula. One that will be dynamic, though, and we will make sure we are managing well because it is a more complex equation between rate and occupancy. But, nonetheless, again, we like where we are. The strategy is proving out very much in line with where we expect it to be, and then short, medium, long-term, this is a great business.

Okay. That’s helpful, Bob. Just a follow-up is, I think you had said that – you have been saying that your second quarter was one of your toughest comps. And I wasn’t sure if that was due to occupancy or otherwise, but if I look at what you had over 91% occupancy in the third and fourth quarters last year, it seems like you also have some tough comps in the back half of the year. So maybe you can just explain how we should be thinking about your guidance and what it assumes four – I don’t know – I forget This has been mentioned yet, but occupancy, whether it is sort of declining year-over-year, if that is built into the guidance in the back half of the year.

Right. Okay. So looking at the guidance for the year in the back half, what we expect to happen is we narrow the gap, if you look year-over-year, in terms of occupancy relative to the first quarter to the second. That is still lower than last year. We hope to continue to narrow that gap at – on a full-year basis, occupancy will be below prior year. However, rate, we continue to expect will be strong and to hold with where we are, and that is really important in part to cover costs. And, therefore, the paradigm of the P&L is one where revenue growth very much in line with expense growth to deliver the guidance we gave for the year. So that is the P&L profile. I think if you look within construction markets, you will see a different dynamic where we still see rate growth, albeit not as strong, and you do see some occupancy pressure. And so for that 30% of the portfolio, you do see a slightly different P&L. But again, because of the engine room, it is more than offset by the key markets to deliver the overall year.

Appreciate it. Thanks.

Thanks, Nick.

Thank you. Our next question comes from Kevin Tyler from Green Street Advisors. Your line is now open.

Yes. Good morning, thanks. The triple net assets, the customer growth I guess that I expect from those more in the 2% to 3% range and you reported 4% in the quarter because of the Kindred fee, it didn’t seem like there was a ton of role or any role in the portfolio, and I know you mentioned escalations. But can you just explain how you got to 4% and maybe why it is running, at least so far this year above the normalized pace?

Sure. I will highlight a few things. One is, we mentioned the Kindred deal that we did in April, which, as part of that, you will recall, we reallocated rent to more productive assets. We saw that in the second quarter. That is a same-store benefit that contributes to the 4% and will continue to do so as that rent, again, was reallocated to assets that could sustain that given the strength of those assets. So that is one driver. And then, second, we have a couple of higher escalators. We have talked about holiday, for example, in the past in the senior housing business, which we are seeing the benefit of, again, also expected to continue into the back half when we look at it. So in place escalators, notably with a few significant drivers, are really what is underlying that, Kevin.

Okay thanks and holiday rolls off this year, correct?

Our last 4%-ish escalator is in 2016, yes.

Okay. Thanks. And then, within the triple net bucket, Ardent is certainly a part of that, and CMS was out with some hospital quality star ratings. And just on some quick numbers that I looked at, it looked like the average star rating for Ardent was kind of in the 3 out of 5 range, and I am just wondering how you think about that number, just in general the ratings, but then 3 out of 5 going forward, does it change revenue? Does it have any impact on the way people make their decisions? We are early, but I am just curious thoughts on that.

Yes. Oh, I am so glad you asked that. That did come out this week, and if you eliminate the 20% of hospitals that were not rated and you look at the percentages, Ardent performed well above average and, in fact, in its markets, performed better than the competition. So we were pleased with the outcomes. I know that the management team there is focused ultimately on certainly having everything 3 and above and, ideally, everything in at least a 4. But that is a rarefied air. So we were happy with Ardent’s performance and particularly in its market that it is outperforming the competition on quality ratings.

Okay. Thanks. And then, the last one I had, Bob, just going back to SHOP for a second, on the other more tertiary markets, the 500 bps of occupancy decline was higher than I would have thought. And I am just wondering, is there anything more than just supply, or is it really supply specific? Its sounds like you are attributing most of it to the new competition, but is there any operational missteps or anything operator specific that might be in there as well?

