Ventas, Inc. (VTR) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the First Quarter 2019 Ventas Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Juan Sanabria. Sir, you may begin.

Thanks, Lauren. Good morning and welcome to the Ventas conference call to review the company's announcement today regarding its results for the quarter ended March 31, 2019. As we start, let me express that all projections and predictions in certain other forward statements to be made during this conference call may be considered forward-looking statements within the meanings 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 and 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, 2018, and the company's other SEC filings. Please note that the quantitative reconciliations between each non-GAAP financial measures referenced on this conference call and its most directly comparable GAAP measure, as well as the company's supplemental disclosure schedule are available in the Investor Relations section of our Web site at www.ventasreit.com. I will now turn the call over to Debra A. Cafaro, Chairman and CEO of the company.

Thanks, Juan, and good morning to all of our shareholders and other participants. I want to welcome you to the Ventas' first quarter 2019 earnings call. I'm happy to be joined on today's call by my outstanding Ventas colleagues. We are delighted with our strong start to the year. During today's call, I'd like to describe some specific areas of excellence, performance and focus for the company, comment on market trends, and discuss our pivot to growth. Let me begin with our excellent company-wide performance. I'm very pleased that we delivered $0.99 of normalized FFO for the quarter. Our property portfolio delivered solid same-store growth. Our cash flow was strong, and our balance sheet was even stronger, some terrific capital markets activity. We are also today reaffirming our guidance issued in February. Our skilled and tenured team continues to be positive, cohesive, and actively focused on delivering 2019 performance, and driving our pivot to growth. I was struck again this quarter by the resilience of our large diversified business that's expected to generate approximately $2 billion in net operating income during the year. That indisputable demographic demand for our businesses, which is in the very preliminary stages of asserting itself, the broad-based investment opportunities we have across our verticals, our best-in-class financial conditions, our experience in proactive and effective asset management, our relationships with outstanding universities, partners and leading care providers, and the bright future ahead for Ventas. It is easy to recognize these immense strengths while also acknowledging that we continue to feel the effects in our senior housing business of elevated openings of new communities as the industry works its way through the timing mismatch between delivery and demand. Turning to some proof points for my optimism and confidence, our office business, which should produce over $550 million in annual NOI and it's the focus of our investment activity, turned in an excellent quarter. It delivered 3.8% same-store cash growth, hit multiple milestones, received numerous prestigious recognitions, and proved out its value in attractiveness. Let me illustrate with a few examples. First, our completed developments are succeeding. Our trophy downtown San Francisco MOB is open, and 83% percent leased, principally to double A-rated slaughterhouse, and our new 3675 Market Street asset at Penn's [ph] Campus is already 92% leased within months of its opening. 3675 recently attracted a publicly-traded global biotechnology company, who wants to relocate, so it can collaborate with UPenn's genetic researchers. Second, our in progress previously announced developments are hitting their stride, as we broke ground on the $77 million development at Arizona State biomedical campus in Phoenix, 0.225 our Brown-related Research & Innovation project is expected to open in the second-half of 2019, and we signed a lease with Ascension to occupy a 100% of our medical office building in Panama City, Florida, which we have begun to redevelop for them following last year's hurricane. Third, we acquired a high quality Research & Innovation asset in April for a $128 million. This desirable fee [ph] simple lab building is near MIT and Harvard in the Cambridge market. We expect to see significant rent growth in this asset, which also offers us a window on the Cambridge life science cluster market, one of the most desirable real estate markets in the U.S. We also effectuated the seamless re-tenanting of 250,000 square feet of research space to Yale University. Yale immediately replaced a corporate tenant in our world-class research building adjacent to Yale's campus for a 25-year term, so it could utilize the space for its STEM initiative and collaborate with the Yale School of Medicine. Yale has now become our second largest R&I tenant. Finally, we continue to make tangible progress on the balance of our $1.5 billion research and innovation development pipeline and expect to reach significant additional milestones for a large portion of these identified projects through the balance of this year. We are also confident that substantially all of our $1.5 billion pipeline will be commenced within the next 15 months. We're also making considerable advances in our triple net lease business, which grew same-store cash results over 2% in the first quarter. Expected to generate over $750 million in NOI, this diversified business continues to grow, driven by annual lease escalators, improving performance by certain tenants, and our continued investment in our property, partially offset by modest anticipated lease modifications or asset transitions. A few key accomplishments and themes to note in the triple