Ventas, Inc. (VTR) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ventas Q4 2016 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 is being recorded. I would like to introduce your host for today's conference, Mr. Ryan Shannon, Investor Relations. You may begin.

Thanks, Tiara. Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the year and quarter ended December 31, 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 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 disclosure schedule are available in the Investor Relations section of our Web-site at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the Company.

Thank you, Ryan. Good morning to all of our shareholders and other participants, and welcome to the Ventas year-end 2016 earnings call. I'm delighted to be joined this morning by my Ventas colleagues as we discuss our excellent productive year, highlight our continued execution of our business plan and discuss our outlook for 2017. Our results and our 2017 expectations are completely consistent with the preliminary view we shared with you about a month ago. The Ventas Advantage of superior properties, platforms and people has enabled us to consistently deliver growth in income and outstanding performance through multiple cycles for almost two decades. Our success has been founded on solid strategic vision, innovative and rigorous execution and a stable team with the skill and the will to excel. With our commitment to diversification and balance in our high-quality portfolio, our financial strength and flexibility, and the insight to allocate capital wisely in five asset types across the capital structure, we have enjoyed an enduring advantage in value creation. These principles powered our great year in 2016 as we reinforced our position as the premier provider of capital to leading healthcare and senior living companies and university-based research institutions. They will also serve us well as we look forward to 2017, despite a changing macro environment. I am happy to share some of our important accomplishments during the year. First, we delivered 16% total return to shareholders, outperforming the S&P 500 and the REIT and healthcare REIT indices. Our 17-year compound annual return to shareholders is an exceptional 25%. During the year, we grew normalized FFO per share by 5%, at the high end of the guidance range we presented at the beginning of 2016, and we did so on an even stronger balance sheet than we expected ending the year with a meaningfully enhanced credit profile. We worked with our leading operators to grow our same-store cash NOI through operational excellence initiatives and focus. We made or committed to investments of nearly $2 billion, including our exciting and accretive $1.5 billion acquisition of a high-quality new life sciences and innovation center portfolio, affiliated with leading universities, academic medical centers and research institutions. This deal is a winner with great yield approaching 7%, attractive real estate, long-term leases with institutional quality tenants and a leading developer partner in Wexford. It also added an important new channel for growth and we already have a robust pipeline with significant near-term acquisition and development opportunities. We also delivered reliable income growth to our shareholders by increasing our dividend by 6%. Ventas has one of the best dividend growth records in the REIT industry, and it remains an important component of the value proposition we offer to shareholders. To fund our business, we once again demonstrated excellence in capital markets by completing over $2 billion in highly attractive long-term senior note and equity offering. We also generated additional funding sources by accelerating our capital recycling and portfolio optimization plans, receiving over $600 million in profitable loan repayments and disposition proceeds from non-strategic assets. We cooperated with several of our customers to help them achieve their business objectives and increase their cash flow, while at the same time protecting Ventas and optimizing our portfolio. These mutually beneficial arrangements with Sunrise, Brookdale, Capital Senior, Kindred, and others, demonstrate our commitment to our customers and our ability to find innovative solutions that benefit both companies. Key among these agreements is a $700 million SNF disposition deal we reached with Kindred to enable Kindred to exit its skilled nursing segment at a very favorable cash rent yield to Ventas of 7%. Finally, we also delivered an innovative capital solution to our partners, Ardent and Sam Zell's EGI, to fund their pending acquisition of high-quality acute care provider LHP and scale the Ardent platform into a $3 billion revenue company operating in six states. With its major market share, valuable not-for-profit relationships and strong margins and payor mix, LHP is a great fit for Ardent and we hope to close our investment at the end of the first quarter. As a result of our 2016 activities and 2015 spin-off of most of our skilled nursing properties, Ventas has created an industry-leading differentiated portfolio, highly diversified by asset type, business model and tenant. Specifically, our owned portfolio generates 93% of its revenue from private pay sources. Our SHOP portfolio represents approximately 30% of our net operating income. Our attractive life science and medical office building segment generates about 25% of our NOI. Our operating and development partners are the best in their respective businesses. Our triple-net leases, representing 42% of our NOI, have virtually no lease expirations through the end of 2018, and none of our tenants represents more than 10% of our NOI. And finally, at the end of this year, we expect to generate only 1% of our NOI from skilled nursing facilities. During my 18 years at Ventas, we have seen a lot of changes in our markets as we've become the premier provider of capital to leading healthcare and senior housing operators and research institutions. We've navigated successfully through multiple economic, capital markets and reimbursement cycles and have continued to grow with strength and integrity. That said, we now face a period of significant macro volatility and uncertainty. Whether it's major tax reform and its impact on real estate, modifications to the healthcare system, interest rates, or the unknown contours and economic impacts of potential trade barriers or immigration trends, none of us knows exactly what's in store for our businesses. What we do know is that Ventas will operate with intensity, experience and skill at the dynamic intersection of healthcare and real estate, two of the largest and growing sectors of GDP. We will focus on managing the risk and capturing the opportunities that a changing environment presents to us, through development of the right strategies, prudent capital allocation and excellent innovation and execution. That's what the talented and cohesive Ventas team has done successfully for almost two decades and it's the same thing we intend to do in 2017, to create value for investors and customers. Let me share some of our specific priorities for the year ahead. Enhancing our balance sheet through lengthened debt maturities and increased liquidity to take advantage of opportunities and preserve value in the context of a more volatile and uncertain environment; allocating and recycling capital prudently by investing principally in life science, high-quality acute care hospitals and customer-related growth, and by making smart divestitures including our SNF sale as a way to further differentiate our excellent portfolio mix; investing in our future growth and higher quality asset base through selective development and redevelopment, especially in our exciting new life sciences business and premier senior housing and MOB assets with leading developers and tenants, like AA rated Sutter Healthcare in San Francisco; continuing to build on our Advantage platform, including Atria, Ardent and Wexford; capitalizing on increasing convergence we see between healthcare providers, managed care companies and senior living operators; engaging in mutually supportive and beneficial transactions with our customers; driving cash flow growth and performance in our high-quality assets to deliver reliable growth and income; and continuing to align, motivate and challenge our team, which provides a winning competitive edge. It is indisputable that senior living and healthcare real estate is a great place to be. Underpinning our confidence is the incredible market that will certainly provide long-term opportunities for assets to be owned in the most efficient hands, like ours. The senior population in the U.S. will grow rapidly, and with it, demand for our real estate sites where essential home, care and comfort are provided to individuals and their families and groundbreaking research is conducted every day. We also foresee that senior housing and healthcare providers will work with each other and with managed care companies to limit readmissions, control health care costs as our nation ages, and advance the nation's health and wellness. We expect to be a full participant in these trends, supporting this operating convergence with our capital. So, while we may experience near-term challenges from peaking deliveries of senior living units in 2017 or potential changes to the Affordable Care Act, the opportunities in our $1 trillion fragmented market are unmistakable, inexorable and gigantic. That is one reason we continue to see significant interest in all of our asset types from private equity, pensions and sovereign wealth funds at robust pricing. In the midst of a highly dynamic environment, we are confident that we can continue to capitalize on these opportunities. We have the properties, platforms and people to continue leading our sector. The entire Ventas team is excited and ready to deliver in 2017 and beyond. Now, I'm happy to turn the call over of our CFO, Bob Probst.