Kevin, because we are very transparent in almost all – virtually all of our SHOP assets are in same-store, there is a redevelopment asset that is bringing down that number, which is the principal driver as it goes through significant redevelopment. And, of course, redevelopment can both suppress as well as over time increase same-store performance. So that is what is really happening there.

And it is such a small pool, Kevin, that it really stands out on the page. And we saw the opposite to Debbie’s point last year where we had a ramp-up in one of the redevelopments that really flattered that segment. So you will see ebbs and flows in that bucket simply by size.

Yes. It is a tiny pool

Redevelopment is a very small pool.

Yes. It is a tiny pool

Okay. I guess I was under the impression that most of the major redevelopment was on the Atria assets in SHOP, but is there more going on beyond that? Is that what you are…

Well, that is an Atria asset in SHOP.

Okay.

It is in Cape Cod, which is considered by the MSA nomenclature to be a tertiary market.

Got it. Okay. Thanks for the color. I appreciate it.

You’re welcome.

Thank you. Our next question comes from Rich Anderson from Mizuho Securities. Your line is now open.

Thanks. Good morning.

Hi, Rich.

Hi, Rich.

Great quarter. Is the risk of a SHOP going negative off the table now as you see it today? SHOP NOI growth; same-store NOI growth.

Our guidance would certainly suggest so.

The math of the guidance, Rich, would say it is going to grow in the back half, and certainly our experience in the first half supports that. Again, because of the quality of the high barrier to markets in their momentum. So that is why we raised the lower end of the full year.

I’m thinking further out, though, disruption 2017, 2018, anything. I mean, so that is the conversation.

We will be excited to give you 2017 guidance as soon as we can.

Okay. Debbie, do you have an opinion today as you see it, if the new cardiac bundling programs would be more or less damaging to the skilled nursing business versus CJR?

Well, that is a loaded question. I would say you wrote an interesting note on that. And I did mention that the value-based payment – the transition to value-based payments is accelerating with the addition of this new cardiac bundle that is going to be mandatory in, I think, 98 markets in 2017 on top of the CJR. We don’t even know what markets the 98 are yet, and so there is a limited amount of clarity we can provide. But overall, the bundling initiatives, which will continue to come as part of the evolution of the healthcare system, in general, should favor high quality hospitals, and, while longer-term may present opportunities for the winners in skilled nursing, in the near term will likely create some pressures on the business. In terms of quantifying it, again, too early to say on the CJR because we have only been in it since April.

Okay. Fair enough. And then last question for me on Wexford. So you mentioned 10% market share. So you expect to just traffic in that corner of life science, a.k.a. university type business, or do you see yourselves also kind of trafficking in the more conventional space like the research hubs of Boston and San Diego and so on?

Yes. Well, one direct answer and one clarification. We are focused on building the university-based institutional part of that business, which is really Wexford’s core business, and they are far and away the leader in that market. So a great brand, trusted developer, and we believe there is opportunities there to grow that business and have some on the drawing board now, as I mentioned. And that is really where we are going to focus. And the clarification is that these 11 universities that we are already doing business with in the Wexford portfolio – so 11 universities that are tenants, they account for 10% of all university life science R&D spending, which is amazing when you think about it, that this pool of tenants that accounts for 10%. So our strategy will really be to grow with those leading research universities and then, also, kind of target the next 20 or so institutions in terms of research and development. So we think we can grow with the tenants we have, and we have those development sites, most of which are in those markets. And then, we also have additional institutions that are top- tier research universities that we would hope to grow with as well.

Okay. Just one quick one. Do you ever intend to bring in the management function as well, like you have with Lillibridge and so on and fully run it, or are you satisfied with the current structure long-term?

We are actually pleased with the structure, and we have a great example of that in our PMB relationship in medical office. Because it is really a really high quality development platform that we have exclusive relationships with to fund and own preleased premier projects like the Sutter building in California that we are building in downtown San Francisco. So we see Wexford very similar to that, and we think it is a great structure that works for both sides and has worked well for us in the past.

