Ventas, Inc. (VTR) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2018 Ventas Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Ryan Shannon, Investor Relations. You may begin.

Thanks, Sarah. Good morning and welcome to the Ventas conference call to review the Company’s announcement today regarding its results for the year end quarter ended March 31, 2018. As we start, let me express that all projections and predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. The Company cautions that these forward-looking statements are subject to many risks, uncertainties and contingencies, and stockholders and others should recognize that actual results may differ materially from the Company’s expectations, whether expressed or implied. Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes in expectations. Additional information about the factors that may affect the Company’s operations and results is included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 and the Company’s other SEC filings. 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. Good morning to all of our shareholders and others participants. I want to welcome you to the Ventas first quarter 2018 earnings call. I’m delighted to be joined today by our team to report on our excellent start to the year, highlight our continued progress and executing on our strategic priorities, update you on our mutually beneficial agreement Brookdale announce today to discuss our improved 2018 expectations. Our strategic priorities for the year included improving our triple-net maturity profile, investing in our future growth, appointing a new leader for a high quality office business, establishing a new senior housing platform, improving our balance sheet, and all the while delivering on our financial commitments. In classic Ventas fashion, I’m delighted to report significant progress against all of these objectives. Let’s start with results. We were pleased to grow normalize FFO per share by 2% to a $1.05 this quarter. With our strong start to the year, our full year expectations for 2018 normalized FFO has increased to $3.99 to $4.07 per share. Our diversified portfolio also performed well with each segment contributing to 2.6% total same-store cash growth. We are really happy with the mix, quality, performance and resilience of our differentiated portfolio. We also enhanced our financial strength and flexibility during the quarter by a standing and staggering our debt maturities and recycling capital to improve our net debt to EBITDA ratio to a strong 5.5 times. We continue to invest in our future growth through development and redevelopment focus on medical office buildings, institutional quality, life science and innovation centers, and highly selective senior housing project. We are seeing good momentum with our life science new development projects. Our development at Washington University which is scheduled to open in 2018 now has recent commitment to approaching 90%. Meanwhile, our 3675 Market development at Penn also expected to open later this year has commitments for approximately 70% of this available phase. Finally, our asset at Duke University which opens in summer 2017 is expected to be stabilized only one-year after opening as a large creditworthy tenant has expanded into most of the remaining available space. Meanwhile, our trophy MOB development in downtown San Francisco adjacent to the new $2 billion Southern Hospital building has now reached approximately 80% preleasing, anchored by Sutter Health, a AA-rated health system. The grand opening of our Sutter MOB is expected by early next year. Development and redevelopment of medical office and university-based life science and innovation centers remain our top capital allocation priority. Turning to senior housing and the significant improvement in our triple-net maturity profile, I’m very pleased to tell you that we’ve reached a mutually beneficial deal with Brookdale, a long-standing tenant and the nation’s largest senior living operator. We have agreed to combine and extend all of our Brookdale assets into one guarantee master lease whose terms rents for eight more years to 12/31/25, when the senior population will be extremely robust. To give Brookdale support and stability while it executes its operational turnaround under its new team, we've provided an average of $6 million and annual rent credit to Brookdale in each of the remaining years of the lease, which provides even greater reliability for our future cash flow. We’ve also agreed on the straightforward objective change of control standard for Brookdale, balance with significant credit and other enhancements for us is a change of the control does occur. The agreement includes the ability to sell up to 15% of the Brookdale asset to improve portfolio quality, reduced lease asset at Brookdale, and further diversify the Ventas portfolio. So, we continue to find innovative ways to optimize our portfolio, invest in significant operator relationship, and advance interest of Ventas shareholders. We support the efforts of Brookdale’s new leadership team to drive operating performance in our portfolio and across the Company and command them for acting decisively to move Brookdale forward. With the completion of our Brookdale agreement, we have less than $2 million per year of triple-net senior housing rents that matures through the end of 2020 and our total triple-net weighted average lease maturity is expanded to 10 years. Moving onto our newest winning platform, ESL, led by Kai Hsiao and his experienced team of senior living executive, partnering with ESL has given us important strategic and operational flexibility in senior housing because high quality management team are the scarcest asset in our business. We successfully the transitioned the portfolio of 76 Ventas-owned senior living communities to ESL in January and both ESL and the portfolio are off to a strong start. ESL has a fully staff team and it is ready to come a sought-after manager in the senior living business. The portfolio has begun to show good times of operational upside including sequential improvement in occupancy. With the transition behind us, we believe we will drive good risk adjusted return and growing cash flow from this portfolio. As we come upon our 28th anniversary at Ventas, we are proud of our accomplishments and we remain driven for more. Despite the challenges in REIT market today, we remain bullish on our industry, our enterprise and our future. As I look across the entire equity market, I can’t think of where else you can invest in an S&P 500 stock with a rock solid 6.5% dividend yield, BBB plus balance sheet, a compelling demand story, a dynamic, fragmented and large investible market and an experience excellent team that has a long record of extraordinary value creation, innovation and results. Before Bob begins his remarks, I want to especially welcome our new colleague Pete Bulgarelli to his first earnings call at Ventas. Pete joined the team in April as the leader of our highly valuable integrated 25 million square foot ambulatory MOB and university-based life science business. Pete has a long and exceptional record of accomplishment in real estate, most recently focused on healthcare, life sciences and higher education including academic medical centers. We know Pete will bring high energy and great experience that will take our office business to the next level of success performance. And now, I am happy to turn the call over to our CFO, Bob Probst.

