Ventas, Inc. (VTR) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ventas First Quarter 2017 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 would now like to turn the conference over to Ryan Shannon, Investor Relations. Mr. Shannon, you may begin.

Thanks, Taika. Good morning and welcome to the Ventas conference call to review the Company's announcement today regarding its results for the quarter ended March 31, 2017. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current beliefs as well as on a number of assumptions concerning future events. These forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the company's expectations, whether expressed or implied. We refer you to the Company's reports filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2016 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 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 first quarter 2017 earnings call. I'm delighted to be joined this morning by my Ventas college as we review our positive results, discuss our fast start to the year executing on our strategic priorities and confirm our outlook for 2017. The Ventas advantage of superior properties, platforms and people has enabled us to deliver consistent growth in income and outstanding performance through multiple cycles for almost two decades. The first quarter continued our pattern of resiliency and performance as we delivered a $1.03 per share in normalized FFO, driven principally by excellent property NOI growth from our high quality diverse portfolio. Our year is also off to a great start in other key areas. As the premier capital provider to leading senior living and healthcare companies and university-based research institutions, we have been exceedingly active and productive during the two months since we last spoke with you. It has always been a hallmark of Ventas that we do what we say. So, I'd like to highlight a few of our significant year-to-date achievements that show how much we've accomplished towards the strategic priorities we established for the year. We've enhanced our balance sheet by increasing our liquidity through revolver capacity growth to $3 billion and an $800 million bond deal, we've linked into our debt maturities and substantially increased our liquidity. Liquidity will enable us to take advantage of opportunities and preserve value for stakeholders. We've already accomplished our investment guidance of completing over $1 billion of investments in high quality assets that provide superior risk-adjusted returns and build out our leading platforms. And our $700 million skilled nursing or SNF sale remains on track. Completion of the SNF disposition will further differentiate our excellent portfolio mix, provide proceeds to repay debt and generate a material profit. As you can see, we are allocating and recycling capital prudently as we use the proceeds of our late 2016 and early 2017 dispositions also completed at a significant gain to invest in new, high quality medical, life science and innovation projects, such as the South Street lending project associated with Brown University. South Street Lending is a 100% preleased, contain state-of-the-art medical teaching labs and simulation facilities and we expect it to be fully open later this year. We also continue to expand our investments into our future growth and a higher quality asset base through selective development and redevelopment. For example, we've committed to or begun significant expansions of our University based life science pipeline with projects affiliated with University of Pennsylvania and Washington University and we expect to fund an Atria ground-up senior housing development in the Greater Philadelphia MSA. Those investments also represent significant progress towards our goal of building out our best-in-class platforms. Already, we've expanded the Wexford business by 25% since we acquired it last year. We are also building out the Ardent platform but expanding Ardent's acquisition of LHP, transforming Ardent into a leading care provider, generating $3 billion in annual revenues and operating in six states. Ardent continues to perform very well. The acquired assets and enterprise have significant market share, strong margins, excellent payer mix, material synergy opportunities and outstanding relationships with not-for-profit and academic medical centers. The deal is excellent fit for Ardent's business and early integration efforts are going well. We've also expanded our relationships with an existing senior living customer, investing on this $200 million into triple net leased senior housing assets and we've engaged in mutually beneficial sale of asset transactions with other customers. As we continue to focus on driving cash flow and enterprise efficiency and effectiveness, we grew cash flow from operations this quarter by 21% and same property NOI by 3.9%. So, we have put some great numbers up on the board already this year. Our terrific team at Venta’s is energized by the momentum we have to accomplish even more as we look to the balance of the year. As a result of the continues progress we've made, Venta has created an industry-leading differentiated portfolio, highly diversified by asset type, business model and tenants. Among other things, our owned portfolio generates 93% of its revenue from private pay sources. Our shop portfolio represents approximately 29% of our net operating income. Our attractive life science and medical office building segment generates about 25% of our NOI. Our triple-net leases representing 41% of our NOI have virtually no lease explorations through the end of 2018. None of our tenants represents more than 10% of our NOI and we expect to generate only 1% of our NOI from skilled nursing assets by year end. As we look at the macro environment, we continue to see volatility and uncertainty in the markets, in public policy and in the geopolitical sphere. The U.S. and other Western democracies continue to grow albeit slowly as today’s GDP print shows. Although employment and inflation indicators have continued to trend positively. While the new administration is attempting to jumpstart the U.S. growth trajectory with its policies, it is unclear yet whether its proposals on taxes, regulations, trade or healthcare will do so, or whether there is sufficient support in Congress to pass the administration's agenda. In this environment, we continue to believe its most important for Ventas to remain financially strong and liquid, maintain diversification and balance in our portfolio, drive cash flow and efficiency in our enterprise, allocate capital wisely, continue to elevate the already outstanding quality of our portfolio, make selective investments in our future growth and keep our team together and focused on creating value for customers and