Ventas, Inc. (VTR) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 3, 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 follow 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 with Investor Relations. Sir, you may begin.

Thanks, Donaman. Good morning and welcome to the Ventas conference call to review the company’s announcement today regarding its results for the quarter ended September 30, 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. The company caution that 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. Additional information about factors that may affect the company's operations and results is included in the company's Annual Report and Form 10-K for the year ended December 31, 2015 and the company's other SEC filings. 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 third quarter earnings call. We are delighted to report on our strong financial results brought to you courtesy of the Ventas advantage, our excellent people, platforms and properties. Today. I'll also discuss our close and pending major transactions and provide an overview of economic and market conditions. Because we've been so productive, there is a lot to cover. Following my remarks, Bob Probst will review our segment performance, financial results and full year expectations. After that we will welcome your questions. Leading with results, this quarter we delivered a $1.03 and normalized FFO per share, representing 5% year-over-year comparable growth. We also demonstrated capital markets excellence and positive trend in our credit profile. As a result, we are also pleased to improve our full year normalized FFO per share and same store NOI guidance. Our strong and consistent 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 prospect. Recent activities continue to demonstrate that we are executing on our strategy allocating capital wisely and doing what we said, a Ventas hallmark. We have built an exceptional enterprise that continues to deliver reliable growth and income from a high quality, diverse portfolio on a strong balance sheet. Our innovation over the years and especially the spin-off of most of our skilled nursing assets and other development since the third quarter of 2015 have produced a differentiated business mix and put us in a great position for continued success. Let me highlight just a few of the platforms and property that are driving our positive outlook. First, during the quarter we closed on our exciting and accretive $1.5 billion acquisition of institutional quality like science, innovation and medical real estate leads by top universities, academic medical centers and research companies. Our new tenants include Yale, UPenn Medicine, and WashU. Like other areas of our business, our tenants are market leader accounting for fully 10% of all university life science, research and development spending in the US. This investment represents a great entry into the large and growing healthcare related R&D space. It adds an adjacent business line to Ventas that further diversifies our portfolio and cash flow. At a 6.8% going-cash yield for the 23 Class A operating properties, we are delighted with the Wexford investment. We are also benefiting from an exclusive development pipeline with Wexford. There are two assets already underdevelopment in the portfolio anchored by Duke and Wake Forest and nine development sites for future growth. We are already making progress on a high profile, potential new development project adjacent to UPenn Medical. This demonstrates the attractive growth opportunity that should flow from combining Ventas' capital with best in class developer Wexford. Likewise our investment in Ardent has proven to be a channel for growth. Last year during the third quarter we closed our acquisition of Ardent's hospital real estate and articulated a vision for building formidable, high quality hospital business in this large, dynamic space. We chose Ardent as our beachhead investment because it is a winner and potential consolidator with its good hospitals, significant market presence, attractive payer mix, good quality of care and strong margin. We also design the growth strategy that focus on scaling Ardent's experience management team and strong infrastructure. At that time, we identified some desirable acquisition target and legacy hospital partners for LHP who's at the top of the list because it shared these desirable characteristic. We are now happy to say that Ardent has inked a deal to acquire LHP just like we drew it up on the board. As healthcare premier capital provider, Ventas is fueling Ardent's growth by providing a $700 million secured loan enabling Ardent to acquire LHP. This deal is attractive both financially and strategically for all Ardent partners and shows our continued ability to align with market leaders to support their growth. Financially, the loan will be accretive to Ventas' 2017 earnings with a going in floating interest rate of approximately 8%. Ardent will remain financially strong and expect to achieve significant synergies. We are happy to say that Ardent continues to perform very well on its base business through the third quarter. Strategically, the LHP acquisition expand Ardent's existing business by 50% making it the second largest privately owned hospital company in the US with annual pro forma revenues of $3 billion and major market share in its diversified location. It also provides Ardent with very valuable partnership with top not so profit health system and academic medical center. As a result, the LHP hospital enjoys strong brand recognition, clinical integration, good market and favorable payer relationship. We expect the Ardent LHP deal and our loan to close in the first quarter of 2017 subject to customary regulatory and other condition. Ventas is committed to being a positive influence in our industry to maintaining strong relationships with the nation's leading providers of care and to working collaboratively with them to create value. Recently across our business line we made good progress advancing our customers' interest in areas important to them. Here are a few examples. First, we recently reached mutually beneficial agreement to modify our decade long agreement with Sunrise Senior Living. In short, we provided long term stability in the management contract with Sunrise and Sunrise agreed to reduce the management fees we pay under that agreement on a permanent basis. Other changes to the agreement align the companies towards profitable growth and enable Sunrise and its dedicated on-site employees to focus on providing superior services to seniors and their family. We also entered into a new multiyear pipeline agreement with Sunrise, giving Ventas the right to fund a pool of new Sunrise roundup development. Second, we've also reached agreement with various customers to cooperate with them on modest asset sales or asset buyback. These included the recently completed sale of seven long -term acute care hospitals, or LTACs with Kindred to a new operator. And a pending disposition of 11 non strategic senior living