Thanks Debbie. I am happy to report a strong start to the year from our high quality portfolio of healthcare, seniors housing and office properties. Our total property portfolio delivered same-store cash NOI growth of 2.6% in the first quarter ahead of our expectations, with all segments contributing to growth. Let me detail our first quarter performance and 2018 guidance for a second starting with SHOP. Our SHOP business came out of the gate strong, with cash NOI growth versus prior year of 0.7% ahead of our full year expectations. As expected, first quarter same-store revenue were nearly 1%, occupancy exceeded our expectations at 87.4% for 150 basis points below Q1 of 2017. A severe flu season did have an impact on moving activity in the first quarter. This impact was mitigated by move outs which were better than those expectations in prior levels. Less new competition opening its stores in the first quarter also supported occupancy and continues the trend of delays in new opening. Q1 RevPAR growth was 2.7%, the wind place increases were strong. RevPAR was muted by a freight competition and supply challenged markets. Meanwhile operating expenses do in line with revenues in the first quarter at nearly 1%. Our operator did a terrific job managing staffing levels in the quarter and expenses also benefited by a 50 basis points from a favorable insurance true up in the quarter. At a market level, we continue to see NOI growth in our traditional strong holds including Los Angeles, San Francisco, Boston and Ontario. This strength was mitigated by NOI declines and markets effected by new competition most notably Atlanta, Dallas, Chicago and a number of secondary markets. I would also note, we continue to see fewer new construction starts in our trade areas with the 50% sequential decline in Q1 starts versus the fourth quarter of 2017. In fact, the first quarter 2018 represents the lowest level of new construction starts in our markets since 2014. However, the recent trend of delayed new deliveries of construction already in the way increased the construction inventory percentage in our trade areas by 10 basis points. Despite the strong start to the year, as this stage we are maintaining our full-year same-store NOI guidance of minus 1% to minus 4% though was updated assumptions. Our guidance now assumes an improved full year occupancy gap, low prior year in the range of 150 basis points to 200 basis points while RevPAR is now anticipated to grow between 2% and 3%. The full year NOI guidance range is a function of spacing new deliveries and resulting revenue impacts. ESL, our new senior housings operating corner is now reflected in our Q1 SHOP supplemental reporting. We are pleased to welcome Kai and the ESL team to our high quality SHOP business. ESL has certainly hit the ground running, growing occupancy in the portfolio by over 100 basis points since transition. Moving onto our triple-net segment. Our triple-net portfolio grew same-store cash NOI by an outstanding 4.4% for the first quarter driven by base rents escalations. Trailing 12 months EBITDA cash flow coverage in our overall stabilized triple-net lease portfolio for the fourth quarter of 2017, the latest available information remains stable with prior quarter at 1.6 times. PTM coverage in our triple-net same-store senior housing portfolio also helps at 1.2 times. Please note that our supplemental reports rent coverage on a PTM basis, hence the current reporting does not include the beneficial impact to coverage of the Brookdale agreement. In our same-store IRF and LTAC portfolio, PTM cash flow coverage was 1.5 times, down 10 basis points sequentially as a result of the impact of the LTAC reimbursement change. With recent positive LTAC reimbursement news and continued operational strategies taking hold, we expect our LTAC to generate improving results in 2018. Our skill nursing assets principally operated by Genesis, now represents just $20 million of annual rents or 1% of Ventas' NOI. The SNFs health coverage at 1.5 times in the quarter, continued to experience industry headwinds on the top and bottom line, trends which we expect to continue. Finally, Ardent delivered terrific results in 2017, leading the path across top and bottom line metrics and enabling strong and stable rent coverage of three times. In 2018, Ardent is focused on integrating the East Texas Medical Center into peak acquisitions, rolling out a new IT system across this platform, refinancing its debt structure and driving results. We’re also encouraged by CMS as better than expected 2019 proposed rate of 3.4% per hospitals. For the full year 2018, we forecasted our triple-net portfolio will grow same-store cash NOI between 2% and 3%. We then placed lease escalations partially offset by the 80 basis points cash impact of the Brookdale lease extension, which is now fully incorporated in our guidance. Around the asset portfolio review is our attracted office reporting segment which now represents 25% of our NOI and delivered healthy same-store cash NOI growth of 2.2% in the first quarter. Let me break out these results between our university-based life science and medical office portfolios. Our exciting life science business grew Q1 same-store cash NOI by 3.1%, driven by occupancy increasing by 70 basis points to an outstanding 97.3%. For the full year 201, we continue to expect robust life science same-store NOI growth in the range of 3% to 4%. Turning to our medical office business, MOB same-store NOI grew 2% in the first quarter. Our team did an excellent job managing occupancy with tenant retention above 85% in the first quarter. Revenue also benefited from in place lease escalations that exceeded 2.5%. We continue to forecast 1.5% to 2.5% growth more strong and steady same-store medical office portfolio in 2018. On a combined basis, we expect our office portfolio of life science MOB assets to grow 2018 same-store cash NOI in the range of 1.75% to 2.75%. Now onto our overall company financial results and are updated 2018 guidance. Normalized FFO per share in the first quarter grew 2% to a $1.05, as a result the total portfolio of same-store growth of 2.6% in addition to accretive acquisitions and profits for beneficial transactions. Income from continuing operations per share was below prior year driven by an impairment of our equity in an unconsolidated joint venture Holdings SNFs. and we expect this sell in 2018 at a 9% cap rate on cash rent and deal cost related to VSL transition. Dispositions and receipt of final repayments on loans receivable totaled $300 million in proceeds in the first quarter of 2018. Proceeds from the dispositions were used to retire debt, resulting in an improvement in our net debt to EBITDA ratio by 0.2 times to a healthy 5.5 times. We also had strong execution in the capital markets and extending and staggered of maturity profile in February since the successful issuance of $650 million of 4% 10-year senior notes in order to retire $700 million of maturing 2% notes. In addition, we took refinancing risk off the table by tendering and retiring $600 million of 4% senior notes due in 2019. Let's close out with our updated 2018 guidance for the Company. We're excited at this early stage in the year to improve our full year outlook for a normalized FFO for fully diluted share to now range between $3.99 and $4.07. This guidance represents both the nearing of the guidance range as well as the $0.03 increase at the midpoint compared to our previous guidance. Our increased expectations are driven by our strong start to the year, the resilience of our cash flows and the progress against our key initiatives. Notable guidance assumptions include the revised expectation for $1.25 billion in proceeds from asset dispositions and loan repayments at a cap rate of over 8%, the proceeds of which will principally be used to retire debt. Our guidance assumes 100% ownership by Ventas of the assets managed by the ESL. The sales of our minatory shareholding in this new JV and the impact of the Brookdale agreements including one-time noncash charge of $22 million. For the full year, we are updating our total portfolio of same-store cash NOI growth guidance to now range from 0.5% to 1.5%, with our SHOP and office same-store guidance unchanged and the triple-net outlook revised to improve the impact of the Brookdale lease extension. To close, the Ventas team is very pleased with our strong start of the year and is committed to execute with excellence against our strategic initiatives in 2018. With that, I’ll hand it to the operator to open the line for questions.