Thank you, Debbie. I am pleased to report another strong year of cash flow performance from our high-quality portfolio of healthcare, senior housing and life science research properties. Our overall same-store cash NOI increased 2.7% for the full-year 2016, right in line with our 2.5% to 3% total Company same-store guidance range. Our fourth quarter same-store NOI growth of 2.9% was also right in line with our expectations. Let me detail our 2016 performance and 2017 guidance for our portfolio at a segment level, starting with our triple-net business which accounts for 42% of our NOI. Our triple-net portfolio grew same-store cash NOI by an excellent 3.7% for the full year 2016 over 2015. In the fourth quarter, triple-net same-store cash NOI increased by 4.5%, driven principally by strong in-place lease escalations and rent reallocated to more productive assets from the Kindred LTAC lease modification agreement in Q2. Cash flow coverage in our overall stabilized triple-net leased portfolio for the third quarter of 2016, relative to the above information, was consistent with prior quarter at 1.7x. Coverage in our triple-net same-store senior housing portfolio remained at 1.3x, incorporating escalator growth for the trailing 12 months that exceeded 3%. Coverage trends in senior housing were supported by low single-digit EBITDARM growth at the asset level for the trailing 12 months. Cash flow coverage in our same-store post-acute portfolio was 1.8x. Our shareholders continue to benefit from our spin-off of the majority of our SNF assets in 2015, together with the anticipated sale of our Kindred SNF assets in 2017. We expect that the spin-off and Kindred disposals will together achieve a highly attractive blended cap rate approximating 7%. It will reduce our exposure to the skilled nursing space to only 1% of Ventas' NOI. Specialty hospital coverage declined by 10 basis points to 1.9x, in line with our expectation, as Kindred entered the new LTAC patient criteria in the third quarter. As a reminder, Kindred expects this transition will have the most impact on asset performance through the first half of 2017, after which the net mitigated impact of criteria begins to ease. During the year, we also pruned our Kindred LTAC portfolio and extended leases on remaining LTACs for eight years, while Kindred navigates through the new rules on patient criteria. Finally, Ardent continues to drive strong performances and stand out as a leading hospital platform, delivering sustained positive momentum in top and bottom line key performance indicators. Rent coverage at the assets improved 10 basis points sequentially to a very strong 3.1x in Q3. Third quarter 2016 results for Ardent compared favorably to even the very best publicly traded hospital systems in the U.S. Meanwhile, adjusted admissions, revenue and EBITDA continued to trend positively through the fourth quarter of 2016. For 2017, we expect our triple-net portfolio overall will grow in the range of 2.5% to 3.5%, driven by more normalized in-place lease escalations in the year. As we discussed in prior calls, 2016 benefited from outsized escalators with certain tenants as well as nonrecurring profits and fees from various value-creating transactions. Consistent with prior practice, our outlook does not include the benefit of new fees in 2017. Taken together, these items result in more moderate yet still attractive triple-net same-store cash NOI growth in 2017. Moving on to our senior housing operating portfolio, the framework by which we established our SHOP guidance range one year ago held up very well throughout the year, both for the full year and the fourth quarter 2016. Our same-store SHOP cash NOI increased by 2.3% for the full year 2016 and grew over 1% in the fourth quarter, both right in line with our expectations. In both the fourth quarter and full-year 2016, REVPOR increased at approximately 4% overall, driven by our high barrier to entry coastal markets where we have attractive pricing power. We also saw strong pricing in independent living rents, in the care component of assisted living revenues. Labor cost increases driven by wage pressures exceeded 5% in 2016. These increases were partially tempered by the benefit of $2 million in lower Sunrise management fees in the second half of the year. Our framework for predicting the impact of new competition on performance was accurate throughout 2016. Our premier coastal markets in the U.S., such as New York, Los Angeles and Boston, provided the engine-room of growth for our overall SHOP portfolio in the fourth quarter and for the full year. These high-quality infill communities represent 70% of our SHOP NOI, and for the fourth quarter and full year these communities increased same-store NOI mid-single-digits on strong rate and revenue growth. Canada also delivered very strong performance, increasing NOI by nearly 7% in the fourth quarter and 5% for the full year. We observed elevated levels of new building openings in our trade areas in the fourth quarter. Our NOI exposure in markets with a new supply surplus continues to represent 30% of our SHOP portfolio, or less than 10% of Ventas' overall NOI. Our same-store NOI performance in the fourth quarter in these communities decelerated to a mid-single-digits decline via occupancy pressure, as a result of the cumulative impact of new deliveries. Net-net, the 70% of our portfolio in high-barrier markets powered same-store NOI growth overall, both in the fourth quarter and for the full year. Turning to 2017, we remain bullish on the value proposition of seniors housing and we expect the SHOP portfolio to grow same-store NOI in 2017 in the range of 0% to 2%. We are encouraged by continued pricing power in our SHOP portfolio, which fueled our growth in 2016 and continues to present opportunity in 2017. In fact, both Atria and Sunrise implemented accelerated rent increases through the annual rate letters issued this January. These rate increases appear to be holding up well in the first quarter. Given over 70% of annual SHOP revenue is determined by these rate letters, they are extremely important to our full-year SHOP profit delivery. A more severe flu season thus far in 2017 will pressure occupancy in the first quarter. A slower start to the year, together with new deliveries throughout 2017, will likely result in a widening of the occupancy gap in 2017. Nonetheless, the aforementioned strong rate increases support expected NOI growth overall for the year. The accelerated level of pricing is also important in light of the continued labor wage pressure, which we estimate will approximate 4% to 5% for our SHOP portfolio overall in 2017. The carryover impact of Sunrise fee reductions from the revised contract signed in Q3 2016 act as a partial offset to these wage pressures. We expect deliveries of new supply in 2017 to outpace the elevated levels observed in 2016. And with 30% of our SHOP portfolio with the supply surplus, we anticipate mid to high single-digit NOI declines, a deceleration due to the cumulative impact