asset with Brookdale. This approach can give the care providers operating flexibility and higher cash flow and also enabled Ventas to recycle capital into attractive development, redevelopment or acquisition opportunities. We are committed to finding way to support our customers' effort to improve their own results and performance in ways that also benefit our portfolio and protect Ventas shareholders. As a result of our portfolio performance and accretive acquisition, we drove good cash flow from operations this quarter too, enabling us to pay our investor a strong and secured dividend of over 4%. We expect our Board to increase our dividend in the fourth quarter of 2016. When we look at the investment market, we continue to see attractive opportunities but we remain highly selective. We focus on deals that would generate reliable cash flow and cash flow growth at an appropriate risk adjusted return. Our capital allocation is also strategic emphasizing sectors with upside and situations like Lillibridge, Atria, Wexford, and Ardent where significant future growth potential exist from consolidation and/or development. Our ability to invest capital across cycle to deliver value to our investors comes from the combination of our advantaged position within fix asset classes or vertical, our strong relationships with market leading customers and platform. And our team hardened experience and skill. The macro environment unbalanced continues to be favorable including GDP growth in the 2% to 3% range and a global thirst for yield that is accelerating foreign investment into US real estate. While the expectation of higher interest rate can initially dampen enthusiasm for REITs and real estate, we are still enjoying the benefit of incredibly low long-term borrowing rate, reasonable job growth, rising household income, low inflation and improving corporate confidence as expressed in surging M&A activity. Hopefully, we will also have certainty about the election soon. All of these conditions should be positive for commercial real estate fundamentals and growth. At Ventas with our need based demographically driven best business, a super track record of consistent reliable growth, external investment opportunities, a terrific credit profile and an advantage business mix, we should continue to thrive. Finally, the third quarter marked the anniversary of our Ardent deal and the successful spin-off of most of our skilled nursing facility. When I reflect on the tremendous improvement in our enterprise since then I really like what I see. Compared to the third quarter of 2015, we still generate over $2 billion in an annualized NOI. Our assets are higher quality, our business is more diverse, and our cash flow is robust and even more reliable. And most of our business is with the nation's leading care providers and research institutions. And we enjoy multiple channels of growth. We are also lucky to have a best in class team that truly enjoys working together for the benefit of shareholders. Now to talk about our positive quarter, I am happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. The third quarter was represented from the hallmark of Ventas' performance for over a decade. Strong earnings growth and even stronger balance sheet. On the back of that performance we are pleased to update and improve our guidance for both FFO and same store NOI for the full year 2016. Before I get to our overall financial results and guidance, let me start by reviewing the performance of our high quality healthcare and senior housing properties, which together delivered same store cash NOI growth of 2.4% for the nearly 1,200 asset in the company's quarterly same store total portfolio. Performance in the quarter was led by our triple net lease portfolio which accounts for 42% of our NOI. Triple net reported same store cash NOI growth was 4.2% in Q3 versus the prior year, driven principally by strong in place lease escalations. Cash flow coverage and our overall stabilized triple net lease portfolio for the second quarter of 2016, the latest available quarterly information, was strong and consistent with prior quarter at 1.7x, reflecting the quality of our triple net lease properties and of our operators. Coverage in our triple net same-store senior housing portfolio remains at 1.3x. Coverage trends were driven by low single digit EBITDARM growth at the asset level for the trailing 12 months. Our shareholders continue to benefit from our decision to spin-off the majority of our post acute portfolio in 2015. And SNF now represent only 4% of Ventas' NOI. Cash flow coverage in our stabilized post acute portfolio is 1.9x. This rent coverage level though it declined of 10 basis points sequentially, is still best in class among peers as skilled nursing operators remain under pressure. Finally, Ardent continues to go from strength to strength delivering continued positive momentum in top and bottom line key performance indicators. Adjusted admission, revenue and EBITDA have continued to trend favorably through the third quarter. With solid year-to-date performance, we expect our triple net segment to deliver towards the mid point of our 3.5% to 4% full year 2016 same store NOI range. Moving to our SHOP portfolio. Before we jump into results, I'd like to take a moment to reflect on the value senior housing through lens of Hurricane Matthew to South East United States. Our leading operators took every precaution and ensure the seniors in our communities were safe and secure as Hurricane approached, including stockpiling food supplies and fuel for generators. Staff members went above and beyond to make the residence safety their number one priority often staying overnight and supporting sister communities in area. The support that our seniors received before, during and after the Hurricane highlights the value of senior housing. Dedicated staff and resources, peace of mind, safety and security and a sense of community even in the most challenging situations. All of us at Ventas thank our senior housing operator team for their continued skill and commitment to seniors and their families. Let's turn to the Q3 SHOP results. The framework by which we established our SHOP guidance range for the year continues to hold up well. Our SHOP portfolio delivered a solid quarter generating Q3 same store cash NOI growth of 2% versus the prior year. Rate showed continued strength growing 3.6% in the quarter versus 2015. Additionally, same store occupancy grew 60 basis points sequentially, while the year-over-year occupancy shortfall narrowed to 30 basis points. Operating expenses rose nearly 5% driven by upward wage pressures, tampered by the lower fees from the new Sunrise agreement. The positive impact specifically of the permanent reduction in Sunrise management fees is approximately $1 million per quarter effective July 1, 2016, and therefore benefited third quarter results. Our key coastal markets such as New York, LA and Boston continue to be the engine room of our overall SHOP portfolio growth in the third quarter. Our high barrier entry infill