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

Just on the Brookdale lease, I was hoping you can walk us through the impact to the EBITDAR coverage ratio kind of pre and post? And what you expect that to go to, if you’re able to execute on the targeted assets sales?

So, we are pleased to announce the Brookdale deal today. It is I think a really creative deal that is good for both parties just the way we like to do our deals. The rent credit, the cash rent credit is a fairly small amount as you can see and therefore would have minimal but positive impact on the EBITDAR coverage under the leases.

Is there any material impacts from the potential asset sales? I’m just trying to get a sense of why you think this is a good long-term sustainable number because it looks like the EBITDAR coverage is still kind of at or below one-time?

Well, the purpose of the deal Juan is to give us really a good bridge to a much longer lease term with enhanced credit protection while we contribute and support Brookdale operational turnaround. And so, our expectation is with eight more years from now on the lease substantial credit protections and the meanwhile the Brookdale team focused on operating turnaround the silver wave that we know is coming that overtime this will be an excellent need for us, and when that we feel really great about. It gives great visibility to our cash flows going forward and we’re happy about that.

Then just a follow up Eclipse, you decided to keep it -- it looks like a 100% of those assets rather than sale a minority piece. What drove that decision? Is it anywhere related to pricing, and just if you could comment on the mechanics of the operating transition? It seems like you've gained occupancy within any headwinds you see from here going forward is the transition is coupled down?

What I can tell you is that we are really happy to have a successful transition behind us. We think the team is aligned and doing great. And so we're happy to own the portfolio. We know it is a very valuable portfolio and we will continue to evaluate our options but we did take it out as guidance as you've correctly pointed out as we reevaluate our options on the portfolio. Right now, we like the upside and are feeling good about our decisions here move it.

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

Just kind of off of Juan’s question related to Eclipse. Debbie, if you could describe the upside that you see in that portfolio, is that something that the new team can kind of streamline operations? Or do we have to wait for better demographics to kind of impact those results?