net portfolio, we and Brookdale are successfully collaborating and implementing the agreements we reached in 2018. First, we've committed $36 million in capital for approved projects to enhance the quality and competitiveness of our Brookdale lease communities at a 7% return. And second, we are jointly marketing and expect to sell over 20 assets in the portfolio for proceeds exceeding $120 million. We also executed a very attractive five-year lease extension with Genesis HealthCare recently through 2026. The Genesis extension is on the same rental and escalation terms as the existing lease. It also retained the Genesis' corporate guarantee, a sizable security deposit and a guarantee of their rent by a credit worthy third party. This favorable transaction demonstrates our proactive asset management approach and capabilities. We are applying this experience and capabilities to other portions of our triple net portfolio. We are on track to complete a series of transactions in the portfolio that in the aggregate should offset our triple net leased NOI by approximately $10 million this year. Regarding our lease of 26 assets with holiday retirement, operations appear to be stabilizing and slightly improving. It expects it's pro forma to fixed charge coverage to be about 1.15 times at year end inclusive of the guarantor. The management team appears to be energized and have a renewed focus on the company and operation. Turning to our relationships with leading care providers, I'd like to highlight that Ardent had an outstanding fourth quarter and its continuing operations and we are delighted with his performance. We are also encouraged that Medicare has proposed a nearly 4% effective rate increase for hospitals in fiscal year 2020, which commences later this year. This increase is very positive for the sector. Kindred is also performing well and its results trended positively through year-end as its operational strategies have taken hold. In the long-term acute care space, Kindred continue to be a market leader who is able to attract and care for medically complex compliant patient. The Medicare rate proposal for LTACs that was recently released includes a favorable 2.3% rate increase for compliant patient. Atria continues to be a best-in-class senior care provider. It is nice to see that other developers and institutional owners agree as Atria is experiencing significantly increasing demand for its services and capabilities, including Atria's development partnership was related to operate high end senior housing in major market. Our one-third ownership in Atria enables us to benefit from Atria's success and maturation, which we embrace because it builds value and sustainability for the company. We hope to duplicate that success with middle market operator, ESL, over time. Moving to our investment activity, we continue to see quality investment opportunities in the market across our asset classes. I believe strongly in our ability to reignite external investment volume on top of our robust, research and innovation development that will drive future growth at Ventas. When we look at the investment environment, we segment opportunities roughly into three categories. First, low cap rate, private pay and high quality assets like our Trophy Battery Park Senior Living Community in New York City, which is performing well and our recently acquired Research Act that in Cambridge the second category consists of higher yielding or opportunistic investments that arise episodically or investments where Ventas has superior understanding of the asset or a unique relationship or a market position. And third, classic medical office and senior housing investments where we can use our enhanced knowledge of the market, data, relationships and other competitive advantages to underwrite and integrate attractive portfolios. Executing on all three avenues over the years has produced significant accretion and value creation and we intended to continue this approach. Next, a word on senior housing trends, through the first quarter, we are encouraged by the recently reported continued improvement in senior living starts. In the top 99 market, starts were at their lowest level since the third quarter of 2012 and down 55% from the peak start level achieved in mid-2015. Even more notably, we are seeing early, but unmistakable signs of demographic demand, manifesting in the sector. The year-over-year growth in occupied unit in the top 99 markets at 2.7% is the highest since Q3 2014 and close to its highest point ever. In the primary market, annual absorption growth in the first quarter was 3%, the highest on record. Construction as a percentage of inventory remains elevated, but is improving gradually. As a result of these positive trends and the forward growth rate in our customer demographic, the supply demand equation will flip in our favor in the future after we work our way through absorption of the current excess supply, creating a powerful cyclical upside. The coming improvement in the senior housing cycle represents a key underpinning to our company's pivot to growth. The other pillars are organic portfolio growth in the rest of our business. The NOI expected from a research and innovation development pipeline and accretive external acquisitions. The whole team at Ventas brings us optimism, strength and skill to the table as we optimize the current environment and focus on capturing the significant opportunities ahead. In closing, the current economic expansion is on pace to be the longest ever shortly. As it inevitably winds down, Ventas is well-positioned. With our growth prospects, resilient diversified business model, need based assets, solid dividend yield, outstanding balance sheet and demographic demand story, Ventas is a great place to invest. With that, I'm happy to turn the call over to our CFO, Bob Probst.