communities overall represent approximately 70% of our SHOP NOI and grew Q3 same store NOI mid single digit on continued strong rate growth. Also notable was the strong top and bottom line performance in the quarter of our Canadian portfolio, driven by very positive results from Atria' integration of the Canadian assets we acquired in 2014 and from our high quality Sunrise Canada portfolio. Throughout 2016, we have consistently discussed our framework in regards to the impact of new supply on performance. This framework continues to be valid through the third quarter. Our NOI exposure and markets with the new supply surplus continues to represent 30% of our SHOP portfolio. And consistent with the framework and the initial guidance range we established at the start of the year, our same store NOI in Q3 in these communities decline mid single digit in aggregate. When combined with the mid single digit growth from the 70% of our portfolio in high barrier markets, we blend to the 2% overall same store NOI growth in the quarter. We also continue to see the positive growth impact of redevelopment overall on our results. As a reminder, virtually all of our SHOP assets are in the same store pool including redevelopment properties which can both suppress as well as increased same store performance over time depending on stage of completion of the redevelopment. This is evident in the performance of the small pool of assets in the tertiary markets in the quarter where the disruption from a full scale redevelopment in Cape Code impacted growth. For the full year 2016, we are trending towards the mid point of our full year SHOP guidance range of 1.5% to 3% same store NOI growth for the full year same store pool. Looking ahead to 2017, we are working in close collaboration with our operator partners as they set the annual rate increases for existing residence for next year. We are encouraged by the continuing pricing power in our portfolio and the clear value proposition of senior housing as Hurricane Matthew demonstrated. Further, we continue to believe strongly that the leading operators and the best assets will continue to out perform and we like our position. We are excited to round out the segment review with our newly renamed office operations reporting segment, which now includes our medical office business as well as our newly acquired life science and innovation centers. Taken together these new assets now represent approximately 25% of Ventas' annualized NOI. In our supplemental reporting this quarter, you'll be able to find further details behind the office operation segment. We are pleased with the early performance of our life science acquisition which closed in September. The 23 operating assets are performing well and in line with underwriting. The two development assets are underway are on schedule. And we see exciting growth potential in the pipeline of future new development. In our medical office business, cash NOI and the 354 property quarterly same store pool increased modestly in the third quarter consistent with our expectations. Third quarter results were driven by rate growth from in-place rent escalations, mostly offset by lower year-over-year occupancy resulting from expected move outs as well as the timing of repair and maintenance spend. We continue to make progress on filling the leasing pipeline. Therefore, for the full year 2016 we expect the MOB business will also trend towards the mid point of our 1% to 2% same store growth guidance range for the full year asset pool. Turing to our overall financial results. In the third quarter, we delivered superior earnings growth and balance sheet strength supported by terrific capital market execution. First, our earnings growth. Third quarter 2016 normalized FFO totaled $1.03 per fully diluted share, representing 5% growth on a comparable basis over the third quarter of 2015. This strong year-over-year growth was driven by the accretive investment together with the third quarter same store NOI growth. Ventas made over $1.5 billion in new investments in the third quarter of 2016, principally for the 25 life science and innovation centers managed Wexford. During and following the quarter in order to fund Wexford, we issued over $900 million in equity at an average gross price exceeding $73 per share. This included a block issuance in July for approximately $750 million as well as over $175 million of new ATM issuance in the quarter. We also made progress in our capital recycling program, realizing nearly $200 million in aggregate gross proceed during and immediately after the quarter, principally from loan repayments. The company's normalized FFO results in the third quarter benefited by $0.02 per share from receipt of net fee associated with the repayment of loans in the quarter. Our year-to-date share of proceeds from asset sales and loan repayment now totals nearly $275 million. And we have line of sight for the $500 million of full year gross proceeds including in previous and current guidance. To round out the capital activity in the quarter, we also issued our best 10 year bond in the company's history raising $450 million of 10 year senior notes at an all effective yield of 3.22%. This represented the lowest spread to treasuries and the lowest dollar in 10 year rate in Ventas' history. In addition, the issuance was in very high demand demonstrating strong investor confidence in Ventas' financial strength. The outstanding capital markets activity during the quarter ensures that our balance sheet and liquidity grew even stronger. The company's net debt EBITDA ratio held steady 5.8x at the end of the third quarter. Our fixed charge coverage grew to an exceptional 4.7x, our debt to gross asset value improved to 39%, and our secured debt to total indebtedness reached 6%. Let me closed out the prepared remarks with our revised full year guidance for the company. We are updating and improving our full year 2016 normalized FFO per share guidance to now range from $4.10 to $4.13, up from previous guidance of $4.05 to $4.13. An increase of nearly $0.03 at the midpoint. The new guidance represents 4% to 5% growth in normalized FFO over 2015 on a comparable basis. Our improved guidance range is a result of year-to-date portfolio performance, closed accretive acquisitions and excellent capital market execution. On the heels of positive year-to-date portfolio performance trends, we are also raising the lower 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 2.5% to 3% up from the company's previous range of 2% to 3%. Our guidance continues to assume 2016 asset disposition of approximately $500 million. We assume the loan Ardent to fund the LHP acquisition closes in Q1 of 2017 and therefore is not included in our 2016 guidance. No further unannounced material acquisitions, dispositions or capital activity are assumed in guidance. In summary, the entire Ventas team is pleased with our highly productive third quarter and our track record of sustained excellence throughout 2016. With that I'll ask the operator to please open the call for questions.