The occupancy is probably the biggest upside that we see and that's been trending positively since the transition and the portfolio is really segmented. There's a very large component of sort of stable growing cash flow. And then there's a component where we really think that specialized operating plans can improve performance and so there's a very targeted planned asset by asset that we see starting to gain traction and that we hope will deliver improved cash flows over time.

And then can you provide some color on the potential asset sales the Brookdale leased portfolio. Have those properties already been identified? And have you agreed to sell those specific properties with Brookdale? Or are you still kind of doing your work and doing your research to figure out what assets do want to get rid off?

Well, as you can imagine, my colleague John Cobb and a number of our other Ventas' colleagues has been working with Brookdale for a quite a while on the outlines and completion of this agreement. We have jointly identified really a pool of assets that we think would be a good group of assets to sell that would improve the portfolio performance and quality. The final details are yet to be determined but we think there is directional agreement around a group of assets that would be targeted for potential disposition.

And assuming these assets have lower coverage metrics?

Remember that within the master lease coverage is somewhat artificial it really just depends on how you allocate rent within the lease. So the real idea is to identify assets where you believe that's the future operating performance may not be as good as the assets that you're not selling. So it's really about the operational future of the assets, it's not about coverage which is as I said as somewhat artificial allocation within a master lease. So that’s how to think about it, which assets are not strategic to the portfolio, which assets do we think have a better upward trajectory in terms of performance and then segmenting out the ones that we think are either nonstrategic for one reason or another or could be operated better by someone else that type of thing.

Thank you. Our next question comes from Smedes Rose with Citi. Your line is now open.

I just maybe wanted to turn to the SHOP for a moment. You notice -- you noted that your first quarter results were better relative to the execution, but the full year outlook is unchanged. I’m just wondering are you more comfortable at the higher end of that range? And do you still hear from your operators that full year occupancy would be impacted by the more intense flu season or there have you thinking about that changed at all?

We certainly are pleased with the start growing 0.7% in the first quarter, always good to come out of the gate strong that’s indeed what we did. One of the things that benefited the quarter I mentioned was the reduced number of new openings in the quarter and we’ve seen trend delayed new openings for the last several quarters now. So, our outlook is really assuming that those are going to open in the balance of the year. We’re going to see an increase in new things coming online and the consequent impact on the P&L. So, good start to the year, but obviously still early and so on that assumption we’re keeping the range.

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

This is Trent Trujillo with Nick. I wanted to circle back on Eclipse just potentially for clarification here was, what was embedded in guidance in terms of how much of the portfolio you are going to keep versus potentially JV? Just wanted to some clarification since now you’re retaining a 100% and maybe that having an impact on FFO?

Sure, the guidance assumption in February was that we would sale approximately 25% into the JV and it would not be consolidated into our result. So, you’ll see kind of financial impacts in our guidance through the P&L of the decisions to keep on 100% in the guidance. And therefore, we see a consolidated P&L coming through. So, that’s the real changing guidance. The impact on FFO is really de minimis.

And just again wanted to clarify, what is the latest thing on the LHP line? I think that was pre-payable starting March. Are there any discussions on that front?

Well, in our guide we’ve consistently projected for the year and continued asset in and around maybe a year, the LHP loan would be refinanced as Ardent continues to do well and wants to consolidate its capital structure into more streamline way. And so, that’s our expectations that will obviously be driven by market conditions.

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

So, if I could just kind of get a little bit into the Brookdale rent issue. So, I think if I’m reading this right, you start off with at $8 million of rent concession this year and it trickles down into $5 million in 2025, and there is a profits that’s get you there. So, from adding it up right its $48 million of rent cuts collectively over eight years. So, if the question -- is it appropriate to say that well you maybe aren’t resolving the coverage issue all it once, but you’re doing a gradually overtime and then once the as you call the silver wave hits in 2025, hopefully, you have achieved the goal of appropriate coverage or even better coverage by that time. Is that a good way to think about it?

It is the good way to think about it and again we're trying to create a mutually beneficial agreement where we can support the efforts of the team to drive operational improvement. We have always said that the best thing that Brookdale can do to create shareholder value is to drive operations. And so, we are supportive of that effort and that's why you see the pattern of the rent credit over time as you correctly point out, and we would expect Brookdale to -- it's all about improving EBITDAR of the portfolio.

And then on the topic of change of control, Brookdale says that you have relinquished your consent rights at least to some degree. Can you give a little bit more color on how that has changed for Ventas as a consequence of this negotiation?

Yes. So, we have basically modified our change control right. So that it has become more streamlined and objective change of control that protect Ventas from and Ventas shareholders from the credit side from the reputational side and an operational side because we have always cared deeply about who takes care of these 100,000 seniors and their financial wherewithal to do so. And importantly in that situation that gives Brookdale some flexibility strategic flexibility. And in that event, we also get some significant enhancements including lease extensions, if the change control does occur as I mentioned at the outset.

