Ventas, Inc. (VTR) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ventas Second 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 is being recorded. I would like to introduce your host for today’s conference Mr. Ryan Shannon, from Investor Relations. Sir, you may begin.

Thanks, Terence. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended June 30, 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. 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, 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 second quarter earnings call. I'm delighted to be joined this morning by my Ventas colleagues. We’ve continued our momentum this quarter by delivering really good results, growing cash flows, and executing on our strategic objectives. I’ll touch on performance briefly, and focus on our continued capital allocation strategy, our leading operators, our formula for value creation, macro trends, and our great people. Following Bob’s review of our financial results, we’ll be happy to take your questions. The second quarter continued our pattern of strength as we delivered growth and our normalized FFO to $1.6 per share, driven principally by property and NOI growth from our high quality diverse portfolio and excellent investments. We are delighted to reaffirm our full-year guidance of $4.12 to $4.18 per share, compared to $4.13 in 2016. This expected growth in normalized FFO per share at the midpoint of our range is notable because we are simultaneously completing $1 billion of dispositions to improve our portfolio, we continue to strengthen our balance sheet, and we are investing in future growth through selective development and redevelopment. As an enterprise Ventas is and always has been focused on delivering consistent reliable cash flow and dividends from a high quality diverse portfolio on a strong balance sheet. And we are proud that we are continuing to do exactly that. After a terrific start to the year, we continue to make significant progress on our capital allocation priorities. Here are some examples. To invest in our future growth, we committed to four Class A senior housing developments or major redevelopments in terrific locations with our leading operating partners Atria and Sunrise. These are mutually beneficial arrangements with long-standing operating partners and in the case of Sunrise, the development flow directly from the revised agreements we reached with Sunrise last year. We also allocated capital to help other customers grow during the quarter, including a modest expansion of our senior housing footprint in the U.K. A major piece of our capital allocation strategy, which of course includes decisions about where to grow and where to shrink, has been to reduce our investment and skilled nursing facilities or SNF and Medicaid programs. Here too, we have made demonstrable progress. Kindred recently announced they had signed a deal to exit its entire skilled nursing business. As part of that transaction, we expect to sell our 36 SNF for $700 million, at a very attractive 7% cap rate on cash rents. With the sale, SNF will represent only 1% of our NOI, and our private pay revenues as an enterprise will rise to 94%. Our top capital allocation priority for reasons described more fully in a moment is expansion of our institutional university-based life science business, which now accounts for 6% of our NOI. In Q2 alone, we have opened two brand new assets, South Street lending and Chesterfield, where we expect Brown University and Duke University respectively to take occupancy by year-end. And we’ve broken ground on two new ground-up developments; one in new city adjacent to Penn Medical in Philadelphia and another affiliated with WashU in Saint Louis. Our pipeline of additional development and acquisition opportunities remains robust as our leading platform Wexford continues to use its sterling reputation and experience to assist top tier universities in developing attractive research, medical, and technology hubs. Turning to my second topic, our leading platforms, we are pleased to highlight that Ardent Healthcare Services continues to outperform and deliver excellent results through the second quarter. With its successful integration of its strategic acquisition of LHP, with its outstanding and experienced management team, and the pipeline of acquisition opportunities, Ardent has validated our $2 billion plus vote of confidence in the company. Ardent now generates $3 billion in annual revenues, employs 18,000 individual, and serves patients in six states. We’re also proud to say that seven Ardent hospitals were recently named by modern healthcare in its prestigious 150 best places to work with, wonderful recognition for Ardent’s team, especially when you consider that Ardent operates 20 hospitals within a Universe of over 5,000 hospitals nationwide. We continue to work with our partners Ardent and Sam Zell's EGI on further growth as we consider opportunities to acquire other high-quality healthcare assets and fold them into the scalable Ardent platform. Let’s know turn our attention to Ventas’ demonstrated formula for value creation. As I mentioned on our last call, our diverse high-quality assets have never been more valuable, and we continue to see all-time high pricing across asset types in the market. I’d like to highlight two cases in point. Our medical office buildings and our Life Sciences assets that are at different stages of value creation. Our MOB business now generates nearly $400 million, and net operating income annually comprises 20 million square feet and represents 19% of our NOI. It is 95% on-campus or affiliated with 84% of our NOI derived from buildings with investment-grade tenants and HCA. Occupancy is a robust 92%. We allocated capital to our MOB business early in the valuation cycle. The 4 MOB’s became one of the hottest asset classes, prized for its steady reliable cash flows, and increased utilization from baby boomers turning 65. Our unleveraged yield on our MOB portfolio is an incredible 7.5%, inclusive of all of our post acquisition CapEx. Given the recent benchmarks for MOB transactions in the mid-to-high 4s, our investment has created literally billions of dollars of value for our shareholders. We expect our University life science business to follow a similar pattern of investment and value creation. In fact the recent mid-to-high 4s yield on MOB sales represents a great comp for these assets, given their significant similarity. Like MOB, like science assets are fueled by an ageing population dealing with illness and chronic condition. The buildings are anchored by highly rated large institutions and those institutions are the engines of economic growth in their communities and magnet for other tenants. Our university-based life science portfolio of 25 operating assets stacks up favorably from an analytic standpoint to recently traded MOB portfolios. Our 25 assets are better occupied at over 97%, newer with longer lease terms and a higher proportion of credit tenants. Yet in our university-based