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

Good morning. I was just hoping you could talk a little bit about the Sunrise agreement that you modified. It sounds like you had a $1 million reduction in expenses that was fully baked into the third quarter that helped your same-store NOI growth. What did you give them in terms of the incentives, if you could just walk through how that works?

This is Debbie, Juan. What I would say about the agreement is that it's a mutually beneficial one where we were able to provide Sunrise with good long-term stability in its management contract for the original term. And we were able to make sure we were really aligned for growth going forward and also we were able to achieve as you said some lower management fees.

Is there going to be any increased costs if they hit in tenants fees that would offset that $1 million in savings at some point? How should we think about that?

Well, you should think about I'd say very positively which is that we've actually created incentive for Sunrise to grow even more than the old agreements provided for. And if they do, there will be shared benefit to both companies from hitting those goals which are stretch year goals.

And did the management fee go from like a 6% to a sub-4%?

No. It is not. It is again to percentage decline, you can see on the face P&L 1 through the management fee line, the change is very clear on the face of the P&L, but the $1 million is permanently for a year starting this quarter and carrying on is a good number.

Okay. And then just secondly, I think you mentioned some Brookdale dispositions. Could you give us a sense of, A, did Brookdale exit the operations, or did they buy back those assets themselves? And then pricing expectations there -- and were they impacted at all by rent coverage levels at the facility?

Good. So again this is a really good opportunity I think for us to work with our customers and benefit them in a way that also is good for Ventas shareholders. So this is still at the very early stage. It is 11 asset, we've agreed to jointly market those assets with Brookdale. So we would be exiting those assets together and a new operator would take over. And our portfolio would improve, Brookdale's performance would improve as a result but again it's a modest transaction in $20 million plus range. So at the margin but again a good example of how the companies can work together to benefit those sets of shareholders.

Just one last one from me if you don't mind. On the MOB portfolio, you guys have lagged a little bit. You've had some occupancy headwinds and some pressures from expenses. How should we think about that going forward relative to, I guess the typical 2% to 3% that we generally see?

Juan, performance of the quarter very much in line with expectations. We talked earlier in the year about significant move out which flatter the first quarter in particular and we have to rebuild that pipeline. We are doing that successfully. We expect to see sequential improvement in our occupancy line as we think about the balance of the year. We talked about reaching the mid point of our one to two point guidance which implicitly is a confident vote in fourth quarter so we feel like we are on track.

And our next question is from Smedes Rose from Citi. Your line is now open.

Hi, good morning. I wanted to ask you as you look at the pace of expense growth at the RIDEA portfolio, was it a little higher because of, and maybe, overtime associated with Hurricane Matthew? And also just as we look forward, what sort of rate increases do you think that portfolio would need to drive in order just to maintain margin?

Sure. Good question and I'll approach that both sequentially and year-over-year. Sequentially you have a day's difference and you have seasonality, so I wouldn't look at the sequential growth rate because it isn't representative, year-over-year however we have approximately 5% growth in the expense line and that's principally driven by labor. And it is due to factors we talked about before whether that is minimum wage pressures or just a tightening labor market. And so that is certainly something, we are keeping a wary eye on, we've got a price to cover that and that's where -- therefore I come to the importance for example of annual rate letter and really being smart about where you have pricing power and getting the ability to cover your cost through improved pricing. So that is something we are likely to see carry on.

Okay, because I think this year you talked about a 4% rate increase that kind of moved through the system. If the operators are able to push a similar rate increase for next year, do you think that's enough to maintain where you are now, or just to -- I mean it seems like the pace of expenses is higher than that now. So I was just sort of wondering has that maybe spiked a little bit in the third quarter. Or is that truly kind of the run rate going forward?

I caution using any quarter as representative. There are always ebbs and flows. I think it is safe to say as we talked about early in the year 4% as a good benchmark. We saw a bit of pressure on that in the third underlying drivers of that I think we expect for the foreseeable future in the near term carry on. And so therefore we need to have the smart pricing decision on top of that. That as we think about 2017 is particularly important.

Okay. And then just sticking with senior housing for a second, you mentioned you're exiting some of your Brookdale assets. But would you consider purchasing other Brookdale assets that would be potentially more productive going down the line? I think there are a number of things going on with their portfolio across the different owners.