shareholders. Before I turn the call over to Bob, there is one final point I’d like to highlight. Our diverse high-quality portfolio has never been more valuable than it is today. As equity capital flows and inquiries continue to accelerate across of our asset classes. These capital sources range from public firms, private equity, sovereign wealth funds, pension funds and other domestic and international players. This surface of equity capital is attracted by the resilience, demographics, demand profile and risk adjusted returns in our business. So, we remain excited and optimistic that the Ventas business is situated at this dynamic and increasingly valuable intersection of healthcare and real estate. I am confident that we have the right portfolio mix, strategies and tenure team to capitalize on our premier position and enjoy an enduring advantage in value creation. With that, I am happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. I am pleased to report another strong quarter of cash flow performance from our high-quality portfolio of healthcare, senior housing and life science and innovation properties. Our overall portfolio had an excellent start to the year, with same store cash NOI growth of 3.9% in the first quarter. Let me detail our first quarter segment performance before moving to overall financial results and our reaffirmed 2017 guidance, starting with our triple-net business, which accounts for 41% of our NOI. Our triple-net portfolio with same-store cash NOI by an outstanding 4.7% for the first quarter of 2017, driven principally by strong in-place lease escalations and rent reallocated to more productive assets from the Kindred lease modification agreement in Q2 of 2016. I would highlight that the benefit of the rent reallocation cycles out of beginning of the second quarter of this year. Cash flow coverage in our overall stabilized triple-net lease portfolio for the fourth quarter of 2016 related to the overall information was consistent with the prior quarter at 1.7 times. Rent coverage in our triple-net same-store senior housing portfolio remained at 1.3 times, incorporating escalator growth for the drilling twelve months that exceeded 3%, while coverage remains stable, operator cash flows have recently been compressed by occupancy declines and labor expense growth. Nonetheless, our senior housing coverage benefits from operator, market and acuity level diversification as well as strong lease protections for Ventas. It is also important to note that triple-net senior housing portfolio overall has lower levels of construction as a percentage of inventory than the net industry averages. Within our post-acute portfolio, SNF cash flow coverage held at 1.7 times, despite continued operating pressure in the SNF segment. After completion of the expected Kindred SNF sale in the second half of 2017, SNF sale only represent 1% of Ventas' NOI and we’ll enjoy very strong rent coverage. Our final coverage in the fourth quarter declined by 10 basis points to 1.8 times. This change was in line with our expectations as rent escalated and Kindred completed its first full quarter under the new LTAC patient criteria. We are encouraged by Kindred's Q4 same-store volume and revenue growth amidst the revised criteria. As a reminder, Kindred expects the impact of this transition will peck in first half of 2017 after which the net mitigated impact of criteria should begin to ease. Finally, Ardent continued to drive outstanding performance through the first quarter of 2017 and stands out as a leading hospital platform, delivering sustained positive momentum and same-store adjusted admissions, revenue and EBITDA. Rent coverage of the assets was strong at three times in Q4. Fourth quarter 2016 results for Ardent compare favorably even with very best publicly treated hospital systems in the U.S. and early stages of the LHP integration are on track. With regard to Medicare reimbursement, CMS issued proposed rules for fiscal year 2018 in-patient hospitals, LTAC, IRF and SNFs. The in-patient hospital proposal included a net 2.9 payment increase, which was ahead of expectations. While the LTAC proposed rule was in line with expectations. The IRF and SNF proposed rules included a 1% payment increase. These proposals are subject to a common period before final rules are issued later this year. For 2017, we continue to expect our triple-net same-store cash NOI overall will grow in the range of 2.5% to 3.5% driven by in-place lease escalations. Moving on to our senior housing operating portfolio. We had a positive start to the year in our SHOP business. Same-store cash NOI in the quarter grew 2.9% in line with our expectations. Unpacking the first quarter results further, same-store revenue increased nearly 2% driven by solid rate growth partially offset by lower occupancy. As expected, first quarter occupancy was pressured by typical seasonal patterns together with cumulative new unites coming online in a more significant flu seasons. A further note on the flu. This season was more severe and occurred later in the quarter in 2016. The flu impacts both move-outs and move-ins as communities are close to tours and new sales as a result of flu quarantine. Encouragingly, RevPAR increased by more than 4% overall when adjusted for one last day in the first quarter versus the 2016 leap year. This rate growth was driven by accelerated in-place phase rate increases and our high barrier to entry coastal markets as well as through increased pricing of care. Operating expenses in the quarter rose approximately 2% in line with revenue. Ongoing wage pressure in the 4% range was mitigated by effectively flexing labor versus occupancy while controlling nonlabor-related costs, a benefit of our senior housing scale with leading operators and efficient operating platforms. The results also benefited from reduced Sunrise management fees and performance incentives in the quarter. Turning to market level performance, we were pleased to see the momentum continue in our high barrier markets including New York, Los Angeles and San Francisco. These communities Q1 same-store NOI by mid-single-digits on very strong rate growth exceeding 5%. Canada also posted very strong performance, increasing NOI by nearly 7% in the first quarter. Elevated levels of new building openings in markets including Atlanta, Denver and Chicago continued in the first 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 these communities declined by mid-single digits as a result of the cumulative impact of new deliveries. Nonetheless, our portfolio in high barrier markets powered same-store NOI growth overall. New construction as a percentage of inventory within our trade areas when prior periods are revised for the NIC data improved by 10 basis points to 5.5%. At the same time, as is