Great. Thank you very much.

Thanks, Rich.

Thank you. Our next question comes from Jordan Sadler from KeyBanc Capital. Your line is now open.

. :

It will be, again, yes, similar to what we have with PMB and very straightforward, which is, when Wexford has projects, we will work on them together. We have the exclusive rights to fund and own them on market terms.

Okay. So each asset would be negotiated, individually.

Yes. I mean, we would expect to have, like we do with PMB, development profits in the deals that we would do with Wexford.

Okay. So that infers that the returns would be better than the stabilized cap rate that you guys paid for the in place portfolio.

In general, yes, but, of course, if it were fully preleased to a AAA credit, I mean, that would be one thing. And if it were – it is just like any other type of deal that you look at. It will be market based, and we will gain the benefits of a substantial amount of the development process.

So you would buy something that was non-stabilized and let them lease it up, like if it had an anchor tenant, for instance.

Well, honestly, it is like everything else. From example, we are developing this premier MOB in downtown San Francisco that is anchored by AA rated credits that are held, and we make a decision on that with X amount of pre-leasing based on our expertise, knowing that that – and this is why the businesses are very similar. You have strong institutional support from AA rated institutions for a big component of the building, and that anchor tenant drives the demand for the building to fill in the spaces that are not preleased by that institution. It is exactly parallel. And so every deal is different with PMB, and every deal will be different with Wexford. But we are very excited about the prospects and, as I said, have some things on the drawing board that we think are very attractive.

And how does the Wexford portfolio in that business rollup within the organizational structure at Ventas? Is that going to be under the MOB Lillibridge umbrella or other?

It will be its direct line

Okay. Thank you. One clarification. And this – on the SHOP portfolio, REVPOR it sequentially looked like it was flat or maybe down a little bit. Is there anything going on in that? I know that the increases in the portfolio and rate came through, I think, in the first quarter, but anything that would have driven it to be flatter as opposed to rising?

Yes. It is flat, as you say, sequentially and up approximately 4% year over year. The big benefit of the rate bump happens in the first quarter where the majority of the increase comes. And then if you look at – typically, you will see some small drift from there, just to the dynamic of move-ins and the acuity associated with that. So I wouldn’t really read into anything there. Jordan.

Okay. Thank you.

Thank you. Okay.

It’s great.

Thank you. Our next question comes from the Michael Carroll from RBC Capital Markets. Your line is now open.

Yes, Thanks. With regards to the Wexford platform, Debbie, I know you highlighted several near-term development opportunities that you guys are tracking. But how many projects that you comfortable pursuing at once with that platform right now?

Hi, Mike. Like everything else, it will be a function of what is available and will be opportunistic, and we will – we are a large company. I mean, we are a $36 billion, $37 billion company. So if anyone project is $100 million, $150 million, I think we could certainly manage multiples at one time, assuming we think that they meet our risk-adjusted return expectations. So I like the idea. Unlike a big office building, for example, you’re going to have basically uncorrelated assets under development at one time. You might have one with a Washington University or one with a UPenn or something like that, and so this would be uncorrelated. But we are large enough and have the financial strength and flexibility to do multiple projects at one time.

And given the growth prospects that you are tracking right now, how big do you think you can grow that platform over the next three to five years?

Well, we want to be reasonable about the expectations. We are very optimistic about it, but we would imagine that in five years, it could be anywhere from 1.5 to 2 times. We have certainly scaled the Atria and Lillibridge businesses. But it is always a function, again, of what the opportunities are presented and whether they meet our capital allocation discipline and whether we think they are going to make money for shareholders.

Okay. Great. Then, the last question, can you give us additional color on the Company’s investment outlook outside of Ardent and Wexford? I mean, what is your specific strategies right now in the MOB in the senior housing spaces?

This is John Cobb. I see, we have been very disciplined on how we have approached it. We have looked at the hospital space, like you said. We have looked at now the life science space with Wexford. But we’re also focused growing with customers, and you saw the three deals this past quarter. We did two deals with Lillibridge and one with PMB, and we are focused on growing with our customers and doing some development and redevelopment.