And if you don't like if someone comes in replace them. What is your possible response to that?

Well, I don't think liking has much to do with it. It really is an objective view as a company a firm who has significant credit behind its obligations to care for seniors. Is it a company or a firm who has operational experience in senior living and is it someone who reputationally should be in a position to do the things that Brookdale does care for seniors and that's very important, that’s always has been.

Right, so if some of those boxes are not checked, you can have a voice?

Right, like if you took over.

Kidding me. Last question on the guidance, isn't it mainly an accounting issue really? Now I guess the Brookdale rent can no longer be straight line with the inclusion of the CPI element. I assume that's correct. Am I thinking about the guidance correctly that you just basically?

Yes, let simplify it for you. What’s really good about it is that, before we get this deal our cash rate was higher than our gap rent, and by doing this lease expansion for eight years, we gap and cash are approximately the same. And so you can think it, I think it more aligning gap in cash and we like that.

Our next question comes from Michael Knott with Green Street Advisors. Your line is now open.

Hi, everybody. On the Brookdale front, just curious, Debbi, how you thought about sort of on one hand a full recommitment of Brookdale in that entire portfolio versus maybe operator transitions maybe to ESL and maybe then SHOP conversion as appose to strictly keeping it triple net lease?

Well, thank you. Bob's feeling like the LTAC repairman. So, I’ll be happy to answer that and then we’ll move on -- look I mean we as I said want to be a good partner, we want to Brookdale, we believe this is an excellent outcome for Ventas shareholders and we have retain certain flexibility and certain cases to continue to have optionality including some asset transitions in certain circumstances.

And then maybe on the SHOP side, you continue to site sort of the bifurcation and performance between high barrier and low barrier markets. I’m just curious if that start to the year comparing those two sites is that about as you expected or did one side is better worse than sort of what you had built into your guidance?

Thank you for taking care of my partner Bob.

Look, I called the stronghold markets in the prepared remarks, the LA, Boston continued to perform very well. We’ve seen that literally over the course of the year and that’s both on top and bottom line, good pricing power, good occupancy, good bottom line momentum. The challenge markets from a slide perspective also are very common theme at Atlanta, Chicago et cetera. And the performance of those again roughly as expected, so no surprises really I think from that perspective. What is unique and I have highlight is the delaying in new openings and which is obviously helpful to give time for absorption to occur, and also very newables to lots of the planning in new starts which is encouraging for the future for us. But the profile generally by market it hasn’t really changed materially

Our next question comes from Jordan Sadler with KeyBanc. Your line is now open.

Hi. I apologize in advance I have one more Brookdale question for you Debbie. Regarding their rights under the timing of the sales, I guess I’m just trying to figure this potentially $30 million of additional rent concession or credit, if you depending on how much you still…

No, no.

Sorry.

No, no, no.

I was just trying to -- there was a $30 million credit potential, you want to go through that?

No, no. Okay, there is -- let say the portfolio has rough numbers in the 170s of the annual rent about 15% of that could be sold, we get all the proceeds from that and depending on what the proceeds are we get a credit to Brookdale at a six in the quarter yield basically.

Is that up to a maximum credit of $30 million that how should we think about it?

If 30 is somewhat a relevant to the second part of the calculation, Jordan.

Okay.

So, all the…

If you sell 480.

Let me try it different way. Think about it this way. All the rents basically that's now there which stay on the portfolio minus, net proceeds to Ventas times 6.25% maybe that certifies this achievement.

So you could sell $500 million of Brookdale assets and give them a 6.25% credit on that theoretically?

Yes, it all turns on proceeds.

Got it. So I guess my question surrounding those sales which was really the heart of my question necessarily, but is -- do they have any rights in terms of terminations of those leasehold interests? How do they or do you have full control over timing and when those leases will terminate and assets will sell?

Well again given the fact that we think that this potential sales improve the portfolio, help Ventas, help Brookdale in a very positive for those companies we would encourage that process to happen over the next year or two, and obviously subject to market conditions. And again think it as a seriously would be getting money that we could reinvest into life science, medical office development redevelopment and redeploy those proceeds? That's really how to think about it.

Okay, but they can't terminate, can they terminate those leases at their option?

Well it's a full scale sale, so we would the idea is there would be no lease at that point in time. There would be a new buyer. You know any person who wanted to buy senior housing and they could have the benefit of operating that asset which we think would enhance proceeds.

Okay.

So it's just a sale of asset to the third-party which again…

No, I understand but let's say you guys were dragging your feet in terms of the sale process and how long it was taking or at least they may have thought you were dragging your feet. And so do they have any rights or control to accelerate in that sale?

I mean we've worked out something where we think the asset sales are good for both sides and that we would work cooperatively together on a commercially reasonable timeframe to identify the assets for sale and sell them in a optimal way, to invest buyers.