Thank you, Debbie. I'm happy to report a fair start to the year with solid property level growth from our high quality portfolio of seniors housing, office and healthcare real estate. Our total property portfolio delivered same-store cash NOI growth of 1.1% in the first quarter with the office and triple net leading the way in all of our segments performing in line with our expectations. Let me detail our first quarter performance and 2019 guidance starting with shop. Our shop business cash same-store NOI decreased 2.2% versus prior year within the range of full-year expectations. Q1 same-store occupancy was solid at 86.6% as a result of share gains and expansion in demand. The first quarter occupancy gap versus prior year represented a modest 20 basis point decline and compares favorably to a year over year occupancy gap that averaged 80 basis points for the full-year of 2018. Meanwhile Q1 REVPOR grew 30 basis points. January 29 in place renting care increases to existing tenants were healthy, partially offset by releasing spreads which continued to be impacted by price competition. However REVPOR in the balance of the year may benefit from lapping heightened discounting in the second-half of 2018. Operating expenses grew a modest 1.2%. Our leading operators did a terrific job adeptly managing staffing levels and driving efficiencies. Operating expenses including management fees were also favorable given aligned incentives for growth with our operators. At the market level, we continue to see NOI increases in our traditional strongholds including Los Angeles and Canada. This strength is mitigated by lower NOI in markets affected by new competition, most notably Atlanta, Chicago and Detroit. We note that although this year's flu was more modest than last year, this season's activity has extended longer and later. We are monitoring the potential impact in the key second quarter selling season. We're maintaining our full-year same-store shop NOI guidance of flat to modest 3%. Big picture though we are in the midst of elevated new openings, we are keeping our eyes on the horizon, improving construction starts, accelerating demand and operating leverage underscore our conviction of the powerful upside in a senior housing recovery. Moving on to our highly valuable office segment, which includes our university-based, research and innovation and medical office businesses and now represents 27% of our NOI. We note our office contribution to total NOI has expanded by 12 percentage points over the past five years. Our office segment delivered terrific same-store cash NOI growth of 3.8% in the first quarter. The R&I business took the lead increasing Q1 same-store cash NOI exciting 13%. Q1 benefited from a lease termination fee of $1.9 million from Alexion whose space was backfilled [indiscernible] with a 25-year term and enhanced credit terms in credit quality. Adjusted for this item R&I increased 6% driven by occupancy gains of 70 basis points and attractive lease-up at our Duke and Wake Forest assets together with revenue per occupied square foot increasing 5.1%. We affirm our full-year guidance of 3% to 4% for R&I same-store NOI and expect some same-store quarter-to-quarter lumpiness driven by timing of lease up activity. Turning to our Medical Office business, MOB same-store NOI I grew 1.1% in the first quarter growth was 1.5% for the quarter. Right at the midpoint of our MOB guidance range after adjusting for a prior year Q1 lease modification benefit. Our team did an excellent job managing occupancy with tenant retention exceeding 87% in the first quarter. Pete Bulgarelli now one year at the helm within our office business is making tangible moves to positively affect the MLB performance arc. Enhancing our leasing capabilities and processes a sharp focus on customer satisfaction and early wins in redevelopment are a few examples. On a combined basis, we continue to expect our office portfolio of R&I and MOB assets to increase 2019 same-store cash NOI in the range of 1.5% to 2.5%. On to our triple-net segment where same-store cash NOI increased by 2.2% for the first quarter driven by rent escalations. Trailing 12 month EBITDARM cash flow coverage for our overall stabilized triple-net lease portfolio for the fourth quarter of 2018, the latest available information remained stable with prior quarter at 1.5 times. Trailing 12 month coverage in our triple-net same-store seniors housing portfolio was 1.2 times in the current reporting period. As rent coverage is a lagging measure, we expect to see future coverage around down to 1.1 times with current industry conditions. In our post-acute portfolio, trailing 12 month cash flow coverage was stable at 1.4 times. Finally, Ardent delivered terrific results in 2018, driving rent coverage to expand to a robust 3 times. We continue to estimate that our triple-net portfolio will grow 2019 same-store cash NOI in the range of 0.5% to 1.5%. Consistent with our previous guidance, rent escalators are expected to be partially offset by $10 million in NOI reductions from lease modifications with certain smaller senior housing operators. Now turning to our overall company financial results and our 2019 guidance, normalized FFO per share in the first quarter was $0.99, it was achieved together with an even stronger balance sheet. We again demonstrated capital markets excellence in the quarter. We issued $700 million in bonds with an average of 16 year duration at an attractive 4.1%. Thereby extending our maturity profile and reducing our floating rate debt exposure. Our new commercial paper program is off to a great start and it's proving to be a very cost effective way to financers' short term working capital needs. And $100 million of equity issued under our ATM program efficiently funded our Cambridge Life Sciences acquisition. As a result of these actions, net debt to adjusted EBITDA improved 10 basis points sequentially to a robust 5.5 times in Q1. And our financial strength and flexibility is in top shape. Also of note in the quarter was the adoption of the new accounting leasing standard. Its effects include establishing an operating lease asset and liability exceeding $200 million, recasting revenues and expenses with no effect on NOI and $0.02 per share in incremental leasing costs for the full-year, reflected in SG&A expenses and incorporated in our guidance. That's a good segue to our 2019 guidance for the company. We are pleased to reaffirm both our property cash NOI same-store guidance as well as our expected 2019 normalized FFO per share of $3.75 to $3.85. We expect to receive at the midpoint of the year $500 million in asset dispositions and receipt of loan repayments used to fund $500 million of redevelopments and developments principally focused behind the R&I pipeline. This capital recycling is diluted in 2019, but delivers attractive future growth in value creation. At our guidance midpoint implied FFO per share over the balance of the year is $0.94 per quarter on average. The expected $0.05 difference versus our $0.99 in the first quarter is simply described by $0.01 of non-recurring fees in Q1, $0.02 of high yielding dispositions used to fund R&I development and the balance is typical sharp seasonality This is consistent with previous guidance. Finally as is customary, guidance does not include unidentified acquisitions and also assumes approximately $362 million weighted average fully diluted shares. To close the Ventas team is very pleased with our start to the year and is committed to execute with excellence against our strategic initiatives in 2019. We also hope to see you all at our Investor Day on June 17 and July 18 in Philadelphia where we will bring to light the quality of our assets, our operators and partners, and our Ventas team. With that, I'll hand it to the operator to open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Nicholas Joseph with Citi. Your line is open.