of new units online. That said, new construction as a percentage of inventory within our trade areas has held steady at 5% overall over the last several quarters and we are seeing early signs that suggest new starts may be slowing. Encouragingly, the 70% of our portfolio located in high-barrier markets are expected to continue driving mid single-digit NOI growth in 2017. In fact, we continue to invest in attractive high-return redevelopment projects in these advantaged markets, with six new projects totaling $70 million now underway to help fuel our growth over the medium and long term. Let's round out the portfolio review with our office operations reporting segment, which includes our medical office business as well as our newly acquired life science and innovation centers. Taken together, these assets now represent approximately 25% of Ventas' annualized NOI. The 23 operating assets acquired through our life science investment, which closed in September 2016, performed very well in the fourth quarter and are in line with underwriting. We expect two more properties to come online late in 2017, adjacent to Duke University and Wake Forest. Finally, we have already made exciting progress in scaling the life science platform by green-lighting two new ground-up developments associated with the University of Pennsylvania and Washington University. In our medical office business, cash NOI for the full-year 2016 same-store pool of 270 assets increased by 1.3%, in line with guidance. In the fourth quarter, same-store NOI increased 2.1%. Fourth quarter results were driven by rate growth from in-place rent escalations and expense controls, modestly offset by lower year-over-year occupancy. On a sequential basis, as expected, we made progress in the fourth quarter in growing occupancy with sequential occupancy increasing by 40 basis points to 92%. Looking ahead to 2017, we expect stable and steady growth of 1% to 2% from our same-store office portfolio of 364 medical office assets. This guidance assumes modest occupancy and revenue growth as we continue to fill the leasing pipeline through 2017. Turning to our overall Company financial results for the full year 2016; in 2016, we delivered strong earnings and dividend growth together with enhanced balance sheet strength. These results were driven by increase in cash flows from our high-quality properties, optimization of our portfolio through continued capital recycling, and terrific capital markets execution. Income from continuing operations per share for 2016 grew 36% to $1.59 compared to 2015. Full-year 2016 normalized FFO totaled $4.13 per fully diluted share, representing a 5% growth on a comparable basis over 2015. This strong year-over-year earnings growth was driven by accretive investments, lower transaction costs, positive property performance, and profits and fees from transactions with borrowers and tenants. We closed on $1.6 billion in acquisitions in 2016, including our acquisition of 23 high-quality life science and innovation centers. We also invested over $140 million in high-return redevelopment and development projects in 2016. We accelerated our portfolio optimization and capital recycling program during 2016. Ventas sold properties and received final repayment on loans receivable for proceeds totaling nearly $620 million at a gain of $100 million and with 8% cash and GAAP yields. These proceeds outpaced our previous guidance of $500 million, including approximately $350 million in proceeds realized late in the fourth quarter. Importantly, we made great strides in enhancing our balance sheet and financial strength in 2016. We demonstrated capital markets excellence by issuing $1.3 billion in equity over the course of the year at an average gross price of approximately $70 per share. We also raised $850 million of new senior notes, including our most attractive 10-year bond in Ventas' history with an all-in rate below 3.25%. Meanwhile, we retired or refinanced approximately $1 billion of in-place debt, yielding approximately 2.3% on a GAAP basis. This cumulative capital activity during the year further bolstered our balance sheet. At year-end, the Company's net debt to adjusted EBITDA improved to 5.7x, a 0.4x reduction from our year-end 2015 leverage of 6.1x. Our fixed charge coverage grew to an exceptional 4.8x; our net debt to gross asset value improved by 4 percentage points to 38%; and our secured debt to total indebtedness reached 6%. Let me close out our prepared remarks with our full-year 2017 guidance for the Company. In 2017, we expect to demonstrate continued enterprise strength through ongoing strategic dispositions, by extending debt maturities and through continued investments in our attractive platforms. Our expectation as we begin the year is for 2017 income from continuing operations to range between $1.72 and $1.78 per fully diluted share. We expect normalized FFO per share to range from $4.12 to $4.18. We expect the total Ventas same-store portfolio to grow cash NOI by 1.5% to 2.5%, with all segments contributing to growth as described earlier. Our guidance range assumes continued capital allocation discipline. We expect our ongoing capital recycling program to generate $900 million in disposition proceeds, at a 7% to 8% GAAP yield. This includes $700 million in proceeds at a gain approximating $670 million in the second half of the year through the potential sale of 36 skilled nursing facilities. Disposition proceeds are expected to be redeployed at approximately the same rate into new 2017 investments approximating $1 billion, principally to scale our life science and acute care platforms, including $700 million in secured debt financing to fund Ardent's acquisition of LHP. The LHP deal is expected to close late in the first quarter of 2017. We also expect to invest in future growth through attractive new ground-up life science developments, with our development and redevelopment funding expected to accelerate to approximately $300 million in 2017. A note on quarterly phasing; we expect a softer first quarter sequentially in 2017 due to nearly $350 million in late Q4 2016 dispositions, the proceeds of which are principally being held as cash until they can be redeployed into our LHP acquisition in late Q1. We plan to drive an even stronger financial profile and liquidity in 2017, including refinancing approximately $1 billion of low-cost short-duration debt with longer-dated notes. Our outlook assumes 358 million weighted average shares in 2017, compared to 348 million shares outstanding in 2016. The increase in share count arises from the full year impact of shares issued in 2016 and we do not assume new equity issuance in 2017. Net, we forecast our leverage at year-end 2017 to be in line with our strong year-end 2016 position. The result of this 2017 activity underscores the continued excellence of Ventas as enterprise and our team's confidence in our ability to continue to create value for our shareholders. With that, I'll ask the operator to please open the call for questions.