Okay that's helpful. And then the other one I had for Bob is on the Skilled Nursing joint venture sale. Can you shed a little bit of light on that? Maybe your stake, you said it 9 cap, I just wasn't sure who it is what it is?

Sure. It's an old joint venture, small within which there about 13 SNF assets, and we decided to sell those assets. And as a consequence therefore that being impairment that I mentioned in the first quarter that we recognize, but we'll be selling those assets effectively at a 9 cap rate on cash rents. Small deal ultimately cash proceeds saw at 80 million of share gross, but another exit if you want to get there other - business for us at an attractive price.

Yes, we’re in a quarter of the joint venture, so we're selling our quarter interest.

And your share would be to 80 million gross proceeds.

Yes exactly.

Our next question comes from Chad Vanacore with Stifel. Your line is now open.

I just wanted to get a little more detail on the Brookdale leases. So you mentioned the objective of the metrics on change in control. What are the some of those key thresholds on the objectives side that have to be met in order to have this change of control?

All right, thanks for the question. Again let me just recap for everyone. So, there is an objective, there are objective standards for a change in control hence the change of the control occurs than rents we’ll received additional protection and enhancements including lease expansions out to 29 as well as commitments to CapEx and fees. In order to do that, we have provided basically three general objectives standards. One is financial result that fire. One is reputational. And one is really operational experience in the asset classes. And I’m over simplifying obviously, but that – those are objective standards principally through a chase control would be consider.

Okay. Is there a threshold on the financial covenant?

Yes, there is significant net worth and leverage requirements.

And then you referenced the additional CapEx commitment for Brookdale and possibly Ventas. So, what are the commitments now amongst the car lease and where they go to under the new lease?

Right, so, Brookdale as the triple net tenant is responsible for ongoing maintenance CapEx. And then as we said in the press release, Ventas will work with Brookdale to consider whether it’s appropriate to invest additional capital to improve the market positioning and performance to the asset and we would work with them and if we agree there would be a market return based on capital investment, which of course again would be definition improve the quality and hopefully the performance of those communities.

So what’s the minimum CapEx requirement per year under the new lease?

If memory serves it’s about a $1,000 a unit a year.

Okay, that’s great. And then you just mentioned some additional credit protection in the Brookdale lease. What are you referencing there?

Well, we have handful network and leverage type requirement. Very typical credit type requirements to know that as I said before that the operator is financially credit worthy to conduct a business that is new which is typically taking care of seniors. And those requirements are enhance if there is a change of control.

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

QCP has put itself up to a sale and then this game open to completing bids. I’m just wondering would a transaction right that where you've got skilled nursing but a different high quality operator be of any interest?

I’m not sure it has passed the SNF test John.

It looks like SNF.

That's something that you probably should take up with the parties who are involved in this transaction.

So would that be interesting to you or no?

We are really focused on executing our plan which is as we've talked about you know really investing in our future growth through our life science and MOB development and redevelopment and working with our operators to really drive performance and delivering results for our shareholders.

And then on the supplements. Probably a question for Bob. All of your metrics exclude assets held for disposition. And I'm wondering how big that portfolio is and if that's equivalent to the $62 million dollar assets up for sale?

It's the held for sale assets are most materially and they are now those – assets I talked about those 13. Outside of that there was a dozen or so intended for sale. So it's a very small proportion of the overall 1200 properties.

And then some other REITs within this sector and outside of healthcare are planning to expense internal acquisition and leasing constant G&A. And I'm wondering if you're doing that currently or plan to do it in 2019?

That's a great question and first part, so that we think standards, which working on right now along with everyone else for commendation next year. So we'll see how that goes. One of the tenants of that potentially having to extend those leasing costs. So we're working through that right now and obviously we'll report back as we get more.

Our next question comes from Tayo Okusanya with Jefferies. Your line is now open.

So my question is I am looking at the piece that has you triple net lease portfolio, the breakout lease that might taken by cash flow coverage and I'm comparing it against last quarter, trying to look for the big change that reflects Brookdale. And if I'm reading this correctly it seems like Brookdale move somewhere from 1.2 to 1.3 EBITDAR coverage last quarter to somewhere between 1.1 and 1.2 this quarter. Is that correct?

Yes, I mean Wells partnered in speak to our disclosure, the 1.1 to 1.2 bucket which you see at 8.9% does include Brookdale as you imagine is the biggest piece of triple-net senior housing and that did move relative to last quarter. And again this is all TTMm, so doesn’t reflect any of the group we've been talking about today but on the old agreement that's the math.

That's the math. Okay, so now that I have that correct. So on the old agreement coverage kind of slipped down a little bit. It's an EBITDA number if you adjust that number for about 5, 6 basis points to show EBITDA you still somewhere around like 1.1 to 1.15 on Brookdale. So -- why going to backs Juan's question, why only a $6 million credit might be enough to feel confident about the sustainability of the coverage.