life science business we are still investing at 6% to 9% unlevered stabilized yield providing excellent risk adjusted returns. Our thesis is that this attractive portfolio should ultimately be valued at cap rates comparable to high-quality MOB's. That’s why we are so excited about the opportunities and are committed to dedicated dedicating significant capital with Wexford to build out this attractive value creating business. Turning to the macro front political and policy uncertainty continues to weigh on healthcare, taxation, regulation and trade. Washington has been wildly unpredictable, although last night or I should say, this morning's - early-morning vote should restore some stability to the healthcare environment as the majority leader of the Senate concluded that it is “time to move on" from the efforts to repeal some or all of the Affordable Care Act. Now the real estate community can buckle up for the tax reform rollercoaster ride as major changes to the tax code are proposed, many of which would have significant consequences for all public and private real estate companies. Yet the debt and equity capital markets remain remarkably favorable. Therefore our view is that we should in all events remain financially strong and liquid, maintain diversification and balance in our portfolio continue to drive cash flow and efficiency in our enterprise allocate capital wisely, staying nimble, and opportunistic, and continue to elevate the mix and quality of our portfolio. We want the Ventas team to work together to deliver superior long-term performance and reliable enterprise growth in income on a strong balance sheet to our holders. Before I turn the call over to Bob, I do want to touch on the extraordinary and cohesive Ventas team and the planned change we announced this morning. Todd Lillibridge will transition to a senior advisor role at the company in early 2018. We intend to commence a search for a new leader of the MOB business promptly and expect to complete the transition in the first quarter of 2018. Todd is committed to leading the Lillibridge MOB business until his successor joins us, when we expect him to undertake a variety of responsibilities and initiatives for the company. As you all know, Todd is a great partner. He also happens to be a visionary. He has founded his namesake firm over 25 years ago with the goal of providing comprehensive real estate solutions to high-quality health systems. Todd pioneered the idea of MOB's as a unique institutional real estate asset class. He created a strong enduring company, Lillibridge Healthcare Services that we were lucky to combine with in 2010. Since then, we have grown the MOB business together by an amazing seven times. We look forward to continuing to work with Todd and his team to deliver strong MOB results and lead a smooth transition to a new MOB leader. Todd's commitment to our organization and his colleagues and clients is truly exemplary and gives you some insight into the special Ventas culture. That commitment extends throughout the Ventas team. We are aligned, consistent, and focused on the success of the company and our colleagues. Unquestionably the strong culture and our people create our winning competitive edge and underpin our long-term growth, reliability, and performance. In sum, I’m confident that we have the right portfolio mix, relationships, strategies and team to capitalize on our exciting position at the dynamic intersection of healthcare and real estate for the benefit of all of our stakeholders. With that, I’m happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. In the second quarter, our overall portfolio of healthcare, senior housing, and office properties, grew same-store cash NOI by 1.5%. Let me detail our second quarter portfolio performance by segment before turning to overall financial results in 2017 guidance. I’ll begin with our triple net business, which accounts for 39% of our NOI. The triple net portfolio grew same-store cash NOI by 2% for the second quarter of 2017, driven principally by strong in-place lease escalations. Adjusting for the impact of a roughly $3 million fee received in the prior year, same store triple net NOI growth in the second quarter 2017 was a strong 3.5%. Cash flow coverage in our overall stabilized triple net lease portfolio for the first quarter of 2017, the latest available information was 1.6 times a sequential decline of 10 basis points from the fourth quarter. This change in overall coverage was driven principally by IRF and LTAC coverage, which declined as expected by 10 basis points sequentially to 1.7 times driven by rent increases and the continued impact of the LTAC reimbursement change. As noted in its first quarter earnings call, Kindred continues to execute on its patient criteria mitigations strategy, and expects the net mitigated impact of criteria should begin to improve in the second half of 2017. As updated by Kindred as Ventas in June, we continue to expect the attractive $700 million sale of our Kindred SNFs will be completed by year-end 2017. Given the pending sale, we are now excluding those assets from our coverage and same-store supplemental reporting in current and prior periods. As a result of the sale SNF will represent just 1% of Ventas’ NOI. In our triple net seniors housing portfolio, rent coverage remained at 1.3 times. Rent escalators for the trailing 12 months increased low single digits, outpacing asset level cash flows. Nonetheless, our triple net senior housing portfolio benefits from strong lease protections, operator and geographic diversification, as well as solid asset level cash flow coverage. Finally, Ardent’s strong performance continued in the first half of 2017 with volume, revenue and EBITDA growth ranking among the top performance in the industry in the first quarter. At the asset level for the Ventas properties, rent coverage remains strong and stable at three times in Q1. The LHP integration is proceeding very well, synergies are on track and the team is motivated and performing at a high level. For the total triple net same-store portfolio in the full-year 2017, we continue to expect cash NOI 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, consistent with prior guidance assumptions, same-store cash NOI in the second quarter grew 0.4%. Unpacking the P&L further, second quarter same-store revenues increased nearly 2%, driven by attractive rate growth of over 4%. Rate growth was partially offset by 200 basis points of year-over-year occupancy decline. As discussed on our last call, the lower occupancy starting point entering Q2, due to a late and severe flu season together with the impact of new deliveries resulted in a widening of the occupancy gap in the quarter. Overall expenses were contained in the quarter increasing by 3%. Our operators continued to control non-labor costs and deflects labor versus occupancy. At a market level, we continue to see very attractive growth in high barrier to entry markets such as California and Canada, which drove very strong top and bottom