typical in the NIC data, delivery scheduled for Q1 were pushed to future quarters. We continue to actively manage our SHOP asset portfolio, transitioning assets to new operators and business models and renegotiating management agreements about a few of the clots in our bag we have recently used to maximize value. In terms of our full-year outlook we continue to have confidence in our SHOP portfolio same-store NOI guidance range of 0% to 2%. The implied modest NOI growth at the guidance midpoint for the balance of the year is driven by the wider occupancy gap entering the second quarter and anticipated new supply coming online through the balance of 2017. Despite near-term challenges, we remain encouraged by the resiliency of our high-quality senior housing operating portfolio, operated by the nation's leading care providers. The strength in our core markets reflects the continued long-term opportunity in senior housing. Let's round out the portfolio review with our office reporting segment, which is comprised of our University-based life science and innovation portfolio and our high-quality medical office business. Together the office portfolio accounts for approximately a quarter of our NOI. Our life science operating portfolio continued to perform well through the first quarter and is in line with underwriting. Sequentially, occupancy increased by 250 basis points to an outstanding 97%, driven by our attractive Wake Forest School of Medicine property that is 100% leased to Wake Forest University. Progress in capitalizing on the growth opportunity in this business has already exceeded our high expectations with more than $350 million in follow-on investments since acquisition in 2016. We now have four development projects underway totaling over 900,000 square feet and a rich pipeline of opportunity is still ahead. In our medical office business, same-store cash NOI in the first quarter increased by 3.7%. First quarter results were driven by in-place lease escalations and the benefit of lease termination fees. Adjusted for these fees the MLB business grew same-store cash NOI by 1.5% in line with expectations. The first quarter exhibit strong tenant retention exceeding 80%. As we noted in February, our lease rollovers this year are higher than normal levels and the team is actively working to maintain occupancy levels. In summary, our full-year outlook continues to forecast cash NOI growth of 1% to 2% for our same-store medical office assets. Turning to our overall company financial results and our outlook for the year. We delivered a strong start to the year with solid financial results, excellent capital allocation and an even stronger liquidity profile. Income from continuing operations per share for the first quarter 2017 grew 22% to $0.44 compared to the first quarter of 2016. First quarter normalized FFO totaled $1.03 per fully diluted share, a modest decline versus prior-year. First quarter results were driven principally by strong property performance offset by the impact of 2016 dispositions and a higher share count. We closed on over $1 billion in attractive new investments in the first quarter, including the expansion of our acute-care hospital platform through a $700 million loan investment to scale Ardent to the second largest for-profit private hospital system in the U.S. We also invested $130 million in high quality University-based life science buildings, which added an exciting new affiliation with Brown University. We're also on track with our continued portfolio optimization and capital recycling efforts. In the first quarter, Ventas principally sold senior housing properties and also received final repayment on loans receivable for proceeds of approximately $100 million with gains exceeding $40 million. Our efficient and effective operating model was on display in the quarter. Cash flow from operations increased by 21%, driven by cash earnings and we absorbed the life science acquisition without material incremental G&A cost of the company. We also moved as planned to a forward-looking long-term equity incentive plan as a result of investor feedback, with a modest non-cash transition cost excluded from FFO in the quarter and expected for the year. We made great strides in enhancing our liquidity and maturity profile. We raised $800 million of five and 10-year senior notes to extend our maturity profile debt. We also closed this week on a new revolving credit facility, increasing our immediately available borrowing capacity from $2 billion to $3 billion, extending our maturities through 2021 and improving our pricing and terms. Our long-term track record of growing cash flows on a strong balance sheet resulted in an impressive oversubscription from our banking partners and we sincerely appreciate our lender's strong support of the company. Our credit metrics in Q1 include best-in-class fixed charge coverage of 4.6 times debt-to-gross assets of 40% and secured debt to total indebtedness holding steady at 6%. Net debt to adjusted EBITDA rose modestly to 5.9 times, a temporary increase, which we expect will reverse when the disposition proceeds in our guidance are received in the second half of the year. Let me close out the prepared remarks with our reaffirmed full-year 2017 guidance for the company including the following. Income from continuing operations is expected to range from $1.72 to $1.78 per fully diluted share. Normalized FFO per share is forecast to range from $4.12 to $4.18. Total portfolio same-store cash NOI is anticipated to grow 1.5% to 2.5% while segment level growth expectations also remain unchanged. Our guidance continues to assume that our capital recycling program will generate approximately $900 million in disposition proceeds of which $100 million has been closed to date. The outlook includes $700 million in proceeds at a gain exceeding $650 million through the expected sale of 36 skilled nursing facilities in the back half of the year. Investments included in guidance consist principally of the $1 billion of investments completed year to date. In addition, our total development and redevelopment funding is expected to approximate $350 million for the year, demonstrating the progress in allocating capital to these high return projects and scaling our life science and innovation business. Consistent with previous practice, we do not include any further material investments, dispositions or capital activity in our outlook. We assume approximately $358 million weighted average shares for the full year of 2017. We do not assume any new equity issuance in our guidance. To close we are pleased and excited by the strong start of the year and committed to continued excellent execution of our strategy and our priorities. With that, I'll ask the operator to please open the line for questions.