Thanks. Debbie, you discussed the three buckets of deals, what's the long-term balance between low corporate opportunistic and more traditional MOB senior housing assets?

Well, I do think you stated properly, which is, there's a balance, and that balance in any given market may change. I think that basically between your first and third buckets, which is the low cap rate and then the attractive portfolios of MOB in senior housing, that would be anywhere from, call it, 50% to 75%, and then the opportunistic would be, call it, a quarter of it.

Thanks. And then if you look at the current acquisition pipeline, how does it break down between those three buckets and where are the best risk adjusted returns today?

Uh-huh. Again, it varies in different markets. Right now, our number one capital allocation priority is really the research and innovation pipeline, and that's clearly at the top of the list, and then I would say our pipeline breaks down along -- generally along the lines I described.

Thanks.

Thank you.

Thank you. And our next question comes from Nick Yulico with Scotiabank. Your line is open.

Thanks. Good morning, everyone.

Good morning, Nick.

Good morning. I was hoping to hear a little bit more about the Cambridge deal. This is more traditional lab space than you've previously owned. Is this a change in strategy where you're looking to focus more on traditional lab space within your R&I segment?

It was a good opportunity for a quality asset in a great market with potential rent growth at a size where it can give us a nice window on that market. We do view it as adjacent or related to our existing university strategy, given the type of tenants who are collaborating with MIT and Harvard.

Okay. And then in terms of I guess the larger portfolio deals you might be looking at, how does that opportunity set look today? And you talked a lot about senior housing at some point flipping in your favor in the future, and so, I guess I'm wondering as does that mean that now the attention will focus even more on trying to get senior housing acquisition opportunities?

Our pipeline is typically across all the asset classes, and obviously we do see the upside in senior housing and certainly would invest in that sector. Our priorities are as described.

Okay. And then just lastly, Bob, I want to go back to the triple net lease coverage in senior housing, I think you said that, you gave a preview in that, you expect it to move from 1.2% to 1.1% since it's been a bit of a lagging metric that we see, and I guess what I'm wondering then is you do have the $10 million of lease modifications in guidance, but then when we look at the portfolio and when we look at the bucket that has coverage of below 1.1%, it's about 13% of the company's NOI, and so just wondering how much of the lease modifications in guidance address that pool of assets where the coverage is lower? And then, what point -- you talked about Holiday, you know, sounds like things are improving there, but I mean should we not be assuming that there is a lease modification needed at Holiday at some point? Thanks.

Well, there is a lot in there. I would say again because the lease coverage is a lagging indicator. We expect to rounding down at some point as the cycle bottoms, and the primary driver of it is really Brook deal, and the $10 million obviously would improve it, but it's really that's a rounding error in the whole calculation. It's so small.

Thank you.

Thank you. And our next question comes from Vikram Malhotra with Morgan Stanley. Your line is now open.

Good morning. Thanks for taking the questions.

Good morning.

I wanted to just get a sense of, sort of, how you're viewing the radar [ph] trajectory from here. I noticed sort of on a same-store basis, occupancy was probably at a low point where we've seen recent trends, but the expense growth was lower as well. Can you kind of talk about how you see the expense trajectory trending through the year and how much of that may have been a low occupancy function?

Sure. I'll take that one. Good morning. So you're right, we had a great quarter in terms of OpEx growth, a little over 1%. Our guidance for the year, you'll recall was 2% to 3%. So particularly good in the first quarter, a few drivers in the quarter continue to flex the volume of labor in light of occupancy, so that lever continues. Indirect costs manage very, very well is the second bucket I would highlight for example utilities where - new procurement contracts have been signed up are benefiting that line, and then just alignment with our operators in terms of profit growth. Those are the three buckets I'd highlight 2% to 3% still feels like the right number for the year underlying wage pressure trends haven't changed for example, but it certainly was a good quarter.

Okay, great. And then just a bigger picture, I mean you've talked a lot about the research and innovation, the MOB, the office segment as a full, there have been several portfolios that have recently created probably a few more in the marketplace, just sort of wondering how do you look at those portfolios relative to sort of the development opportunity which you've outlined very nicely kind of what cause you to maybe stay away or was it just pricing cut away from you?

This is John Cobb. And I think you should assume that we look at all those deals, we evaluate every single one both from the medical office side and the senior housing side. And we're exploring about the R&I developments but also look at acquisitions as you saw this quarter.

Okay, great. And then just last one if you can clarify the transaction expenses went up, is that all Cambridge-related for the year?

They went down.

For the outlook is I think your point and there's some transition costs embedded in that that have gone up in terms of addressing some of these triple net smaller operators. So that's in the outlook for the year.

Oh, got it. Okay. Okay, great. Thank you.

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

Thank you. On the investment buckets, the opportunistic higher yielding buckets, is it possible to give some characteristics of what this may entail whether it's public or private, which property type or what geography it maybe in?

There is a little feedback on the line.

Is that better?

Could you identify yourself again and ask the question again?

Sure. It's John Kim from BMO. I wanted to know on the investment buckets if you could provide some characteristics of what the opportunistic high yielding investments may be whether it's public or private, what property type they maybe or what geography?

Good morning, John. Good to hear from you. I mean opportunistic by definition are things that pop up that have a variety of characteristics that are not what I would call regular way activities. They can be across the board public or private. For example public is when you know your multiple may - may have a huge advantage over someone else. Typically there are more often private opportunities where we may get a call on something where we have a relationship or we may have particular knowledge about access that enables us to move quickly. I would say even our acquisition of our research and innovation portfolio itself I would call opportunistic in the sense that it was an attractive asset, we had worked on multiple times and at some point John Craig called and said you know can you do this in 30 days. And we said absolutely and we were off to the races. So that's one good example. Another one was when we helped Ardent by a very attractive portfolio and enabled them to double in size with the loan that we made to them that was well-structured in higher yielding and was repaid on time and early actually. And so those are good examples I would say of this - this opportunistic category. I hope that gives you some color and texture what I mean by that.

Sure. What about geography as far as domestic versus international or core versus non-core markets?

Uh-huh. Well, International has not typically been in what I would classify as that category, I mean something could be, but typically as you know these international opportunities in healthcare are at very low cap rates, particularly when tax affected. And so I'd be less likely to put it in that category, but of course there could be something from time to time that's in that category.