line growth. The performance in Canada was particularly exceptional, growing and NOI by nearly 12% in the quarter. Despite the strength in certain high barrier markets, elevated levels of new building openings in select markets constrained our portfolio growth. The second quarter saw the highest number of new units coming online in recent experience, with the overall deliveries of new units in our trade areas up 50% sequentially from Q1 of 2017. New openings were concentrated in high construction markets, including Dallas, Salt Lake City, Atlanta and Denver. Switching gears to a forward view, construction in progress as a percentage of inventory, within our trade areas improved by 20 basis points sequentially to 5.3% in the second quarter, encouragingly representing the third consecutive sequential improvement in this metric. For the full-year 2017, we are maintaining our shop portfolio same-store NOI guidance range of 0% to 2% growth. The guidance range is a function of the level and timing of new deliveries and operator execution in the back half of the year. The high-end of the range implies roughly 2% year-over-year NOI growth in the second half, driven by delayed new openings and the resulting occupancy gains. Conversely, the lower end of the shop guidance range implies approximately 2% NOI year-over-year declines in the second half, assuming accelerated new openings further widens the year-over-year occupancy gap. As a mild reminder, like last year NOI should be lower in dollar terms in the second half versus the first half of the year as a result of technical factors like the number of days in each period. So, shop performance seems to be playing out as we predicted when we initiated our 2017 guidance. Our shop operators are sharply focused and incentivized to manage our shop assets with excellence to ensure bottom line performance in 2017. A final note on senior housing. We are encouraged by strong demand reported by Nick in the top 99 markets where absorption reached almost 3% in the second quarter. This supports our view of the strong value proposition of seniors housing and with our premium real estate located in high quality markets, we are well positioned to take advantage of the coming demographic tailwinds. Rounding out the portfolio review is 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 very well through the second quarter. Sequentially, new leasing drove 90 basis points occupancy increase to an excellent 97.5%, while revenues and NOI increased almost 4%. In our highly valuable medical office business, same-store cash NOI in the second quarter increased by healthy 2.2%. Second quarter results benefited from approximately 2% revenue growth driven by low single digit rate increases together with year-over-year and sequential operation occupancy gains. Given the higher than normal level of lease rollovers in 2017, our team has done a terrific job in managing occupancy by driving new leasing and maintaining strong tenant retention that exceeds 80% year-to-date. Our full-year outlook continues to forecast same-store 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 excellent results and enhanced financial strength in the second quarter. Second quarter 2017 income from continuing operations per share grew 5% to $0.42, compared to the second quarter of 2016. Normalized FFO per share in the second quarter grew 2% to $1.06, compared to the second quarter of 2016. Second quarter results were driven principally by accretive investments and improved property performance versus prior year. Ventas funded investments of $110 million in the quarter, including $53 million of acquisitions helping our operator partners grow in our seniors housing triple net portfolio, and $57 million of funding for our share of development and redevelopment projects currently underway. To fund investments, Ventas issued and sold 1.1 million shares of common stock under the ATM program for net proceeds of $74 million, and sold properties and received final repayments on loans receivable for proceeds of $45 million. During and following the quarter we also committed the future growth through new development and redevelopment projects and seniors housing in MOB's with total project costs of $188 million. We continued to drive enhanced financial strength through excellent capital raising. We tapped the attractive Canadian bond market in May and issued 275 million Canadian dollar five-year notes at 2.55% to refinance short-term low rate Canadian debt, thereby extending our debt maturities, while providing natural currency hedges. Meanwhile Ventas delivered attractive cash flow growth in the quarter with 5% growth in net cash provided by operating activities. Ventas also paid a quarterly dividend of $0.775 a share representing 6% year-over-year increase, as well as a well protected FFO payout ratio below 75%. The result of this cumulative activity is an even stronger financial position. Net debt to EBITDA improved 10 basis points sequentially to 5.8 times, which we expect to further improve upon receipt of disposition proceeds by year end, fixed charge coverage remained best in class at 4.6 times, and secured debt to total indebtedness improved sequentially to 5%. Let me close out our prepared remarks with our reaffirmed full-year 2017 earnings and same-store guidance for the company, including the following. We continue to expect income from continuing operations to range from $1.72 to $1.78 per fully diluted share. Our normalized FFO per share forecast continues to range from $4.12 to $4.18. It is a Testament to the strength of our portfolio that even with all the expected portfolio changes asset sales leveraging the funding of developments and senior housing supply our normalized FFO grew year-over-year in Q2 and is expected to grow full year at the midpoint of our guidance range. Total portfolio same-store cash NOI is anticipated to grow 1.5% to 2.5%, while segment level same-store growth expectations also remain unchanged. The $700 million Kindred SNF sale at an 8% GAAP yield is expected to occur in phases, beginning in the third quarter, and to be completed by year-end 2017. The high-end of our current FFO guidance range assumes the majority of proceeds received late in the fourth quarter of 2017. Earlier, larger dispositions coupled with the associated paydown of 2% LIBOR-based debt will reduce FFO by approximately $0.01 per share per month. Upon completion of the SNF sale, Ventas is expected to record a gain exceeding $600 million, which will increase the company's net income per diluted common share. Consistent with previous practice we do not include any further material investments, dispositions, loan repayments or capital activity in our outlook. We assume approximately 359 million weighted average shares for the full-year 2017 with no new equity issuance contemplated. To close, we are pleased with our performance in the year and our progress on executing on our strategic priorities. With that, I will ask the operator to please open the call for questions.