We have a good relationship with Brookdale and they are one of the largest obviously senior living providers. And we've been doing business with them since 2005. So I would hope that over the years as we have we will engage in lots of different types of discussions with them to grow and to dispose as we just talk about in ways that can be beneficial for both of us.

And our next question is from Tayo Okusanya from Jefferies LLC. Your line is now open.

Hi, good morning, everyone. I just want to talk about the Ardent deal a little bit. And again, on a longer-term basis, a couple of things I wanted to understand. Do you have an ability to kind of do a loan to own, and actually own any of the real estate, number one? Number two, is there any risk of Ardent prepaying the loan early, and is there any prepayment penalties associated with that? And number three, what kind of acquisition pipeline does the deal create for you on a going-forward basis?

Well, I love the way you say loan to own, I wish I could say it as beautifully but what we really have committed to in the hospital business and with Ardent is to help Ardent grow and extend their business in a really high quality selective way. And that means of course great market share, great assets and good payer relationship, good mix. And so LHP meets all of those and what we've tried to do is create a bespoke capital solution for the deal that really enabled Ardent to win the deal and will enable Ardent to close the deal. And gives us great optionality as you point out it is a well structured loan, if we get it paid back we'll be quite happy, there are limitation, a lock up period and so on the repayment. And of course LHP has this great partnership with very high quality not for profit system and academic medical centers and in that regard we wanted to be good partners to them. And if they believe over time that there is an opportunity to gain real estate ownership we would be very open to that. But the key is really developing this relationship with not for profit, fueling Ardent's growth and creating obviously a larger rolodex of relationship in for profit and not for profit quality healthcare business. So we are very excited about this and I think it does a lot for us, for Ardent and for EGI.

Got it, okay. That's helpful. The second question on the senior housing operating portfolio: just taking a look at the quarter results, again, there's some OpEx pressure for sure. What is the -- is this opportunity to get even more aggressive with rental rate increases to kind of offset some of that OpEx pressure going forward?

Yes. Tayo absolutely and I mentioned earlier the need to understand your portfolio where you have pricing power. This is the time of the year where we are working in collaboration with our operators around the annual rent letter which is an important part of the revenue line for the forward year. And therefore we need to take advantage of that pricing power and the value senior housing which I keep espousing, the value proposition is tremendous and therefore we need to recognize that through that price. So we will be very thoughtful about that as we head into 2017.

Okay. That's helpful. And then just the last one from me; thanks for indulging me. Just going back to Juan's question around Sunrise. Again, I know it might be difficult to give a lot of details about the changes, whether for competitive reasons or you guys have non-disclosures and things like that, but it would still be helpful to just get a better sense of you guys are getting $1 million a quarter in savings trying to get a better more detailed understanding of what Sunrise is getting that makes this mutually beneficial to them.

Thank you for your sensitivity to the situation. I would just say that Sunrise is really getting the ability to have stability in this management contracts for the original term. Again opportunities to align both of our companies towards profitable growth.

Okay. But again the term didn't change, so it's not as if they'll now have the management contracts for a longer period of time. It seems like -- I mean did they -- is there some type of promote that they get at a certain point, if they hit certain margin requirements? Or just kind of anything we can kind of get a sense of what is the opposite side of this transaction?

Well, as I mentioned we've established some positive growth target in the new arrangement and should Sunrise outperform those then we will both mutually benefit.

Okay. It's just that it's very hard to try to model this now because something's changed, and we're just not quite sure what that means going forward.

Just be happy.

All right, Debbie. All right. Okay. I will let you guys go. Thank you.

Both Ventas and Sunrise are happy so you can share that. Thank you.

And our next question is from Rich Anderson with Mizuho Securities. Your line is now open.

Thank you and good morning. If I could just finish that Sunrise dialogue, is there any change to the way by which a given contract can be cancelled? Or there are still the same types of covenants involved in terms of their performance?

Well, we basically have modified the contracts to convert single asset right that Ventas has into more favorable but full contract provisions.

Okay. Okay. That's interesting, okay. And then would you have produced -- would you have had to reduce your SHOP same-store growth had it not been for this revision?

No, Rich. Thanks for that question. And I highlighted the fact that we are expecting to hit the mid point of the range for the year. And even adjusting for the benefit of the Sunrise agreement that would still put us right into that guidance range.

Okay. And then lastly, I am fielding a few questions on LHP and I want to give you the opportunity to respond here. Can you talk about to the degree you know -- their coverage metrics currently, pre-merger with Ardent? There is a perception about their kind of C credit worthiness in terms of their debt costs and what not. If you could give a perspective on why LHP is the great opportunity for Ardent, or if it's an opportunistic investment for Ardent to improve upon what is maybe something at a lower scale than where Ardent is operating? If you could comment on that.