Okay. On the triple-net coverage and the $10 million impacts on lease modifications which was unchanged during the quarter. Is there a likelihood that this increases just given the coverage is coming down? And also can you remind us if that's already reflected in your same-store results?

John, I'll cover the second question which is there $10 million is really the balance of the year, John.

Okay.

It's the way to think about it, and we're comfortable that that covers these smaller regional operators we talked about both last time and this time for the full $10 million.

I guess one last one for me. Is there an update on the Ardent's IPO?

That's a subject that we've agreed between us that that Ardent will address on behalf of both of us.

Okay, great. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.

Yes. Thank you. Debbie, I wanted to touch on your comments that you had in the prepared remarks saying that you're seeing early signs some of the demographic trends kind of starting to impact the senior living space. Can you highlight what you're actually seeing is that just looking at the population trends or are you actually seeing some stuff on the property levels that's encouraging you?

Uh-huh. Well, I think the absorption or demand, it's really the key green shoot I would call it that we're seeing at record levels in the top 31 markets. And again we're seeing the supply over -- less than half of what it was at the peak. These do not as we know translate into financial results in the current period, but will over time translate into the powerful cyclical upside.

Okay. And then just real quick, Bob. I just wanted to touch on the €10 million lease amendments. I know there's been several questions already about it, but I just wanted to confirm have you done any of those adjustments in one queue? I guess when is the timing of that €10 million adjustments? Is that in full €10 million, is that just the 2019 impact or is that the run rates going forward?

That's 2019 impact, Mike, the €10 million really the balance of the year. So I think that is now reflected in the first quarter but affected in the balance of the year. And we have line of sight to basically execute on those by mid-year. So we should see those impacts coming through.

Okay, great. Thank you.

Thank you.

Thank you. The next question comes from Joshua Dennerlein with Bank of America. Your line is open.

Hey. Good morning, guys.

Hi, Josh.

The term fee in office, the €1.9 million if you backed that out of the office same-store pool what would have been same-store growth there? And then I guess same for the Genesis cash payment and what that would have done to net lease?

So let me start just in reconfirming. Those are both great deals.

Yes.

Whether it'd be Genesis or the Alexion and Yale transactions that you highlighted, really strong credits, really great transactions, which we're really proud of in cash in the bank at the same time, so to answer the question specifically office impact is 150 basis points to the same-store in the quarter, triple-net is 90 basis point impact for the quarter. Triple net it when all's said and done for the full-year it's call it 10 basis point impact on same-store.

Okay, all right. Thank you.

Sure.

And then I saw that you guys, it looks like you added a new line item on the income statement under property level operating expenses called triple-net lease. Could you - I guess before the triple-net, we use rental income, it looks like it was a net number. Is this something new going forward or what was sort of changed?

Yes. So I mentioned we adopted the leasing standard in the quarter…

Okay.

-- that had a number of effects, one of it is we gross up effectively in triple-net where we're reimbursing both revenues and expenses, no NOI impact, things like taxes so that's the geography change you're seeing in the P&L.

Okay. Got it, thank you, appreciate that.

Thanks.

The next question comes from Daniel Bernstein with Capital One. Your line is open.

Hi, good morning.

Hey, Dan.

Hi. I just wanted to go back to the lease expenses on seniors housing, the drop on that is it -- how much of that is ESL kind of maybe realigning the expenses from uncropped assets or is that more broad in [indiscernible] across each of your Sunrise operators as well?

Yes, I think you're referring to operating expenses if I'm right…

Yes.

Dan is that correct? Yes.

Yes.

So yes, again you're right to say favorable a modest slightly over 1% growth rate in OpEx. We think 2% to 3% for the year. So some things that happened in the core as I mentioned we continue to have some runway on flexing labor volume and at the same time have done a great job managing indirect costs. So that's what's really driving the quarter. But again with wage inflation, we expect to see more like 2% to 3% for the year.

Okay. So it's broader, not just ESL.

It's - yes, it's broader and telematics.

Okay. And then the other question I had is on the MOB assets within office, the NOI growth there's about 1% and the industry is probably doing 2% or 3%. You alluded to some initiatives that you've taken in there to maybe improve that. So I just want to rehash that. And what are those initiatives and kind of what do you think the upside is within that MOB part of your portfolio?

Sure. This is Pete Bulgarelli. Great question, glad you asked this. I was hoping for this question, at least hoped for.

Glad to ask it.

Yes. Thanks. One clarification we should make is that if we weren't lapping an event in the first quarter of 2018, it would have been 1.5% growth. So they're right in the midpoint between our guidance. But having said that look we think that heavy tenants are awfully important. They increased our renewal rates, which we're very proud of at 87% and they also are great for word of mouth and leasing. So in the last year we've been able to cut our response times just as an example to work orders by 50% between first quarter of 2018 to first quarter of 2019, which is really enhancing our tenant satisfaction. We've also put a large focus on improving common areas as well as just infrastructure within the building. Some buildings look a bit better and we're very proud to say we just hired a new head of leasing. She comes from Kayos, who led their healthcare practice across the country and she starts May 1. So we're very excited to have all three of those coming together to drive better results.

Okay. So it sounds like maybe once you get past some of that lapping of last year maybe you're back to 1.5% kind of 2% NOI growth…

Yes.

-- with the second-half of this year. Okay.

And we're striving to…

Okay. That's great. That's helpful.