Thank you. [Operator Instructions] And our first question comes from Michael Carroll from RBC Capital Markets. Your line is open.

Yes, thanks. Debbie, can you give us some color on the company's - are the company in which you guys are tracking in the acute care hospital space? And is a plan to mainly grow with Ardent or are you willing to make investments with different operators?

Good morning Michael. I would say that we are involved in both undertakings. As you know, when we first invested with Ardent and with Sam Zell, we believed it was a scalable investment opportunity because of the high quality team there and the good platform. And that has played out exactly as we expected, and I would continue to expect that there will be opportunities with our partners to grow there. And we also, in a very selective way could pursue opportunities with high quality health systems, so long as they share the kind of characteristics that we’re looking for, which I would describe as many HCA type characteristics, which are basically great market share, good payer mix, good branding, opportunity for margin improvement and so on. So, we’ve very consistent in that regard. It is a gigantic market and we’re focused on a very high quality slice event both with Ardent and separately.

Okay. And then I guess, I'm not sure if we're done with the repeal replay, seems like everything comes back, I guess every week or so about something new that could be passed, but as we get more clarity on the new health care environment and what's the GOP may or may not do, do you believe that Ventas can be more aggressive deploying capital in this space?

Well again, we are going to be consistent and very selective in the types of investments we will make in this trillion dollar highly fragmented sector. We’ve talked about Todd’s expertise over the years. We really are expert both in our management team and our board in identifying the kinds of opportunities we think fit with our strategy. It is helpful certainly that we may have more clarity given the Senate majority leader’s view that it's time to move on to, as I said tax reform and defense bills and so on, and so that’s helpful. But this is long-term secular thesis that we have that will play out over decades and so we’re going to continue to pursue that with consistency and strength and I believe we will be successful at it.

Great, thank you.

Thank you.