Absolutely. So again LHP is extremely attractive because and then we noted that at the very beginning of our deal last year and that's because they have really strong market share exceeding 60% really good margins, really good mix and as I mentioned these valuable partnerships with brand names that give pricing power. And so it is a real gem and in terms of we are looking at 2017 expected performance. And I'll tell you that LHP now is borrowing in the 4s. And so we think that the credit market is understanding the credit worthiness of the company based on that.

Do you have any comment about how they are covering their rents, their existing hospitals?

As I understand it, they only have one aspect and it is performing exceeding well. [Multiple Speakers]

One asset it doesn't own I guess. Instead of being rent, maybe talk about interest coverage.

Yes. I mean as we look forward we expect to see very strong coverage of our loan which is at a higher interest rate as well as rent on the pro forma organization.

And Our next question is from Michael Knott, Green Street Advisors. Your line is now open.

Hey, good morning. Just to touch again on the Sunrise question, I was just curious if that was contemplated in last quarter's guidance; and just sort of what drove the need to do that arrangement -- redo that arrangement now?

As I mentioned, we have myriad ways at Ventas is working all the time to produce results and cash flow for shareholders and to be a good partner to our customers. And this fits really squarely within that. And our business is very dynamic, it always evolving and we have opportunities all the time if we are wise enough and alert enough to see them to work with our partners whether it is the kind of Kindred LTAC sales that we just completed or the Brookdale deal that we just got launched or this agreement with Sunrise to really find innovative ways that are creative, that are customized, that help both companies achieve the goal that they have. And the Sunrise deal fit squarely within that.

Okay, thanks. And then just with respect to pricing power, can you help me understand the difference that you guys are seeing between renewals versus new residents, and discounting, and things like that?

Sure. It really is the market by market conversation based on the dynamics of that market, Michael. But I can say is if you look at across our portfolio as the rate growth that we had and we saw 3.6% RevPAR growth in quarter. We see growth pretty consistently across the portfolio. And I think in the next data if you do the same you see that rate is up pretty significantly. And we see that in our portfolio. Now there are always pockets where there are exceptions both above and below the average. But I'd say overall we are seeing good rate opportunity. And again the opportunity to carry that forward as we look ahead. So the pricing power is there and it is real.

So it's not just on the renewal side? You're not seeing increased discounts for new residents? It's fairly balanced, it sounds like you are saying.

Yes. I mean the revenue line is going to be a function of both moves ins and the annual rate letter on a blended basis, very positive and again it is market by market dynamic but overall across the portfolio we feel good about the price. And that is as you know has been the strategy from the beginning of the year and it is held in very well.

Okay. And then if I could just ask one more quickly just on your thoughts on allocating capital? Obviously you have a very favorable cost of capital, and you continue to emphasize your discipline, which is admirable. Just curious your thoughts on -- do you expect that you will see more opportunities? Are you thinking about anything on the senior housing side? Just curious if you will -- in general, you expect additional investment going forward as opposed to the last couple quarters?

We are seeing attractive opportunities and that is one of the beauties of our diversified business as I mentioned with the six vertical. I think over cycles we've consistently seen good opportunities to allocate capital in the right ways, hopefully at the earlier stage of cycle and we continue to see that. I think we look John and his group looks at tens of billions of dollars of transaction every year and this year is no exception.

And our next question is from John Kim with BMO Capital Markets. Your line is now open.

Good morning. I had a question on Ardent or a follow-up on Ardent. So some of the hospitals that have merged recently have struggled with integration, and most publicly Community Health. How should we be comfortable that Ardent is any different with LHP?

Great question. So the hospital market does seemed to be a little bit of tale of two cities and I can't speak for the community deals that they have done which have been large and in the rural to rent, Ardent was a huge consolidator when he was the number two executive at HCA over the years and really started the hospital consolidation craze, if you will. And so we have a lot of expertise, so here at Ventas and also at Ardent and of course with Sam Zell's organization which is the majority partner in Ardent. To make sure that we have a positive integration, we don't take anything for granted and there will be lots of people focus on having a smooth integration. But thank you for that question.

But as far as the leverage post-deal and perhaps synergy expectations, can you just elaborate on what they are for Ardent?

Well, I think the synergies are likely to be significant. We would hope to achieve those over a couple year periods with a majority and achieve in the first year. And so we feel really great about that.

As far as the --.

I mean remember, we are also just so you know to keep this in context, and these are five hospitals.

Right. As far as the loan you provided to them, did they approach more traditional lenders first? And I just wanted to make sure that they were paying cash interest and not PIK.

We paid -- we are a dividend paying company so we like cash payments. So it is cash and it is a floating rate loan and our view on it, it is a market loan, it is attractive for all parties and we were able really to step up and provide a lot of certainty and expertise to EGI and Ardent. And that was I think really beneficial for the deal as a whole. And all three parties I think are happy about it.

Okay. On CapEx, your CapEx as a percentage of FFO has trended down this year by about 100 basis points. I'm wondering where you see that going forward, especially as you've increased your office and SHOP portfolio.