So then the MOB and senior housing investments will be more smaller transactions with your existing relationships?

It depends on the opportunities. Of course, we want to help our customers grow. We want to be help them do tuck-ins and fill in markets and so on. And, in addition

Yes. I think if we saw a Class A portfolio that had – where we had a Ventas advantage, we would be aggressive, if it made sense for us and our customers.

Great. Thank you.

Thank you.

Thank you. Our next question comes from John Kim from BMO Capital Market. Your line is now open.

Thanks, good morning.

Hi, John.

Last year and again today, you made a very solid case about hospitals becoming a big opportunity for your Company, and then you sort of pivot with the acquisition of Wexford. Can you elaborate on how difficult it is to source high-quality hospitals, especially when you are competing against the communities and HCAs of the world?

We feel very optimistic about the longer-term opportunities to scale Ardent and build a high quality hospital business. The sector is gigantic. It is a $300 billion-plus space. It is consolidating. And, importantly, I truly believe, in my nerdy University of Chicago way, that assets will flow to the most efficient owners and that we are in such an efficient owner with significant expertise. And so I feel very confident about it, and we are working hard on it. All investments are really based on opportunities set, though, and we have said over and over that in the hospital business in particular, we will be selective on quality. And so the thesis remains intact. In fact, it continues to be very exciting to us, and it is really a matter of time, I think, which is a little bit more unpredictable. But we feel good about it.

Okay. And then in terms of dispositions, can you comment on what you are seeing in terms of pricing in the private market? Historically, healthcare REITs have been price setters, and it seems like this year your cost of capital has improved, but you are also being a little bit more disciplined. So what are you seeing as far as the private market buyers?

Heck, we have always been disciplined. There is a deep market with new entrants who, once you invest in medical office and senior housing, they are very financeable assets. And the good thing, as you point out with our cost of capital and just our overall strength of our business, is that we are sellers by choice. So what we are trying to do is create options in terms of sale and continue to refine our portfolio and do some routine capital recycling. And so I think that is all to the good. And so we feel right on track with our guidance and feel confident about the market for those assets.

I may have missed this, but did you provide a guidance on cap rates on your dispositions?

Well, it really depends. As I said, we are sellers by choice, and so we have a pool of opportunities that we can decide whether to do or not. And so the cap rates will depend on what we decide to ultimately pull the trigger on in terms of disposition.

Okay. And then, a final question on your SHOP guidance. Today, we got a weak GDP print of just 1.2%, which is good for your share price, I suppose, but probably challenging for the environment overall fundamentals. What happens to your strategy if we enter into a zero growth or recessionary environment, and is that factored into your guidance at all?

Right. We are in a relatively Goldilocks environment for REITs in general, I would say, and for Ventas in particular as I mentioned. We have been in this slow growth in the U.S. economy for a while, that what I would say is that in the financial crisis and recession, senior housing was the only real estate asset class that continued to show positive NOI growth. Our business – our guidance is based upon a continued low single digit GDP growth. However, what I would say is, because of our long- term leases, if you look at the kinds of things we are doing with Wexford, if you look at our business mix and our business model, we have inelastic demand, growing demographics, long-term leases with escalations, where our business really should and has in the past in recessionary environments, continued to produce reliable income, and I would expect that going forward.

Agreed. But the last recession you were mostly triple net, and this time around you have a higher percentage of operating portfolio assets. So I’m just wondering in this – if we enter a recession time this period, how confident are you that that part of your portfolio is going to be resilient?

I think resiliency is exactly the right word, and I think that what Ventas continues to offer to investors, which is highly valuable, is a very protected downside on cash flows with significant upside from internal and external growth. And that is more valuable now than ever.

Great. Thank you.

Thank you. Okay. We have time for a couple more

Thank you. Our next question comes from Chad Vanacore from Stifel Nicolaus. Your line is now open.

Hey, good morning all.