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

Hi, thanks. I wanted to ask you on the SHOP assets for the U.S. portfolio and you sort of talked about some of the ranges for the outlook, so could you see that be negative for the year or do you think that will, are you guys expecting that to improve in the second half back into positive territory?

Hi Smedes, thanks for the question. The range obviously of 0 to 2 for the year, which we reconfirmed today really recognizes that new deliveries are primary drivers of the performance and the balance of the year, difficult to predict clearly. So we think it is appropriate to have a range for the back half of the year, and we are pleased with our start, I think it is hard to say we are right where we expected to be, whether it be top or bottom line. With the balance of the year that range is really a function of those new deliveries. So, we will have to see how that plays out.

Well just on that front, are you seeing any changes or hearing about any changes in capital of the ability for construction and senior housing?

Yes.

Anecdotally it is continuing to get more difficult, financing is getting more difficult finding good operators is getting more difficult. I mentioned that we said three now - periods in a row where the construction to inventory metric has improved, so that’s encouraging. So anecdotally and quantitatively I think we’ve seen some positive trends.

Okay, thank you.

Thank you, Smedes.

And our next question comes from Nick Yulico from UBS. Your line is open.

Hi, good morning everyone.

Hi Nick.

Just a first question on kind of Lillibridge, I guess I was reading through the filing, first off it is not clear, it sounds like there might, there is not much of any G&A impact, may be you could just clarify that.

I think you’re right that it will be not much of a G&A impact that’s correct.

Okay. And then is there, I guess the plan there, are you planning to keep the Lillibridge name and is there a no-compete for Todd?

Well, we were very happy to acquire Todd’s business in 2010 and combine forces with him and we like his name, and so we're going to keep it, and he likes it too, so he will probably use it. Like all of our executives Todd has a 12-month no-compete from - after leaving the company and we hope he will stick around for a while doing lots of good things for us, after he transitions the MOB leadership role.

Okay. And then, Debbie I just wanted to ask about acquisitions, if you look at your leverage, your balance sheet, it puts you in a good position to do a larger acquisition. So, I want to hear your thought about the investment opportunities out there, you mentioned asset pricing being strong across healthcare real estate, so does that restrict your acquisition opportunities?

Well we are in a great spot. As you correctly point out, and I think we can compete and win in transactions where we are focused on winning. And that’s a great spot to be in. We have really picked our spots and been very clear about our capital allocation priorities over the last couple of years, and I think we have the ability to really execute on those. And so we feel really good about that.

Okay. I guess just going back to the pricing commentary, I mean did that relate to specific asset classes like medical office where pricing has gotten pretty aggressive and may be little bit more difficult to do acquisitions versus some of the other types of real estate you're looking at?

Yes. I mean, we like what we see in terms of value creation. The institutionalization and performance for example the MOB’s is now sort of a mid-to-high 4s cap rate. I think in seniors housing, we have grown with customers we have been selective and we're focused on some high quality redevelopment both in MOBs with our center project in down town San Francisco, and in senior housing with our new projects with Sunrise and Atria. And then we continue to build this Life Science business where we see great opportunities and selectively in the hospital and health systems business as we discussed. So, there is lots of opportunity for us to do that and when we see investment opportunities that really add to our strategic direction, add to our portfolio accomplish things and our high-quality, I think we can very well compete and win on those opportunities.

Okay, thank you.

Thank you.

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

Thank you. Good morning.

Good morning.

Good morning.

So, on the Life Sciences kind of a priority growth platform for you right now, can you comment on the size of the university market for that and the competitive landscape and then as an anecdote to that, you mentioned you know you are buying in the 6 to 9 range, but you think it’s worth a four handle or maybe a low five, do you feel yourself in a competitive advantage in the sense that you may not be consensus among other investors in this space, and so you could be a little bit more aggressive to win deals, is that a fair way to think about it?

Yes this is John Cobb and I think, we think the size of the market is 4 billion to 5 billion or pretty big. We feel that with the Wexford brand and our brand. We have a great value proposition to the universities. Where we see the 6 to 9 is really on the development side. We think that when you, we can build to those yields, which is what we’re doing in new city and Penn and then WashU that once we build and fill them up to 95% occupancy we think that’s where we get the value creation.

And what’s really interesting, just another stat on that is, the existing tenants that we have, these universities, Brown and Yale and Duke and UPenn just the existing portfolio, 25 assets, those universities account for 11% of all US R&D spending by universities. We think we can expand with those tenants and are working on that. Then there is another cohort that really accounts for the next kind of 30% of US University R&D spending, and that’s where we are targeting and we have ongoing discussions with Wexford with virtually all of that next cohort. So, that’s kind of the target market Rich.