Sure. Well, certainly as we think about the redevelopment and development pipeline that something we've talked about that we are really excited about. And we get strong risk adjusted returns on that area with the addition of Wexford clearly there is new opportunity there as well. So I'd expect to see those expenditures go up. At the same time on a non recurring type FAD CapEx if you like, I think we've been quite disciplined and maintain the right level of spend to invest in the properties but also being mindful of cash flow. So I'd say it will trend up through those high return opportunities. We step back from it all and look at our underlying free cash flow, we feel very comfortable we can service that. So aren't concerned about the financing.

I am glad that you've noticed that our FAD is going up because of course that's very beneficial to our cash flow. And also the Wexford assets are very new and so we would not expect to have a significant amount of recurring CapEx on that, 25 assets portfolio. So hopefully that's helpful.

Yes, it is thank you. And then finally, just a follow-up on Brookdale. Can you just discuss if there's an opportunity to reshape your portfolio further with them, either through dispositions or maybe even acquiring some more of their assets?

We are going to have to move on. But like I said we -- our work is never done. And so we continue to work with our customers, with our partners to benefit both companies. So let's move on to the next question.

And Our next question is from Jordan Sadler with KeyBanc Capital Markets. Your line is now open.

Thank you. Good morning. As it relates to the Sunrise agreement, is there an opportunity for you guys to I guess roll this agreement out more broadly -- maybe approach Atria with something similar? I guess I don't know exactly what it is that you have done, but can you do what you did with Atria?

Every agreement is customized to the specific situation. We have very positive agreements with Atria and we've now reworked the Sunrise agreement in a way that we feel in sense align growth and allows them to have stability and take care of seniors. So each is unique, I think we have improved the Sunrise situation and we like the Atria situation but it is a customized approach.

Okay. I guess the nature of my question is, it seems like your agreement is aimed at -- you know, Sunrise has been the beneficiary of the great top-line growth, the revenue growth you have been able to achieve, but doesn't necessarily share as much in the expense growth. And so this agreement seems to maybe help them share a little bit. And I guess I was curious if you would look to do the same thing because you have been getting great top line, but there are expense pressures. So just given the nature of these management agreements, would you try to maybe do that a little bit more broadly with your other SHOP operators?

I mean part of our expertise is really developing these contracts in ways that incent the behavior and outcomes that we want. And in general those types of management agreements do have incentive sharing. And the art is really figuring out under different environment what those levels are and what the percentage sharing is. But in both cases with Atria and Sunrise we have that. And we therefore are aligned towards profitable growth.

Thanks so much. And one last one on LHP. Seems both these topics are getting a lot of airtime today.

Nice talking about them.

Okay. Good, good. I'm hoping not to pester you too much. So I'm just curious; you made a comment in reaction to a question or response about a 4% rate that I think LHP were borrowing at. And I was kind of curious about the differential between your loan rate and maybe what they are able to borrow at otherwise in the market.

Yes. I mean as I mentioned LHP is an attractive, they are well capitalized and therefore they have an attractive borrowing rate. We believe the five year floating rate loan that we made to help Ardent acquire LHP is a market loan and is an attractive one at the same time that benefits the consortium of owners that is trying to move Ardent toward being the best privately owned hospital company in the United States.

And our next question is from Chad Vanacore of Stifel. Your line is now open.

Hi, good morning, all. So just thinking about the structure of the loan to Ardent. Are you going forward more inclined to provide secured financing of this type rather than outright own the real estate?

Okay. I am ready. So we are inclined to be the leading premier capital provider to the best healthcare senior housing and research companies in the world. And what we do to do is to customize capital solutions for specific circumstances and help our customers achieve their objective. And in this particular case that evolves the secured loan which has of course been part of our business from time immemorial. So the beauty of our business again is we have multiple vertical, six of them, we have -- we are doing business with the consolidators. We are in a gigantic sector and we can invest at different parts of the capital structure. Whether it was the BMR mezz that we did or this secured loan or sale lease pack et cetera. And that is part of the formula that we've used to deliver reliable growth and income to investors for so long. And so this fits in that pattern. And it was a customized solution. It enabled -- our willingness to step up with this capital enabled Ardent to get this deal with certainty because we provided certainty and so that's why we did it. And I think it provides great optionality down the road. And so we feel very happy about it.

All right. And from your prior answer to Tayo, I wasn't sure -- it sounded like you don't have a purchase option on a property. Is that true?

Well, we have the right to should asset be sold to be the acquirer of those assets. But of course that involves cooperation amongst all the parties should they ever decide to do that. But we are in the right position if that ever comes to path.

All right, so that is a right of first offer?

If they ask then several comes to market, we will be in a good spot.

All right. You noticed -- you brought up the low end of your same-store cash NOI guidance, but you didn't actually change the individual segment guidance. Can you talk about what gave you more confidence in the overall, if you didn't change the individual segments?

Thank you for noticing that increase.

Yes, certainly the confidence in the performance of the portfolio is what's driving that increase. We increased in last quarter as you know, increased it again this quarter. I mean that's just due to portfolio performance overall. And within that each of the segments we identified we think will be at the point and that led us to overall strong performance. So that confidence in year-to-date plus the fourth quarter is why we did it.