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

For the [indiscernible] portfolio, how are you guys thinking about the trajectory of that same-store growth? Could there be any quarters throughout 2017 where the growth goes negative but the full-year is still positive? It just looks like you've got pretty tough comps with [indiscernible] in the second half in particular and rolling the benefit of this lower Sunrise fees in the second half as well. How should we think about growth?

For the full year, just to reinforce, we expect to grow. So the guidance of 0% to 2% is the full-year outlook. As we look at phasing, I expect that will grow throughout the year. And fairly consistently, there are puts and takes. We mentioned for example the flu season in Q1 highlighted that the occupancy challenge from that is going to affect Q1. However, for the first half we also have the carryover benefit of the management fee savings on Sunrise. So net-net-net, as we look across the quarters, we expect fairly consistent growth. No hockey stick type movements either way.

Okay. And then on the MOB platform, you guys had I think 1.2% same-store growth in 2016 and kind of 1% to 2% in 2017, which is below the kind of the typical trend we see for most MOB platforms at 2% to 3%. If you could just delve into what is driving that kind of lower growth and when should that start to reaccelerate?

So, 1.3% was the growth last year. And if you unpack that a little bit, we had an interesting year in the sense of a significant tenant departure early in the year, then having to refill that pipeline in terms of tenancy in the back half. That's what we saw in the fourth quarter, we saw the sequential improvement and 2% growth in the fourth quarter, just in line with our expectation, and reiterating the same steady type of growth in 2017. I'd highlight we have fairly significant rolls in 2017 relative to history. So that's our challenge to meet and beat in 2017 on the top line. So that's really how I think about it. It's going to be a top line driven business but very steady and predictable.

Okay, great. And just last question for me, for hospitals, how are you guys thinking about making incremental investments with the uncertainty, Debbie, you alluded to with the potential repeal of the Affordable Care Act? Are you changing how you are underwriting or are you kind of hitting the pause button, or how are you looking at things on the hospital space at this point in time?

We are excited about our investment in Ardent, which as Bob said is performing very well. We're executing on the game plan, which is to scale that platform as we hope to fund the acquisition of LHP in 2017. And LHP is a real gem. So I think our strategy of acquiring really high-quality assets, scaling the business, and we're very focused on executing on that this year. And in addition, we have said all along that we are going to be very highly selective, which we have been and we'll continue to be, but we have a gigantic secular opportunity and we will continue having conversations with people, and should there be additional opportunities that we think will create value, we will certainly pursue them. So that's where we stand on the business right now.

Okay. Thank you very much, guys.

Our next question comes from the line of Smedes Rose from Citi. Your line is open.

I wanted to ask you on – you mentioned Bob that Atria and Sunrise have rolled out accelerated rate increases. And I was just wondering, when you say that, does that mean that they are increasing what they normally would have done or are they impacting more customers sooner for rate increases, what does that mean exactly?

Sure. So as you know, Smedes, in January for most of the business, not all but most of the business, the annual rent increase for in-place residence goes out. And the point I made this year is, we had more aggressive, it would be the right word, accelerated rate increases for this year versus last year, and particularly so I'd say in the Sunrise portfolio, and Atria has historically had the same methodology but I think we saw more alignment between the two operators this year. So, strong growth and stronger than last year in terms of that rate later, which I mentioned is really important to the full year revenue number.

And I think one of the real benefits that Bob has brought to our senior housing business in working with our care providers is really understanding pricing and where we're making money and making sure we're pricing appropriately for the care and the home that seniors are receiving, and so really deconstructing what the pricing should be and matching it with the services that are being provided and the quality of the residence that's being provided. So, double-clicking, triple-clicking into pricing and making sure that we are matching pricing with needs and services.

Okay. And then just on the supply as you break out in your supplement, it continues to kind of tick up a little bit sequentially. Do you feel like 2017 is a peak year in terms of construction, you mentioned that you're seeing some slowdown in starts, or kind of maybe a little more color on that?

Sure. So let me start with deliveries first. And so, we saw elevated deliveries really in the second half, beginning in the second half principally of last year, and we expect that to continue to increase in terms of new deliveries in 2017 versus 2016. At the same time, when you think about new starts, we've seen through the NIC data that for two quarters now for our trade areas we've had 5% construction to inventory, so level amounts in both quarters. And as we look at the data, we said, some early signs perhaps that that new starts may be slowing. And so that gives us some hope about that, but the delivery certainly in 2017 will be elevated even versus 2016 levels.