Thank you. [Operator instructions] Our first question comes from Smedes Rose from Citigroup. Your line is open.

Hey. Good morning, it's Michael Bilerman here with Smedes. Debbie, I want to pick up on your final comment where you talked about inquiry from equity capital sources and also the fact that they’re interested in your space. Can you talk about how those discussions are going about whether you want to use that to liquefy some of your holdings or are you looking at this as co-invest for new investments?

Thanks Michael. Good morning and good morning Smedes. So, what I think is really important as I highlighted are these the incredible interest in the space from existing players, new entrants of all types and there are good reasons for that interest. So, the way we look at it is that every environment is going to give us an opportunity to create value and we view that interest as one more tool in our toolkit that could be used either to team up for growth and/or could be used to recycle capital or both. And it will depend on the individual situations and opportunities, but it’s a very positive development.

I guess you close to doing anything either selling existing assets or using those capital partners to grow and advise how at the forefront this is for you?

I would say it is a very knowledgeable, but nothing eminent.

All right. Thank you.

Thank you.

Thank you. And our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.

Yes thanks. Debbie can you give us a little bit more color on the Kindred SNF sales and what type of hurdles that are left to clear for both you and Kindred in order to complete those sales?

Sure. Good morning. Let me recap the transaction for you and this is a very mutually beneficial transaction for Ventas and Kindred and the two companies work very well together to enable Kindred to achieve its strategic objective of exiting the SNF business. So, the way it works from our side is Kindred will either purchase from us in connection with third party sales or otherwise, 36 SNFs for $700 million or as an alternative if that does not occur, they would renew those 36 SNFs out through 2025. At the present time, we expect Kindred to we believe transaction is on track to sell those assets as Kindred has stated publicly and that’s our current expectation, but either way, we’re in a good position as we look forward on those 36 SNFs.

Okay. And then I guess last question, looking at your LTAC coverage ratios, and correct me if I'm wrong, I believe that you previously indicated that coverage could drop 30 basis points with the patient criteria rolling out. So, is it safe to assume that coverage should stabilize at this level and maybe improve over time?

Well as Bob pointed out, the LTAC just started going through their patient criteria and the trough of that we expect to see really through mid-2017 and then would presumably start to improve through the back half and into '18 and remember we report on the trailing 12 basis. So, we’ll be well into '18 I think before you see the impact of the coverage improvement of those sequential quarters should expect to see an improvement in the net mitigated impact of criteria towards the back half of '17, subject of course to seasonality as we see in that business.