Good morning.

Good morning.

So, looking at your SHOP portfolio and digging a little deeper, it looks like there is a much greater decline in the secondary markets. Now, would you classify those as higher candidates per disposition, or would you expect those operations to turn around?

I think if you step back, there is a strong correlation, as I describe our engine room markets versus those that have some construction exposure, there is a high correlation between primary and secondary markets. Now the performance you see in the secondary market does have a number of those supply challenge markets in it. Witness Indianapolis and Knoxville, for example, to take a couple specifics, whereas the primary markets I talk about in New York and LA and Boston all the time, clearly those aren’t primary. If you step back, I think from a portfolio point of view, that is a little bit of an artificial segmentation that is really NIC driven. We step back and like our portfolio and are looking at ways to be able to, for example, help Atria continue to drive operational excellence, help invest behind that, help them build scale, and even in some of these markets, we continue to see that we gain share in those markets because we have great assets that are run really, really well. So it is not a matter of reacting to the here and now, but thinking about how I can grow short, medium, and long term, and we have not only the assets but the operators to do that.

All right. So not really candidates for disposition. You think that those operations will turn around.

Well, everything is a candidate for disposition. And, as I have mentioned with the portfolio that we have, we want to continue to think about where we can optimize the portfolio, where we can recycle capital, and we want to optimize that. And so we review the portfolio on a regular basis and think about the best ways to create pools of potential disposition candidates, and I would say SHOP and MOBs are in that pool, along with loan repayments, as Bob mentioned. And so I would just think about it that way.

All right. And then, I forgot – either Michael or Jordan had asked about priorities for acquisitions. I might have missed that. Would you say hospitals first and foremost and then some life science expansion, or how would you rank order your assets priority?

n no specific order, I would say, as John mentioned, helping customers grow and being a good partner, development and redevelopment, which will be with Wexford, with Atria, et cetera, with Sutter, and PMB and then putting capital to work, supporting Ardent’s growth within the hospital space. So those are key capital allocation priorities.

I don’t want to make you choose amongst your children, but where do you think the most compelling returns are right now for you?

I am not going to choose between my children. So let’s take that another time, and we will go to our last question. Thank you.

Thank you. And our last question comes from Tayo Okusanya from Jefferies. Your line is now open.

I will try not to hold us up for too long.

You are bad and cleanup, come on it’s a good one.

A quick one just around Wexford on financing. I know we have the equity bit in place. How should we be thinking about the debt piece of that transaction?

Well, there’s is two pieces to that equation. One is certainly debt and the other are dispositions, both of which are going to cover the balance. So we did obviously do $750 million on the pre-funding, and the balance will be split between those two.

Got it. Any sense of timing when our long-term financing will be locked in?

About the time of the closing, which we estimate to be in the fourth.

Okay. Perfect. And then the second thing, Debbie, what are your thoughts right now just around the UK in general, especially on the senior housing side?

Well, we have a very small investment in UK senior housing. The assets are performing as we expected. We like our partner there. We continue to look at opportunities in the UK. The regulatory and operational environment there has been challenging for the operators, and so we are continuing to do work, and that is how we feel about it. We like our investment. It is small. We are glad we have a presence in the market that enables us to be opportunistic and knowledgeable as I mentioned before, so that is how we are thinking about it.

When you see the regulatory side has been challenging, can you expand on that a little bit?

Well, there’s new staffing roles rules and things and enforcement activities of that staffing that have increased costs, and the operators are getting kind of up the curve on that. And that is what I mean.

Okay. Great. You guys keep fighting the good fight. Well done.

We care about our investors, and I would just like to close by saying that we know that demand for healthcare and senior housing products and services is going to increase exponentially as people live longer and our aging population grows. With our diverse high quality portfolio, our leading platforms for growth, and our cohesive team, we believe that Ventas and our shareholders will benefit from this wave of oncoming demand and increasing life expectancies. We really appreciate your time and interest in our Company, your continued support of the Company, and nothing makes us happier than making money for you. So, thank you, again.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.