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

I know, Bob, in your prepared remarks you kind of talked about the LTAC portfolio and Kindred's plans to mitigate the new patient criteria. Can you explain how they plan on mitigating some of that weakness?

I'll take that, Michael. So as we talked about before, Kindred spent a year or two preparing to move into patient criteria, which Select Medical, another LTAC provider, went on successfully almost a year prior. And so Kindred was highly prepared to make this transition. And essentially, Kindred has been adopting a strategy of really identifying patients who are eligible for LTAC reimbursement as well as developing a strategy where they can care profitably for what are called site-neutral patients. So, I have every confidence that Kindred will be able to go into criteria in accordance with its expectations and work through the reimbursement and mitigate some of those impacts as we look to the back half of 2017. So, that's a shorthand way to describe a very complex transition.

Okay. And then real quick on the coverage, I guess that 1.9 or 1.8 now, I mean how much further should we expect that to drop as these mitigations kind of take hold?

Right. I mean, what we've talked about in the past is, over time we would expect it to be maybe 20 basis points, 10 to 20 basis points, all else equal, but there will be a trough and then of course they'll elevate out of that in the back half of 2017 and into 2018. So, in and around that neighborhood, and again, very expected I guess and that we have confidence in Kindred's ability to execute and we have good long-term lease arrangements with them as we go through the transition.

Our next question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

I was just wondering if you could talk a little bit more about Wexford, and it sounds like you've got some robust development opportunities there. Can you just maybe talk a little bit about the deal, what's gone well, maybe what have been some of the challenges, and maybe talk a little bit more about the returns and the opportunities on the development front?

Sure. First of all, we're very excited to be in this business with the university-based R&D tenants, and it's UPenn Medical, it's Yale, it's Duke, Wake Forest, really leading institutions who account for 10% of university-based R&D spending in the U.S. And I think the opportunity – and also Wexford is the name in this business, so being partnered with them I think is a real advantage – and the business opportunity is really very much like the MOB opportunity. For example, which is to say we have these big institutions, they have a lot of demands on their capital, and they don't need to own or build all of their real estate. And so, we have this great nucleus of assets now, we have a great development partner who is renowned among the universities for what they do, and the business plan is to scale that platform by doing more business with the universities who are already in our tenant base and to do business with additional leading R&D universities, very simple. And what's exciting about this acquisition is that, A, the assets we acquired are excellent and are performing well, and then B, the demand for what we're doing is very strong. And so, we see additional follow-on opportunities in the pipeline with one very well-known university, we also as Bob said have green-lighted a couple of other projects, one adjacent to UPenn in downtown Philadelphia, another one related to WashU, and the pipeline is very robust. And so, we think this can be a great channel for growth for us. It's really come in sort of fast and furious and our job is to make sure we're doing good underwriting and that we're available to build this as a real growth opportunity for the Company. So, we're excited about it.

And could you provide any parameters around sort of unlevered development yields in this business?

Of course it always depends on the amount of pre-leasing, et cetera, and what the credit quality is, things like that. But in general, we'd…

7% to 9%.

We'd be looking at 7% to 9% yields.

Okay, thanks very much.

Our next question comes from the line of Nick Ullico from UBS. Your line is open.

Just I guess first off on , Bob, going back to the senior housing operating guidance this year, I know you gave some detail on how to think about occupancy and labor expenses. Is it possible to get a little bit more of a breakout for the same-store revenue growth versus the same-store expense growth?

For 2017 specifically in terms of the outlook?

Yes.

Sure. Yes, let me unpack that a little bit. In terms of occupancy, we finished the fourth quarter about 120 basis points down year-on-year. Our expectation as we come into the first quarter as I mentioned is with the flu and with these new deliveries that that gap would widen. I would put that, that versus prior year, I would put that in the 200 basis points down range. At the same time, really importantly, the pricing that we expect to see if we delivered REVPOR of 4%, I think given that we were more accelerated in our rate letters this year, we expect to see something north of that in terms of rate. And that's not, to say it again, because of the wage pressure in the 4% to 5%, that's for labor I should say, that 4% to 5%. Total cost will be below that growth rate as we drive efficiency and utilities and things like that. So that's the algorithm net-net-net to get us down to the 0% to 2% outlook.

Okay, that's helpful. And then going back to Ardent, can we get a feel for the ultimate ACA benefit that they've gotten? I mean, if we look at the public hospital operators, it's been between around 5% to as high as 15% as EBITDA benefit for operators in 2016. Do you have a sense for where Ardent would fall in that range?

I do, and if you look at Ardent pro forma with LHP, they will be in six states as I mentioned. Only two of those are Medicaid expansion states. Our general view is that the potential impact on the companies as a whole would potentially, assuming no mitigation, be less than the potential synergies from the transaction. And so we have a built-in buffer there as well as obviously as a landlord we have over 3x coverage. But just at the operating level, we think that what we're doing is really smart and we have a built-in cushion there should there be any impact from a change to the Affordable Care Act. I do think it's interesting, and I caution investors not to equate equity operator prices with the reliability of lease streams, but I would note that if you look at like an HCA for example, their stock price was $66 last year at this time, it's $84, $83 to $84 now. I mean, I think there is recognition that these good companies will continue to be good and what these excellent operators do over the decades is they know how to hold the levers in this business to create positive cash flow, and that's what we would expect Ardent to do with a very seasoned CEO that's been through this for three decades. And so, we feel good about it.

That's helpful, Debbie. Just I guess one last question is, it sounds like there is some acquisition opportunities heating up a bit in hospitals but more so on the non-profit side. Is there any opportunity for you and Ardent to participate in that?

Well, good. I mean, we're really focused on closing LHP and are excited about that because it's a gem, and what comes with it, as you point out, are these really valuable not-for-profit relationships with academic medical centers and other large not-for-profits like a sanction. And so, that is one incremental step toward this gigantic opportunity. And again, we'll continue to have conversations, but our focus right now is really closing LHP and then we'll take it from there.