Well back to me I guess. Again, what we’re feeling here is to expand the lease maturity out for eight years. We are giving some near-term cash flow support to the new Brookdale team, who is focused on driving operational improvement. We received significant credit enhancement of that will support the reliability of the future rent stream. And importantly, we are bridging to really 2026 when we are quite confident that the silver wave as Brookdale causes will be in full force and hopefully customers of all of our senior living communities. And so really think about it as at lease expansion, credit operating improvement and bridging to a period of time where the senior population will be very, very robust and the demand will be extremely great. And then the meanwhile, again we have the credit support from Brookdale to carry forward which as I said improve the visibility and resilience of our future cash flow.

I think most of us get the large, I guess what the strong believer what you know is the $6 million today and then 12 months from now will get another press release saying fundamentals even further because of supply so we have to give another $6 million. So, I just don’t think people want us to kind of go through that depth to what we cut, rather than just kind of take the pain today kind of where we’ve done with it. So, I think we’re just going to put some comfort that $6 million is it type of thing?

Well, we think, we feel really great about where we are and we believe the Brookdale team is very focused on improving operations which is really the key to everything. And we are upward trajectory that expanded our leases for eight years which people should feel really, really good about.

Okay. All right. That’s helpful.

And at the same time again, we believe we’re helping Brookdale to succeed.

Yes. The assets on our targeted sales, could you an indicate of what rent coverage on that pull and that get pulled in?

Right, as we talked about before, when we have a master lease the coverage is based on what we write in the schedule of the asset by asset coverage. So, it should be relative consistent across the portfolio with the lease expansion. The focus of the sale of assets for both of us is really can focus on assets that are non strategic maybe there is one in the market maybe someone else a local operator can do better, maybe leasing that the assets doesn't have as good as of future growth profile, as to assets that we’re retaining. It has nothing to do with coverage which basically will be consistent across the board by asset as we do the lease expansion, but it will have everything to do with our expectations of future performance of that, again, the goal being to improve the quality and future performance of the retained assets by pruning.

Got you, okay

We appreciate the question and your support.

You got it. Thank you. One more just quick one for Bob, if you don't mind. Just began the SHOP portfolio again really good performance in 1Q. Could you just remind us like why you've decided to kind of keep guidance where it is right now? And what are you used kind of looking for before you get more confident about pass the new raising SHOP guidance?

Sure. Well, one quarter does not here made it clearly. So, we like to get some more experience on frankly and the range is really driven by the pacing of occupancy, pacing of new deliveries and the consequent impact on revenue. And that's where we want to see unfold over the next quarters so to really get a better handle on the full year.

Again to start to the year and we are happy about that.

Yes, we’ll take it.

Our next question comes from Daniel Bornstein with Capital One. Your line is now open.

I want to actually turn towards development which is the first comments that you’ve made almost first comments you made in your opening remarks that’s focused on your capital allocation, you increase because you haven’t good start with Sunrise this quarter. So if you could talk about the opportunities to increase development and perhaps redevelopment within your portfolio? Do you think that’s going to continue to increase as a percentage of the portfolio? And are any -- do you see an increase of operators coming to you for development funding particularly in seniors housing given that this flow on your start and I think there's some limited more limited funding within the seniors housing space? I'm just trying to understand the opportunities and development?

Well, development is clearly a number one focus area for us from a capital allocation perspective and most notably within that life science and we've been hearing along the way over the last year. So the progress there and we highlighted a few new tidbits today that - and append which is really exciting and we continue to see a robust pipeline of opportunity there was really good risk adjusted returns and have grown that business even ahead of our high expectations since we brought it several years ago. So we continue to focus on that and see further opportunities. Other trophy assets for development, clearly you can see this presume we talk about this MOB, San Francisco opening really next year. Now approximately 80% preleased super excited about that. The selective opportunities in senior housing in high variable markets with operators like Sunrise, we’ll continue to pursue. But again very selective trophy type assets, but it's really our life science as we think about development.

Could that dollar number, which is almost $350 now, could that check closer to a 1 billion or is that should be thinking about the development staying around this level?

Yes, this is John Cobb Mike. I can see that definitely getting there I mean we have some really good partners with Wexford on the life science side, PNB and others on the medical office side we're seeing some good traction recently. But we do see -- because of our reputation and their skills set, we see a lot of great really good risk adjusted high quality like Bob said trophy asset is some really great markets in California. So, we're and this is a good really good pipeline.

And importantly really with really well rated highly regarded institution like Penn, like West U, like I mean some like Sutter, These are where we’re focused and the demand for the product as John said, the PMV, Wexford and others can deliver is very, very high.

And really get preleasing as you saw earlier, we’re signing up preleasing before we start development and by the we’re opening we are seeing some really good traction even during the development period.

And if you look the yields that you’re getting on some of these investments going credit versus their bonds yields and this kind of came up with the KCP deal yesterday. Do you think cap rates on some of these assets should be a lot lower overtime? I mean that’s -- if the investment grade houseful credit bond 4% below and you’re getting 7% to 8%. Does that rationale for doing more retro assets?