All right. Then one last one for me: have you seen any change in cap rates in senior housing back half of the year?

There haven't been a lot of transactional data to look at. But we haven't seen anything significant to comment upon. All right. Let's keep going. We have a few more.

Our next question is from Michael Carroll with RBC Capital Markets. Your line is now open.

Yes, thank you. Real quick on Ardent, how scalable is that platform? And I'm basically trying to get is how big can they get, or how big does Ardent want to actually grow?

Good, good. Well, remember we are talking about a sector that’s a trillion dollars in annual revenues. Over $300 billion in real estate value. So what we've always liked about this business is that it is fragmented, very capital intensive, it is consolidating and we just need to do a little bit to be successful. So those are good characteristics. So look we want to make sure we effectively integrate LHP and it delivers results that we believe it will. But 80% of this market is owned by not for profit and academic medical centers and so we like this additional entrée into that community which of course Todd has had his whole career as well. So we like that aspect to it. So I think over time we want to build suite set of formidable high quality hospital business. And that's a long game. But the opportunities are quite large.

Okay, great. And then Bob on the SHOP results was there more of a focus on improving occupancy this quarter, as the rate jumped up about 60 basis points sequentially? Or was that just a seasonal impact?

Well, sequentially we saw a nice increase that seasonal typical this time of a year. But also narrow the gap year-on-year which was encouraging to us. And is consistent with what we've talked about last quarter. And so again very much in line with what we had or trade a quarter ago.

And our next question is from Vincent Chao, Deutsche Bank. Your line is now open.

Good morning, everyone. Maybe just staying with the hospital opportunity, we talked about potential in Ardent, but I'm just curious how focused you are on potentially adding new hospital operator partners versus tapping the Ardent opportunity.

Yes. Good question. I would say that, again, while the opportunity is large we are going to remain selective. And in this business we care deeply about who the managers are. And so we do have multiple ways we can grow this business. I think it's a great advantage to try to scale Ardent in the way we have some of our other businesses because you are capturing those synergies and so on. And so that really helps a lot but over time, I'd imagine like our other business lines that we will have a multiple opportunities to grow with potentially multiple partners.

Okay. Is there anything you can comment on -- I think you said that the business is doing well, but just any comments you can make on sort of admission rates that they are seeing at Ardent?

Yes without specific numbers I think if you look across the board and their key performance indicators green is what you will see, positive trends through the third quarter consistently through the third quarter adjusted admissions, revenue, EBITDA are three highlighted and so a lot of momentum this revenue is going from strength to strength and that's what we are seeing in our business.

Okay, thanks. Just one last one, just going back to the same-store discussion: on the triple net side, it does seem like the midpoint would suggest acceleration from the third quarter. Kind of was just curious if there's anything specifically that you know about that's going to cause that to move higher? And then I think, if I recall correctly, there are some larger than normal escalator deals in there that would roll off at the end of 2016. Is that right?

In terms of the growth rate in the fourth quarter, I think you will see it looks and feels very much like what we saw in the third to get to that full year number so not anticipating anything unusual.

And also true that at least one of our triple net escalators has early year outside escalators and that the last one of those would be in the fourth quarter of this year. Yes, it would revert to more normalized level. So all right one more.

And our final question comes from Nick Yulico with UBS. Your line is now open.

Hi, everyone. Just going back to this Sunrise question, I want to be clear. Is the actual base management fee being reduced, or is it only a change to the performance management fee?

The base is being reduced.

Okay. And, sorry, did you quantify what the percentage amount was or the sort of benefit is from an expense standpoint?

I just gave a million dollars per quarter number so you can back-of-the-envelope that based on the revenues in the P&L.

Okay. All right, thanks. And I guess just lastly, just a bigger-picture question for you, Debbie, is how you're thinking about senior housing exposure overall. We are getting later in the cycle; occupancy seems like it peaked a year ago. Supply is having more of an impact. If you go back to sort of the big debate of five, six years ago, it was whether it made sense to take a lot of operating exposure in senior housing or just stay with triple net. It feels like we are now past the period of outsized growth in operating, and maybe triple net is going to outperform. So how do you think about managing your overall senior housing portfolio? Are you looking to maybe sell some assets, reduce some of your operating exposure? Thanks.

Thank you. Well, we believe in balanced and diversified portfolio that over time again will deliver reliable growth and income as it has I would say that in our senior housing operating portfolio which is about a little bit more that a quarter of our business, we have enjoyed tremendous growth as you point out and it is really some of our best assets in the best market. And so we like owning those assets. They will go through normal cyclical activity, but at the end of day in all the assets we owned whatever structure we own them in, the asset have to perform and grow and product EBIT arm growth over time. And so we really like our spot. We like the diversification. We can always modify kind of at the margin or wholesale as we did with SNF business. But on balance, we really like the diversification of our business and also the quality of our SHOP portfolio.

Thanks.

Well, thank you for being patient. And to everyone on the phone, if you are still there, thank you for joining us today. We sincerely as always appreciate your interest in our company. We look forward to seeing you at NAREIT. Thank you.

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