All right. Thanks everyone.

Our next question comes from the line of Vincent Chao from Deutsche Bank. Your line is open.

Maybe just to stick with the last line of questioning, Debbie, maybe if you could expand a little bit, you mentioned some cushion at the operating level beyond just the coverage. Exactly what are you referring to there, like what are some of the things that can help offset some of the potential ACA pressures?

Should there be ACA pressures, which honestly I think there may be a lot of easier policy priorities to accomplish in the near term, but should there be something, I think they will be first of all pushed out, and secondly, we have – we announced that there would be significant synergies in the merger between the two companies, which again only have two of the six states in Medicaid expansion. And so, we think that's more than enough cushion should there be impact from an ACA repeal. But the key thing is, what is the replacement? The replacement may be fine, and so it may have no impact. The key thing is, what is the replacement, and of course we would expect that that replacement would not take effect for one to multiple years.

Okay, just trying to clarify that point. And then just on the hospital opportunity, which you are very happy with the Ardent performance and still looking to scale that business, I guess from a pipeline perspective given some of the uncertainties out there, have the pool of potential acquisitions changed at all on the hospital side or are you still seeing the same level of potential?

As we said, we're going to be very selective and we're going to play at that top percent of operators and assets that have significant market share, that have quality outcomes, that are efficient, et cetera, and so those conversations will continue over time and it's a really gigantic opportunity, it's a $1 trillion revenue business, the acute-care business.

But I guess have the conversations changed at all in light of some of what's going on out there with regard to policy?

Really I talked to Todd, he is here with me, and we were at the J.P. Morgan Healthcare Conference, and honestly, the hospital acute-care providers are going about their business, which is creating efficiencies, driving quality, all the things that they were doing before. And many of the changes that are in the health care system are so already embedded in what they are doing, I would say that that is really what they are focused on, execution of their business.

Okay, thanks.

Our next question comes from the line of Michael Knott from Green Street Advisors. Your line is open.

A question for you just along the lines of ACA potential repeal, can you just touch on how you think that might impact your MOB business and maybe helps us in decision-making with regards to space?

Right. So I would say that again let me just repeat a little bit of what I said, which is that the acute-care providers are going about the business of driving efficiencies, quality, improvement, M&A, et cetera, and they are some of the biggest customers obviously in the MOB business, and we have a really high-quality portfolio that's affiliated with some of the top hospitals. And so, while uncertainty generally can delay decision-making and things like that, we may see some of that this year, I do think that we are well-positioned to continue creating stable growing cash flows in our portfolio.

Okay, thanks. And then just on the investment side, do you mind just touching on what you're sort of seeing out there, the pulse of the investment market, any changes in cap rates or appetite, is there a slowdown because of some of the uncertainties? And then, I think Bob used the word 'discipline' with respect to your investment activity. Just curious if we could also sort of infer that 'caution' is a word that you are applying to your investment activity opportunity set just given where we're at in the cycle?

So I think what's really interesting is that we are seeing huge continued interest at very robust pricing as I mentioned across our asset types, and it's coming from pension funds, it's coming from sovereigns, it's coming from private equity. And I think that is a sign that people value our assets and they see the big opportunity in our business. When we talk about being disciplined capital allocators, as you know, we have always been about doing things that create value for our investors and hopefully being good partners with our customers at the same time. And so, I would not conflate those two words. I think we are disciplined when we think about our cost of capital, when we think about risk-adjusted returns and when we think about what is going to create value, and that's always been a hallmark of Ventas'. And that's partly why we have such a good track record of total return, that's why we have a good track record of capital allocation and growth in income, as we take that very seriously, and we think about deals on their own and also how they affect the balance and mix in our portfolio. So, we will be disciplined, we've always been disciplined, and take all those factors into account as we continue to make investments.

Okay, thanks. And then just one more for me if I could, and thanks for the time, on senior housing, I know you've emphasized, Bob, the strength of the rate letters that are going out and there's this kind of dichotomy between reduced occupancy but strong pricing power. Can you just talk about how long do you think that can persist, and if we look into maybe a year from now as we think about 2018 just with all the continued supply growth, deliveries in 2017 and then probably similarly high in 2018 I would argue, can you just talk about the outlook for pricing power, how long can that dichotomy between occupancy and rate growth sort of persist? Thanks.

Sure. Good question, Michael. I keep coming back to the value proposition of senior housing and let's not forget the big picture of the cost of replicating the services that you receive in the senior housing community. It's twice as expensive to do so at home, not to mention the benefits of being in a community. And that I think is a truism every market that we go into and everything we hear. And the value-added of the services in your report highlights this, of assisted living services, the value it provides to residents. And I don't think that generally speaking [indiscernible] we priced that value necessarily to the point that we can. And so, we are seeing in 2017 the opportunity to do that. Because of the value proposition, I see the opportunity to continue to do so. I come back to the framework though of looking at the high-barrier markets where you have the demand, where you have the wealth, where you have little supply in your competition, that's the area where we have pricing power and that's where we're focused, and I think that can continue. But clearly, the supply is going to have an impact in the balance of the portfolio.

And just a quick follow up, so in general, you think sort of stronger renewal rent prospects and then maybe weaker on the new rent side can continue for a while just given what you talked about, the value that's provided to residents, et cetera, seems like that can persist?

Yes. So we have not only the annual increase but also street rate. We expect to see year-over-year growth. Again, that's driven by those engine-room markets where we see nice increases, not at the level necessarily of the rate letter but still nice growth. So it's both that we see particularly in that 70% of our portfolio, that is the high barrier to entry markets.

Our next question comes from the line of Richard Anderson from Mizuho Securities. Your line is open.

Thank, and I know one hour is the magic number, so I'd be quick. So in your disclosure, you've had this footnote before for SHOP. It says it excludes closed units during periods of closure, which is kind of a funny way to say but I assume it's been a lot of thought put into it. What does that mean like and how substantial is that relative to the impact it might have on your growth profile in the SHOP portfolio?