You’re making a very, very good point, and I’d like to comment it in a couple of ways. One is that whether it’s a high way help systems or heavy weight universities both of which are new partner, it has lot of experience. And we see that they have a very robust mission, they want to accomplish lot of things, so they’re in hurry to do it. And even they the AA rated, the highly well capitalized organization. They still have more leases than sources. And so where we come in and where we have really moved our business is to be able to provide those additional forces in the academic medical centers and the life science business and the MOB with these highly rate organization with brand names. And they are willing to use our capital in these assets and develop their rest of their capital to academic programming in the case of the universities and things like that. And so this is a very good way to rotate our capital which in healthcare retail business has historically been around got the retail of lower cost capital we’re going to provide it to people who have a cost capital. This is actually a beautiful inverse of that where we are getting great risk adjusted returns from really highly rated well capitalized companies. And then as you’ve seen over the past years, we have significantly rotated our capital allocation in that direction. And as we’ve said it’s our number one capital allocation priority for that reason among others. So, it’s a very interesting concept I’m glad you raised it and its where we think we’ve already created a huge amount of value in the $2 billion portfolio we built in life science where we think we’re in about six in three quarters and we see assets trading at five or below. And so that’s a big amount of value creation for Ventas shareholders and we will keep filing that feel as long as we can.

We have a follow-up question coming from Smedes Rose of Citi. Your line is now open.

Hi, it's Michael Bilerman, Debbie.

Hi, Michael.

I wanted to go back. Hi, I just wanted to go back to the nanocare transaction, more or so not relative to any Ventas interest, but more or so your views about the changing landscape, clearly Promedica and Welltower, are trying to make the view that there is not skilled nursing deal, but this is health system that’s coming in and trying to reinvent the skilled nursing space. I mean do you sort of subscribe to that view? Can we see how something like that could be successful over time and then maybe at some point down the road then more interested in getting into back into this sector?

Well Michael, thanks for the question. One thing I would say is we've talked about healthcare and senior living team a really large fragmented dynamic space and you're really starting to see a huge amount of -- there was a lot of horizontal merger activity for a long time and now you're really starting to see a lot of vertical integration, what we call convergence at one point across assets types. And if you recall when we first became a partner of Arden, we talked a great length about how these asset types are converging whether it's hospitals without patient or post acute et cetera. And we really are seeing an acceleration and the dynamism all across health care, not as exciting and it’s a place where we see exceptionally well positioned to play and to help all these organizations achieve their goals, but also do great for Ventas shareholders. And so, there are lots of ways to play. We think we're right in the heart of it all and I think there's a lot of opportunities for us to continue to move the business forward within the dynamism that we see across the landscape of healthcare and senior housing.

Specifically on integrating skill nursing into a larger health system, and then any know the Arden could potentially go down the road and integrate skill nursing to the hospital portfolio. Is that something again I guess how do you view skill your nursing exposure of your potential tenants in that regard? Is there a changing that you get more comfortable given your prior comments of the industry has been pretty negative?

We have seen for many years and I've been working 19 years to get to a place where we are right now within the portfolio, which is which I think speaks for itself. I would say that the trends that we see in skilled nursing business have been significantly negative for a very long time and we continue to see those headwinds, and there have been a lot of smart people over the years who have awaited into the business, and it’s a very very very difficult business. And so we are happy with where we are, we're happy investing in our life science, MOB business in a way that Bob described and that's really where our focus moving our business forward is and we do continue to see senior lending over time being also a good place to be.

Just one last question on Brookdale. I've never seen so many people unhappy that your FFO and cash flow is not lower than you’re actually got it to be. So in some ways you know if things get better and you would have lowered the rent further you would never have seen an upside over the next eight years and you've expanded the lease. But I guess in regard to that as things to get worse you run into this issue where you may have discussions today structure of a participating lease with the floor potential upside come about. Did you talk about maybe having certain efforts being SHOP assets relative to lease assets just trying to better understand the dynamics of limit two negotiations?

Well, thank you. Yes, we tell the lot of brain cells so for coming up with what we thought was the optimal solution for the Brookdale and Ventas shareholders. That could really and I really believe that this is one of the same her team has great expertise and a track record in whether with – or others which is really looking at a situation and figuring out A how both people can be better off achieve the goals that they have and also optimize the results and advance interest of Ventas shareholders. And I think this is a really great proof point of that, there were many different ideas and structures that were considered, discussed Brookdale was I think really creative and corporative in the process as well. And we came up with what we think is the best outcome. And honestly I’m so glad that you said that because I think we achieve that and that constituents of those companies should be really happy with the outcome.

Is that our final question? Okay. So, we want to thank everyone sincerely for being here today for your interest and support to Ventas. We appreciate everything you’ve done to make a last 20 years of Ventas such a great success story. And we look forward to seeing you again here. Thank you.

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