Thank you.

That's helpful. Thank you.

Thanks, Dan.

Thank you. Our next question comes from Rich Anderson with SMBC Nikko. Your line is open.

Thanks. Good morning everyone.

He's back.

Hey, Rich.

Hi.

How you're doing? So…

Great.

When I was listening to your comments Debbie at the beginning you said the focus of your investment activity is in the office sector. And my first thought was that -- was surprised to hear that not that you haven't said in the past but you guys usually zig when others are zagging, but then I kind of thought about it more and I was thinking perhaps higher yielding opportunistic were just requires more work to get done and takes longer to cross the finish line. Is that kind of what you're thinking that when you think about that more opportunistic high yielding bucket you just have to be a lot more careful about approaching them and hence the probability of completion is lower than the other two?

So I would say that the office is a focus of investment activity because it is performing so well and we have such great advantages and momentum that we're trying to take advantage of especially in the R&I development pipeline. So I think I want to clarify that. In terms of the opportunistic, those can be more complex and take longer but they can also be as I said things have pop up that we can get them really because of our understanding of the market or the asset. So that can go either way.

Okay.

But the important part again is to have a big pipeline, have a diverse pipeline, have good relationships and good understanding of the market, so we can act across the Board.

Okay. And then just a follow up perhaps on the hospital side, I realized that you had already speak for under IPO but I'm just curious if you are seeing things pop up a little bit more on the acute care hospital segment of the world, with a split Congress and some consideration given to the fact that maybe we're going to be with ACA for a period of time despite what the President says.

We continue to think that the category of health systems and hospitals that we've invested in, we've great management teams, great market share is an area, where we would certainly be willing to commit capital. And Arden has proven to be an excellent and incredible investment for us. And we would do more, but we will continue to be selective in that market. I do believe that we will have the benefits of the Affordable Care Act for a while. I mentioned the 4% effective increase of almost 4% that is being proposed for later in the year. And I also believe that we may see additional Medicaid expansion in certain states which would also be favorable. So those are some good trends I would point to, and we would continue to invest behind that if we had appropriate opportunities to do so.

All right, great. Thanks very much.

Thank you.

Thanks so much.

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

Yes. Good morning, everyone. Congrats on the quarter.

Hi. Thank you. That was a good one.

Yes, it was. First question, the commentary just around the opportunistic bucket of kind or transactions or investment you could do, I mean I get that and again you guys have been pretty good about doing that I think in the past, I used to kind of call it the rabbit out of the hat that you would pull, but the thing about that is while I think it's great near-term if it's not sustain on a long term bases, you may have these kind of occasional dip in earnings growth. So how do you kind of manage those kinds of two things?

Well, thank you. I think again we've done a good job over time in allocating capital to the three different categories as I described. The opportunistic one is something that could be -- it could be a higher yielding asset as which can be lumpier as you pointed out or it could be something like the life science research and innovation acquisition that I mentioned that really has created a whole new business line for us and has been sustainable and actually has driven and will continue to drive a significant amount of growth. So that category of assets is broader than simply a high yielding category.

That's helpful. And then could you also talk about the Genesys transaction again…

Yes.

-- it's been a pretty unique structure here as you see in some of your peers either trying to get rid of their Genesis exposure, you guys have actually extended it. You've got a cash payment some of your peers either trying to get rid of the Genesis exposure, you guys have actually extended it, you got a cash payment, you got a corporate guarantee, you got a guarantee of a rent by a third party. Again, I'm just kind of -- it's impressive to me that you can kind of do this while you have a lot of other people who are kind to doing the exact opposite thing, and what are you seeing here that you think others may not be seeing?

Well, thank you for saying that. It is a good example of our proactive asset management capabilities, and our ability to really optimize situations on behalf of our shareholders. And I agree well Genesis is a small tenant about $20 million a year. The fact that we extended the lease with the corporate guarantee out to 2026 is impressive and is a real win for the company, including a cash payment and guarantees and all the other things that we talked about. And this is the kind of management expertise and you know the benefits of our excellent team that we bring to bear to try to create good outcomes for our shareholders across the board and we've done it time and time again over the years.

But who is this third party that's kind of being given a guarantee on their behalf? I'm just like really surprised to hear that.

Well, if you think about the corporate history of Genesis, you might be able to figure it out, but I'm just going to leave it where it stands now with a credit worthy third-party guarantor.

Got you. All right. Well done.

Thank you.

Thanks.

The next question comes from Todd Stender with Wells Fargo. Your line is open.

Hi, thanks good morning.

Hi.

I was taking a look at your -- the new Cambridge acquisition. When you look at the low cap rate and high cost per square foot it's suggest you are looking for some pretty good upside in rents and you noted that with the double-digit rent increases for the last couple of years. Can you provide more details on that current tenant base maybe, occupancy and maybe with the lease row looks like?

Sure. This is John Cobb. The 1030 mass deal that we announced is what we think is a highly attractive asset in Cambridge. It is a high price per foot but you have really great current rental rates, which is in the low-70s. You're seeing a market rents above that the current it is 100% occupied with you know a really good diverse tenant mix that are all lab in life science.

And substantially all the tenant base are really as I mentioned people who either work at or collaborate with MIT in Harvard and it's an above 5% cap rate with room to grow. So, and it's a fee simple interest, which is very significant in terms of valuation.

Good point. All right. Thank you.

You're welcome.