Okay, so beyond - beyond the universities in terms of the buyer poll for this asset class, who are you competing with?

We pretty much as John said, I mean I think we have a great opportunity with limited apples-to-apples competition because of Wexford's brand, relationships, and track record where the University see us and then our institutional nature partnered with them. So they see that, those completed projects, they see the brand names that have already had success with this. They see us with our institutional long-term hold, and I think we really have the market pretty much in an attractive spot for us to win a large percentage of these development yields and that’s why we’re excited about continuing the opportunity.

Okay. And then last question you ought to talk about how healthcare could fill the void for e-commerce and retail establishments and of course we are saying that in many respects with some of the different levels of types of care that you can get in a retail environment, do you see - how do you see that evolving over the next five years or so? Do you think like, Macy's and Sears, these big blocks of space could somehow be occupied by some sort of healthcare component or are they just too big, so you really got to go smaller when you are looking at those types of assets?

Good question. You know what I would say is, everybody wants to go where the demand is. And the demand is in healthcare and senior housing. And so it is a great spot to be in. I would say that there may be some successful at the margin opportunities for that type of conversion, but in general based on the sort of regulatory environment and new rules that are coming out for example that are pushing outpatient services that hospitals offer back toward the campus because of pricing changes. We think that the conversion of retail to medical would be a limited phenomenon over the next five years. And obviously the box size is relevant as well. But I really think the way hospital and health systems really provide outpatient services is being driven by the regulatory environment back closer to the hospital campus and that’s very important.

Interesting. Okay, thank you.

Thank you.

And our next question comes from Michael Knott from Green Street Advisors. Your line is open.

Hi everybody. Question just on skilled nursing, it is going to be down to 1%, and just curious if you're thinking about taking that all the way to zero, and with what timing?

Well we’ve gone from 70% when I started to 1%, so we're pretty happy about that. We will continue to be opportunistic and smart as we have, I believe we’ve been in our capital allocation, which as I said includes disposition activities. Right now we don't have any plans in that regard, but we will continue to be patient and opportunistic and if we have opportunities to do anything in our portfolio in any of the asset classes, we will always look at that if we think it’s going to create value.

And then on the hospital front, it sounded like you were saying it would be possibility for Ventas to further expand in that business outside of Ardent and EGI, did I hear that correctly?

Yes, and that’s consistent. I think what we have always said is, this is a huge market. It’s fragmented, there are a lot of high quality, highly rated health systems that we’ve been doing business with for 25 years. We think this scalable Ardent platform with the management team is a great place to do bolt-on acquisitions and we have shown that that has been occurring and we’re very pleased with the way that is playing out, and with Ardent's performance. But there also is an opportunity in this gigantic market to pursue other potential opportunities on a very highly selective basis. And that’s consistent with our thesis from the beginning.

Thank you.

Thank you.

And our next question comes from Steve Sakwa from Evercore ISI. Your line is open.

Hi thanks, good morning. Debbie I was wondering if you or Bob could just maybe comment a little further on the occupancy decline in the SHOP portfolio, was there anything regionally that you noticed in that basis point, the 200 basis point drop?

Sure. I’ll take that Steve. The 200 basis points down is right in-line with what we talked about last quarter. We entered the quarter at lower point as you know from the flu, which was more severe and occurred later in the year then this is normal. And then we saw the new deliveries come online as I mentioned. The regions and the locations of that new supply of the same that we’ve been talking about for over a year and a half now, I highlighted Dallas, Salt Lake City, Denver, Atlanta is a few most notable, but the same markets that you read about when that report comes out are the ones that we’re seeing. It is contained to the same 30% of our SHOP portfolio that we’ve been talking about for some time. So, it is not new, but there was an increase in the amount of deliveries in those markets in the second quarter.

Okay thanks. And then I guess secondly, may be Bob this is for you, but just in terms of equity issuance in using the ATM, how are you sort of thinking about that and you know obviously the balance sheet has gotten much better, but how are you sort of thinking about raising equity capital and is the sort of primary sort of financial determinants sort of earnings accretion or I assume any via the much less important factor when you are looking at issuing equity?

Well coming back, we agree we feel very good about the balance sheet and the financial position we are in. Our net debt to EBITDA is a really good. Our fixed charge coverage is fabulous. Our liquidity is really strong, our cash flow is very strong, so we feel really good about our position and have multiple options. In the quarter itself we did make commitments to investments of about $110 million. We funded that in part with ATM that’s just one of the clubs in the back that we use as a relatively small amount, but efficient and it is one of the ways that we will fund new investments, but dispositions are another and we view that very considerably over the last year including $1 billion this year. So, multiple ways to finance ourselves.