I mean, it's very minimal. It's like, for example, if there was a fire and the building was closed down or a flood or something like that, that type of thing, very minimal.

Okay then, short answer is good with me. And then for 2017, you pointed out Canada was a leader at 7%-plus, or whatever it was, for 2016, what do you think that Canada/U.S. breakdown might be for SHOP in 2017?

First of all, thrilled about the Canada performance, it grew mid-single for the year, it's great, 7% in the fourth. And if you look at occupancy, pushing 95%. And so I'm just sounding like a broken record here, but the opportunity as we think about 2017 is very much with a 95% occupied building to get some pricing.

Plus they have good hockey.

Hockey, yes, really. All right.

Yes, it's really hockey. So it's going to drive Canada next year, or this year, 2017.

So Canada will again be a leader you think?

Yes.

To the degree it was this time? I mean that was pretty substantial.

It will be a nice grower, no doubt, it will contribute nicely.

Could that mean that U.S. could be a negative number?

Again, we have a range. So at 0% to 2%, you could probably back into math to suggest that to be true.

Multiple permutations.

So that's where you are in the range.

Okay, sounds good. Thanks very much.

Our next question comes from the line of Chad Vanacore from Stifel. Your line is open.

So thinking about fourth quarter earnings, FFO was largely in line, FAD was a little bit lower than expected, and it looked like that was on CapEx spending. And I know you had warned us about this last quarter, but it still seemed to come in a little bit higher at around $45 million a quarter. So, should we expect that to be a run rate through 2017 or does that moderate or increase?

So FAD, relative to what we put out a month ago, in the range in terms of dollars, I think we're about $1 million below the $1.27 billion of our outlook, and that was really CapEx timing as much as anything. I would step back and say, in terms of FAD CapEx focus areas, MOB is one area of focus in particular, but I wouldn't infer anything kind of beyond that.

Then what we should be thinking like on average per quarter?

If you look at the reconciliation for 2017…

We have about $125 million of what I call FAD CapEx in the year. It tends to be more back half weighted, typically the fourth quarter, to ramp a little bit in the fourth quarter. But again, it depends a little bit, Chad, just on what's going on in terms of the projects. You could have a [indiscernible], so it would be lumpy for example. So, there is an extreme seasonality to that number.

Okay, thanks. And then just speaking of pricing growth, you mentioned pushing aggressive pricing on the SHOP portfolio. What's the difference in pricing between at 70% of SHOP that seem to be in high barrier entry markets and the 30% that's facing competition?

In terms of absolute REVPOR…

Again, I think the pricing is really an enhanced way to appropriately have the operators be paid for the care and services that they are providing and to match pricing with the value that the families and the seniors are getting, and we are doing that more effectively I would say in 2017. And Bob will take the rest of that.

If you look at the 70% versus the 30% at REVPOR, the 70% equilibrium markets, there's not a significant difference on REVPOR. What's different is the growth rate between the two.

So pretty [indiscernible] what you're saying is, pricing in a more competitive market, that growth is going to be smaller than the high-barrier market, is that right?

Yes, exactly.

Well said, yes.

Okay, all right. And just one quick update, the Kindred portfolio sales, I think you left most of that in Kindred hand. Can you give us an update of where you are in that process?

I can and would encourage you to listen to Kindred's call later because they'll give a more fulsome update because they are on point there. Our understanding is that it's going well and there's a lot of interest. As I talked about earlier, that there is a lot of interest in all of our asset classes and this would presumably be no exception. And so, we are anticipating on balance a second half execution of that transaction.

Our next question comes from the line of John Kim from BMO Capital Markets. Your line is open.

So last year in your supplemental, you broke down a sizable revenue enhancing CapEx figure of $110 million, and this year that figure is not in your supplemental. Do you still have this program or is it just now reclassified somewhere else?

We absolutely still have the program, John. We changed a little bit the presentation to really highlight on that one page, I'll call it the FAD CapEx breakdown, sustaining CapEx, versus the prior pages which demonstrate the development and redevelopment. So really just tried to differentiate and distinguish the different types of spend. But the program is very important and a huge priority for us. As we've said, in fact we're going to…

Accelerate it, yes.

Increase our amount of spending from $140 million to $300 million, round number, 2016 to 2017. So it's key, it's a core priority.

And so can you just remind us or maybe provide some color on what constitutes a redevelopment, and also if you have a projected yield on your existing program?

If we have a what, I'm sorry?

A projected yield.

Okay. So in those numbers, we're talking about this selective redevelopment and development program we talked about, we would include within that ground-up development like our Class A downtown San Francisco medical office building, it would be our newly opened senior living community, Foster City in Northern California, it would include any life sciences, as we mentioned potential developments with UPenn or WashU that we talked about. And it would include some redevelopments that we've done over time where there are significant impacts on the community where we for example add a life guidance or memory care unit or build another wing or convert parts of the building to other uses, those types of things. And we tend to, as John said, we tend to look at 7%-plus returns depending again on the profile of the tenancy, the pre-leasing, the credit quality in the ground-up developments. I mentioned the San Francisco MOB, we've got AA rated credit, it's substantially pre-leased building. That's one type of yield. As we're doing these redevelopment projects, I'd say high single-digits, low double-digits unlevered expectations for returns.

Okay, that's helpful. So the redevelopments are mostly additive, not just enhancing existing units?

I mean, principally they are redos of things or additions of things, yes.

Got it, okay.

That generate a return.

That generate a return, yes.

That generate returns as distinguished from the FAD CapEx which are profit sustaining type initiatives, roofs and boilers and things like that.

Yes.

And Debbie, you mentioned briefly the share prices of some of the public operators. I'm just wondering if you find it preferable for your operating partners to be public or private.