Thank you. The next question comes from Lukas Hartwich with Green Street. Your line is open.

Hi, thanks.

Hi, Lukas.

Hi. It looks like Brookdale EBITDA coverage moved down a tier. I'm just curious how that will look after the planned asset sales?

Hi. Yes I mentioned that in that you know we did the great deal with Brookdale last year we're implementing that feel, committing capital to the assets and also disposing of a pool of assets that we identified together. That coverage will not change materially because as you recall Ventas keeps the net proceeds and then Brookdale gets a rent credit equal to 6.25% on the net proceeds that we receive. So it will be a well move materially.

That's helpful. And then you kind of talked about it earlier, but I was just hoping you could provide a little more color on the strong performance in the shop portfolio from Canada?

Sure.

Oh, Canada, yes.

We love talking about Canada.

Yes.

We grew occupancy rates bottom line, we have a great position and wonderful answer to that market. You see the demand growth what the powerful upside is senior housing can look and feel like and it has another great quarter. So it's really been a shining star for us over the last couple of years.

Great, thank you.

Thanks.

You bet.

The next question comes from Karin Ford with MUFG Securities. Your line is open.

Hi, good morning. On the last call, you guys talked about an upward dressed in cap rates, is that what you've seen and if so how much in and what segments?

Karen, this is Debbie. Just commenting on that, I would say that when we talked last quarter, we said we may be starting to see a slight upward tick in cap rates. And I think in some transactions, you still may be seeing that although the quality may not be like-for-like. Right after I said that of course, as interest rate expectations had been moving up, I thought that that was related to some of the potential cap rate expansion that we were seeing and that of course those expectations have then changed fairly significantly in terms of people's forward expectations and the actual rate. And so the impact of that really probably would put a lid on any hope for cap rate expansion that we might have seen at that time on a like-for-like basis.

Understood. My other question is can you give us any insight into shop occupancy and rate growth in April, it sounded like you were a bit more cautious given the comments you made on the flu, just wondering if I was hearing that correctly.

Right, Karen. So the flu was really unusual this year and so far as it was clearly more mild in the first quarter relative to last year, but what's unusual is how it's extended into the second quarter and indeed Atria has had a few recent buildings close for flu in terms of quarantine which is unusual so. That's why we just are flagging it, the key selling season is Q2. It's an unusual item. I cycle back to that occupancy year-on-year were down 20 basis points continues to be trending well relative to prior year, which is both share gain I think and some of that demand lift we've been talking about.

And did occupancy continue to do well in April?

It's still early days. It trend seasonally, it tends to be quite flat this time of year.

Okay. Thank you.

Thanks, Karin.

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

Thank you. Good morning. Just following up…

Hi, Jordan.

Hi. Just following up on the shop discussion a little bit, so I think Bob if I recall correctly, you saw it throughout the year performance would generally be pretty consistent. Is that generally still your expectation based on what you're seeing in shop and if I could sort of also ask what are you seeing, you've given us previously sort of the releasing spreads…

Yes.

-- of sort of the street rates, I'll be curious what those are?

Yes. Good questions. Let me start with pricing and RevPAR in the releasing spread. Our guidance for the year, you recall was - releasing spreads to be down high-single digits and indeed that's what we saw in the first quarter. At the same time, the in-place increases for residents in place, was again healthy. And so, the blended average of those two things is what you see in a 30 basis points for the quarter. Now, looking at the prior year, we really saw discounting in the back-half of the year start to take root and some more aggressive pricing in the back half of the year. So as I think about RevPAR over the course of the year, I think there's some stabilization in the back half of the year that could be potential given prior year comps. To the first question, generally speaking, our range as you know for the full-year is flat to down 3%. We were down call 2% in the quarter or in that range. And it will be relatively generally speaking consistent I would say, wild swings are unlikely.

Okay. And then…

There's always choppiness. I don't want to kind of overstate the nature of it.

Okay. I think you laid it out well.

Thank you.

The other question I had was regarding -- I think Debbie you said that you seemed confident about starting the rest of the $1.5 billion pipeline over the course of the next 15 months. Did I catch that correctly, so I just want to make sure?

Yes. I am confident because my partner John Cobb is confident.

Okay. So you basically have about….

Yes, so…

-- a $1.4 billion of additional commencements to announce…

Right. I mean…

-- this quarter?

So we believe we'll have significant milestones to announce on a number of the projects this year and that we're confident that we'll commence substantially all the $1.5 billion research and innovation pipeline within the next 15 months.

Okay. I think that's a bit faster than I think we thought last quarter when we spoke to you although maybe you didn't lead us to believe so…

Go ahead.

The last one was just Alexion, what was that termination fee and where is it sitting on the P&L?

Sure. It was $1.9 million in the quarter, is sitting in the office R&I same-store in the quarter.

And what's interesting about it though too is that their replacement tenant in Yale moved in to the tune of 50,000 square feet with zero downtime. So better credit, 25-year lease term and the fee was kind of the additional benefit, the tale really because the dog is the Yale expansion with us.

Okay. Thank you, guys.

Thank you.

Thank you.

Our next question is from Michael Mueller with JPMorgan. Your line is open.

Hi. I just have two quick questions. So for the $1.5 billion starts over the next 15 months, can you give us a rough idea of what the delivery window will span from?

Well, once commenced, the rule of thumb is really 18 months to 24 months of until opening.

Okay.