Okay, thanks. That's it from me.

All right Steve, thanks.

And our next question comes from John Kim from BMO Capital. Your line is open

Good morning.

Good morning.

Hi. If you look for a new leader for your MOB business, I am wondering how you envision this business changing, are you looking for someone with more of an acquisitive or a development background or different relationships going forward?

Well, I think that we have a bias towards a leader who will be results oriented, proven record of accomplishment, and a deep understanding of the healthcare industry. I don’t - if they have a nice head of hair and a great smile like Todd that would be an added bonus, but that’s generally the direction we’re looking. John’s team is really in-charge of all of our investments, including MOB investments, and so it will be great to have a partner who can assist in that regard, but the MOB leader is really running the business.

Okay. And then earlier this week it was revealed that Amazon has a healthcare division, I know its early days still, but can you comment on how you think technology and data is going to change demand, and offer any of your assets classes?

Yes, I mean that is obviously - Amazon has been a disrupter in a number of areas. We believe, again why are people going to healthcare and they are going to healthcare because that is where there is incredible, inexorable, demographic demand and so everybody wants a piece of that. I do believe that technology will change and enhance the delivery at healthcare services as it has been doing for quite some time. And basically it hopefully will drive down cost of providing healthcare in the country. But we believe that we will continue to see increasing utilization of our assets from this demographic ways that has started and will continue to come.

These technology changes, when do you think they will start to make an impact? Is that over next couple of years or is it really longer term?

Certainly not in the near term and so over time, I mean again we want healthcare delivery in the United States to be enhanced and delivered efficiently and so our job is really to align ourselves with leading providers who are always going to be there delivering high quality healthcare services for this ageing demographic and that’s our business model and that is what we are really focused on.

Great, thank you.

And our next question comes from Jordan Sadler from KeyBanc Capital Markets. Your line is open.

Thanks. I wanted to just go back to your comments on life sciences being sort of a big area in focus in terms of capital allocation, would you similarly look to expand that business outside of may be University or outside of Wexford?

Good morning. Good question. Look, right now as I said, we’ve got this big task in front of us with great opportunities to allocate capital in a very value creating way and we are really focused there. I also said that we will continue to be nimble and opportunistic as we continue to grow cash flows and no reliable way. And so we will remain open to other opportunities. Our focus is on the investment opportunities with Wexford in the university-based business that are staring us right in the face with their very robust pipeline, and so that’s really what we’re focused on.

Okay, that is helpful.

Good.

And I was going to toss my hat in the ring for the Todd Lillibridge see it like John Kim, but I don't have the good head or hair, so probably kept me out. So, but seriously congrats there on the stewardship of capital and in that investment, Todd’s leaving so brings the question to me, obviously you made a lot of money there, would you look to monetize a portion there or is that still an area of focus for investment?

Well we have a great MOB business, I think its value is perhaps underappreciated by investors and that’s one reason we really wanted to highlight it. We’re happy that we invested at the early stage of value creation, and really built this business seven times from 2010, but we continue to look for opportunities to grow, but also to prune the portfolio as we think is appropriate, and so that’s where we stand.

Okay, that’s fair. Hey Bob, can I just as you on the occupancy on the SHOP portfolio, you were down 200 basis points year-over-year, I know you affirmed the same-store expectation, but do you think that that gap could widen further into the back half of the year or does that seem unlikely at this point?

Yes, we in the low end of the range what’s implied in that Jordan is that we could see a widening of that year-over-year gap, sequentially. Conversely at the high end, we could see an improvement and it’s really again a function of the timing and pacing of new deliveries, so that’s what dictates the range in the back half.

Thank you.

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

Hi, Good morning.

Good morning.

Good morning.

This is Seth Canetto on for Chad. My was first question on the SHOP portfolio centers around expenses, you know they are up sequentially, I think last quarter was a little artificially low based on number of days, but just focusing on expenses and giving your portfolio on high coastal markets, top MSAs are you guys seeing a slowdown and wage pressure at all?

We started the year seeing 4% to 5% wage growth and that’s been pretty consistent in the first half of the year. In the quarter, we posted overall expense growth of 3%, so by definition the operators are doing a really good job of not only flexing that labor relative to occupancy, but also driving indirect costs down and are very much focused on that, but the 4% to 5% wage accounts in volume I would describe it, consistent volume wage growth has been pretty consistent.