Okay. Thank you.

You’re welcome.

Thank you. Our next question comes from Juan Sanabria with Bank of America. Your line is open.

Hi good morning.

Good morning.

Just a question on following up on the Kindred question, do you see any risk from I guess the lower than expected CMS initial rate increases as for their first set of guidance on that rate increases for 2018 and the changes in the reimbursement for the higher therapy, do you see that as a risk at all for the dispositions?

Well, I see we’re up late last night reading the CMS website. So, good for you. As you correctly point out, the market basket came out for fiscal year 2018 for the SNF last. It’s a 1% increase, which is in line with what we expected from several years ago that was what was cancelled in a couple years ago. In terms of proposed rule to change some of the reimbursement for 2019, which is what I think you're talking about, I would say that this has been on our radar screen for quite a long time as we looked at the higher therapy utilization and so this is at some point an expected change from us. I think the important point is that it is intended to be revenue neutral. There is a long way from here to a final rule and I think it's really just something that for us will be not overly relevant as SNFs will be 1% of our business. But I do see that this is where CMS and OIG and the other regulatory authorities have targeted which is to adjust that and shift the way they pay the SNFs away from some of the ultra-high therapy categories and really into the nursing and Tier component of the business.

Thank you. And then the second question on the RIDEA business, solid start to the year particularly on the expense controls as flagged but what should we think of in terms of occupancy and especially expense control for the balance of the year and your ability to recapture lost occupancy from the flu?

Juan its Bob here. And I agree a positive start to the year, 2.9% quite happy with that. And within that in particular the rate growth we see on an adjusted basis for the day year-over-year over four that was really important sign for us for the quarter and for the year. So that’s really encouraging. The occupancy change certainly impacted by the flu and new supply coming online, in line with what we had told you back in February, I think I mentioned we were probably the 200 basis points down range. I think that’s probably a good place to pencil in for the balance of the year. We are starting from a lower point as we enter in the second quarter. We will follow seasonal patterns obviously, but we expect there is still to be a gap and that’s principally with new construction coming online. The important thing you highlight to is not only prices, its expenses. Nice to see expenses in line with revenue and driven in part by controlling your cost, flexing labor versus occupancy to make sure you protect your margin and we saw that in the first quarter. So that’s an important part of the balance of the year.

So, you expect that to continue that lower expense growth.

Well you have the wage pressure we've talked at length outlines about that continues to be part of the equation for sure. We've said 4% to 5% for the year, we saw about 4% in the quarter. So, it's really our job to make sure we are mitigating that’s to these other means flexing labor, driving the indirect costs to hold that in line with revenue. So that’s the job to be done.

Thank you.

Thank you.

Thank you. Our next question comes from Nick Ullico with UBS. Your line is open.

Thanks, hi everyone. Turning back to the same-store expense question, Bob the 1.9% in quarter, if I look here that was the lowest level you've had since the end of 2014 and you've been running 3%, 4% since then. So, I was hoping you could unpack this a little more and explain, I know you talked about flexing labor, but it's still a little bit hard to understand how the expense growth could have been so low in the quarter?

Well, thanks for asking, I think an important thing to highlight in this extra day last year versus this year. That clearly has an impact both on expenses and on revenue. Depending on how you bill, there is a revenue in fact in some cases for us, we have operators that bill by the day. And when I talked about the RevPAR adjusted about 4% it's recognizing that fact, but obviously for expenses that has an impact across the portfolio. And so that is one of the items you need to lay as you look at 1.9% year-on-year, or even sequentially, you have to factor in the day's impacts. So, there is an unusual item there I would highlight.

Okay. That’s helpful. And then one clean-up accounting question here, you had $2 million of merger deal cost on your income statement, I thought acquisition cost are generally not being expensed any more, can you just explain what are that related to?

Good catch. We'll continue to have you'll see in our full year outlook money in that line item. Things like net deal costs will run through there. So not every deal happens. Clearly, because of the new roles you’ll see some capitalize will successful deals, but what you basically see running through there are run rate costs on deal that don’t happened.

Okay. That’s helpful. And just last question Debbie, for you on medical office, from talking to brokers, it sounds like cap rates have come down sort of around 5% for some of the highest quality medical office product year-to-date. So, I’m wondering whether you can still expand your MOB business through acquisitions giving where pricing is today? Thanks.