We are agnostic. We want our operators to be great at what they do, leaders in their markets, provide good quality care, and operate with a lot of integrity and compliance. So that's what we like. And we have the lion's share of our portfolio as we've reshaped our business over the last couple of years, is with those leading operators. So we have a few more questions. I'm sorry, but we have to hustle, we have a few more questions that we still want to take, John. We'll be happy to…

Sure, no problem.

Our next question comes from the line of Jordan Sadler from KeyBanc Capital. Your line is open.

In terms of your acquisition discussion and guidance in terms of deploying $1 billion or so in 2017, you're focused on life science and the acute-care hospital pipeline. So should we expect the life science deployments principally to be through development, is that right?

Yes.

So, no new really stabilized property acquisitions there outside of Wexford?

There could be – again, when we give the $1 billion, it's pretty straightforward. We've got $700 million that we are funding on the Ardent acquisition of LHP. Then we have $300 million of other, some acquisitions of stabilized assets, some are developments of life science that we've talked about. And so…

I guess my question is, as you are looking out and pursuing and underwriting transactions, I'm just curious what your interest level is, where the best risk-adjusted opportunity is among the segments that you are invested in?

Yes, I think the best risk-adjusted segments are the areas we have identified for capital allocation, which will be really high-quality hospitals, definitely growth in the life sciences segment, principally by development but also by potential acquisitions, and follow-on opportunities, and customer oriented activities. That's where we have been focusing the last couple of years and that's where we'll continue to focus and that's where we think we have the best return, in addition to of course the development/redevelopment that we just talked about.

Okay. And so, on the other side, the trimming that you're doing, which is also identified, but there's a couple of hundred million that's not necessarily, your trimming could be done presumably out of the MOB and senior housing portfolios, as you've done…?

I think the trimming – so we are talking, I think it's important to identify this capital recycling that we are doing in 2017 of $900 million of dispositions and then $1 billion of investments. So the $900 million straightforward to, it's the Kindred $700 million and then some dribs and drabs $88 million we just closed on some senior housing with a customer that was a good mutually beneficial deal. So that covers about $800 million of it, and the rest is kind of dribs and drabs to get to the $900 million, and I've already gone over the $1 billion. So that's the capital recycling that we've talked about that really is value creating.

Okay. Thank you.

Our next question comes from the line of Josh Raskin from Barclays. Your line is open.

Thanks for fitting me in at the end. I guess I'll just ask a quick one. Just getting back to the slowing of new construction, I wonder is there specific data on maybe markets or how long that takes to get the deliveries, et cetera, just when you would expect that to start showing up in terms of results.

I'd say, one thing to point to is the data we referenced that could suggest some slowing is NIC data, where if you look both for IL and AL at starts, in both cases they are the slowest that we have seen since 2012 to 2014 in that range. So, it's a couple of data points. Anecdotally, around financing would be another one, difficulty in financing, difficulty of lining up construction at a reasonable cost, et cetera, et cetera. So those are some of the facts that would indicate it may be slowing, but it's still early to call that.

Yes, I didn't know if you were seeing anything in your specific markets anecdotally more than the broad NIC data of just saying, okay, here are the markets, and then I didn't know if the $88 million of divestitures, maybe that was related to what you're seeing in certain markets, et cetera.

The divestitures were really with one of our customers, their underperforming assets. So we were able to sell those at a fixed yield and increase their cash flow and improve our portfolio. So, everybody was happy. So that was something that was a unique sort of solution that worked for both companies.

Okay, thanks.

Our next question comes from the line of Todd Stender from Wells Fargo. Your line is open.

Thanks for hanging in there.

Likewise, for everybody.

Is Todd Lillibridge there? MOB question for him.

He is.

All right. Same-store NOI growth in MOB has picked up a little bit in Q4, got you over 2%. But your outlook for this year would only top out at 2%. I just want to see if you can go through some of the drivers behind your growth expectations. That's part one. And part two is, maybe just touch on the stuff you sold in Q4.

As Bob mentioned, we were within our guidance this past year at 1.3%, at the midpoint roughly, and as we have said, 2017 guidance again really at that 1% to 2% range. And you are correct, we did finish the Q4 on a year-over-year basis at 2%. Our leasing and therefore occupancy was up in Q4 where we got to 92%. So we see a steady year. But again, as Bob mentioned, we do have a bit of a peak in terms of overall renewal activity that we're going to be faced with here in 2017. So, we factored that all in, and again, we feel very comfortable with our guidance for 2017 between 1% and 2%.

Great, thanks. And then how about what you sold in Q4, any characteristics we can point to where there's single tenant or smaller buildings?

Non-strategic assets that we thought we got a really good price for and that were more valuable to the tenant user than they were to us. So, good transaction there.

Great. Thank you.

Our next question comes from the line of Tayo Okusanya from Jefferies. Your line is open.

It's just a quick one. Just kind of given some of this recent news around Brookdale, I just wanted to, could you just talk a little bit again about if Brookdale does kind of end up in play, what rights do you have as a landlord for the company?

Good. Okay, so Brookdale as you know is an important customer of Ventas and they are an important industry participant with 80,000 employees and 100,000 seniors that they care for every day. We have a good relationship with them. We have excellent agreements between the companies. And we continue to try to work with Brookdale, as we do with all of our customers, to continue to enhance and improve our mutual businesses.

But I guess specifically, do you have to approve a transaction or like how exactly will that look if the entire company is being sold?

Tayo, how long have you known us?

I'm just trying to get an answer there.

All kidding aside, I mean we care deeply about the success of Brookdale and we will continue to try to work with them as we have with our small disposition deal that we have in the market and as we have with our other customers to try to continue making them a success.

All right, I had to give it a try.

Thank you. With that, I think we're going to close the call. We're going to thank everyone for their patience and we really appreciate your tuning in to hear us talk about our great year and what we hope to accomplish in 2017 on your behalf. So we look forward to seeing you and thank you again for your interest and attention.

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