Alright. And just on flexing labor, I mean if the year-over-year occupancy deteriorates further, which I guess is kind of depended on the deliveries online, but is the flexing something that they can keep doing as long as occupancy is declining to help offset that, is that how we should be thinking about that?

Well there certainly is a point where fixed cost kicks in. I don't think we are there. I think there is certainly plenty of headroom, and again this is a very market-by-market centric conversation, but I think there is still continued room to be able to flat labor for sure.

All right and then just shifting gears to the LTAC business, you know coverage declined as expected, and I think it is safe to assume that it should stabilize towards the end of 2017 and into the beginning of 2018 when you guys report the numbers. So, I guess what gives you confidence that Kindred will be able to mitigate that business and then improve the coverage there?

Great question. Kindred commented on the business in its first quarter call, and I think that you’ve got it exactly right about the pattern that in the early quarters you would expect unmitigated impact to be larger and then as Kendrick’s mitigation strategies take hold that impact will be lessened and improved considerably. I mean that will take place in the back half and then into 2018. I mean the bottom line is Kindred is the best LTAC operator ever. I mean this is their historic business, I think they are showing good opportunities to increase their compliant patient population, improve and take some site neutral patients, to control expenses, and to improve mix in terms of Medicare advantage and other favorable asset types because of course as you know, now you can have shorter lengths of stay with those patients and I think Kindred feels good about the fact that Medicare advantage and Managed Care payers believe that there’s a good value proposition that Kindred could provide on a shorter length of stay basis than the historical norm. So that’s what gives us confidence in Kindred's ability to operate this portfolio and manage through the patient criteria changes successfully.

Okay great. Thanks for taking my questions.

Thank you, good to talk.

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

Hi yes, good morning. Just a quick one from me, the same-store NOI, the occupancy for the SHOP portfolio, I know you kind of talked about it, kind of being dragged down a little bit by flu season and things like that, could you talk specifically about how you are expected to come back a little bit in the back half of the year, is it really just slowdown in delivery like, what else do you kind of expect to kind of go on to kind of close that gap?

You hit the key one, which is slowdown in deliveries and the ability for lease up and absorption to happen. And one of the things - I want to make sure everyone notice the fact that the demand growth is stronger absorption with 3% year-on-year as per the NIC data which is really encouraging, but obviously a lot of units in lease-up. So, we need to have some time for that absorption to happen. No seasonality typically, one would see a pickup in the back half, but it really comes down again to this question of pacing in new deliveries.

Got you. Okay, anything from, I know some other operators had like bans on admissions because of the flu and things like that, is all that kind of stuff coming off?

That’s really a first quarter phenomenon Tayo and we are back in the normal season I'd say. So nothing unusual like that that’s occurring now. It’s really about the summer season and gaining market share and operating with excellence in the context of supply demand.

That’s helpful. But another quick one on the MOB side, again it sounds like there are a couple more large portfolio transactions in the market that could kind of go at mid-4% cap rates, again just while that’s all great for NAV and how does one really kind of think about a world of buying MOB’s at, you know high-quality MOB’s at the mid-4%, like is that really sustainable longer term do you guys kind of expect some of that stuff to kind of turnaround, and in the near term you kind of wary of making acquisitions, like how do we kind of think about that well just kind of giving the typical 2% to 3% same-store NOI growth profile of MOB.

Well great question, and I think that the way we think about it is, our value creation opportunity is generally to invest early in asset types where we think there will be cap rate compression, and/or cash flow growth and we evidence that the example, I would say in the MOB business and in senior housing, and we have been consistent at Ventas in our ability to see those trends, invest early, and create value for investors through cash flow growth in the assets and/or cap rate compression. So, what I would say is, we have this really great business with a diversified portfolio, and one of the ways that we’ve been able to deliver reliable growing cash flows over cycles for almost 20 years is this underappreciated ability to allocate capital around the wheel as I call it, where we can and have been able to consistently find good risk-adjusted return investments, so that if one asset class happens to be exceedingly valuable, we have lots of other places to go to find good investments that deliver good risk adjusted return and meet our investment criteria. And that has been, I think an underappreciated, but very important part of our long term success. And so that’s how we think about it. We have a great business. We have five verticals. We have a great investment team, and expertise and relationships and we will use those for the benefit of our shareholders to make progress.

That’s helpful. Thank you.

All right. So with that I think we will end today's call. I’m just shocked and disappointed that no one congratulated me on winning the Stanley Cup, but it’s been a great summer so far. I’m really, really pleased with where Ventas is in our performance, and we hope everyone has a great summer and we look forward to seeing you soon. Thank you so much for your interest in the company and your attention this morning.

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