Thanks Nick. I would say that we're very happy to have a large and attractive medical office building business and believe we created a lot of value in terms of that time that we acquired the business and how we scaled at probably seven times since we got together with Todd and his team back in 2010. And I am excited about the continuing compression in cap rate that ties exactly to what I was talking in terms of the institutional interest in our asset classes MOBs being a prominent one and people really, really love the assets. They're core-like qualities with still exactly about core return and that’s why I’m excited about where the valuation is.

Thanks.

Thank you.

Thank you. Our next question is from Tayo Okusanya with Jefferies. Your line is open.

Yes, good morning, everyone. Just a couple for me. First of all, cograts on the quarter. I thought things look pretty good.

Thank you.

The line of credit and the expansion on it, is that, are you guys signaling your expecting to be more involved in transaction going forward like is that expansion signaling anything to us?

It is a direct result of what we outlined as our strategic priorities. I think that in this environment that we have, we believe that liquidity in an important competitive advantage, and as I said it is offensive and defensive. It enables you to take advantage of opportunities through financial strengths and it also protect shareholder's capital and those are both core values obviously. And so, we intend to maintain a strong balance sheet, but we are always active on acquisitions and having greater liquidity we think is our top strategic priority for the year and we’ve already done a great job expanding the revolver by 50% or $1 billion, so we’re very happy with that.

Okay. That’s helpful. Then secondly, going back to the proposed changes to the SNF case mix, and again understanding that you guys elaborate a little SNF exposure going forward, but you take a look this…

Could you please say that again?

You have very little SNF exposure going forward.

Anywhere I am sorry. Go ahead Tayo.

No worry that way you're coming from. I guess what I am trying to understand with that is that again the theory here is that although the overall dollars may not change, when you take look at the reallocation that CMS is proposing, it seems to have some real impact for SNFs that historically have been very heavy in regards to utilizing the high therapy rug categories. And that seems to be like a general complaint regulators have had again quite of few of the large public SNF operators. So, I guess my question is would you expect some all those large SNF operators, if this thing is going to go through to be heavily negatively impacted even though overall dollar still remain to be roughly the same.

Great question. A couple things, one is as you mentioned, this has been on the radar screen. I think people have been reviewing, these ultra-high therapy utilization minutes as you point out and this is a consequence of that. And so very much a continuation of the trends that we have expected and seen in this business. I would tell you that there is an estimate and this would in fact for the public operators result in a modest diminution of EBITDAR, but the real issue is that the good operators in healthcare businesses are constantly working through these changes in reimbursement. Typically, they're telegraph very early on. There is a lot of industry comment and there is a transition period. And so, I think you have to look at potential behavioral changes, which the rules want to incentivize and generally you’ll probably see less utilization of those therapies and those high categories, but the good operators will be able to hopefully manage through that in a relatively a neutral way.

Okay. That's helpful. Then lastly on the LTAC side, please indulge me, I do understand that the increase of the 1% mandate increase, but based on other changes that they're making, CMS is actually forecasting overall LTAC payments come down about 3.75%. Again, when you kind of take a look at that and understand what Kindred is doing, what you generally expect the impact of that to be to the LTAC industry?

Yes, and that's exactly what we factored into, what we were talking about before in terms of there is a very specific guidance provided by Kindred, who is the leading LTAC operator of what the mitigated and unmitigated impact is and what are share is expected to be as it effects coverage and the 2018 CMS rule is perfectly in line with our projections and Kindred’s expectations. Kindred is mitigating the impact, again as we talk about how operators do this through taking more site neutral patients and that's becoming an important part of the business driving volume and then hopefully being able to contain cost. And so that is how Kindred has express visibility to mitigate the impact of those changes and again very well telegraphed and understood and it’s up to Kindred then to execute its business plan within that context.

Great. Thank you very much.

Thank you.

Thank you. Our next question is from Vincent Chao with Deutsche Bank. Your line is open.

Hey, good morning everyone.

Good morning.

Just wanted to go back to the SHOP conversation, we talked about the occupancy staying at sort of the minus 200 basis point level year-over-year, just given the flu plus also the supply coming online. But I’m just curious in terms of the revenue growth, which was very strong and the rent growth this quarter, with occupancy down and supply coming up, how much do you think rent across will be impacted going forward?