And the projects will be commenced obviously [indiscernible] on a project-by-project basis over those next 15 months.

Got it. Okay. And then, Bob, just to confirm, so going back to the $10 million lease modification, you said the impact during 2019, I think you mentioned mid-year or so, should we assume that the $20 million annualized impact going forward?

Yes. So to clarify the $10 million is this year impact Qs 2 through 4. We expect to have effectively activated the changes by mid-year and that obviously helps drive that that impact over the course of the year, but it's $10 million over the course of three quarters.

Over three quarters. Okay. So less than $20 million, got it. Okay. That was it. Thank you.

You bet.

Thank you.

Thank you. The next question comes from Chad Vanacore with Stifel. Your line is open.

All right. Thanks. Good morning, all.

Hi.

Hey, Chad.

Hey, Bob, so just looking at the shop occupancy it's down same-store 20 basis points in year-over-year 120 basis points sequentially. How much of that would you estimate is normal seasonally weakness from flu and weather and how much of that is from excess of volume pressures?

Well, seasonally you're right to say that there's typically a decline Q4 to Q1. So we tend to look year-over-year as our as our best measure and the 20 basis point GAAP when you go back as you know and look back last year is starting out in the first half we had call it 150 basis point GAAP versus prior year that narrowed by the end of the year and has stayed pretty consistently tied to prior year at 20 basis points down. So the occupancy line we're feeling pretty good about. And again I think it's reflecting that we're gaining share.

All right. So in light of that view, how should we expect shop occupancy to trend from this point to the end of the year and especially considering comments that you're seeing some pickup in demand?

Well, we're staying with our guidance really through the P&L which occupancy was flat to down 50 basis points for the year on average. So I think that's still a good number.

Okay.

Okay.

Sorry, just got a one more quick one, so you're marketing 20 assets with Brookdale. How much of a total 31 million rents you agreed to does that represent? I guess there's more to come?

We expect there to be a total of about 15 ultimately and maybe that may be it -- that may be all that we decide to do with them.

Yes. I'm sorry, Deb was that 15 in the rents or 15 more assets?

In total, not just the ones that we're marketing now.

Okay, $15 million in total, right.

$15 million is right.

Okay, all right.

Yes, exactly. Thank you.

Thanks a lot.

Okay, we have time for a couple more and then we'll wrap up.

All right. The next question comes from Derek Johnston with Deutsche Bank. Your line is open.

Good morning and thank you.

Hi, Derek.

Hi. Just a little more on shop revenues, and I was hoping you could help reconcile the strong January rent increases from in place residents as mentioned in the release with really the first time we've seen REVPAR drop below 1% on a year-over-year growth basis. And really the first time your year-over-year same-store shop revenue growth has been negative at least as far back as we've been tracking since 2010?

Sure. I mean a very quick and simple answer is the releasing spread discussed earlier. Again the in place is very strong. What you have to look at is last year over the course of the year what happened. The price competition was suppressing price over the course of the year and therefore Q1 versus Q1 year-over-year that is driving the impact. Now in the balance of the years particularly the second-half will be lapping that discounting that should firm up, but really it's a year-over-year comp issue driven by the releasing spread.

Got it, understood. And then, just kind of looking forward when do you think we see an inflection point in senior housing and really a return to growth within that portfolio? Is it like a mid-to-late 2020 event as supply wanes and comps get a little easier or how should I kind of think about this going forward?

Derek, you will be the first to know.

Well, thank you.

It's a very good, very important, very complex question, and we look forward to giving you more visibility on it.

Thank you. And our last question comes from Jonathan Hughes with Raymond James. Your line is open.

Hi, there. On the Cambridge acquisition, I know it's 100% lease, but I don't I heard the least maturity. When would you be able to reset those rents?

Yes. Another great question because we're looking at upside here, we talked about the cyclical upside in senior housing, and now, we'll talk about the asset. The weighted average lease term right now is about five years. One of the things we really like though about this market and its characteristic of this building is that the tenants are successful. They expand, maybe there's not enough room for them in this particular building. And so, they made by out of their lease early and then you have a chance to mark-to-market and you may have the opportunity to get a lease termination fee. So that's how we would expect that to play out.

Okay. That's great. And then, just one more looks like Eclipse annualized NOI was down 15% year-over-year despite one more property versus year ago. I'm just curious how should that portfolio trend throughout the year and maybe what kind of happened versus a year ago?

Yes, Jonathan. I think when you look at the annualized -- when you look at the annualized NOI Q1 versus Q4, you get some of the technical factors namely days that play a role and there were fewer days when you build by the day as a revenue and NOI impact and so that annualized is much of what you're seeing.

It's been exaggerating.

Yes.

Yes.

Stepping back, we believe ESL is going to be accretive to our growth this year and if they continue to implement the plans, they identified early on.

Great, but on a year-over-year, it was down 15% so that should negate the seasonality impact, right?

Well, I'm very -- there's a lot of noise, as you know, we transitioned this time last year, first quarter last year, there's a lot of noise in the ESLP and all I would encourage you to look over a longer period when you think about year-over-year. And again on that basis, I think they'll be accretive to our growth.

Okay, great. I'll follow up in the offline. Thanks.

Okay. We appreciate that, and we absolutely appreciate everyone's attention this morning and interest in the company. The whole Ventas team is really excited about delivering an excellent quarter and we look forward to seeing you in Philadelphia in June. So, thank you again.

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