Great question. Probably sound like a broken record here, but I do believe we have strong pricing power and senior housing both up and our approach as we thought about the base rent increases was looking where we had advantage positions, high barrier to entry markets with pricing power and pricing to reflect that. Not only in base rent but also in car provision and we did not see financial move out quote as a consequence of any material kind and that to me is really encouraging. Where we see -- clearly see pricing pressure is in the market where new supply is coming online and that's no surprise, that's as expected. And in that situation, we're a price taker and we need to make sure we're watching occupancy vis-à-vis price. And the good news for the portfolio overall and the high barrier to entry markets we compete in is that drives overall growth for the portfolio, but it’s really a tale of two cities as you look at the different markets.

Okay. And then on the 5.5% supply as a percentage of inventory in your markets, can you -- do you have a sense of what that might trend to? It sounds like it will get worse over the course of the year, but just curious if you have a sense of what that will translate by the end of the year?

Yes, it has been trending consistently flat for our portfolio here for about three period in a row which we're encouraged by.

And that's start, that's start.

Percentage of inventory when restated as Nick does, we do now and to be able to see what is the like-for-like period to period and on that basis, we improve modestly in this period. So that's encouraging. I also noted at the same time and this is not unusual more of that construction rolling forward and being pushed in future quarters in terms of what to expected to start. And that is the dynamic we've seen and continue to see that file wave a bit moving forward. So, we'll see where it goes, but three periods in a row now of being flattish is encouraging to us.

Okay. Thanks, and one just maybe cleanup questions and in the commentary on the MOB seems to annoy growth for the quarter the lease termination fees were noted as a positive variance. Do you have a dollar value of that lease termination fee?

It's slightly over $2 million, so when adjusting for that you come back to 1.5% growth on a more underlying basis pretty much in line with our 1% to 2% guidance.

Got it. Okay. Thank you.

Thank you.

Thank you. our next question comes from Chad Vanacore with Stifel, Nicolaus & Company. Your line is open.

Hey. Good morning, all.

Good morning.

All right. So just thinking about same-store shop occupancy, which was down significantly 150 basis point that's more than NIC MAP Data would suggest but Bob you had mentioned last quarter you expected somewhere around 200 basis point. So, does that imply further declines in second quarter and then you assume any occupancy recovery late in the year in your budget?

Yes, I think we certainly foresaw some of the impact here on the flu when we had the February call and that clearly is an unusual item as you look at the quarter and the sequential impact, there is always a softening in the first quarter sequentially, but that was exacerbated I think by the flu no doubt. That 200-basis point range is really for the full year and reflects the range we've given of guidance overall. So, we're starting from a lower point. There is new supply coming online through the balance of the year and therefore that 200 basis point is part of the range of expectation going forward. Now I hope we can do better. I hope we have 160 now down. I hope we can tie in that gap and again that's what the operators are very focused on, but the range reflects that that gap being either consistent or slightly wider based on new deliveries.

And are those pressures more concentrated anywhere by geography?

Sure, so the new construction will not be surprised as you look at the NIC data. Markets like Atlanta, Dallas, Detroit, Chicago, that's where the pressure is and that's the 30% we talk about within our SHOP portfolio where the pressures are, but again the New York's and LAs and San Fran's powering along and very strong.

All right. Yeah, great and just one more, 1Q CapEx was under the average for the year, when do you expect that to ramp up and guidance implies an increase about $10 million a quarter through the balance of the year?

Right. So, we're about $25 million in the first quarter. Our guidance is the 130 range, so clearly a ramp on the balance of the year. Very typical to see in the back half in particular that's been to ramp.

All right. And then just split up the CapEx spend between MOB and SHOP.

Core fed CapEx give me a minute, we'll get back to you with that number.

We have to move along. We have a few more callers that we would like to take questions.

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

Thanks. So much pressure. So, with every new day it seems new message from the administration as it relates to the U.S. healthcare. I'm curious to what degree that's affecting your investment strategy in the hospital business specifically. I know you know quality, growth and all that I get that, but there has to have been some change when you consider all these inputs and outputs from the Trump administration, is that true?

Well, I would say that you're right that one day it's terminating faster and the next day it's not and the next day it is again and so there is a little bit of policy whiplash going on across all businesses certainly including ours. And we have always said that we believe the hospital business is a huge secular opportunity for us as the leading capital provider and that we would do business with high quality assets and high-quality providers and I think we've done that. Right now, our focus is on the integration of LHP and Ardent, which we said is going well and we're continuing to do work, but obviously we'll be very, very selective in allocating capital while there is a wide range of possible outcomes. I would say that most of our hospital customers and relationships in parts business are full speed ahead with all of the things that they have been focused on for many years, which are unrelated to repeal and replace and its value-based care, it's cost containment, it's quality, its expansion of market share etcetera. And so, to summarize we continue to believe it's a great opportunity for us long-term. We have been selective and we'll continue to be selective and we think that right now, we're cautious but continuing to work in the business.

Right and then in 2009, circa 2009 you were given credit for hunkering down protecting the balance sheet and not necessarily being overly aggressive from an investment standpoint. You just we're always active on acquisitions, but do you see yourself in more of a hunker-down mode? Do you -- if there was a zero-acquisition year, would that be a bad thing for Ventas?

Well thank you for the watch out memory lane there. We did get an A-plus for reading the market right and protecting the firm, which enabled us then to come out of the financial crisis early, faster, stronger and then go back into growth mode. I think we are always reading the external environment. We are nimble. I think we've been able to find ways in different environment to create value and certainly, the liquidity is an area of focus from a opportunistic and a risk management standpoint. We've already closed a $1 billion in attractive investments and we have really over the last 18 months I would say shifted our capital allocation efforts really into this selective hospitals, customer related deals and the high-quality investments in future growth with the development, redevelopment pipeline and that's what we foresaw and I think we're in exactly the spot where we wanted to be on those things coupled with really smart dispositions.

Okay. Fair enough. I'll let you to get the next questions. thanks.

Thank you, Rich.

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

Thanks. Good morning. Debbie, on the capital sources that you mentioned are looking to invest in the market. Do you expect there are going to be price leaders in any particular asset class and drive values up?

I don't understand -- could you repeat the question I'm sorry?

How competitive do you think there will be on pricing versus REITs?

Well, I think that there is a strong bid as I pointed out in our asset makes our asset extremely valuable. I think this has been going on again for a while and it continues without abating and it's in fact accelerating. So that makes our assets more valuable and it requires us as we have done to shift our focus on capital allocation to where we see the best risk adjusted returns. And that has been in you can see this funding of the Ardent expansion where we're getting almost an 9% return, good risk adjusted returns, scaling the platform. We're investing in these higher yielding, yet high quality and future growth development, redevelopment opportunities and we’re doing smart dispositions among other things. So, there are always ways we like it that our assets are more valuable but there are always ways given our position in the market, given our diversified portfolio, given our relationships and platforms where we can invest attractively and that’s what we’re doing.

And then that deal cost that you record in the first quarter was that related to Brazil?

No, it was not.

Okay. Thank you.

Thank you.

Thank you. Our last question comes from Michael Knott with Green Street Advisors. Your line is open.

Hey guys, saving the best for last I see.

Absolutely go for it.

A question for you, on the SHOP portfolio, still trying to understand, it seems like you had said it’s encouraging to you, it seems like it was just outright better than you expected in terms of occupancy and on the expense side, but I guess should we infer that is really just a timing issue that the flu has bled into 2Q in terms of occupancy. So just trying to better understand that and then also if you can cut it through between U.S. and Canada and then the better markets versus the worst markets where you talked about last quarter the bifurcation in terms of those two types of markets?

It was a good quarter.

Yeah absolutely, we were very pleased with it and let me talk about the markets a bit, thanks for asking. The Canada result continues to be really strong. 7% in the quarter, we saw similar growth last year. Occupancy is pushing 95% and we see real opportunity for further pricing there and we have a wonderful portfolio in that country. So that’s really powering and helping the business and similarly, I keep talking about the engine room markets in the U.S., New York, LA, San Francisco, Boston. We continue to go from strength to strength in those markets and the pricing is really taking hold there and that’s really positive. The other part of the portfolio continues to be the same markets and you know as well as I which ones those are and again, the competitive pressure we see there is on price. We see labor pressure there. So, all the same dynamics we expected are happening, but overall those strong markets are driving the business. So, we had a strong start. So, we’re encouraged.

So that was better than expected across the Board or did Canada do better than you expected and the U.S. was kind of as expected?

It was pretty consistent with expectation I would say.

Great. So, with that Ryan, I think we’ve completed all the questions and I just want to close by saying that we are delighted we were able to deliver strong results this quarter across the Board. We have a great high quality diverse and balanced portfolio, great financial strength and liquidity. We’ve been expanding our leading platform, focusing on cash flow and cash flow growth and value creation and we have a great team here at Ventas that’s working hard for you. So, with that I want to just say let’s go pens and with all due difference to our friends in Washington and we look forward to seeing everyone soon. Thank you very much.

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.